LONDON — “Naphthenic base oils have seen more change in the past three months — and even more in the past three weeks — than I’ve seen in years,” Tomas Wallin, chief executive of Nynas Naphthenics in Stockholm, Sweden, told the recent ICIS-LOR World Base Oils Conference here. Global naphthenic markets, already out of balance, could be rocky for years to come, he indicated.
Announced closings of two naphthenic refineries — Shell’s Deer Park, Texas, and Martinez, Calif., facilities — have buyers frantically trying to line up new suppliers, and will send long-lasting reverberations through the markets for process oils, transformer oils and lubricants, he said.
Naphthenics is a 2.8 million metric ton global market, Wallin noted in his Feb. 20 presentation. Of that, roughly one-third is used as electric transformer oils, one-third goes into various lubricants, and one-third is used in chemical manufacture.
These three markets are not equals in their need for naphthenics, however. The “key” segment is where naphthenics can deliver a clear technical advantage, such as high solvency and/or low-temperature properties. This includes transformer oils for the electrical industry; specialty lubricants such as greases, metalworking fluids, refrigeration oils and cold-climate hydraulic fluids; and chemicals such as rubber oils, printing ink oil, adhesives and anticaking agents.
These are premium markets, where naphthenics should command a 10 to 15 percent price advantage, Wallin said. That they fail to do so is largely attributable to the oils’ use in less-valuable markets.
Next are the secondary market (such as neat metalworking oils, where naphthenics are technically equal to paraffinics) and last — dead-last — are non-naphthenic applications such as monograde engine oils, where naphthenics only can compete by selling at a discount below paraffinic oils. This unappetizing market mostly exists in North America, and is no longer supported by refining economics. “It’s dragging down the U.S. market and hence the closings,” stated Wallin.
The secondary and non-naphthenic markets are the ones most at risk, and the ones that most easily may switch from naphthenics. The secondary market could even see a pitched battle against Group I base oils, because as solvent-refined paraffinic base oils lose ground elsewhere to high viscosity index stocks, “they will try to face-off with naphthenics for market share,” Wallin said.
“For the same reasons — quality and price competition from paraffinics — the non-naphthenic markets will fade. Why expect users to buy naphthenics when they can get better paraffinics at the same price or better?” he asked.
An immediate question is whether naphthenic capacity exists to meet the needs of the world’s transformer oil markets. If not, the fear is that disappointed buyers will turn away from naphthenics, will substitute other ingredients, and won’t come back even if supply loosens again in the future.
“Shell is the major supplier here, and its exit will create a short-term shortage,” Wallin acknowledged. “Some other grades may be adaptable, and Ergon’s announced expansion will help too. But the next two or three years will be rocky.”
A second quandary is the imbalance between naphthenic supply — concentrated in North America — and its highest-growth market, Asia-Pacific. North America still holds the lion’s share of the naphthenics market, consuming 56 percent of the world’s supply. The next-largest market is Europe, with 17.5 percent of the total, closely followed by Asia (17.0 percent).
“The U.S. market is highly over-naphthenized,” Wallin pointed out, “while the market in Asia-Pacific shows a heavy deficit.” Already, Asia-Pacific consumes about 470,000 metric tons of naphthenics, and must import about a third of its needs. Wallin believes this market could require 800,000 metric tons by the end of the decade — or 28 percent of the supply — but unless naphthenic supply expands, it might go thirsty. “Who’ll feed that coming demand, or will this market never reach balance?” he pondered.
Why this imbalance? Many of the early oils discovered in the United States, especially around the Gulf Coast region, were naphthenics, Wallin said. This ready supply allowed the major U.S. oil companies to push naphthenics into lots of applications. However, as global crude supply shifted to paraffinics in the 1980s, these became favored for the largest-volume lubricants, especially automotive engine oils. More and more, naphthenics came from smaller, independent refiners, from non-U.S. sources such as Venezuela, and some North Sea crudes.
Meanwhile, naphthenics’ share of market declined. In Western Europe, for example, naphthenics supplied over 20 percent of the base oil market in the 1970s, versus only about 11 percent today. Wallin believes that North America will shrink to only 35 percent of demand in the next few years, while Asia-Pacific will grow to 28 percent and Europe to 24 percent of the total.
Long-term, the “key” segment is where most naphthenic oil will be channeled, Wallin said, with transformer oil and process oil markets being most desirable. The market for transformer oils will be largely determined by growth in electrical demand, while specialty lubricants will track general industrial development and GDP. And in the chemical process industry, strong growth may be seen in use of naphthenics as a solvent — between 5 and 10 percent growth, Wallin said.