Chevron Global Lubricants President Dale Walsh said that with the additional manufacturing capacity from Pascagoula, the company would become the worlds largest producer of premium – Group II and III – base oils, with 61,000 b/d of capacity. Chevrons Richmond, Calif., plant has 20,000 b/d of Group II capacity. GS Caltex, a 50-50 joint venture of Chevron and South Korean company GS Holdings, has 12,000 b/d of Group II and 4,000 b/d of Group III capacity in Yeosu, South Korea.

(Chevron may not hold the top spot for long, however, as Shells 28,000 b/d gas-to liquids plant in Qatar will also come onstream in 2011.)

Brent Lok, base oil marketing and new business development manager, said Pascagoula is very much oriented around both North American and European premium base oil applications. Secondary to those two premium markets, we are also looking at Latin America, Lok told Lube Report. Theres a lot of pent-up demand for more premium, more reliable basestocks. Its certainly a fast-growing market.

Lok pointed out that Chevrons exports of Group II basestocks, and some Group III, to Europe are well under way. Most of its from Richmond right now, he continued. After we have Pascagoula up, it will be moved to Pascagoula. A lot of activity we started almost two years ago now – integrating Richmond materials to Europe – was to prepare for Pascagoula. We couldnt say that at the time, but now we can be lot more open and say, this is why weve been shipping oil halfway around the world.

Chevron does not publicize its product mix at its base oil plants. Lok did say Pascagoula will emphasize Group II, just as the Richmond plant does, and that the company has Group III capability.

Were going to probably make a fair amount of Group II, thats the volume consumption reflected in the marketplace between Group II and Group I, Lok said. We need to adjust our product line to reflect the market demand. On the other hand, we recognize the fast-growing demand for Group III, so we clearly have well-advanced activities to try to cost effectively bring Group III products into the entire mix. Its not as further developed as the Group II plans.

When the Pascagoula plant comes on stream, according to Lok, it will change where Chevron markets base oils from the California refinery. Richmonds reach right now goes both east and west, he explained. It certainly satisfies its own home market, and then does move some materials to east of the Rockies, and west to Asia even. With east of the Rockies basically being filled by Pascagoula, Richmond will probably emphasize moving into parts of Asia. And then it will supplement our Yeosu production out of Korea.

Pascagoula will also help address a substantial portion of Chevrons internal needs, said Doug Bea, senior product manager. We also are very likely intending to supply third parties, so this is not base oil captive to Chevron by any means.

The refinerys infrastructure lends itself well to adding base oils. They had some of the things, hydroprocessing equipment, that we could basically feed back off of, Bea said.

Lok said Chevron has completed preliminary engineering on the project. Weve already ordered many of the long-lead equipment this year, so the message is were pretty committed to this, he emphasized.

Pascagoula gets its crude oil from a variety of sources, according to Bea, including West Africa, the Middle East, Mexico and Latin America. Thats the nature of a lot of North American refineries – more and more they are bringing in crudes from all over the world.

The refinery has two crude oil trains, which allows more flexibility. You can basically bring in crudes that are suitable for base oil manufacturing, as well as crudes that many dont want to put towards the base oil plant, and keep them segregated at the refinery, Bea explained.

He said Pascagoulas geographic location was appealing in terms of logistics. Its connected to major shipping lanes, and its in a very large Group II market, Bea said. Its capable of supplying other markets that are moving, we think, towards Group II, such as Europe and Latin America.

Most of Pascagoulas base oil will move via ship or barge, though it will also use rail. Well supply the middle of the U.S. via rail, and everywhere that we can get to via barge, we will do via barge, Bea continued. Anywhere else overseas would probably be by a larger ship.

A base oil trader agreed Pascagoula will demonstrate the advantage of a deepwater location, and give Chevron the capability of competing throughout the world. If you look at the paraffinic base oil producers in the United States, 75 percent of the paraffinic produced in the U.S. will be produced in three states – Texas, Louisiana and Mississippi, this trader told Lube Report.

The trader said the new plant could put further pressure on high-cost producers, expecting it will enjoy very, very low operating costs, because it will be a newer plant with newer technology. The facility will use Chevrons Isodewaxing technology.

If youre a high-cost producer and you dont run your plant very well – whether Group I, II or III – youre going to be suspect to closing down, the source said. The reason Group I guys come into play is theyre not going to fit into any motor oils, or any heavy-duty engine oils, once GF-5 and PC11 are in place. They really dont fit into motor oils today (perhaps a little into heavy-duty engine oil) and theyll be completely squeezed out when that next generation of oil comes onstream.

A base oil broker said there should be plenty of demand for Pascagoulas base oil, especially as more and more Group I players such as Citgo and Marathon exit the market.

Once they shut down, companies like Citgo with its own private label become a net buyer of base stocks, the broker told Lube Report. So where you had them covering their own requirements vis a vis their own production, theyre going to become starting next year a buyer of base stocks. I think even with the Chevron system coming online, I dont think youre going to be able to curtail some of the Asian products that are going to eventually start making their way to the United States.

Consultants said the Pascagoula plant could have a big impact on other suppliers, depending on how the Group II and III mix works out.

Milind Phadke, energy industry manager for Kline and Co. in Little Falls, N.J, said Chevrons new plant will add to the existing surplus in high-performance base stocks.

If the production is largely Group II, the plants that are affected most are the Group II plants in North America plus a renewed drive to rationalize Group I plants, Phadke said. If there is a large Group III component, then Group II+, South Korean Group III plants, and Shells GTL plant will all be affected by this development.

Phadke speculated how a large component of Group III at Pascagoula might affect Group II+ production in North America. If there is easy availability of Group III in North America, Group II plants producing Group II+ may have to stop this production, and maximize Group II, as this would make economic sense – for example, Motiva, PetroCanada, Chevrons Richmond, Calif. base oil plant and Excel Paralubes, he said. It might be the case that even ExxonMobils Group II+ plant at Baytown would be adversely affected. Also, the Group III exports from South Korea would be adversely affected.

If the Pascagoula plant has a large Group III component, Phadke said, that might also free up some Group IIs from North America to compete in South America and other places. Globally, the supply of Group II/III is quite comfortable with the global demand level, he said. However, at a regional level, Europe would welcome more choice – in terms of sources/sellers – for Group III. Also, in North America, blenders for 5W and 0W multigrades would also welcome more choice for Group III.

Jamie Brunk, of Solomon Associates in Dallas, said the base oil market typically balances itself after major expansions and additions. Traditionally when a lot of capacity like that has come on in the U.S., its created a surplus in the U.S. for some period of time, Brunk told Lube Report. Im sure Motiva did that for a while, and before that Petro-Canada and Excel Paralubes when they came online.

The surplus typically results in some base oil getting exported. Now whether its going to be Chevron exporting it, or whether its going to be somebody else, somethings going to go offshore, he added. But at the same time its going to drive margins down in the U.S. So therell be some period of time when people are going to have to suffer through some bad markets. In the past, what has happened is someone has decided to shut down, and after that period, it balances things back out again.

Brunk emphasized that refiners should be prepared for an influx of base oil from Pascagoula and other upcoming projects. Refiners worldwide need to be assessing their competitive position, and developing those strategic plans, he said. A lot of base oil is going to hit the market in the next couple of years. Although there is some forecast of demand increasing, its not in Europe, and its not in the U.S.