Neste said at the time that the joint venture would be 60 percent owned by Takreer and 20 percent each by Neste and OMV. However, in 2010, Takreer awarded a U.S. $463 million engineering, procurement and construction contract to Koreas Hyundai Engineering, effectively ending the joint venture agreement with Neste. The base oil plant is part of the massive U.S. $10 billion expansion of Ruwais refinery with Takreers existing hydrocracker providing feedstock to the base oil project.

Riding on the back of its agreement with Adnoc, Neste inked another joint venture in the Persian Gulf with Bapco (Bahrain Petroleum Co.) in 2008 in a deal valued at a 300 million. Neste holds a 45 percent share and is responsible for marketing the VHVI production from Bapcos plant at Sitrah.
The plant was commissioned in October 2012 and, combined with the Adnoc deal, Neste looked well placed to use the Persian Gulf as an important supply hub as business increasingly tilted toward Asia and other emerging markets.

However, since 2010, discussions with Adnoc were confined solely to the sales and marketing of Group II and III base oils at the yet to be commissioned Takreer plant in Ruwais. The plant about 240 kilometers west of the U.A.E. capital Abu Dhabi is wholly owned by Adnoc and is set to produce up to 500,000 tons per year of Group III base oils as well as 100,000 t/y of Group II. The discussions were clearly protracted, but the outcome was not what many were expecting. In a statement buried in a stock market announcement last September Neste said, The planned marketing cooperation in VHVI base oil with Abu Dhabi National Oil Co. (Adnoc) will not proceed as previously announced.

April Showers

As reported by Lube Report, rumors began to gain momentum that Adnoc would take charge of the marketing of its base oils following comments at a conference in Abu Dhabi in April 2013. Fareed Mohamed Al Jaberi, vice president, supply division, Abu Dhabi Oil Refining Co. (Takreer) and an executive at Adnoc both stated Adnoc would manage marketing of the base oils.

At the time, a source familiar with the matter, who spoke on condition of anonymity because the negotiations were not public, said Adnoc had the capability to go it alone and would likely do so. Adnoc alone can take advantage of big demand from regional markets as well as Group II demand from India, the source revealed.

The precise details of what happened remain unclear, but it appears the two companies failed to reach agreement over marketing rights. According to a senior executive at Adnoc, who asked not to be identified, there were fundamental differences of interpretation during the negotiations, which lasted more than two years. We had a lot of proposals from Neste, but we were clear we would not give marketing to a third party. We are a seller of base oils, and if they want to be a buyer they are welcome – most likely they will be.

Ulla Kotila, a spokesperson for Neste, insists the concerns were over demand. Due to over capacity in the market, we didnt see demand for the entire output in [the] short term and decided to go for other commercial alternatives for meeting [our] long term growth.

Fortunately for Neste, the abrupt exit from the agreement wont cost anything because the Finnish company had no financial investment. The partnership arrangement was purely a marketing one, and Neste Oil did not invest in the project, Kotila confirmed.

T. R. Kumar, managing director of Tesla Lubricants in Dubai, said Neste could have tried to drive too hard a bargain during negotiations. They may have tried to push Adnoc too far when it came to the commercial agreement.

According to analysts, the collapse in discussions between Adnoc and Neste reflects a growing confidence on the part of refiners in the Persian Gulf and changes in the regional base oils landscape. They point to successes such as Luberef in Saudi Arabia that has evolved into a sophisticated international business and that recently underwent a corporate identity overhaul after announcing investment plans close U.S. $1 billion.

Similarly, Shells ambitious Pearl GTL project with Qatar Petroleum is adding to regional base oil production. Adnoc could try to consolidate its position in the U.A.E. and the wider Gulf region due to the countrys position as an important hub for the re-export of base oils. With about 50,000 t/y of Ruwais production earmarked for Adnoc Distribution, a company that markets lubricants and petroleum products primarily in the U.A.E., it is not beyond the realm of possibility that it could also supply successful lubricants marketer Enoc (Emirates National Oil Co.) in Dubai, which currently imports and blends base oils.

