Whitby, based in Woking, Surrey, U.K., said that European blenders will likely have to use more Group II and Group III base oils, in place of Group I. The causes of Europes base oil supply and price problems start with the high price of crude oil.

Prices for Group I are primarily based on the cost of crude oil, Whitby told Lube Report last week. I dont believe anyone can predict whats going to happen with the price of crude, but I think crude prices are about where they should be at the moment, and that base oil prices will stay close to where they are if crude does the same.

The shortage of feedstocks for base oil plants, due to high demand for low-sulfur gasoline and diesel fuels, is a major source of supply problems. When demand for gasoline and diesel is high, or prices for gasoline and diesel are high, feedstocks will be routed to maximize gasoline or diesel production, Whitby told the conference. Integrated refineries are always operated to meet demand for fuels, and production of transportation fuels always takes priority over production of base oils and specialties.

A compounding factor, he added, is the shortage of good quality crude oils for Group I base oils.

Recent disruptions to base oil production due to fires and unplanned down time have made a difficult supply situation worse. Disruptions have included fires at ExxonMobil Port Jerome, France, and Nynas Nynashamn, Sweden, and strikes at Total Gonfreville, France.

While the numbers of disruptions in both Europe and North America may be an aberration, Whitby warned that accidents may be more frequent in the foreseeable future than in the past. The drive to maximize output means that refineries are being run much harder, at the same time that opportunities for maintenance are declining.

Fewer storage tanks in the distribution chain are another factor that blenders need to cope with. While less stock in storage improves supply chain economics, said Whitby, it means there is less of a buffer to cope with disruptions.

Closure of older Group I base oil plants in both Europe and North America has also contributed to tight supply.

Europes Base Oil Scorecard
In 1990, Whitby said, Western Europe had 30 base oil plants with 7.33 million metric tons capacity. By February 2006, that was reduced to 21 plants with 7.1 million tons capacity.

Whitby reported the following changes between 1990 and 2006 in Western European base oil manufacturing:

• 10 = Number of refineries closed.
• 4 = Number of refineries sold or transferred.
• 4 = Number of companies exiting the base oil refining business.
• 1 = Number of new refineries (Fortums Group III plant in Porvoo, Finland).
• 5 = Number of major refinery upgrades or expansions.

Why have so many Group I plants closed? Low profitability due to low prices and/or lack of economies of scale is a major reason, said Whitby. Maintenance and upgrading costs are frequently not justifiable. Refiners may face a shortage of suitable feedstocks. Improving quality and availability of Group I base oils from Central and Eastern Europe and the Middle East, combined with increasing demand for Group II and Group III base oils helped push the older, smaller plants to fold.

Most Group I plants are more than 30 years old, and their mechanical equipment needs maintenance, updating or replacing in order to meet Europes current health, safety and environmental requirements. Low operating profitability from 1997 to 2003 discouraged investment, Whitby said, while higher throughputs from 2004 onwards have put increasing strains on old equipment.

The underlying fundamentals will lead more Group I plants in Europe to close, although the trend may have a hiatus in the near term.

Given whats happened over the last six months, Whitby told Lube Report, I think that if BP and Shell [which both closed plants last year] could reconsider, they may have decided to keep their plants open slightly longer. And I think that while availability and prices remain as they are now, it will encourage a few [companies] that might have been considering closing plants to keep them open longer.

Whitby cautioned that consistency of base oil quality is critical to blending plant managers, and base oils must always be evaluated against standard criteria for formulation requirements. But he had some advice for lube blenders: Blend base oils to minimize poor performance properties. Mineral oil-synthetic oil blends can be very effective, he noted – but check compatibility. Use base oils that do not require as much additive to achieve the desired performance. Use the minimum amount of additive necessary to achieve the required specification or performance; using too much additive is called quality giveaway. Keep in mind that readily available base oils and additives generally have lower prices, and buy in bulk whenever possible.

With more Group II and Group III plants coming on line around the world, Whitby predicted increased differentiation between Group II and II-Plus base oils. And Group II base oils are likely to become the standard grade of paraffinic base oils, he said.

Looking ahead, Europes smaller, older Group III base oil plants will face competitive threats from larger, newer plants, and Group III supply is likely to be increasingly tight in Western Europe over the next three to four years.

Dont expect GTL base oils before 2009, said Whitby, and prices for GTL oils are likely to be higher than prices for Group IIIs.

Lube blenders may have to adapt to a new environment where tight availability and high prices become the norm, he said. I think blenders will be able to get the base oil they need, but theyre going to have to pay for it.

Tim Sullivan contributed to this report.