Group I Squeeze Continues

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ALICANTE, Spain – At around 35 million metric tons per year, global base oil demand has been depressed in the past few years and it is expected to rise to about 37 million t/y by 2020, according to a consultancy. At the same time, surpluses of API Group II and III base oils will squeeze more Group I out of the market.

Technical Demand vs Actual Production

IHS Energy Director of Downstream Consulting John Leavens addressed the ACI European Base Oils and Lubricants conference about technical demand demand for base oil, which he defined as the minimum volume of Groups I, II and III needed to make lubricants that meet the performance expectations of end-users. Actual demand for them is much higher, and we expect significant increase of Group II and Group III technical demand, Leavens said at the conference last month in Alicante, Spain.

In 2013, global technical demand for Group I base oil was 64 percent of total, according to IHS, a London-based firm that acquired Purvin & Gertz consultants in 2011. By 2020, this demand is expected to be 55 percent of total. Actual demand is a little different because Group II and Group III base oils can also be used in applications where, from the quality point of view, they are not required but can be used anyway, Leavens said. Here there is a degree of what we call over-blending, when higher Groups are used in applications where Group I can be used and this is happening of economic, logistic or marketing reasons.

IHS found that actual global demand for Group II/III base oils is higher than the technical demand which impacts the demand for Group I base oil. We expect total global technical demand for Group II/III to be low – at 10 million tons – in 2014, while production volume is expected to be almost [twice as high]. In 2014, Group II/III production capacities would stand at 24 million tons, with utilization rate at 80 percent, Leavens said.

In contrast, this years global Group I technical demand will be higher than global Group I production – 23 million tons to 14 million tons, according to IHS. With total global Group I base oil capacities of around 27 million t/y, Group I utilization rate would be more than 50 percent. It shows us that production of Group II/III is much higher than the actual production of Group I, Leavens observed. That gap has been filled by Group II/III base oils used in applications where technically one can use Group I. Because these groups have been used in the application where they [dont have to] be used, it reduces the actual demand and production of Group I base oils, Leavens observed.

Expansions and Closures

Significant base oil capacity expansions are planned in Europe and Asia – almost all Group II and Group III facilities – and IHS expects growing excess of global base oil production capacity. In Europe these capacities include Ilbocs (a joint venture between Korean SK Lubricants and Spanish Repsol) new 663,000 t/y Group II/III plant in Cartagena, Spain; Oil Refinery Modricas expansion of 200,000 Group III base oil production in Bosnia and Herzegovina; and Tatnefts 190,000 Group II/III plant in Nizhnekamsk, Russia, We expect cumulative base oil capacity/demand growth to reach around 10 million tons and 1.8 million tons respectively by 2017. Clearly, this will lead to a global base oil oversupply situation, Leavens said.

IHS also found that base oil investment projects are driven by refining economics or economics of scale. For example, cost of production for European small Group I base oil plants stands at almost U.S. $1,200 per ton, compared to their large Group I counterparts where cost of production is $1,000 per ton, Leavens said.

Base oil plants along the United States Gulf of Mexico Coast have even lower production cost – around $800 per ton, similar to Asian opportunistic Group III base oil plants (which have a lube train attached to a fuel hydrocracker that gives them technical advantages), according to IHS. It shows that hydro-processing creates higher quality base oils for lower costs and that low-cost production routes will eventually win out over high-cost routes, he said. IHS found Asian Group II base oil plants have the same level of operating costs as large European Group I plants.

Group II and III capacity additions impact Group I utilization rates and will eventually lead to Group I rationalization, according to IHS. Leavens cited three European closures from recent years: Petroplus 320,000 t/y Group I base oil plant in Petit Couronne, France; Essar Energys 260,000 t/y Group I plant in Stanlow, England; and TNK-BPs 275,000 t/y Group I base oil plant in Ryazan, Russia. Shells 375,000 Group I plant in Pernis, Netherlands is set for closure in 2015, Leavens said.

By 2018, the Group I capacity utilization rate is expected to drop to 36 percent from the current 54 percent, while the Group II/III capacity utilization rate [should] be 80 percent by then. We estimate that almost 9 million t/y of Group I capacity would have shut down to get its utilization rate back to 70 percent, he said.

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