API Group I base oil plants have been closing right and left in recent years, for numerous reasons. The biggest factor is certainly the rise in lubricant performance demands, which spurred lube formulators to shift from Group I to Group II and III stocks. But other developments also made an impact, such as the trend toward heavy, sour crudes, which lead to lower yields in Group I plants.
Now Group I has one less thing counting against it. Light, sweet crudes have made a comeback the past few years, thanks to the rise of alternative exploration methods, primarily tight oil extraction in the United States. The result has been a boost in availability of crude feedstocks that work well in Group I plants.
When you average it all out, oil is getting lighter and sweeter, Alan Gelder, head of oils research at Wood Mackenzie consulting, said in January at the ICIS World Base Oils and Lubricants Conference in London.
Until a few years ago, crude supply was trending the opposite direction. Older wells that were drying up tended to be light and sweet (sweet refers to crudes low in sulfur), and yields from newer ones replacing them tended to be heavier and sour. This affected base oils because the processes in Group II and III plants make their yields less sensitive to feedstock variety. Loss of access to light, sweet crudes might be one more nail in the coffin of a Group I plant, but would have little impact on a Group II or III facility.
Some analysts had predicted that the trend toward heavy, sour crudes would continue, but the industry received a surprisingly high influx of crude from tight oil, projects that use fracking and horizontal drilling to extract from permeable shales. As Gelder noted, tight oil projects in the U.S. have been so productive that they have significantly reduced the countrys need for oil imports.
Tight oils impact on the global base oil industry has been somewhat blunted due to the fact that U.S. regulations effectively force most of the tight oil produced in the country to be refined domestically, rather than exported. Still, domestic tight oil presumably reduces the need for U.S. refineries with Group I base oil plants to import light, sweet crudes, and this would have some impact outside the U.S.
Gelder also cited a few other refining trends that could impact the base oil industry. Consumption of automotive fuels is shifting from gasoline to diesel, he said. This matters because within refineries, diesel and base stocks compete more directly for feedstock.
Diesel demand is expected to set global refinery runs, so base oils will need to add value to divert transportation fuel feedstock, Gelder said.
The historic link between oil and natural gas prices appears to be dis-solving, with natural gas gaining a significant advantage. If this holds up, Gelder said, it would improve the competitiveness of polyalphaolefin and gas-to-liquids base stocks.