Over the next five years, the lube industry will see a fierce battle between API Group I and II base oils for market dominance, and the smart money is betting on Group II.
Sustainable global base oil capacity will increase by a staggering 11 million tons per year through 2017, with little or no growth in demand, Stephen B. Ames of SBA Consulting told the recent ICIS Pan-American Base Oils & Lubricants Conference. Undoubtedly, some plants will close, but almost certainly not enough to bring supply/demand back into balance. There are too many vested interests.
Consequently, many plants will be forced to operate at reduced rates. Look at the facts and decide for yourself whether it will be Group I or II capacity that is rationalized, Ames said.
Ames first compared typical refining processes for Group I and II base oils. Every refinery is different, Ames stressed, but Group I production is a physical separation process. The lube molecules must be in the crude, so it requires a special lube crude and, in most refineries, dedicated atmospheric/vacuum distillation.
In a typical retrofit or hybrid Group II plant, such as ExxonMobils Baytown, Texas, refinery, an extra hydrotreating step is introduced. It still requires lube crude, but with greater choice, Ames said, and you have the same lower-value byproducts as at a Group I plant, although usually less distillate aromatic extract.
Under a typical purpose-built lube hydrocracking scheme to make Group II, catalytic processes convert non-lube molecules into lube molecules, giving greater feedstock flexibility including lower quality, cheaper crudes. The byproducts are high value.
Feedstock, Products & Byproducts
Hybrid/retrofit Group II
Hydrocracked Group II
|Feedstock||Vacuum gas oil from paraffinic lube crude||VGO from paraffinic lube crude||VGO from many crudes|
|Relative base oil price*||1.0||1.0-1.1
1.1-1.15 for II+
1.1-1.5 for II+
|Byproducts||Bitumen/heavy fuel oil; aromatic extracts; wax||Bitumen/HFO; aromatic extracts; wax||Diesel; kerosene/jet fuel; naphtha|
|Byproduct value (weighted average)||Much less than VGO||Much less than VGO||Greater than VGO|
Source: SBA Consulting LLC
Its clear, said Ames, that a purpose-built Group II plant produces higher value base oils and higher value byproducts. There is a huge differential of some $20 per barrel between the value of ultra low sulfur diesel, the primary Group II byproduct, and of heavy fuel oil, a Group I byproduct.
A comparison of Group I and Group II capital expenses and operating expenses shows a similar result.
Capex & Opex*
|Group I||Hybrid/retrofit Group II||Hydrocracked Group II|
|Processes||Crude/vacuum distillation; propane deasphalting; solvent extraction; solvent dewaxing; hydrofinishing||Crude/vacuum distillation; propane deasphalting; solvent extraction; hydrotreating; solvent dewaxing; hydrofinishing||Lube hydrocracking; hydroisomerisation; hydrofinishing; hydrogen production often required|
|Relative operating cost index, ktpa basis||1.0||0.95-1.10||0.85|
750,000 to 1,250,000 t/yr for lube hydrocracking Group II.
Construction costs as of Dec. 2010.
Source: SBA Consulting LLC
Cost disadvantages notwithstanding, Ames continued, Group I plants have the upper hand in a number of areas. They alone produce high value bright stocks, and they typically have a greater yield of 500/600 N heavy neutral than from Group II hydrocracking. Their capital costs have typically been fully amortized. Fully refined wax operations can provide an important economic uplift, and in general Group I base oils have greater solvency.
On the other hand, Group II hydrocracking plants produce higher quality base oils in greater yields, with significantly higher value byproducts. They hold a substantial cash cost-of-production advantage. Its $150 to $170 per ton cheaper to make Group II than Group I, said Ames. And because they are not lube-crude dependent, they provide greater synergy with the larger refinerys fuels strategy.
Ames cited additional production factors favoring Group II over Group I. Group I plants tend to be located at older refineries, requiring higher maintenance and turnaround costs. The market for Group I distillate aromatic extract byproducts is increasingly limited because of their high sulfur content. And Group I plants were often built in place of diesel production, which now puts them out of sync with their fuels markets.
On the demand side, Ames continued, automaker specifications have reduced the amount of Group I that can be blended into engine oils. And Group II base oils can usually be used in place of Group I, often with additive costs savings. And the move to Group II provides base oil slate simplification and economics as well as supply assurance.
A major migration is occurring away from Group I, Ames concluded. With the closures and reduced throughput needed to bring base oil supply and demand into balance, Group I could account for as little as a third of global supply in 2017, compared to 40 percent for Group II.