Marketing Challenge

Still, Adnoc faces a significant test if it is to establish brand awareness and a price premium for its base oils, according to industry opinion. Joe Rousmaniere, head of new base oil technology at Petronas Lubricants International, believes it has become a prerequisite to establish a brands credentials. Establishing your brand of base oil has become very common in the base oil business and almost obligatory for the higher end Group III products. He added that doing so takes time, and Adnoc may not accomplish it before the production is distributed in the market.

Nexbase is a well-known and accepted brand, so unless they [Adnoc] have been working very, very hard and very, very fast, it is hard to imagine that they can have a well-known brand before their start up in mid-2014, Rousmaniere added.

It is a point echoed by Dr. Stefan Mueller, senior principal analyst at IHS Chemical. Establishing a brand certainly takes time and money. Crucially, he added that the absence of a recognized brand can impact profitability, I expect them to have lower than [potential] revenues as a consequence of this separation from Neste.

Rousmaniere agrees. Branded oils will always have recognition, reputation and pricing advantage over unbranded. Nevertheless, it is clear Adnoc feels the base oils business is a high margin industry that complements its existing infrastructure. And with the size and scope of its upstream business, that is undoubtedly true.

Regulatory approvals will also need to be completed but according to the Adnoc executive we spoke with, they do not anticipate any problems. API approvals are straightforward and we will work with OEMs on other approvals as they become necessary, he said. Yet, according to Mueller, the quality of ongoing technical support could hinder Adnoc in the short term. The greatest drawback for Adnoc will be the lack of constant technical assistance to clients. Thats something that needs labs, skilled staff and lots of experience. Neste has all this.

T. R. Kumar said that Adnoc could decide to bring in external expertise to address the issue. It does take time, so they may use outsiders. And technology does not cost much these days.

Takreers Ruwais plant was originally due to be commissioned by the end of 2013, but Adnoc said it will be delayed at least six months. There is no set date, but it could be decided by customers we are currently in discussion with, according to the Adnoc executive. That strategy indicates Adnoc may well be looking to secure a few long-term contracts building upon an existing distribution network in the U.A.E.

Analysts also say the split between Neste and Adnoc puts long standing relationships with international partners under scrutiny and highlights the different strategies pursued by regional refiners and lubricant manufacturers. As the balance of business shifts away from mature markets such as Europe, the Persian Gulf is geographically well placed to service fast growing markets such as India, Africa and Asia, they added.

Iran Back in Play, Maybe

With the growing possibility of limited sanctions relief against Iran, Gulf refiners will be keen to take advantage of the thaw in tensions. Iran remains predominately a Group I market, and Gulf refiners could step in to supply the expected surge in demand for Group II/III products as Iran gravitates to higher quality lubricants.

A rise in the vehicle replacement cycle and greater awareness by Iranian consumers of the technical benefits of using higher grade lubricants will be the immediate consequences of an easing in sanctions. With the prospect of such a profound change in market dynamics, will there be any modification to Nestes existing joint venture with Bapco?

Mueller is confident the arrangement is intact. [W]ithout being an insider, the cooperation seems to be working and successful. Even so, T. R. Kumar described change as possible and thinks Bapcos management will review Adnocs recent decision. However, Nestes Kotila is clear that it is business as usual. We are fully committed to our JV with Bapco, and we continue producing high-quality Group III base oils both in Finland and in Bahrain to serve our customers globally.

Future Imperfect

Nestes exit from the Takreer relationship looks to be Adnocs gain. Gulf refiners are increasingly competing with Asian counterparts like SK Lubricants, which will probably put pressure on industry margins. With lower margins, Gulf refiners will want to retain as much profit in house as possible.

Adnocs challenge is whether it can avoid being perceived as a commodity supplier and establish a brand and reputation for quality. Timing is also of the essence. Iran, historically a major exporter of base oils to the Middle East, may soon attract international investment to upgrade its refining infrastructure in the wake of an easing of the current sanctions.

It is premature to speculate whether the outcome of Neste and Adnoc discussions will spur a broader industry rethink. For now, it seems that regional refiners are emboldened enough to question traditional ways of doing business. For their international partners, this attitude imposes a new test in a region that is undergoing change and fast-paced economic development.

With Adnoc facing stiff competition from the likes of Luberef and Bapco, the jury will be out for some time to come before it passes verdict on this recent chapter in base oil history.