The Fairfax, Va., based executive looked back over the past few years, and forward to short- and long-term demand. He pointed out that while the worlds vehicle production and fuels consumption have climbed since 1999, lube demand has not. Improvements in lubricant quality have led to longer drain intervals, smaller sump sizes and reduced volatility losses – all of which have kept finished lube sales volumes from climbing, he told the ICIS-LOR World Base Oil Conference here on Friday.

The result has been a relatively flat demand profile over the past few years, Cox said – hardly encouraging refiners to pump up their volumes. Hence, on the supply side of the ledger, the worlds nameplate base oil refining capacity held steady at around 900,000 barrels per day for the past five years – and rarely ran full tilt. Only about 75 percent to 80 percent of the available capacity was effectively utilized on average, for some 700,000 b/d of supply. In a normal year, that still left a cushion between demand and effective capacity of about 40,000 to 60,000 b/d, Cox said. These are the barrels that are left over in the system, barrels that someone just cant place.

2003, however, was far from normal. That year lube refiners faced an unusually high number of reliability issues. There was an increased number of unplanned downtimes, and for longer durations than usual, Cox pointed out. Some outages were due to fires or accidents but in some cases, he said, poor maintenance seems to have been to blame. Group I plants are aging, he explained, and they tend to require more maintenance. Many of the worlds Group I base oil plants are 30-plus years old, and their mechanical equipment needs updating and replacement to operate effectively and safely. Ironically, many such plants are seen as spare capacity, and thats the time when refiners are most reluctant to invest in maintenance and repairs, because theyre just not getting a good return, Cox observed. He suggested that low margins from 1997 to 2003 further discouraged investments in plant reliability.

Normally, about 10 percent of refinery base stock capacity is off-line during any year for unplanned outages, Cox estimated after reviewing years of data, but in 2003, we saw more unplanned outages than usual. Cox and his co-author, Steven T. Swift, estimated that plant reliability issues took a 25,000 to 30,000b/d bite out of the normal capacity cushion in 2003. Things got better in 2004, but reliability issues still accounted for about 10,000 b/d of unmade barrels.

Refining economics did their part, too, especially in 2004. As fuels refining saw better margins, refiners shifted their production into fuels and away from base stock output. Fuels operations became favored for investments and upgrades. Every refiner has to decide whether to invest in nondiscretionary fuels capacity or in discretionary lube oils capacity, and fuels wins in almost every case, Cox said.

And as crude costs climbed during 2004, some refiners switched to lower-cost crudes when available. This may have made sense from an overall refinery operations standpoint, Cox said, but it hurt lubes output. For example, some North Sea crudes can yield up to 4 percent lubes with relatively low sulfur content; refiners pay a premium for such crudes versus sour, lower-yielding crudes. But with lower-lubes-yielding crudes trading at $3 to $8 per barrel below the premium feeds, some refiners gladly made the switch, especially as strong fuels demand brought fuels margins into parity with base stock margins.

Crude diets – the use of lower base stock yielding crudes – created a 4 percent decline in base stock production in 2003, versus 2000, Cox reckoned. Available data, he said, suggests that the global impact of such crude switching amounted to 10,000 to 15,000 b/d of lost base oil yield in 2003, and perhaps even more in 2004.

Finally, theres the issue of demand for higher-quality finished lubes. As users seek lubricants with reduced volatility and lower sulfur content, refiners must increase the severity of their processes – and that always comes with a yield penalty. To upgrade a Group I base oils viscosity index and to reduce its volatility to meet the latest automotive engine oil specifications can mean a loss in output ranging anywhere from 10 to 50 percent. This is not a cost-effective solution for the long term, Cox added, but some refiners do go this route, and it does tighten up the market a bit.

ExxonMobils principal interest through all this has been as a major base oil supplier, Cox said. The majority of our base oil production goes into the merchant market and will continue to do so, and maximizing deliveries to lubricant blenders is a core strategy for the oil giant, he stated. Our favorite container size is a ship – thats what we do well and what we like to do.

Casting ahead to the future, Cox pointed out that at least two refiners have announced closures to take place soon. BP will close its Coryton, U.K.,base oil plant in 2006, taking 7,000 b/d out of the market, and a Shell plant in Hamburg, Germany,will close this year, for another 3,000 b/d hit.

On the plus side, new units and expansions totalling about 35,000 b/d are due to stream before the end of 2007, beginning with a debottlenecking this year at Fortums Finland refinery (gaining 1,000 b/d), and Bharat Petroleums 3,500 b/d grassroots plant in India. Motivas new 13,000 b/d Group II base oil train in Texas will open in 2006, and 2007 will see new capacity in Malaysia (7,000 b/d from Petronas) and France (Totals 10,000 b/d expansion).

While openings and expansions tend to be noisily announced years in advance, and closings to take place quietly and swiftly, certainly theres a lot more new capacity coming on, a lot more than whats going out, Cox said. By 2006, the market will feel long, and by 2007, with the planned expansions and no repeat of the problems weve seen occur, well be up even more.

Longer-term, yet more capacity is on the drawing boards, and production is expected to zoom. All of the announced new capacity will make Group II, II-plus, III and gas-to-liquids base oils, using more efficient processes and more reliable catalyst technology. These new catalysts are capable of up to 94 percent capacity utilization, rather than the more typical 75 to 80 percent we’ve seen, Cox said. Meanwhile, growth in global lubricant demand will be only moderate, despite some faster-paced markets such as China and Eastern Europe.

Overall, he concluded, the current tight base stock market is a result of short-term production problems, and thats why the market feels tight despite apparent oversupply.