Do Group I base oil plants have a future in Europe? If you’re looking at volume growth, the answer is probably not, according to industry expert Stephen Wright. But in many other ways – including potential for operating profits – he sees API Group I base oil as a resilient product that more than pulls its weight at well-run refineries.
Unlocking those profits may be difficult, as Group I demand continues to shrink. Wright, a senior consultant in the London offices of Solomon Associates, noted that European oil companies traditionally made passenger car engine oils by blending Groups I and III. “New engine oil specifications, however, have made it more problematic to still include Group I in the blend.”
An even greater squeeze on demand came from the economic downturn, he told last month’s ACI European Base Oil & Lubricants Summit, and some of this damage may be permanent. “Typically, as past recessions show, you never see lubricant consumption levels restored to what they were before. Industrial and manufacturing plants shut down, and even if new ones open, they’re more modern and will use less lubricants.”
Meanwhile, additional new base oil manufacturing capacity – all of it Group II and III –
has been coming on line in Asia and the Middle East, and reduced these regions’ need to tap Group I exports from Europe.
Wright said Europe has 44 base oil plants, which primarily make Group I. It has zero Group II capacity (aside from a few rerefiners), and some Group III volumes led by Finland’s Neste, he pointed out at the ACI event, which took place in London in September.
The Group I plants are characterized by their use of solvent extraction and solvent dewaxing. “The molecules in the crude are what you get in the base oil,” Wright explained, “and there are a limited number of crudes that fit the requirements.” Group II base oil producers, by contrast, can select from a much bigger crude pool.
To its advantage though, solvent refining results in a full slate of products, with light, medium and heavy cuts of Group I base oil, plus bright stock from those plants equipped with a propane deasphalting unit. Group I refiners also obtain wax, an important product in itself, Wright observed. “As far as I know, no one has come up with the same molecules as petroleum wax, although some have used polyalphaolefin. And bright stock producers also make microwax, which is needed in a large number of applications.”
Group I plants also spit out a number of byproducts, including extracts (some of which are now banned, said Wright, and hence a problem) and asphaltenes, which are useful in building roads.
The multi-step process used in Group I plants, progressing from distillation to solvent extraction, then on to dewaxing and hydrotreating, results in a base oil yield that is typically only 12 percent of the crude input, and maybe 2 percent wax, Wright said. At present, there are approximately 160 crude refineries in Europe, and 12 of them are for sale. Others have recently changed hands, such as ExxonMobil’s Dunkerque, France, facility which was bought in May by Colas Group.
Looking at Europe’s 160 crude refineries, “we expect there has to be closings,” Wright stated. “Some fuels refineries are not making money, and if a fuels refinery closes that has an associated lube oil plant, that will close too.”
In terms of gross margins, Solomon’s benchmarking studies of refinery operations show that base oil margins over crude in 2010 have returned to their levels of 2002. “But if you look at the operating cost as well, to figure the net margin above crude and operating costs, the picture is not so good,” Wright declared.
When Solomon rates Europe’s Group I plants, it finds feedstock costs are a major differentiator, with the lowest-cost producers typically enjoying some sort of low-cost crude source, and the poorly performing ones usually hobbled by higher-cost feeds.
“Despite this,” Wright said, “we see that virtually every lubricants facility within a fuels refinery adds to the viability of that refinery.” In some cases, the base oil unit might produce as little as 3 percent of a refinery’s total output, yet accounts for 30 percent of its profits. “In a few extreme cases, there are some refiners out there who make more money from lube oils than from fuels,” he revealed.
Solomon’s data also points to increasing differentiation opportunities for heavy lube oil cuts. “There’s real money in producing heavy material. This is because a lot of industry runs on heavy lubricants. Also, no alternatives have been found yet to the waxes produced from petroleum.” Despite the availability of waxes from the Fisher-Tropsch process or those from vegetable sources, these are not equivalent, Wright said. “So there are some distinct advantages to being able to produce heavier lubes.”
The looming question is whether a well-run Group I solvent-refining plant can compete with the hydroprocessing route, which requires less energy and is less crude-dependent. Wright believes it can. “Group I in fact has some advantages, including profitable products such as bright stock and waxes. In some cases, it may have lower raw material costs, like if a refiner can use vacuum resid rather than vacuum gas oil.
“If a Group I facility expects to survive, it must look at ‘heavying up’ the slate,” he advised. “That means you’ll need a heavier feed, need to look strategically at the market for these molecules, and need to figure out how to compete against heavy naphthenics.”
In any case, Solomon does not expect to see any new solvent plants to be built, “with the possible exception if someone wants to use a heavy feed like resid and to do it with minimal effort.”
“The phrase ‘well run’ is key,” Wright emphasized. “You have to get everything of high value out of the feed, and maximum wax out.”
Group I producers still have alternatives. One is to add a hydroprocessor after the solvent extraction step, to try to make a light product that’s competitive with Group II and III. However, this means securing a significant source of hydrogen, Wright pointed out, whether the refiner buys it or builds its own hydrogen plant.
Also, because hydroprocessors tend to run as batches, operators will have to invest in storage tanks, which ties up working capital. “And there is also the risk that the unit might only be able to make Group I-plus, not quite making it to Group II,” Wright said.
Another alternative is to use a supplemental feed, such as fuels refinery hydrocracker bottoms, to improve margins.
“Whatever the market or locale, any high-cost plant is in danger,” the Solomon executive warned. “There are some cases where for political reasons a plant is not allowed to close, although it may not be on the surface economical to run.”
And some refineries will stay open even without prospering. “The pressure that keeps some folks from shutting a refinery is the restoration cost; they’ll keep going because the other side of the equation, site remediation, is too expensive.
“In the future, many Group I plants will survive and thrive. Some also will close,” Wright concluded. And the factor that will assure survival is being well run.