China is the worlds third largest base oil refiner, after ExxonMobil and Shell, Amy Claxton, principal of consultancy My Energy in Hummelstown, Pa., told the ICIS Asian Base Oils & Lubricants Conference here in late June. By understanding trends in Chinas refining industry, the base oil industry can be better prepared for the future.

The big story, said Claxton, is the rapid escalation of demand for crude oil, versus Chinas stable crude supply. In 2007, China imported 50 percent of the crude oil needed to meet domestic demand. The countrys major oil basins are mature fields in slow decline.

China imported 180 million metric tons of crude from 45 countries in 2007, Claxton continued; half of that total came from Saudi Arabia, Angola, Iran and Russia. The quality of the imported crude is a critical issue for China. Chinas domestic crudes are among the lowest sulfur crudes in the world, she said, while import avails are primarily mid- to high-sulfur crudes.

To cope, major downstream investments are underway. Massive refining projects to increase sour crude capacity include docks, tanks and some six new refineries and 15 refinery revamps between 2003 and 2012, Claxton said. Significant catalytic cracking and hydrocracking capacity investments are underway to increase gasoline and diesel output. And integration of chemical and fertilizer plants downstream of refining is another major strategic investment, to provide the plastics, resins, solvents, detergents, adhesives and other chemicals demanded by Chinas growing economy.

What does this mean for lubes? Routine crude changes are fine for fuels, said Claxton, but not for lubes. Base oil yields and qualities are very crude sensitive. For example, she said, at the same refinery with the same equipment, with solvent processing the yield is 30 percent higher for Arab light crude versus Arab heavy. With hydroprocessing its still a problem; the base oil yield is 15 percent higher with Arab light than Arab heavy.

However, new hydrocrackers provide high quality lube opportunities from hydrocracker bottoms, though raw material optimization is needed to capitalize on base oil production, Claxton said.

Catalytic cracking units and base oil units can use the same gas oils as feed, she continued, but careful planning is required. Otherwise, increased catalytic cracking capacity creates even more feedstock competition between fuels and lubes units, currently a problem in China and worldwide.

Chinas soaring demand for plastics, textiles, etc., will drive a new era of cooperation between refining and chemicals, Claxton said. Integrated chemical plants are designed for full refinery rates; refinery slow-downs create problems.

At present, while crude prices are determined by international markets, Chinas state-controlled product pricing has resulted in poor margins and refinery slow-downs. Base oils are historically collateral damage in this process, Claxton noted. Different state pricing policies are needed to maximize refining output.

Chemical output is high-volume and can bring policy change, Claxton said. Base oils, while profitable, are too small a market to influence the system. Fuel product prices may become market-based, like crude, or refineries may be given additional subsidies to offset losses.

With tighter linkages between refineries and chemical plants, refinery slow-downs will be increasingly unacceptable. Tight linkage means more cooperation is required between fuel and lube units within a refinery and between multiple refineries regarding crudes, intermediate products and hydrogen.

Raw materials optimization will bring higher base oil yields for Chinas coastal and inland refineries, Claxton concluded. With fuels hydrocracker investments, China has a significant opportunity to capitalize on fuels hydrocracker bottoms to produce higher quality base oils at lower cost. There is a potential for new lubricants from non-base oil refineries, and some solvent lube plants could shift their focus to increased paraffin output. Finally, more integration with petrochemical plants has the potential to bring higher refinery rates and higher base oil output.