Where Will Shell’s GTL Land?


JERSEY CITY, N.J. – Shells 1.5 million metric tons per year of gas-to-liquids base stocks from its Pearl joint venture in Qatar will arrive in two trains, in 2011 and 2012. The first train is likely to be used internally, predicts Klines Bill Downey, but for the second train, watch for swaps, wax and secondary effects.

Branded finished lubricant sales are Shells focus, Kline & Co. Vice President William Downey, Jr., told the ICIS Pan-American Base Oils & Lubricants Conference here Dec. 2. If you understand Shells finished lubes and base stocks positions, youll understand where the GTL base stocks may be destined.

Shell sells 4.7 million metric tons per year of finished lubricants globally, and it has a balanced portfolio. About 36 percent of its sales are consumer automotive oils, 30 percent commercial automotive and 34 percent industrial. Synthetics make up about 10 percent of sales, Downey said. Shell is a big lubricant supplier in Asia, North America, Europe and the rest of the world.

Brand positioning is Shells focus, Downey continued. As a branded marketer, product positioning is critical. In North America, tracking price and performance, the Shell brand is good, Quaker State is better, and Pennzoil is best, while its reversed in the rest of the world, with the Shell brand positioned as best. Best products, he noted, dont move as much in price when raw material prices change.

To make 4.7 million tons of finished lubes, they need 4 million tons of base oils, Downey said. Before Pearl, the Shell-Qatar Petroleum joint venture, production streams, Shell has 4.1 million t/y of base oil capacity, including its jv Motivas 1.6 million tons. But of this, fully a third is unused capacity.

Shell made [API] Group III 20 years before the term existed, Downey said, but Shell has a large number of older plants. The question is whether Shell, with its 2.6 million t/y of mostly Group I production, has the right base stocks to meet advancing requirements.

Pearl, with its 1.5 million t/y of GTL, could balance Shell. But the simple answer is not always the correct answer, said Downey, who heads Klines Energy Practice in Parsippany, N.J.

Today, Shell is a significant base stock buyer, he went on. Its a finished lube marketer. All of train one could go into Shell, but what about train two? Shell still has a large conventional requirement in markets like China, India and Russia; most of its demand is for Group I, not Group III, base oils.

Kline sees four options, Downey said. First, Shell can upgrade demand, by improving the quality of the finished lubricants it offers and pushing the markets up. Shell is doing this now, with the benefit that top-tier products generally have better margins.

Second is a supply-chain option, where Shell can use its ample supply of GTL to replace Group III that its currently buying from others. Under this swapping scenario, some cash may change hands to balance regional price or freight differences, but the base oils are swapped, not bought and sold.

A third option would be trading the surplus GTL base oil – that is, buying and selling rather than swapping, but we dont think this is a core option, Downey noted.

Finally, he said, GTL starts as wax. Shell can sell some of the GTL as wax rather than convert it to base stock.

And, Downey said, we think secondary effects will be one of the biggest impacts of Shells introduction of GTL. For example, he explained, in North America Shell is currently buying Group III from third-party refiners. If Shell decides to ship its own GTL to this market, the present supplier has to find a new customer. Group III refiners will need to find new applications and new homes for their products.

Watch for secondary effects of Group III being pushed out of the Shell system, as the secondary effects may be the biggest, Downey concluded.

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