Middle East

Political Tensions Threaten Middle East Growth


Political Tensions Threaten Middle East Growth

As the Middle Easts largest lubricants market, Iran is amajor buyer and supplier of oil products. Mark Townsendexamines the ripple effects on the wider region from theU.S. exit of the nuclear deal.

Markets do not like uncertainty, and U.S. President Donald Trumps decision to withdraw from the Iran nuclear deal has left the Middle East base oil and lubricants industry searching for stability. With a wind-down period of 90 to 180 days before the full snap-back of U.S. sanctions, analysts say regional markets could be volatile as developments unfold amid what may become erratic API Group I base oil supplies from Iran.

The long-term impact on Irans Group I and bright stock exports could be profound, but international finished lubricant suppliers may also be affected. Iran is the largest finished lubricant market in the Middle East.

Since the U.S. announcement, the market for Group I base oils from Iran has been exceptionally quiet. There have been limited discussions or deals for any major cargoes of Group I from Iran since early May, Izham Ahmad, markets editor at ICIS, said via e-mail to LubesnGreases.

At 2 million to 2.1 million metric tons per year, the Middle East accounts for less than 10 percent of global lubricant demand, according to consultancy Kline & Co. But it is one of the few growing markets and the outlook is promising. Continued urbanization and industrialization have driven lubricant demand as the hydrocarbons-dependent Gulf states rush to diversify their economies.

Regional refiners, including Saudi Aramco and Adnoc in the United Arab Emirates, have recently pledged billions of dollars in downstream investments and forged partnerships with international firms, although it is not clear whether this will result in new base oil or finished lubricant capacity. It is also too early to tell how investors will react, as geopolitical tensions and an ongoing trade embargo on Qatar weigh on sentiment.

Lubricants Market Pressured but Steady

Automotive lubricants account for the largest share of the Middle East market, and it is only in the last few years that regional markets have begun to move away from monogrades. But the market is evolving, particularly as the region is now a source of higher quality Group II and III base stocks. With Group I base oil supplies passing peak demand and the expectation that Irans exports will be curtailed, the switch to multigrades looks all but certain with the exception of Egypt, where the consumer automotive market continues to use significant amounts of monograde oils.

According to Sushmita Dutta, project manager at Kline, the Middle East market is transitioning from low- to high-quality lubricants. Dutta cited a noticeable swing in consumer attitudes towards vehicle usage and maintenance.

Speaking at the seventh Base Oil & Lubes Middle East 2018 conference in Abu Dhabi in April, she said changing market conditions and a concerted effort by manufacturers are reshaping awareness and demand. OEM recommendations are already standardizing with global specifications, she told delegates.

Kline also expects significant growth in the use of synthetic base stocks – still a small part of the overall market but one that is expected to grow given the regions liking for luxury vehicles. By contrast, the heavy-duty motor oil segment continues to be dominated by monogrades in a market estimated by Kline to be between 600,000 and 700,000 t/y. SAE 40, 50 and 15W-40 products make up the bulk of the market where climate conditions demand regular oil changes.

Still, evidence is growing that the availability and proximity of higher quality local base stocks is improving the quality of finished lubricants, said Klines energy practice project manager Anuj Kumar. Consumption of Group III and II base stocks is certainly bigger than technical demand, [and] these base stocks are being used in applications where they are not demanded from a technical point of view, for instance, hydraulic oils.

Hydraulic and process oils are the two leading product categories in the industrial segment, a market that Kline estimated at 500,000 to 600,000 t/y. Countries such as the U.A.E. and Iran have a major industrial base, which explains the breadth of demand for lubricants, including engine oils, turbine and circulating oils, gear oils, compressor and refrigeration oils, greases and metal working fluids.

Optimism is low that newly available Group II and III base stocks may lead to wider adoption of higher quality lubricants in the automotive sector, but global original equipment manufacturer standardization suggests the Middle East will be swept up in the shift to multigrades. At least one oil major is betting on this scenario.

At the time of writing, Shell planned to launch its Helix Ultra SN Plus 0W-20 oil for turbocharged engines in the U.A.E., to coincide with the introduction of the American Petroleum Institutes SN Plus standard. The company plans to introduce additional SN Plus oils to the market in 2018 and 2019, the company said in an e-mail. Shells Group III base oils produced at their Pearl plant in Qatar use gas-to-liquids technology.

