Also in Europe, Shell is poised to shut down its Group I trains in Pernis, Netherlands, one after the other, by early 2016. The two trains total 7,100 b/d of Group I capacity. Nynas plans to switch to specialty naphthenics production at its 3,300 b/d Group I facility in Harburg, Germany, and Total aims to cease making Group I in Gonfreville, France (9,600 b/d), reportedly to focus on higher quality base oils that can be used in automotive engine oils.

Together, these changes will wipe 1.2 million metric tons a year of Group I capacity from the slate. So what does the future hold for the surviving Group I plants? How will Group I producers adapt to the changing market conditions?

These are some of the questions that Blake Eskew, vice president of IHS Energys downstream industry consulting practice, addressed at the recent AFPM International Lubricants and Waxes Meeting.

Eskew confirmed that while base oil demand is growing at a steady but not very robust rate, capacity is growing much faster, thanks to the addition of significant Group II and III volumes to the global supply system.

Base oil projects announced through 2020 total almost 10 million tons — accounting for roughly 20 percent of current capacity — and these additions are fairly balanced between Group II and III, Eskew said in his November presentation.

To illustrate the large shift in production among the different base oil groups, Eskew pointed out that, based on announced base oil projects and changes, Group I will represent only about 40 percent of global capacity by 2020, down from 75 percent in 2005.

One of the main downstream markets for base oils is the automotive segment, and on a global basis demand from this sector is growing slowly, while requirements from the industrial, process and marine segments are flat. Both sectors however are actually slowing in mature markets in North America, Europe, Russia and some Northeast Asian countries.

By contrast, the automotive sector is expanding in developing regions such as China, South Asia, Latin America, Middle East, Africa and the CIS countries, driven by vehicle population growth. Even in these markets though, Group I producers are likely to see strong competition for the remaining automotive market, Eskew said, adding that as the automotive sector increases its use of Group II and III oils, Group I producers will need to retain industrial markets to maintain utilization.

While Group I production wont completely disappear anytime soon, several factors, such as location advantages, feedstock advantages, operating cost control, production of specialty products and forward/backward integration, will determine whether Group I facilities will be able to survive the tsunami of new base oil capacity coming to the market.

Eskew explained that U.S producers are well positioned relative to Europe and Asia because of size and configuration advantages, coupled with the benefit of lower energy and operating costs. The United States generally enjoys more advantageous natural gas, hydrogen and power prices.

Nevertheless, most of the current Group I capacity is concentrated in Europe and Asia. Europe has only 15 percent of the worlds base oil capacity, Eskew said, but 25 percent of the Group I capacity. Asia has 39 percent of global capacity and 27 percent of the Group I.

The Group I plant profile differs widely across the globe. Small Group I plants – those with less than 3,000 b/d capacity – are common in the Middle East, Africa, Latin America, South America and Asia, according to Eskew, while North America has the most large plants (with greater than 6,000 b/d). Even if the worlds 34 smallest plants were rationalized, he stressed, it would eliminate less than 3 million metric tons of capacity — insufficient to rebalance the market.

How can Group I stay in the game? Base oil price relationships have changed dramatically in the last 10 years, Eskew said, and there may be some opportunities for producers if they can concentrate on the more profitable products.

For example, margins on light neutrals have remained unchanged in the past decade, while heavy neutrals and bright stock margins have increased by almost 50 percent.

Group I byproduct values have also risen sharply, creating opportunity to enhance margins. Margins for byproduct sales as feedstocks/intermediates were largely unchanged in the past decade, while wax and specialties margins have jumped by 200 to 300 percent, emphasized Eskew.

Bright stock, waxes, extracts, and asphalts – all are necessary to survival, he declared. Integration within a larger operation can help, but each facilitys performance ultimately will be measured relative to transparent markets: Integration will not disguise uneconomic operations.

Group I producers are likely to try all strategies in the quest to survive, and while some will be successful, others will not, Eskew concluded.