The automotive industry, a key determinant of finished lubricant demand growth, continues to fare poorly in these markets. According to the International Organization of Motor Vehicle Manufacturers, automotive production declined by 3.1 percent in Germany and a drastic 20 percent in France during the first six months of 2013, compared to the corresponding period in 2012.

Western Europe has been a global forerunner in legislating stringent norms for automotive emissions and fuel economy. This has had a direct bearing on the choice of base stocks used to formulate lubricants. Historically, the region has been a key producer of API Group I base stocks and, as a result, had favored Group I in most of its formulation strategies.

As the region transitioned to higher quality lubricants, much of its Group I production has been directed toward export markets. In Europe, Group I finds application in only bottom-tier automotive lubricants and industrial lubricants.

The declining demand for Group I globally and increasing competition from high-quality base stocks have forced the shutdown of some Group I plants in Western Europe. Some notable Group I closures (or announced to be closed) include BP (Coryton), CEPSA (Huelva), Shell (Grassbrook) and Essar (Stanlow). Despite this, Group I accounted for over 80 percent of total base stock production capacity in the region in 2012; the rest consisting of Group II, III and naphthenic base stocks.

Recently, North American Group II suppliers made efforts to establish a market for their products in Western Europe. Due to increased penetration of Group II and a movement toward higher quality, the share of Group I in the overall base stock demand continues to decline. In 2012, Group I represented less than 60 percent of total base stock demand in the region. In contrast, Group III represented more than 20 percent of demand.

Western Europe is active in Group I export markets. Key destinations are South America, Africa and South Asia. Nestes Porvoo refinery is the regions main Group III plant, while small quantities are produced by Total, Colas and ExxonMobil.

The region imports significant volumes of Group III base stocks, mainly from East Asia. It has also started importing from the Middle East with the commissioning of Shells Gas-to-Liquid plant in Qatar and Nestes Group III plant in Bahrain.

The region consumes a significant share of top-tier lubricants, driven by stringent emission and fuel economy rules. In addition, certain areas experience extremely cold temperatures year-round, making the use of low-viscosity lubricants such as 0Ws and 5Ws an imperative.

Base stock demand in Western Europe is changing rapidly. The EU 2020 carbon dioxide emission limit of 95 grams/kilometer, if implemented, will mean a significant improvement in fuel economy. According to the upcoming norms, the carbon dioxide emission limit is the average for an entire fleet. Therefore, heavy cars can emit more, which is offset by lighter fuel-efficient cars. Cars with extremely low emissions (below 50 g/km) will count as 3.5 vehicles in the first year, 2.5 in year two, 1.5 in year three and 1.0 from year four onward (the so-called super credits). Super credits are a source of friction between various EU countries and are holding up final agreement.

When fully implemented, the carbon dioxide norms will translate to greater penetration of hybrid and electric vehicles, mostly due to short term super credits. Smaller/lighter vehicles will increase their share of the fleet. As a result, there will likely be a shift toward lower viscosity oils, which would mean a greater demand for Group III and polyalphaolefin base stocks.

The regions supply of high-performance base stocks will see a major addition with SK-Repsols 500-kiloton Group III plant. In addition, significant capacities are being added in Eastern Europe that will be targeted at Western European markets. These include Tatnefts 200-kt Group III plant and Rosnefts 400-kt upgrade to Group II and III in Russia, and NISs 150-kt Group III plant in Bosnia.

Increasingly, North American base stock suppliers are eyeing the market to place surplus Group II production. Group II exports from North America to Western Europe are expected to increase significantly once Chevrons Pascagoula plant starts production. Clearly, this would result in an increase and even surplus of Group II and III base stocks, further catalyzing a shift toward high-quality lubricants.

However, this surplus will have a negative impact on the regions Group I plants, making it necessary to shut down some capacity. To maintain supply/demand balance, some existing Group I supply must be rationalized. About two million tons, if not more, of Group I capacity in Western Europe will be closed over the next ten years.

However, it should be noted that a number of Group I plants operated by national oil companies may continue operating for non-economic reasons. In addition, plants that produce high-value products such as wax and bright stocks will have an edge over other plants.

Going forward, there is uncertainty about recovery in the region. Although there have been a few signs that the economy is slowly recovering, Western European countries will show a slower rate of growth compared to the rest of the world.

Kline projects that finished lubricant demand in Western Europe will grow at less than 0.5 percent annually over the next ten years. Base stock demand growth will follow finished lubricant growth. Group I consumption will drop significantly because it is expected to be substantially displaced from passenger car and heavy duty engine oils. Group III demand will be strongly influenced by the shift to lighter engine oil viscosity grades. Group III can also gain from the high cost and short supply of polyalphaolefins, catering to the top end lubricant market.

Anuj Kumar is Project Lead, Energy, Kline & Company, a worldwide consulting and research firm. He can be reached at Anuj_Kumar@klinegroup.com.