In addition to ongoing regional tensions with Qatar, the U.S. decision to violate the nuclear deal could alter the competitive landscape of finished lubricants in the Middle East. Right now, the market is led by Shell and Saudi Arabias Petromin, but Iranian companies still stand to lose share in the highly fragmented market if European companies, worried they may be penalized under the latest round of sanctions, avoid doing business with them.

Dutta said the impact on Irans domestic lubricant market may be limited, as it is still thriving despite sanctions. Imports of synthetics could be hit, however. Iran currently does not have domestic synthetic base oil production and relies entirely on imports. The U.S. decision to quit [the] Iran deal could have a negative impact on the availability of synthetics, she said.

Middle East economies may be subject to exogenous shocks in the next 12 months, but underlying fundamentals bode well for lubricant markets. According to Dutta, the region has seen steady growth, and attempts by several Gulf governments to diversify their economies have fueled growth in the industrial and commercial sectors.

Dubai has launched its own Green Mobility Initiative, stipulating that by 2030, 10 percent of all cars purchased should be either electric or hybrid. Taken in isolation, Dubais move may have limited impact on lubricant consumption, but it is possible other Gulf countries could adopt similar targets. Even so, growth in the Middle East is projected to be slightly higher than the forecast global average of around 1 percent in the next few years.

The Rise of Group III

Evolving emissions regulations are pushing lubricant manufacturers to create products with greater effectiveness in the pursuit of fuel economy and energy goals. Part of the reason for the decline of Group I is the need for cleanliness and durability in engine performance, something Group II and III oils are better at delivering. Indeed, formulations from API SM and CJ-4 onwards demand Group II and III, as their thermal and oxidation stability provide some of the best formulation options.

Salem Ahmed Darwish, Adnoc Distributions vice president for production plants, went further, suggesting Group III base oils represent a cost-effective solution, when the all factors are considered. Speaking at the Abu Dhabi conference, he argued low emission oils require low sulfated ash, phosphorus and sulfur, or SAPs, additives and low sulfur base oils, which strongly favor Group III. Aside from complying with emissions regulations, Group III base oils run well in terms of fuel economy, drain intervals, oil consumption and engine performance.

Despite the ascendency of polyalphaolefin base oils and their performance metrics in cold climate conditions, Darwish believes Group III is an optimal solution. PAO is four times more costly than Group III, and in tropical countries Group III base oil quality is comparable to PAO. Under such climate conditions, Group III base oils match PAO performance not only as measured by viscosity index but also in their capacity to remove heat and reduce friction. Yet it is not just the automotive sector where Group III is a viable option. Industrial oils are an important lubricant category and market for Group III base oils.

Darwish said most industrial machinery demands appropriate International Standards Organization viscometrics with long drain capabilities, as well as thermal and oxidation stability, which Group III base oils fulfill. Irrespective of cost, synthetics are frequently used when equipment performance exceeds the capabilities of conventional mineral-based fluids.

Several other factors weigh in favor of wider Group III use. Although capital investment to produce Group III base oils is high, overall operating costs are lower when compared with Group I, and there is flexibility in feedstock – it can be gas, not solely crude oil. Additive treat levels may be lowered in certain Group III formulations. But changes to OEM specifications will ultimately push the market towards higher quality base oils, Darwish claimed.

Incidences of an abnormal combustion phenomenon known as low-speed pre-ignition, or LSPI, pose a challenge to additive companies to reformulate detergent inhibitor packages, which require the use of Group III and above, he added. Left unchecked, LSPI can cause engine super knock, broken spark plugs, cracked pistons and even engine failure.

Nevertheless, the case for Group III base oil use is not a slam dunk. Upgrading Group I refineries to produce Group III requires major investment and takes time. Viscosity grade read-across guidelines are not conducive to the use of Group III in formulations without costly engine testing. That is something Adnoc had to contend with in gaining approvals after ditching a proposed marketing agreement with Finnish refiner and marketer Neste. Adnoc recently inked sales agreements in Europe and the U.S. and appointed Adnoc Distribution to handle sales in the six-member Gulf Cooperation Council, which includes the U.A.E.

According to Darwish, lube companies still lack the technical and commercial understanding of the benefits of Group III. There are also varying degrees of quality between Group III refineries because of inconsistent feedstocks and differing catalysts.

Win Some, Lose Some

Whether that implies Group II and III base oil producers in Bahrain and Saudi Arabia fill the void remains to be seen, but under previous sanctions, Iran became a notable Group I supplier to major markets including China and India. Their response to recent U.S. developments is yet to play out, suggesting that the Middle East base oils and finished lubricants market will continue to be unpredictable for some time to come.

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