JERSEY CITY, N.J. – Nine to 13 million tons per year of nameplate base oil capacity needs to close by 2015. Closures are difficult, and it may take until 2018 or 2020, but it will happen, industry guru Stephen Ames said.
We are not in control of our destiny, Ames, managing director of SBA Consulting in Pepper Pike, Ohio, told the ICIS Pan-American Base Oils & Lubricants Conference here on Dec. 2. Base oil production has been decoupled from the lubricants industry.
Todays base oil drivers are mainly external to the lubricants business, said Ames. A key driver is emissions legislation and the resulting worldwide investment in clean fuels. Refiners installing clean fuels hydrocrackers have the option to invest in API Group II or III facilities, and many have done so.
Examples include Formosa Petrochemical in Taiwan, Bapco Neste in Bahrain, Takreer Neste in UAE, CNOOC in China, Tatneft in Russia, and SKs various joint ventures, which together promise some 3.7 million tons per year of new Group II/III capacity. These refiners have little or no in-house lubricants business to support, Ames continued. Their decision is based on maximizing the value of the overall refined product barrel.
Other drivers external to lubricants include refiners need for crude oil flexibility and growing investments in heavy crude processing. While Group II/III production is less affected by crude selection, this can be detrimental to Group I operations. Group I plants require a paraffinic lube crude that can preclude optimizing the overall refinery product slate, Ames explained.
Almost all base oil plants are integrated within larger fuels refineries, Ames said, and all are dependent on the health of the mother ship. With fuels demand weak in OECD countries, refining margins are under pressure, and more than 2 million b/d of crude refining capacity needs to close and stay closed in the Atlantic Basin in the near term. This does not bode well for Group I base oil plants located in less efficient fuel refineries in Europe or North America.
In addition, noted Ames, the new, highest quality base oil refining processes have the lowest cost of production. So additional Group II+ and III capacity will continue to be built, prompting higher cost operations to close. Most of those are Group I refineries, many in Europe.
Lubricant demand worldwide declined more than 9 percent from 2008 to 2009, said Ames, following a 2.7 percent decline from 2007to 2008. He expected only two thirds of the loss to be regained in 2010. By 2015, he predicted, global demand will reach about 37.1 to 37.6 million tons per year, well below the 2007 peak of 38.4 million tons. Tracking lube demand, base oil demand is likely to reach just 35.6 to 36.1 million t/y by 2015.
Demand pales in comparison to new sustainable capacity, Ames continued. The world faces more than 9 million t/y of new capacity, with more under evaluation, of which 88 percent will be Group II/III and gas-to-liquids and 12 percent naphthenics. Another 2 million t/y of capacity creep is likely, mostly Group II/III, and about 1.8 million t/y of Group I capacity may be upgraded.
As a result, said Ames, more than 9 million t/y of older and higher cost capacity should close. It will be predominantly Group I, with Europe seeing the greatest loss. The global base oil pool will become markedly lower in viscosity, and high saturate base oils will make up half of the paraffinic pool or more.
Looking at regional supply capacities, Ames noted that Group II and naphthenics will dominate in North America. Group II capacity will rise from 6.3 million t/y in 2009 to 8.2 million t/y by 2015, while Group I shrinks from 3.7 million to just 1.3 million t/y in the same time frame.
Both Western Europe and Central/Eastern Europe will see big declines in base oil capacity. Ames predicted that Western Europes Group I capacity will fall from 6.3 million t/y in 2009 to 2.3 million t/y in 2015. In Central/Eastern Europe, Group I will fall from 6.2 million to 2.8 million t/y from 2009 to 2015.
The Middle East and Africa will see big changes in base oil capacity, as 3.7 million t/y of new Group II/III capacity comes onstream by 2015.
Asia-Pacific will continue to grow, with total capacity climbing toward 20 million t/y by 2015. Latin America will continue to be a Group I region, with Group I capacity declining modestly to 1.8 million t/y in 2015.
Closures are very difficult undertakings, and unprofitable operations often continue long past their sell-by dates, said Ames. Shareholders, unions and communities are all involved. As a result, the transition to a more balanced base oil supply-demand position could be uneven and prolonged, extending well beyond 2015.