From atop the refinerys tallest tower swaying in the biting wind, ExxonMobils 60-year-old Rotterdam site stretches in every direction, a forest of upended cylinders, gantries and pipework. Away in the distance, crammed between older refining equipment and the loading docks is its brand new API Group II base oil production unit.

The sunlight sparkles on the units steel work, glistening from occasional rain showers, and miniature clouds of steam vent from a valve on its highest structure – the 50-meter vacuum distillation tower constructed in Belgium and floated to Rotterdam on a barge.

The new unit is the largest Group II production facility in Europe with production capacity of 1 million tons per year of ExxonMobils 5 and 12 centistoke base stocks.

As a matter of practice we reach our production capacity. This is not wishful thinking. How much we will actually use, of course, depends on market conditions, ExxonMobils Rotterdam refinery manager, Erik van Beek, told LubesnGreases.

ExxonMobil started distributing cargoes in February ahead of onward delivery to customers, yet construction began three years ago. Nineteen modules were erected, including three large reactors built in Italy, pre-assembled racks manufactured in Spain, kilometers of pipes and cabling, hundreds of valves and an orchestra of instrumentation, as well as the vacuum tower.

Demand Trends

Since the 1990s, global base stock supply has been trending toward Group II and Group III oils, which were introduced to accommodate – and which enabled – rising automotive engine oil standards. Western and Central Europe had almost no virgin Group II refining capacity until 2015 and initially was much slower than North America or Asia-Pacific to use Group II, opting instead to use blends of Group I and Group III. In the 2000s, Chevron began importing Group II to the region to develop a market, and demand gradually grew as other Group II suppliers such as S-Oil also brought in imports.

In the past couple years, European demand for Group II has accelerated. United Kingdom-based price reporting agency Argus estimated recently that the regions supply of Group II reached 1.7 million tons in 2017, including 1.01 million metric tons imported from the United States, 442,000 tons from Asia and 240,000 produced domestically.

The Rotterdam plant therefore is a four-fold increase in Group II production capacity within Western and Central Europe. Industry insiders agree that having that capacity available locally should convince even more lubricant blenders to begin using Group II.

ExxonMobil says that base oils produced in Rotterdam will help lubricant blenders meet ever-higher performance demands from bodies such as the European Automobile Manufacturers Association – developer of its ACEA engine oil sequences – and tightening tailpipe emissions targets imposed by the European Union. As other industry insiders have noted, the newest generations of low-viscosity, ACEA oils that are low in sulfated ash, phosphorus and sulfur require mostly Group III and polyalphaolefin base stocks.

But ExxonMobil notes that the oils produced in Rotterdam can be used to reduce amounts of Group III required in some ACEA 5W oils and can be used without Group III in some 10W heavy-duty diesel engine oils. The 5 cst oil, which is marketed as EHC 50, is Group II+, an informal base stock category recognized by industry convention for Group II stocks with viscosity index of 110 to 115. The 12 cst cut, marketed as EHC 120, is borderline Group II+. Where formulators can substitute Group II or Group II+ oils for Group III, doing so lowers costs.

ExxonMobil officials said they had this in mind four years ago when they made a final investment decision to build the Rotterdam base oil plant, which cost U.S.$1 billion.

It started with the general trend for the demand for more energy efficiency and lower emissions and, of course, Group II…If you look at the specific European market, we knew at that time that the new ACEA specifications would come and would push for more Group II demand, Sylvie Houry, ExxonMobils global market development manager, said during an interview.

The reason why we made the decision to invest in an expansion project at the Rotterdam refinery is to meet the evolving needs of our customers who are formulating against more and more stringent finished lubricant quality requirements, and as a result are in need of higher-quality base stocks, said Pascal de Bast Thiers, ExxonMobils Rotterdam refinery business venture manager. Industry insiders agree that it is a well-timed move.

The European region, and ancillary markets close by, are going to expand into Group II base oils in a big way, with the new ACEA regulations coming into force, and with further emission-controlling and low-temperature start lubricants hitting this market, said Ray Masson, director of Pumacrown Ltd., a U.K. trader and broker of petroleum products.

With an expansion of its Group II plant in Jurong on par with Rotterdams capacity to come on stream in mid-2019, ExxonMobil will have three production hubs: Baytown, Texas, Singapore and now Rotterdam.

