It is no secret that the global market has seen a decline in Group I base oil production capacity in recent years. This is expected by many to continue, as end users embrace more highly refined base oils to meet changing requirements. However, Group Is prospects appear to remain robust in the Middle East, despite rising output of higher quality base stocks, thanks to demand from inside the region, as well as from neighboring Asian and African markets.

Expansions and new plant construction added a combined 17.3 million metric tons to global base oil capacity from 2006 through 2016, but Group I capacity fell. Most additions were Group II, III, naphthenics and polyalphaolefins, said Majid Safdari, commercial director at Tehran-based additives and base oil company Vista Energie, at the Asia, Middle East and Africa Base Oil, Lubricant and Wax Conference in August in Mumbai. Group I capacity decreased by more than 7 million tons over the same period, he noted.

The global market will see further Group I capacity reduction by 2021 as the use of higher quality base oils and lubricants is expected to pick up, Safdari said. Industry experts echoed the sentiment: capacity rationalization is imminent as producers will need to adjust to the new market reality of stringent environment regulations and changing original equipment manufacturers specifications.

Group II capacity could increase to 19.7 million t/y from 14.7 million t/y and Group III to 7.4 million t/y from 5.6 million t/y by 2021.

Any base oil capacity additions [Group II and Group III] shall be met with closures and/or reduced capacity utilizations of Group I, said Sudip Shyam, global head of base oils at the United Arab Emirates-based GP Global Group, at the same conference. The current installed capacity of base oils in the global market is over 50 million tons per year but the capacity is set to decline going forward, he added.

Safdari projected that global Group I capacity will shrink to 13.2 million t/y by 2021 from 21.8 million t/y in 2015 because of a major shift toward Group II and III base stocks. He also predicted that Group II capacity will increase to 19.7 million t/y from 14.7 million t/y and Group III to 7.4 million t/y from 5.6 million t/y during the same period. Naphthenics and polyalphaolefins are also expected to see a marginal rise in capacity going forward.

Staying Relevant

Group I will remain relevant in the Middle East even though new Group II and III capacities in the U.A.E., Bahrain, Qatar and Saudi Arabia will influence local blenders to shift to higher quality base oils, Safdari said. He added more highly refined mineral base oils offer some performance advantages, but Group I still accounts for about 50 percent of global base oil demand as it offers better additive solubility and is less expensive in some cases.

The Middle East will continue to use Group I for applications such as low-tier monograde heavy-duty and passenger car motor oils, bright stock, process oils, industrial oils and paraffin wax, he explained.

Demand for Group I from marine, grease and petroleum wax segments in Asia-Pacific will stimulate export from the Middle East, Safdari told attendees at the conference.

He added the region will continue to supply bright stock, which comes from Group I plants. Group I plants produce a greater proportion of heavy grades than Group II and Group III plants, which will also help the former to survive.

The Middle Easts total installed base oil capacity is estimated to be around 5 million t/y, according to Safdari. Group I accounts for around 38 percent of that total while Group II and III account for 22 percent and about 40 percent, respectively. Iran is the largest Group I producer in the region with 56 percent market share, followed by Saudi Arabia at 28 percent, Iraq at 12 percent and Israel at 4 percent.

Supply and Sanction Scenario

Evaluating the Group I supply scenario, Safdari said there could be capacity rationalizations by Saudi Arabia going forward and some pressure on Iran amid fresh U.S. sanctions, but the region is unlikely to see closure of such refineries until 2018.

Saudi Arabia is expected to decommission Group I plants after commissioning Group II and doubling bright stock capacity, Safdari said. The move may result in a minimum 250,000 t/y reduction in Group I output in the Middle East, he said, adding that the regions production could fall by another 300,000 t/y if Iran also rationalizes its Group I capacity amid sanctions and viability factors.

Safdari also said Iranian Group I base oil refineries are under pressure because of low value distillate aromatic extract, low conversion rate, high operating expenses, low productivity and diminished demand for light grade solvent neutrals. However, Iran has no plan to close any base oil plants as it is heavily dependent on Group I for its domestic market and still exports sizable volumes to Africa and Asia, he added.

Iran is heavily dependent on Group I base oils because of the old vehicle fleets and climate conditions, Safdari explained. He said the countrys Group I supply will continue unless the domestic economic situation affects feasibility.

Farzad Zandi, commercial director at Irans largest base oil producer Sepahan Oil Co., said that demand for Group I is expected to remain positive due to firm auto sales in Iran and Africa.

Talking about the impact of U.S. sanctions, Zandi said that business sentiment is slightly weak but theres no impact on volume and base oil prices so far.

An executive with a U.A.E.-based trading firm said theres uncertainty on Iranian product movements after renewed sanctions, and banks are raising several queries to buyers on imports from Iran.

Banks in Dubai are asking too many questions. So, we have decided to shift most of our business to the U.K. to help our clients, he told LubesnGreases on the sidelines of the AMEA BLW conference, declining to be identified.

Safdari said if there are no barriers due to sanctions and it is economically viable then Iran may look at substituting Saudi Arabias Group I output cut to some extent and increase its production by 150,000 t/y. However, the regions supply of Group I will likely still decrease in the coming years, impacting export markets such as India, the U.A.E., Africa and the Far East, he noted.

Lube Demand Outlook

Industry experts pointed out that geopolitical conflicts, including U.S. sanctions on Iran and sanctions by Arab states on Qatar, have affected investor confidence while security tensions and conflicts in Iraq and Syria are causing regional instability.

Despite the uncertainty, some forecasters suggest 2016-17 could have been the bottom of the trough, and that in the next four years the region will experience slightly better economic growth, said Bhupinder Singh, an independent lubricants consultant.

Steady economic growth in the six-member Gulf Cooperation Council and changing market dynamics will aid lubricant consumption, Singh said at the conference. He added that the GCC bloc, which includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the U.A.E., will see a 2.7 percent rise in gross domestic product in 2019 from an expected growth rate of 2.1 percent in 2018, supported by higher fixed investment.

Singh, who previously worked for Bahrain Petroleum Co. and Castrol, said the GCCs automotive sector is likely to stabilize and show moderate growth in 2018 following a double-digit drop in new vehicle sales from 2016 to 2017. He noted sales in 2018 will add to the estimated 16.8 million vehicles in the GCC and projected the number of vehicles to rise to 19 million by 2020.

The outlook for lubricants, therefore, remains promising in the Middle East, experts said. GPs Shyam predicted the Middle Easts lubricant demand, estimated to be around 2.8 million t/y, would grow at an average of 1.2 to 1.5 percent annually.

While monogrades and 20W-50s still dominate the Middle East scenario, due to the ambient conditions, a shift towards lower viscosity is gaining momentum, he noted. Iran is the largest market in the region, followed by Saudi Arabia, Turkey, Egypt, Syria, Iraq and the U.A.E., among others.

Singh said emission controls and the increasing use of catalysts, filters, biofuels and the rapid rise of hybrid and electric vehicles have altered the strategy of OEMs toward lubricant specifications and that will ultimately push the market toward higher quality base oils.

He advised automotive industry distributors to look into several untapped areas, such as the rise of Far Eastern brands, more regulations, leaner businesses and a shift from transport to mobility to drive growth given rising competition in the region.

We see many new brands and new plants are popping up and existing market players need to find ways to remain relevant in their space, Singh said. Creative branding, clever costing, strategic market expansion, flexibility and networking could help companies strengthen their market position.

Despite the promising prospects of higher quality base oils, the outlook for Group I remains upbeat in the Middle East as the conveniently positioned region will be a key source to meet demand from local as well as other markets.