Europe has largely depended on Group I stocks for most of the past 80 years. Lubricant marketers in the region may have used higher grades, but the regions refiners did not make much. It seemed as if Europe had decided that Group I products were here to stay, due in no small part to the large investments that had been plowed into their production by international oil majors and national energy companies. As performance demands rose for finished lubricants, base oil suppliers chose to move forward by looking for material to blend with existing Group I supply – in order to continue using the Group I – rather than replacing it.

That material turned out to be Group III base stocks, which could be made using feedstocks from the many crackers that European refineries had installed during the 1970s and 1980s. Thus, Group III production started in Europe as one solution to a problem, and it led many to believe that Group I grades could continue being used to make future generations of finished lubricants.

Missed Chance?

It almost appears that few players in Europe noticed the quantum shift in the quality of base oil output in the Far East and North America, where new refineries (in Asia, at least) and new base oil plants were being built. Built by forward-looking refiners, these facilities used new technology, at first to make Group II stocks, and later progressing to Group III.

Foresight in those regions may not have been perfect, because they seemed to overbuild – at least according to regional demand. Plant upgrades and new units in locations such as Singapore and South Korea yielded more Group II than could be consumed in their backyard, and the same happened in North America. At that point refiners concluded, where better to introduce modern grades of base oils than a region that had no indigenous Group II production and limited facilities for Group III and higher grades?

Suppliers such as S-Oil, SK, Motiva and Chevron identified Europe as one large area of potential untapped demand for Group II and Group III. During the mid-1990s, these companies set up distribution arrangements – some using third parties already in the base oil business, others using their shareholder affiliates as marketing arms.

Later, large tranches of Group III production were also aimed at the European market. Western Europe-based producers such as Neste and Shell were already established Group III suppliers, and they, along with importers from South Korea and Malaysia, managed for a time to more or less meet demand. In the past couple years, however, an influx from new plants in Bahrain and Qatar pushed the market into a state of oversupply. The market is now awash with Group III grades, with suppliers struggling to find receivers for all the production earmarked for Europe.

A Place for Group II?

Some see that development as squelching any nascent demand for Group II in Europe. This columnist believes that Group II imports can still find a place in Europe, largely because the region has no capacity for virgin Group II production and none planned. The SK-Repsol joint venture in Cartagena, Spain, vacillates in its reports about whether its plant – now under construction – will make any Group II. The latest pronouncement says it will make only Group III after opening in 2014.

There are rumors that some European mainstream producers will convert Group I facilities to Group II, but nothing firm has been announced so far. Group I closures are still gaining impetus, as indicated by the imminent shutdown at Essars refinery in Stanlow, United Kingdom. (See Newsmakers, page 55 of this issue.)

So where does this leave the European base oils market? Will the industry still hobble along using all three types of base stocks, hoping for a rebound in lubricant demand that creates a home for all base oils? Or will one or two of the groups win the battle and drive out the other API grade – which is happening in some other parts of the world?

Somewhere along the line, something has to give, and a real direction for European base oil has to be taken by this conservative industry.