Until March last year, when ExxonMobil commissioned its new large-scale domestic Group II production unit in Rotterdam, the continent’s base oil market was largely supplied by imports from SK Corp. and S-Oil in South Korea and Chevron in the United States, as well as smaller regional production units. These imports were granted a duty waiver to allow free trade into the bloc and to meet the needs of finished lubricant blending operations in the European Union and Turkey.

The introduction of this new production from the Rotterdam refinery was generally accepted as a valuable contribution to European base oil output. The unit has nameplate capacity of 1 million metric tons per year. In 2019, European Group II demand was at about 1.8 million tons. With this requirement being expected to grow, demand could surpass 2 million tons in 2020.

Starting Jan. 1, the EU Commission – the executive body of the EU that proposes legislation and implements decisions – under the advice of a working committee called the Economic Tariff Questions Group, or ETQG, ended the waiver for imported Group II viscosities between 150 neutral and 600N. In its place is a new quota system that exempts only 400,000 t/y of material from the current duty of 3.7 percent, which applies to some petroleum products. The quota is applied in two parts, allowing for 200,000 tons duty free in the first six months of 2020, after which is the possibility of a review of the quota’s quantities or the remaining 200,000 tons will be permitted.

Many in the base oil industry, and Group II importers in particular, have reacted with disbelief at this new system. Lubricant associations and government agencies have raised a number of concerns with the commission on the implementation of the quotas. They have included organizations in Germany, France, the United Kingdom, Italy and Belgium, where there are large consumers of Group II base oils.

Among their objections are that the quota does not accurately reflect the size of the EU’s Group II market. The final decision of the qualifying quantity for duty exemption was based on obsolete data that bore no resemblance to the market’s actual requirements.

An additional consideration is that Rotterdam does not produce Group II grades with viscosities lower than 150N or higher than 600N. Hence, any material outside of this range can still be imported duty free in unlimited quantities. This will also be the case for all Group III imports.

There are two more factors to consider regarding production from Rotterdam. First, will the unit run at full capacity? Secondly, will the producer, ExxonMobil, export any volumes from this unit to affiliates and other markets, thus depleting the quantity available for use by blenders in the EU zone?

There is also confusion regarding imports emanating from countries that have free trade agreements with the EU. These include South Korea and Singapore, which are high on the Group II import list. It is unclear whether any quantities imported under free trade agreements will count toward the quota.

As we can see, there are numerous assumptions and miscalculations surrounding the implementation of this quota system that need to be urgently addressed. These concern both the quantities involved and the implementation of rules applying to such a regime.

It appears that, as things stand, the quota is going to be applied on a first-come, first-served basis. Those importers that have the logistical capabilities to move large cargoes and have stocking and storage arrangements in place will be able to benefit from early imports, which will qualify.

“The quota levels should be such that all lubricant manufacturers have equal access to cost-efficient Group II base oils on a fair and competitive basis,” said a spokesperson from Chevron Base Oils, one of the main companies involved in the European Group II market and a major importer of these grades.

This view is echoed by the U.K. Lubricants Association’s Director General David Wright. “As the year goes by, and the quota is insufficient, there is a risk that a two-tier market will be created within the EU, where larger concerns have a competitive price advantage by being able to stock up more duty-suspended product earlier in the year, over smaller companies with less storage, who will be subject to securing supplies at duty-levied prices later in the year. The potential disadvantage for SMEs cuts against EU policy to support smaller enterprises.”

Given that a review after six months is feasible for the quota levels, entities such as Chevron and the UKLA will be making appropriate representations to the ETQG to urge for an increase in quota levels. Also given
that the ETQG started looking at the duty waiver and alternatives to that system some 10 months prior to the implementation of the new quotas, one could be forgiven for thinking that any review may not happen in the immediate term. Indeed, it could be some time before any changes are made to the nebulous system now in place.

The only positive from the current situation is that under present market demand the current quota levels will likely be exceeded prior to the end of February, thus perhaps focusing the minds of those in Brussels to move to urgent action rather than wait until July.