The deal would leave Nynas as the only producer of naphthenics in Europe. Nevertheless, several pale oil purchasers told LubesnGreases that competition should not be affected thanks to imports and Shells low profile in that market.

The Harburg plant makes paraffinic along with naphthenic base oils. Located along the River Elbe, it has capacity to produce 150,000 metric tons per year of naphthenics and 170,000 t/y of API Group I paraffinics. The transaction with Nynas, announced in December 2011, would give the Swedish company a 25-year lease on the plant. Nynas has said it would expand capacity and possibly convert some paraffinic capacity to naphthenic, but it has not provided specific numbers.

The commissions initial survey raised concerns about the possibility of Nynas becoming the regions dominant pale oil supplier. The company operates the only other naphthenic base oil plant in Europe, a 400,000 t/y facility in Nynashamn, Sweden. Naphthenics are used to make a variety of industrial lubricants, as well as transformer and process oils.

No other competitor would remain to supply naphthenic oils for use in some end applications such as insoluble sulfur, industrial rubber, fertilizers, additives, and defoamers, the commission stated. With respect to other segments, including industrial greases, metalworking fluids, adhesives, cold-set inks, and transformer oils, the few remaining competitors who are importing into the [European Economic Area] may not exercise a sufficient competitive constraint.

The proposed merger would remove the only competing producer of naphthenic base oils in the European Economic Area, said Joaqun Almunia, the European Commissions vice president in charge of competition policy. The commission needs to make sure that it would not raise production costs for European companies as well as prices for the customers of the various end products.

The commission has until 8 August to decide whether to allow the deal. Nynas said it still expects the deal to go through. As soon as we have studied the issues raised by the commission in detail, we will collaborate further with the commission to substantiate our application and to achieve an approval, Nynas Communication Director Hans stlin told Lube Report.

Naphthenic users contacted for this article said they do not object to the deal.

I do not think this will have any negative effect on competition, said Eric Delhaye, purchasing director for Condat Lubricants, an industrial lubes producer in Chassesur-Rhone, France. For a long time, we really had just one supplier of naphthenics in Europe – Nynas. Real competition started about three years ago when other companies started to import.

Several blenders said Shell seemed to use much of the Harburg naphthenics in house and was not in the open market enough to provide competition for Nynas.

What we saw from Shell in recent years was very erratic behavior, said a procurement chief with another company, who asked not to be identified. At one time, they were charging high prices and saying they were not interested in selling. Then there was a period when they dropped their prices and said they were committed to becoming a consistent seller. But whatever they said did not last for long.

Blenders agreed that better competition has come from Ergon, a United States company that has been trying to increase exports to Europe the past few years. Ergon operates the worlds largest naphthenic base oil plant, a 1.1 million t/y facility in Vicksburg, Mississippi.

Calumet Specialty Products, another U.S. pale oil producer, also exports to Europe, though reportedly in smaller volumes. Nis-Gazprom Neft has announced plans to build a combination paraffinicnaphthenic plant in Novi Sad, Serbia. Scheduled to open in 2015, it is being designed for 80,000 t/y of naphthenic capacity.

Sources said the commission recently circulated a 70-item questionnaire to naphthenics purchasers and that it appears the second phase of the investigation will indeed be detailed. Blenders warned, though, that naphthenic supply in the region may actually suffer if the deal between Shell and Nynas gets quashed. The Harburg plant was up for sale for some time before the deal with Nynas was reached, and many believe Shell would simply close the plant if Nynas does not acquire it, thereby taking volume out of the market.

Blenders noted that pale oil demand has grown in recent years, partly because of lubricant blenders switching from paraffinic to naphthenic base stocks. There has also been increased consumption by the tire industry, which uses naphthenics as process oils. As a result, sources said, the naphthenics business appears to have become more profitable, and the likelihood of new players entering the market has improved.

Generally speaking, I think naphthenics are interesting to producers at this time, said the procurement chief who spoke on condition of anonymity. With all of the Group I plant closings, the market has lost a lot heavy viscosity grade oils, and naphthenics are a way to get heavier oils. So demand for naphthenics will definitely rise in the future. But while a number of companies appear to have some interest in the market, none of them has formed a plan.

Nynas sees the Harburg plant as an opportunity not only to boost its capacity in Europe but also to close its gap with Ergon on a global basis. In addition to the Nynashamn plant, Nynas has long-term supply agreements to market pale oils produced at a PdVSA plant in Emmastad, Netherlands Antilles, and a Valero plant in Three Rivers, Texas, U.S. Naphthenic capacity at those facilities is 190,000 t/y and 125,000 t/y, respectively. Ergons only plant is the Vicksburg facility.

If it is completed, the Harburg deal would bolster Nynas position as the second-largest naphthenic supplier. PetroChina operates two naphthenic plants in China with combined capacity of 715,000 t/y. After that, the sizes of suppliers drop significantly. The next-largest is San Joaquin Refining, which operates a 420,000 t/y plant in the United States.