Global demand for base oils is expected to decline sharply near term, Stephen Ames, principal of SBA Consulting, Pepper Point, Ohio, told the ICIS Asian Base Oils & Lubricants Conference here on June 24. By 2013, demand will recover only to 2008 levels, and 2009 in particular will be a very difficult year for Group I refiners. Some closures are likely.

For the past 17 years through 2008, Ames said, global finished lubricant demand has fluctuated over a relatively narrow range, from slightly more than 37 million to slightly less than 39 million t/y.

Its still early in 2009 to have a good grasp of what happened in 2008, he continued, but my findings say that the underlying lubricant demand, that is, the demand excluding inventory changes, for all of 2008 was down between 0.5 percent and 2 percent from 2007 levels. Thus Ames set 2008 global demand at 37.6 million to 38 million tons.

Looking forward, said Ames, throw out all previous forecasts. This recession is the worst downturn in the last 50 years. Ames predicted a further 5 to 10 percent decline in lubricant demand in 2009 from year-end 2008 levels – a 2.3 million to 4.6 million ton hit for the two years combined.

No recovery is likely until 2010, with some markets such as the auto industry experiencing slower improvement, he said.

Agreeing with International Energy Agency and OPEC energy demand forecasts, Ames foresees a 2010 rebound in global lube demand amounting to just 75 percent of the 2008-2009 decline. For 2011, further improvement is expected to bring demand within 90 to 95 percent of the pre-recession levels. Not until 2012 and beyond will the industry return to its normal rate of 0.5 to 1.5 percent compounded annual growth.

Whether using an optimistic or pessimistic outlook, Ames said, lubricant demand in 2013 will be within 1 million t/y of 2008 levels.

Base Oil Supply/Demand
Base oil is only 1 percent of total refinery capacity. The other 99 percent drives base oil refining, said Ames, noting that the drivers behind new base oil supply are mostly external to the lubricants business.

Ames detailed four key factors driving base oil supply:

1) Emissions legislation that requires new, clean fuels investments. Most new fuel hydrocrackers produce potential feedstock for new Group II/III base oil plants.

2) The fuel refining industrys move toward heavy sour crude and away from the lighter lube crudes needed by Group I plants. Group II/III operations are less affected as most are not as crude-selection dependent.

3) The questionable viability of some fuels refineries faced with 2009s reduced fuel demand. This does not bode well for base oil plants located at small, Solomon-third/fourth-quartile-rated fuel refineries, said Ames.

4) The technology paradox. The newest, high quality base oil refining processes have the lowest cost of production.

The combined impact of these factors will result in major shifts in the quality and availability of future base oil supply, Ames said.

New paraffinic capacity announced for 2009 to 2013 totals more than 6 million t/y; over half is Group III and gas-to-liquids quality. Ames also identified another 5-plus million t/y of new paraffinic capacity under study, plus over 1.2 million t/y of new naphthenic capacity planned for the period.

In addition, Ames continued, the potential exists for about 2.3 million t/y of Group I to be upgraded to Group II/III over the next five years, and capacity creep could add almost 1.7 million t/y.

The net effect of this flood of new, high-quality supply and pinched demand, said Ames, will be closures totaling 8.5 million to 10.6 million t/y of nameplate capacity through 2013.

And the near-term imbalance will be particularly acute; 2009 will indeed be a difficult year for base oil refiners, Ames said. By the end of 2009, the supply overhang should be 9 million to almost 12 million t/y; the latter figure is twice the maximum long-term buffer the industry can handle. From one quarter to one third of all base oil capacity will be idle, and margins are bad.

Some of the less competitive Group I capacity that Ames had previously thought would be shuttered closer to 2013, may well close in 2009-2010, especially if it is part of a small, high-cost fuels operation, he noted.

By 2013, Ames concluded, Group I capacity will shrink by 9 million to 11 million t/y from 2008s 29.7 million t/y level. Supply of bright stock and heavy neutrals may become problematic, prompting reformulations for noncritical uses.

Growth in high-saturate base oil capacity will be rapid and by 2013 will comprise over half of the paraffinic base oil pool. This should be well in excess of technical demand, Ames said, and may suppress quality price premiums until such time as higher performance levels are demanded by OEMs and/or marketers create new products that make use of the surfeit of quality.