Forecast Calls for Group II Shortage

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HOUSTON – The next passenger car motor oil upgrade will leave the U.S. base oil market with a 10,000-barrel-per-day deficit of API Group II base oils by the end of this decade, an industry insider told an audience Thursday at the National Petrochemical and Refiners Associations Lubricant and Waxes Meeting.

Over the same time frame, predicted thesame individual, who happens to be an official with a Group I supplier,the U.S. will develop a Group I surplus of more than 32,000 b/d.

Those projections were part of a presentation by Terry Hoffman, a longtime member of NPRAs Lubricants Statistics Committee and director of lube sales for Group I producer Valero. The U.S. lubricant market swirled with speculation the past yearabout whether a shortage of Group II would develop because of GF-4, the latest industry standard for passenger car motor oils. GF-4, which hit the market in August, requires greater proportions of premium base oils than previous specifications. Hoffman said he addressed GF-5 – expected in 2009 but already being worked on by the auto, lube and chemical additive industries- instead of GF-4 to avoid running afoul of antitrust rules.

Hoffman laid out theassumptions underlying his conclusions, saying they were relatively easy to make using data from twoNPRA documents: the 2003 Report on U.S. Lubricating Oil and Wax Sales; and the 2004 Lubricating Oil and Wax Capacities report. He assumed total yearly motor oil demand will remain flat at 1.1 billion gallons. He also assumed that Group II demand in 2010 will equal 80 percent of sales volumes of multigrade oils for both gasoline and diesel engines plus 90 percent of Dexron- and Mercon-licensed automatic transmission fluids. For all three categories of products, he assumed the balance would be additives or Group I oils.

These assumptions add up to annual Group II demand of approximately 1 billion gallons, Hoffman said. Including an expansion that Motiva has announced for its Port Arthur, Texas, plant, the United States has nameplate Group II capacity of 89,500 b/d, or 1.4 billion gallons.

But Hoffman contended that actual production is generally no more than 95 percent of capacity. Moreover, he said, motor oils can only be formulated using base oils with viscosities ranging from 100 SUS to 300 SUS, and these account for 65 percent of capacity. This leaves a pool of just 847 million gallons of Group II available for the motor oil market – a shortfall of 153 million gallons, or 10,000 b/d.

Things are going to be pretty tight until GTL comes online, he said, referring to plans by major oil companies to build large gas-to-liquids base oil plants within the next seven years. GTL base oils are expected to perform on par with polyalphaolefins while costing considerably less to produce.

With premium base stocks becoming the main ingredient for multigrade motor oils, Hoffman calculated that Group I demand in 2010 will comprise95 percent of monograde motor oil sales; 50 percent of additive diluent oil for multigrades; 60 percent of process oil sales; 30 percent of grease sales; and 80 percent of industrial oil sales. This adds up to 747 million gallons per year. Based on current capacity, that leaves a surplus of 493 million gallons, or 32,159 b/d.

And thats a conservative projection, Hoffman said. It could turn out to be significantly higher than that.

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