VIENNA – Steeply lower crude oil costs are the biggest reason that margins for fuels, base stocks and other refined products have improved, but other factors have also contributed, including strong demand and supply base consolidations, an analyst told a lubricant conference here last week.
That does not mean the end of pressure on API Group I plants, although their profitability has improved a bit, IHSs John Leavens said at the ACI European Base Oils and Lubricants conference.
For most products, margins usually improve when demand is strong, and that is the case now for oil products. Short-term margin strength in Europe is driven by strong demand for high quality products, particularly middle distillates and gasoline, said Leavens, director of downstream at IHS.
IHS is a London-based firm that acquired Purvin & Gertz consultancy in 2011.
Focusing on base stocks, Leavens said that what IHS refers to as global technical base oil demand will reach 36 million metric tons per year by 2020, compared to the 35.5 million t/y that IHS forecasts for 2015. IHS defines technical demand as the minimum volume of Group I, II and III oils needed to make lubricants that meet end user performance expectations. Actual demand for Group II and III is much higher due to over-blending, and while in 2015 Group I technical demand is expected to be 61 percent of total, it could drop to 55 percent by 2020, Leavens said.
Refining margins have also been aided by marine fuel specification changes for the Baltic Sea and North Sea emissions control areas. What it basically stipulates is to not burn fuel oil in open waters and to use gas-oil distillate instead. The increased demand for this distillate increased the refiners margins, Leavens said.
IHS contends that existing refiners have also benefited from a long period of rationalization that saw closure of numerous older European refineries – some of which produced base stocks – a trend that accelerated during the Great Recession. In this past year we have seen a sudden emergence of economic growth in some key countries such as the United States, Leavens stated, adding that many European economies enjoyed slight recoveries and are much better now than in 2014.
As a result, capacity in the short term is quite tight today, when European refining continues to be besieged on all sides and a number of refineries were closed in the last few years. It give us another reason [for] sales margins staying high, Leavens said.
Looking ahead, large, new refineries are due to come on stream, and these could help re-balance supply and demand, putting downward pressure on the margins, the consultancy found. We expect this to be the result of strong U.S. refining and low international freight rates, the start-up of two large-scale fuel distillates orientated refineries in Saudi Arabia, and the slow but successful refinery modernization in Russia, Leavens observed. To date, he added, this downward pressure has been offset by global demand growth and regional demand recovery.
A number of Group II and III base oil capacity projects are planned in Western Europe and Russia. Three Russian plants are slated for expansions and/or upgrades: Slavnefts plant in Yaroslavl; Rosnefts in Novo-kuibyshev; and Gazprom Nefts in Omsk. In Europe, similar projects have been announced at Totals plant in Gonfreville, France; ExxonMobil and Shell refineries in Rotterdam; and a Nynas site in Harburg, Germany.
European and Russian announced Group II/III base oil plants plus a number of other projects in the Middle East and Asia-Pacific regions add up to a net global addition increase of 7.6 million tons per year by 2020. This is on a top of 2.9 million t/y added in 2014, Leavens said.