Displacement Material

In many kinds of markets, a supply injection of Rotterdams proportion could cause a significant disruption. Some observers do expect that some of Europes existing Group II supply will get pushed nudged aside by the Rotterdam, at least initially.

Yet of all base oil demand in Europe, 20 percent is Group II with Group I accounting for much of the rest. Therefore, producers are vying for a relatively small piece of the pie, which could expand if Group II started encroaching on Group I applications, said Brent Lok, manager of base oil marketing and new product development at Chevron.

ExxonMobils coming in will put a big dent in either Group II or Group I. But basically its a declining market overall, so somehow they are going to have to find their way into that market, Lok told LubesnGreases.

Building a facility close to potential consumers could help boost the use of Group II in Europe, where product has mainly flowed from North America and South Korea and availability can be affected by seasonal factors.

Obviously, having local or indigenous production is going to be a move in the right direction in terms of opening up and developing the European market to increasing the share for Group II grades. This is also in the face of Group I plant closures and possible restrictions on the future availabilities for Group I base oils in Europe, Masson concurred.

Differentiation

Industry opinion is divided over what effects these increased local volumes of Group II will have on the European market. Will volumes increase at all, since an undisclosed quantity of imported material from ExxonMobils Baytown and Singapore plants is already satisfying demand?

There is not going to be a massive increase in the quantities of Group II base oils available in the European market, because what many forget is that ExxonMobil has been…using imported material from U.S. and
Far East sources to build market share and to pave the way for the Rotterdam production, Masson said.

However, one industry insider
who preferred not to be named speculates that the increase from Rotterdam might be offset by ExxonMobil reducing imports from the U.S. and Asia and absorbing several hundred thousand tons for internal use.

That could be between 50 and 75 percent of the units capacity, agreed Kerry Larkin, commercial director of specialty oils and fluids marketer SIP. Indeed, ExxonMobil says its main goal is to ensure product supply security from its three production hubs.

We already had these Group II products in Asia and America. Having local production here in Europe will substantially increase our supply reliability and supply security to our customers, Houry said.

The industry is moving away from regional production and will become increasingly globalized, with production hubs serving wider market areas in various regions. These units will be either evolving from current major refinery sites or will be new greenfield developments, Masson explains.

The installation in Rotterdam will surely focus more minds on Group II within Europe. It will also intensify competition in the region, where Chevron has supply hubs at three Group II storage terminals, as well as additional storage facilities in Belgium and Germany.

There will be a greater awareness of Group II due to the Rotterdam production, but companies such as Chevron, which has led the way in fully approved Group II supply in Europe, are not going to merely roll over and surrender their position to the new kid on the block, Masson says.

As for the pace of changeover to Group II on a large scale, Lok is more cautious and believes it will not happen overnight.

Some people will be proactive and move fairly quickly, and those are typically producers that have lots and lots of premium motor oil grades, and they need more of a mix of products they sell, and it makes economic sense for them to go over. Others who have huge amounts of, for instance, low-tier motor oils or a lot of industrial oils or a lot of off-road heavy-duty motor oils where the portion that you desperately need Group II in is smaller, then they will probably be more cautious.

Larkin is similarly restrained about the competitive landscape.

Chevron may feel the heat, but again this depends on the volume of new business based on the switch from Group I to Group II. I would imagine we will see further closures in the Group I market over the next 12 months, she said.

Disrupting Players

Lok thinks that ExxonMobil may have its eyes on the Group III market, as well.

They have been very vocal about introducing their EHC 50 as a Group II+. And Group II plusses, if you look at their properties, are awfully close to Group IIIs.

The viscosity index of Group II+ is typically between 110 and 120, while Group III is defined as having V.I. above 120. Group I and Group II oils are both defined as having V.I. of 80 to 120, and are differentiated by sulfur content and proportion of saturates.

So the Group II plusses that are coming out from people like ExxonMobil and others are really kind of like kissing cousins to Group III. They are not really alternatives to Group I, they are alternatives to Group III, Lok says. This places Group II+ in contention for many low-viscosity engine oil applications.

While we will have to wait and see what ripples Rotterdam will make in the Group II pond, we already know that there will be lots more locally produced base oil flowing in Europe, a region that is evermore thirsty for this base stock.