The latest expansion now under way at Chevrons refinery in Pascagoula, Miss., on the U.S. Gulf of Mexico coast, includes a 25,000 barrel per day API Group II base oil plant, scheduled for start-up in the fourth quarter of 2013, to supply base oils to the Americas, Europe and beyond.

Fuels, and then petrochemicals, are the typical production from a barrel of crude, and fuels and petrochemicals tend to be commodities, said Kovar. Base oil brings complexity. Its not a commodity, but in the right circumstances, its a positive value-add for refiners. Its a balancing act.

Refining decision-making is driven by balancing whats possible with what the market wants. A refinery is originally defined around the crudes that are available, he continued. The sinking quality of crude supply with the rising quality demands for fuels and lubricants increases the challenges for refiners.

Product specs continue to change – the market demands lower sulfur transportation fuels, lower sulfur fuel oils and low SAPS lubricants – while crudes get poorer, said Kovar. The refinery is the filter between crude dynamics and product specs.

As a result, refinery upgrades must deal with bad actors in the crude by removing, altering or treating them, he said. As the crudes are more challenged, more investment is required. Modifying a refinery is very expensive, and it takes time. The goal is always to maximize net cash margins and overall return.

Transportation fuels are the primary driver for refinery processing schemes, Kovar said, and base oils are an add-on to fuel production that creates complexity for refiners. Fuels are the core marketing product for refineries. Their large production volume is the fundamental reason refineries exist. Fuel refining is stable production, with no batch processing requiring switching and disruption to the refinery. And not least, secure supply of transportation fuels is in every countrys national interest.

Base oils, on the other hand, limit crude stock choice, Kovar continued. They create tension in the decision-making process and take capacity away from fuels production. Refiners are more comfortable with commodity products. Base oils are low volume, specialty products that need specialized laboratories and have more difficult marketing needs.

But base oils also offer opportunities for refiners. The premium base oil market is growing 7 percent per year, and these specialty products earn a premium price. Base oil production can support internal demand for large lubricant marketers, and large linked plants, like Chevrons planned Pascagoula plant and its existing Richmond, Ca., and joint-venture Yeosu, South Korea, plants, allow companies to capitalize on globalization in the industry.

Regional fuel demand drives base oil production, Kovar stated. Group II and Group III base oils have similar processing schemes, but are made from different feed based on fuel production. Group II is produced using vacuum gas oil in a dedicated base oil hydrocracker, while Group III is produced by processing unconverted oil (fractionator bottoms) from a two-stage diesel hydrocracker. Group III requires large diesel hydrocrackers.

Refiners in Asia and the Middle East are best suited to produce Group III, because of the prevalence of diesel fuel, large modern refineries and large diesel hydrocrackers, plus suitable crude stocks.

Europe may see limited development of Group III plants, despite the prevalence of diesel fuel, Kovar continued. The regions diesel hydrocrackers are small, its a difficult development environment for refineries, and excess Group I production is a disincentive for investing in Group II plants. Eastern Europe is the most likely place for any European Group III plants.

In North America, Group II is dominant because its largely a gasoline market, with no large-scale diesel hydrocrackers. North America has seen widespread Group II production since 1995, and automotive lubricant specs favor Group II, although Group III is used in small but growing segments.

These are the regional fuel demands, but OEMs want global supply of base oils and global lubricant formulations, said Kovar, driving large refiners to evaluate multiple plant locations to produce fungible – interchangeable – base oils. Major oil companies are moving to global availability of fungible base stocks from multiple plants.

Base oil customers, Kovar contended, are prioritizing their suppliers based on their portfolio of qualifications, global base stock slate, security of supply from multiple locations and large volume plants, and their commitment to grow with their customers. Examples of global suppliers, he said, include ExxonMobil for Group I, Neste and SK for Group III, and of course Chevron for Group II.

With Pascagoula, Chevron will have three plants producing interchangeable base oils, Kovar concluded. The high pressure reactors arrived at Pascagoula in November, and 800 contractors are on site today. We look forward to completing the project on time, and being part of the new base oil world.