JERSEY CITY, N.J. – By 2020, API Group I base oil capacity will decline to just 40 percent of total capacity, down from 60 percent today, and Group I plants need to plan wisely to survive, an expert cautions.
Will Group I survive? Absolutely, Amy Claxton, principal of My Energy, told the ICIS Pan-American Base Oils & Lubricants Conference here last week. Heavy neutrals, bright stock and wax are very profitable and likely to continue so.
But New Group II and III capacity and Group I shutdowns make it likely that Group I will account for just 40 percent of total capacity by the end of the coming decade. And while Group I plants have a variety of options for navigating the challenges ahead, they need to plan to succeed, Claxton said.
Global base oil capacity today totals about 950,000 barrels per day. About 60 percent is Group I, 25 percent is Group II, 6 percent is Group III, and 9 percent is naphthenic, Claxton said. But API Groups vary by region. North America has a majority of Group II with significant Group I capacity. Asia is mostly Group I but has significant Group II and almost all of the worlds Group III capacity. For South America, Western Europe and the rest of the world, its a Group I world out there, Claxton continued.
Reasons for base oil quality differences by region are numerous, including regional quality needs, different fuel refining investments and varying parent company strategies. But going forward, crude type is a major driver shaping global base oil supply.
What you put into the refinery matters, Claxton said, and the Americas dont have the good waxy crudes, so our region is import-dependent for higher quality lube crudes. By contrast, Asia is cost-advantaged for high quality base oil production, with no long-haul shipping costs for crudes.
Regions with marginal to good lube crudes and no new investments in refining technology are predominantly Group I, Claxton went on. In North America, with Middle East crude imports and investments in technology, Group II dominates. And in Asia, areas with Middle East crude imports and investments make Group II, while those with high-paraffin Asian waxy crudes produce Group III and III+.
Base oil players in the Americas face a make versus buy decision when it comes to high viscosity index base oils, said Claxton. They need to decide whether to invest in facilities and imported crudes to make their own high VI products, or whether to buy imports from Asia.
Turning to the options that Group I plants face, Claxton noted that doing nothing becomes a self-fulfilling strategy. She spelled out more attractive zero-capital-investment options, including 1) a corporate strategy to exit the lubes business over a several-year period, with constant maintenance spending to keep future options open; 2) buying high quality base oils when needed, while keeping up with maintenance, to maintain the status quo; and 3) buying high quality base oils when needed and skewing the product slate towards the most profitable products, while increasing maintenance and energy spending in targeted areas.
If management is interested, Group I plants also have some low-to-moderate capital investment options, Claxton said. These include adding high-pressure hydroprocessing to the Group I train, or adding it just to the existing Group I light neutrals. A shared hydrocracker for fuels and lubes is another option, if its justified on a fuels basis, although high paraffin crude is required to make a Group II or Group III.
Maintain your plant. Otherwise there are no other options, Claxton said. And making it a hybrid can be lower cost than building a grassroots Group II hydroprocessing plant.
Looking ahead, Claxton noted that about 92,000 b/d of new Group II and III capacity is currently under construction and scheduled to stream by 2014 to 2015. An additional 200,000-plus b/d has been announced, although some projects are unlikely to be built. This new capacity puts pressure on the highest cost producers, that is, the least well maintained plants. An oversupplied market means prices will fall, plants will run at reduced rates and the high cost producers will shut down.
While the coming decade will bring some new naphthenic plants, there will be no new Group I capacity, said Claxton. And global base oil demand will grow very slowly, perhaps around 1 percent per year, with developing country growth offsetting contraction in mature economies.
The result, by 2020, is likely to be total global base oil capacity around 1,050,000 b/d – the total pie will be a little larger. But Group I will account for just 40 percent of that total. Expect Group II to rise to 30 percent and Group III to expand robustly to 20 percent, Claxton said. Naphthenics will have a robust niche with 10 percent.
If youre a Group I player, you wont be alone next year, Claxton concluded. Group I wont go extinct in my lifetime.