Speaking Mandarin with simultaneous translation to English, Kong said the key driver to Chinas lube market continues to be growth in passenger cars. In 2008, China had 51 million vehicles, up from 16 million in 2000, she said, and lubricant demand followed, rising from 3.8 million tons in 2000 to last years 5.7 million tons.

Competition in Chinas lubricant market is strong. Multinationals are taking a lot of our market share and are blending in China, she said. Multinational oil companies hold about 29 percent of the finished lubricant market; Petrochina has 26 percent; Sinopec has 21 percent; privately owned local blenders have 19 percent; and recycled oils account for about 5 percent. There is no government support of recycled oils, Kong noted, but that will change in the future.

Turning to base oils, Kong pegged Chinas base oil supply in 2008 at 5.42 million tons. The majority, 53 percent, was supplied by Chinas two largest national oil majors, Petrochina and Sinopec. Other Chinese refiners, including national oil major CNOOC and some very old and inefficient refineries, supplied 22 percent, and imports, at 25 percent, made up the difference.

Imports are increasing because Sinopec and Petrochina are not increasing production fast enough to keep up with rising demand, Kong said. Imported base oils have risen from 450,000 tons in 2000 to 1.4 million tons in 2008. Sources of these imports include Singapore (44 percent of total imported base oils), Japan and Korea (40 percent, including API Group III from Korea), Russia (7 percent) and Taiwan (4 percent).

Most of the Russian base oils are called nonstandardized oils, of low quality that needs further processing, Kong noted. Uzbekistan is a new source of better quality than Russia. [Uzbekistan refineries] use solvent refining. They supplied a huge volume in 2008 at low cost.

New capacity is on its way in China. In 2011, Sinopec plans to produce an additional 250,000 to 350,000 tons of Group II/III base oils in Yanshan, and CNOOC plans 400,000 tons of Group II/III in Huizhou.

Petrochina has announced 300,000 tons of new Group II/III capacity for 2010 in Dalian, Kong added, but it will probably be delayed.

Kong presented Petrochinas base oil supply and demand forecasts for 2010 and 2015:

Source: Kong Jinyuan, Petrochina Planning & Engineering Institute

China will see a huge increase in base oils supply fromits national majors, said Kong, but there will still be a 2 million tondeficit in 2015. This gap will befilled by imported base oils, local refiners and recycled oils.

There will be a big change to 2015 in the quality of base oils in China, Kong continued. The national majors combined Group II/III capacity will rise from 170,000 tons in 2008 to 1.24 million tons in 2015.

Today, Groups II/III account for 13 percent of Chinas total base oil demand, Kong asserted, and that share will rise to 28 percent by 2015.

Although the growth rate will slow down in 2009, Chinas base oil demand will maintain rapid growth over the longer term. Imported base oils will continue to be a necessary supplement, likely rising to 1.45 tons in 2009. Petrochina will work harder to improve the quality and efficiency of its base oil production, Kong concluded.