Historically, Europe has produced large amounts of API Group I base stocks supplemented by a modest amount of high quality base stocks. Overall, the region consumes comparatively high quality finished lubricants that require only a portion of that Group I, so much of it is exported to North Africa, South Asia and other parts of the world. Declining global demand for Group I, coupled with increasing competition from more highly refined oils, has caused numerous European Group I plants to close. But even after those closings, Group I accounted for more than 85 percent of the 8.5 million tons of base stocks produced in the region in 2012. Group II and III base stocks accounted for 8 percent of supply, and naphthenics and other types the remaining 7 percent.
Europe has historically favored blending Group I and Group III base stocks to make its finished lubes, using notably little Group II. This is in sharp contrast to the approach followed by blenders in North America, which relies more on Group II. While European use of Group II is small, it is growing as North American suppliers target the region and blenders continue to experiment with the grade. Increased penetration of Group II and a continued movement towards higher quality mean that market share for Group I in the region continues to fall.
With the regions large Group I capacity weighing against limited and shrinking European demand, Group I suppliers are depending significantly on exports, with key destinations being those mentioned above plus South America. Conversely, Europe imports large and growing volumes of Group III base stocks, mainly from the Pacific Rim. With the commissioning of new plants in the Middle East, that region is also helping to meet Europes needs.
Base stock demand in Europe is changing fast. If implemented, passenger car carbon dioxide emissions limits of 95 grams per kilometer, which have been scheduled to take effect in 2020, will require a significant improvement in fuel economy. This in turn will expedite the transition to lighter viscosity engine oils and hence the use of high-performance Group III and polyalphaolefin base stocks.
At the same time, the regions supply of high-performance base stocks is set to grow rapidly. Key projects include SK-Repsols 500,000 t/y Group III joint venture in Spain, Tatnefts 200,000 t/y Group II/III project in Russia, Rosnefts 400,000 t/y Group II/III upgrade in Russia, and the Novi Sad, Serbia, plant that NIS is building with 180,000 t/y of capacity for Group II and naphthenic base oils. In total, there are plans to establish 2.5 million t/y of Group II and III capacity in Europe by 2022.
To maintain a supply-demand balance, some Group I capacity must be rationalized. Kline estimates that at least 3.6 million t/y of Group I capacity will be shuttered during the next decade. A number of Group I plants in the region are operated by national oil companies, and these plants may continue operating for non-economic reasons. Additionally, plants producing high-value products such as wax and bright stock will have an edge over others.
Moving forward, while its economic climate remains uncertain, there are signs that Europe is slowly recovering. Kline projects that finished lubricant consumption in the region will rise at a cumulative average growth rate of 0.7 percent over the next 10 years.
Base stock demand will grow at a similar rate. Patterns will differ from country to country, with West European countries growing more slowly because of the subregions subdued economic recovery. Overall demand is also being affected by the increased uptake of synthetic oils, which extend oil drain intervals and thus reduce consumption. Conversely, East European countries, including Russia, are expected to exhibit relatively strong growth.