I expect well have some announcements [in Europe] and see projects moving forward in the next few years, he said.

Eskew told the collection of base oil producers, sellers and traders that more and more refiners are basing their operations on hydrocracking, which uses extremely high temperatures and pressures to convert aromatic molecules found in crude oil, as opposed to solvent refining, whichtakes them out.

Several trends are driving the shift. First, demand for distillates – diesel and kerosene – is growing much faster than demand for other categories of refined products, including gasoline and naphtha. Hydrocracking yields higher proportions of distillates than fluid catalytic cracking, its more traditional alternative technology.

Secondly, efforts to reduce air pollutants are pushing refiners to lower sulfur content in diesel. At the beginning of the 1990s, nearly all of the globes diesel production contained more than 500 parts per million sulfur, Eskew said. Today, nearly 40 percent has sulfur content of less than 50 parts per million.

Meanwhile, crude production is trending toward heavier and sour grades, which contain more sulfur than lighter, sweeter varieties. To maximize diesel output and meet sulfur limits, refiners must employ more intense methods, such as hydrocracking. Eskew noted that the world currently has approximately 14 million barrels per day of FCC capacity, compared to approximately 5 million barrels per day of hydrocracking. But Houston-based Purvin and Gertz forecasts hydrocracking capacity to rise 54 percent by 2015, compared to just 11 percent for FCC.

These trends may be driven by fuels concerns, but they have ramifications for the base oil industry. Specifically, Eskew said, they put more refineries in position to become what he described as opportunistic base oil suppliers. Residual bottoms from hydrocrackers can serve as excellent feedstock to make base oils. In refineries without base oil facilities, these bottoms are routed back through the hydrocrackers to make more diesel. But with relatively little investment, refiners can install wax isomerization equipment to turn bottoms into Group III base oils, which carry a much higher price tag.

Eskew emphasized that base oil investments can still hold risks. The global market currently has a surplus of Group III capacity. Moreover, a large volume of gas-to-liquids base oils appears increasingly likely to hit the market in the next few years, bringing very high quality at competitive costs. Finally, base oil plants based on fuels hydrocrackers tend to yield light-grade base oils, which are long on supply compared to heavier grades.

Still, Purvin and Gertz predicts that the lure of higher margins will spur some refiners to build new base oil plants. Several announced base oil projects are already in the wings, mostly at crude oil refineries along the Pacific Rim and gas-to-liquids projects in Qatar. But Eskew said refining trends are creating strong incentives for base oil investments in every region, including Europe, which has not seen a new plant open for years, but which currently has a shortage of highly refined stocks.

The European refining industry has to dramatically shift its [fuels] production slate away from gasoline, he said. About the only way to do that is through investing in hydrocrackers.

Eskew said the entrance of new base oil suppliers could create new dynamics in the market.

The base oil business has traditionally had some very large, influential players, he said. Thats what makes this an interesting phenomenon – because it shifts the balance of power toward some new players.