Throughout most of the world, ExxonMobil is recognized as the market leader when it comes to setting prices for lubricating base oils. But its role could be challenged over the next decade, according to a new study by an industry consultant.
In announcing its study Thursday, Kline and Co. observed that construction of new base oil capacity in Asia/Pacific and the Middle East is helping to create a global market, with four main export supply centers, each focused on a different grade of oil. At the same time, the market is becoming increasingly segmented in terms of quality.
This could open the door for Group II producers like Motiva and marketers like ConocoPhillips and Flint Hills to have a greater influence on pricing as Group II replaces Group I as the mainstream product, said Bill Downey, vice president and head of Klines Petroleum and Energy practice. For Group III, the South Korean producers SK Corp. and S-Oil – as well as their marketing partners – could become the price leaders to meet demand for the Western markets.
Kline said North America and Western Europe currently wield the greatest control over pricing in the global market, thanks to surplus volumes of API Group I and Group II oils that they export to the rest of the world. But SK and S-Oil have become the worlds dominant Group III producers in recent years, and other Pacific Rim refiners plan to build Group III plants within the next few years.
In addition, multinational oil companies have announced plans to build three base oil plants as part of gas-to-liquids refineries in Qatar by 2011. Those projects are expected to produce oils that perform on par with polyalphaolefins and are therefore described by some as Group III-plus.
The upshotwill betwo new supply points producing highly refined oils, much of which will be consumed in North America and Western Europe.
Western Europe will continue to be the primary Group I supply point for the rest of the world, and North America will remain the Group II leader, said Kline Senior Consultant Milind Phadke. But even as these regions export their surplus in these grades, they will need to import greater quantities of Group III and III-plus fromAsia/Pacific and the Middle East.
As Group III and III-plus make inroads on Group II supply in the West, the Asian and Middle Eastern producers will be moving their own large surplus into Europe and North America to gain some pricing leverage.
According to Klines study, Global Business Opportunities in the Lubricant Basestocks Industry, 2004-2020, there may be changes not only in geographic trading patterns, but also in the influence that various suppliers exert on pricing. While ExxonMobil remains the dominant Group I supplier in both Europe and North America, Motiva is easily the largest Group II supplier in North America – and stands to gain a bigger lead upon completion of a 15,000-barrel-per-day expansion at its Port Arthur, Texas, plant. That project, scheduled to come online in January, will swell the plants capacity to 40,000 b/d. The continents second-largest plant is a 21,900-b/d Group II plant owned by Excel Paralubes, a joint venture between ConocoPhillips and Flint Hills Resources.
SK and S-Oil are the worlds biggest Group III producers, with combined capacity of 23,000 b/d. The GTL plants planned in Qatar are being designed with combined capacity of 48,400 b/d – including 30,800 b/d in a joint venture between ExxonMobil and Qatar.
Kline said it is conceivable that ExxonMobil could end up the leader in establishing prices for Group I and GTL stocks, with other suppliers assuming more control of other grades.
We believe that such producers as Motiva and Flint Hills will be the largest merchant sellers of Group II base oils globally, said Geeta Agashe, director of the Petroleum and Energy practice. Hence, if they wanted to, they could step up and drive Group II pricing as opposed to pricing Group II based on ExxonMobils Group I pricing.
If Group II producers like Motiva and Flint Hills start pricing their product without reference to Group I pricing and if they are very aggressive in their pricing — which is likely given that Group II is trying to make inroads in Group I formulations –then Group I suppliers like ExxonMobil will be forced to follow their lead and set their Group I at a discount to the Group II postings. Similarly, for Group III SK and S-Oil could have a significant influence on pricing.
If they do come to pass, Kline said, these changes will benefit lubricant blenders.
The implication for buyers would be that the price-setting role would not be in the hands of one leading supplier but spread [among a number of suppliers], which is good news for buyers, Agashe said.