Amidst the hype surrounding new API Group II and III base oil production from sites around the world, and more particularly in Europe, many players in this business continue to be interested an ongoing debate that centers on the likelihood of a further rationalization of Group l production.

The debate started some years ago when it was realized that the use of Group l oils had started to wane, given the evolution of base oils that could help meet emissions regulations and provide lubricant formulators with materials to produce a new generation of finished lubricants for automotive and industrial applications.

The radical forecast called for ending Group l production altogether and replacing this now outdated base stock with Group II and III oils. Of course, this did not end up happening for a number of reasons.

First was the economic argument. Where they became available, the prices of these new generation base oils were much higher than Group l products. Group II and III oils were initially only used by oil majors in house, leaving third-party blenders continuing to buy Group l base stocks. Also in the earlier days, these blenders were reluctant to switch to new base oils as they were already involved in competitive markets that did not demand more advanced finished lube grades hence no need to use higher-specification blend stock.

Secondly, there wasanoperational issue – these new generation base oils have lower viscosities that do not lend themselves for use as certain process oils or to the production of heavier-viscosity marine lubricants, such as cylinder oils. This was perceived as a problem, and although some ideas were suggested, such as substituting higher-viscosity naphthenics for grades such as brightstock, they have never been fully accepted by blenders producing these viscosity-sensitive lubes.

The issue is made more challenging for marine lube blenders by the International Maritime Organizations 2020 0.5 percent sulfur limit in fuel oils, which could preclude the use of higher total base number lubricants.

Thirdly, and perhaps most importantly, previously there were limited availabilities of Group II and III base oils around the main markets.

Change began gradually when the costs required to keep existing Group l plants maintained to new technical and safety standards began to escalate, meaning they were on borrowed time. It became clear that an international move to Group II was on the cards, with capital investment being ploughed into what would become the ‘workhorse base oil grade for the future.

Some plants were closed permanently, while new greenfield construction, in addition to conversions, have created state-of-the-art facilities for the future. This has been replicated with a global hub model, whereby a number of large plants now supply bigger sectors of the globe rather than merely local domestic or regional markets, with standardized production of identical grades from every refinery site carrying the same worldwide approvals.

The question remains: Assuming Group I demand will continue declining and will ultimately be replaced by Group II, and to an extent by Group III, which, if any, of the surviving Group l plants will close down?

There are a number of points to be considered when looking at the European scene in this regard, not least of which is the ownership of existing facilities and how both economics and politics are involved in continued production from these outlets.

Many Group l plant closures were based on rationalization by majors, which currently operate around 27 percent of the nameplate European Group l slate. The assumption may be drawn that, with further expansion into Group II production, at least part of the Group I availability will be lost or replaced. Indications so far are that some of the majors are committed to having…all types of base oil available in all markets where they are represented. However, this statement does not define or reflect the relative quantities of each type of base oil available at any one time in a particular region.

Other Group l facilities are sponsored or owned by government entities and have in the past initially produced base oils for in-house, national-branded lubricants that carry the country’s oil company name domestically and also in export markets. The problem here is that recent upgrades to specifications incorporating ACEA 2016, and with additional standards to follow will not allow the sole use of Group l base oils in the production of all finished lubricants required across European markets. National oil companies plants are increasingly having to depend on export sales into regions where Group l is still acceptable, such as Africa, India and the Middle East, although in all of these locations the uptake of Group II and III is increasing fast.

Existing Group l facilities would appear to be running out of markets and time, although some pundits claim that these plants will never disappear completely – there will always be a use for this base oil in markets where higher quality standards are not required. This may be the case, but it comes down to a question of the economics of supplying a dwindling market. It becomes apparent that not all refineries can continue to be involved in producing the current European output of 5.3 million metric tons per year, since forecasts predict these refineries will have to run at 30 percent production or less in around seven years time to be able to balance demand. These are not optimum rates and in most cases would be considered uneconomic.

Where governments and unions are involved in nationalized or semi-nationalized refineries, closures or the end of base oil production are less likely. But looking at closures over the past few years, private investors have made swift economic and strategic decisions to shut down units. Thus the industry view is that the oil majors will possibly continue the trend to pull out of European Group l production. The debate would seem to be resolved.