As global base oil capacity continues to migrate from Group I to Group II – along with rapid growth in Group III – Europe is also following the trend, transitioning apace to more Group II applications. One of the consequences is that European blenders and Group I producers are having to take steps to adapt to the changes, industry observers told ACIs European Base Oils & Lubricants Interactive Summit in Florence.

One of the factors driving this transition is the ongoing rise in automotive engine oil performance standards. As of December, products promoted as meeting ACEA light- or heavy-duty oil specifications are required to meet the European Automobile Manufacturers Associations ACEA 2016 sequences. Those sequences include tests that have a direct bearing on base stock selection, according to Catherine Caulfield, Argus Medias senior market reporter for base oil and waxes.

These tests are making it increasingly difficult for Group I oils to pass, she told attendees at the summit held Nov. 28-29. ACEA is aiming to release updated sequences in 2019.

In addition, the Technical Association of the European Lubricants Industry, which is known as ATIEL and which hands out the European Engine Lubricants Quality Management System label, carries out spot-check tests to make sure engine oils are compliant.

These testing bodies are ensuring that what is advertised is in fact what is in the can, Caulfield remarked.

Supply Side

Propelling the shift to Group II will be an increased supply of this base stock. ExxonMobil is poised to open Europes first large-scale Group II production plant at the companys existing refinery in Rotterdam, with capacity to produce an estimated 1 million metric tons per year. (See upcoming editions of LubesnGreases EMEA for more on this.) This will increase the regions Group II capacity five fold.

In addition, Argus predicts that imports from the United States and Asia – which it estimates accounted for 86 percent of European Group II supply in 2017 – will continue to increase, judging from price differentials between the regions. Caulfield noted that Group II prices in Europe were 190 to 270 per ton higher than in the other two regions, whereas shipping costs were approximately 50/t from the U.S. and 85/t from Asia.

She explained that European base oil imports are partly affected by a supply push from refiners in other regions. Global Group I production capacity decreased from 29.2 million t/y in 2007 to 23.3 million t/y in 2018, according to Argus estimates.

Meanwhile, during the same time period, Group II and III capacity rose by almost 16 million tons per year, Caulfield said. This means some regional markets are experiencing a Group II and Group III base stock oversupply.

For example, U.S. base oil exports to Europe increase to keep its domestic market balanced. American base oil exports increased from around 900,000 tons in 2014 to over 1.5 million tons in 2018. At the moment, American base oil marketers are selling light, mid and heavy viscosities, Caulfield added.

Base oil imports from Asia to Europe rose by 53 percent in the first half of 2018, compared with the same period the year before, according to Argus.

Arbitrage from Asia is open particularly on heavy viscosities. In all, the American and Asian Group II base oils improved its supply availability in the region, she said, adding that producers in these regions are looking for high-volume export markets to send their excess products to and keep their domestic prices firm.

To do this, theyre looking at the European markets, she said. If Europe consumed 1.7 million tons of Group II in 2017, it could double due to the rising imports and additional 1 million tons per year of domestic capacity by 2019.

New Capacity

Another important factor is Russia. Denis Varaksin, sales manager for base oils and waxes at Berlin-based commodity trading company DYM Resources, said that Europe buys 25 percent of Russias base oil exports, a figure that grew in 2018.

Group II and Group III…accounted for 15 percent of total Russian base oil exports in 2017, [which] reached 1.3 million tons in the same year, Varaksin told the conference.

Several factors have supported this growth. Total base oil exports from Russia grew 17 percent in 2017, to their highest since 2011. Shipments to Western Europe, as well as to Ukraine and Turkey, have gained momentum in the past couple of years, as Russia has incrementally reduced its crude export duty from 30 percent currently with the goal of reaching zero by 2024. Exported Russian oil products, including base oils, are taxed on a percentage basis of the crude export duty, which is itself linked the barrel price.

Besides lower export duty fees, we observe lower logistics costs due to the rubles depreciation, while base oil prices grew in the last couple of years, Varaksin said.

Two new Group II and Group III production plants began operating in Russia recently. Tanecos 190,000 t/y Group II and Group III base oil plant, which came on stream in 2012, exported a total of more than 160,000 tons in 2016 and 2017. The 100,000 t/y base oil plant operated in Yaroslavl by Slavneft (a joint venture between Rosneft and Gazprom Neft) increased exports of Group III 2018, growing by up to 50,000 tons per year, according to DYM.

Another good opportunity is that [Yaroslavl] can load trucks directly to Europe, Varaksin said. In addition, Naftan is also exporting small volumes of Group II to the Baltic states and Ukraine from its 195,000 t/y base oil plant in Novopoltsk, Bellarus.

European Scene

Caulfield pointed out that European base oil producers and lubricant blenders are responding to Europes growing Group II base oil supply in a variety of ways.

Group I producers are already adapting strategies, coming up with contingency plans for Group I base oils, she noted. Some of these plans include upgrading their Group I products to Group II or Group III, and modification of certain base oils to grades that may be quite attractive in overseas markets.

They see potential export markets for Group I base oil overseas, she said, especially in markets such as Africa and India where that type of base oil is still in high demand.

In terms of European blenders, we are seeing a lot of uncertainty at the moment, she said. Some are looking at additional storage at their blending sites. Do they have space for it? Others are looking at sacrificing some of their Group I storage capacity to store more Group II and III volumes, she noted.

Ultimately it seems there is this goal for diversification in terms of [Group II] supply sources, Caulfield said.

The European market has to adapt to the new realities by seeking alternative price systems, according to Argus. Caulfield said that many Group II contracts are tied to Group I prices and that companies would be better served using a benchmark that reflects Group II dynamics.

Industry sources agree that the Group II imports from Russia, the U.S. and Asia are expected to continue increasing and there will be a supply boost from domestic production, as well.

European demand for Group II and Group III base oils will rise, especially in the engine oil sector, as domestic blenders try to follow strict OEM recommendations. In addition, multiple supply sources aid logistics and encourage competition, Caulfield concluded.