Crude Oil Pain is Base Oils Gain


DUBAI, United Arab Emirates – Despite uncertainty over crude oil prices, there are grounds for optimism in the base oils market, according to an industry consultant.

Jaap Kalkman, managing partner for Arthur D. Littles global energy and utilities practice, spoke to delegates at the 12th ICIS Middle Eastern Base Oils & Lubricants conference here last month.

Global crude oil prices averaged $110 per barrel in 2013 and $99 in 2014, but this year skidded to just $50/barrel. According to Kalkman, this fall is resulting in a wealth transfer of $1 trillion dollars per year from oil exporting economies like the Middle East to oil importing countries in emerging markets, including China and India, as well as established markets in Europe. The massive shift in wealth is set to boost gross domestic product, and that is positive for base oils, particularly API Group II and III.

For example, the fastest growing car market in the world is Western Europe with 8 percent growth year-to-date, he said. He now predicts the regions vehicle sales will reach 13 million units by year end after stalling at 12 million units for the prior three years. GDP growth translates into more spending power and more car sales, and that benefits the lubricants business, added Kalkman.

Yet it is not just car sales that are boosted – the wider transportation sector stands to gain from lower crude prices. Cheaper fuel leads to increased kilometers traveled, and that will support all API base oil groups as private transportation increasingly supplants public transportation. Other transportation sectors including aviation and commercial road transport will see a positive effect, too, all of which points to increased lubricant consumption. Surprisingly, Kalkman claimed Group I exports from Europe could experience a lift as a result of increases in vehicle fleets in developing markets. Plant closures that were planned could likely be postponed as Group I demand gets a pick-up, he said.

Even so, the base oils market is beset with overcapacity, and the problem is unlikely to substantially diminish anytime soon. That does not mean there are no areas of optimism, as the base oils market is complex, with Group I, II and III having very different outlooks, he said. Although Group I base oil remains the dominant type made in Europe, Kalkman says the overall outlook is negative. The market is changing for a very good reason – all the growth is in Group II and III as well as synthetic products.

That trend bodes well for the Middle East, which has announced significant capacity additions. Saudi Arabian refiner Luberef is set to add new Group II base oil capacity next year and Takreer in the United Arab Emirates has stated it will begin producing Group II and III base oils by the end of the year. The Middle East Gulf is well on course to be a base oils hub largely due to tax advantages, labor costs and cheap energy. According to Kalkman, that gives the region a major advantage, and he estimates the Middle East enjoys a $100 to $300 per metric ton production cost advantage over its European and Asian rivals.

Several producers – including Chevron, Shell, Hyundai, Repsol and SK Lubricants – have focused on building plants that produce higher grade base oils. The gravitation to higher specifications has been precipitated by regulatory authorities, original equipment manufacturers and the push by lubricant companies for better margins and product differentiation, Kalkman said. Group III base oils margins have been substantially higher than Group I or II margins, although margins for all API groups have improved recently.

Meanwhile technology is improving the ability of oil companies to extract greater amounts of crude oil. Out of an average oil well you may extract 50 to 60 percent of the oil, so most wells get abandoned with 40 percent of the oil still in there – I expect in the next 10 to 20 years, technology will get another 10 to 20 percent out of abandoned wells.

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