Demand vs. Production

In a presentation at Decembers ACI European Base Oils and Lubricants conference in Alicante, Spain, John Leavens, director of downstream consulting at IHS, reviewed the technical demand for base oils, which he defined as the minimum volume of Groups I, II and III needed to make lubricants that meet the performance expectations of end-users. Actual demand for them is much higher, and we expect significant increases in Group II and Group III technical demand, he said.

In 2013, global technical demand for Group I base oil was 64 percent of total demand, according to IHS, a London-based firm that acquired Purvin & Gertz consultants in 2011. By 2020, this share is expected to be 55 percent. Actual demand is a little different because Group II and Group III base oils can also be used in applications where, from the quality point of view, they are not required but can be used anyway, Leavens said. Here, there is a degree of what we call over-blending, when higher groups are used in applications where Group I can be used. This is happening because of economic, logistical or marketing reasons.

IHS found that actual global demand for Group II/III base oils is higher than the technical demand, which impacts the demand for Group I base oil. We expect total global technical demand for Group II/III to be low – at 10 million tons – in 2014, Leavens said, while production volume is expected to be almost [twice as high]. In 2014, Group II/III production capacities stood at 24 million tons, with a utilization rate of 80 percent.

In contrast, 2015s global Group I technical demand will be 23 million tons while global Group I production will be only 14 million tons, according to IHS. This amounts to a utilization rate of only about 50 percent.

This shows us that the production of Group II/III is much higher than the actual production of Group I, Leavens observed. The gap between Group I demand and production has been filled by Group II/III base oils used in applications where technically one can use Group I. Because these groups have been used in applications where they [dont have to] be used, it reduces the actual demand and production of Group I base oils, Leavens observed.

Expansions & Refining Economics

Significant expansions in base oil capacity are planned for Europe and Asia – almost all Group II and III projects – and IHS expects growing excess capacity. In Europe, these capacities include Ilbocs (a joint venture between South Koreas SK Lubricants and Spains Repsol) new 663,000 t/y Group II/III plant in Cartagena, Spain, that was put on stream in October; Modricas expected 200,000 t/y expansion of Group III base oil production in Bosnia and Herzegovina; and Tatnefts 190,000 t/y Group II/III plant in Nizhnekamsk, Russia, that went on stream in December. A few more Group II/III expansions were announced in Russia by oil major Lukoil and state oil giant Rosneft.

Announced projects will contribute to a growing excess of base oil production capacity compared to demand, according to IHS. The consultancy expects cumulative base oil capacity to grow by more than 10 million tons by 2017 while demand growth will reach only 1.8 million tons in the same timeframe. Clearly, this will lead to a global base oil oversupply situation, Leavens said.

IHS also found that investment in base oil projects is driven by refining economics or economies of scale. For example, the cost of production for small European Group I base oil plants stands at almost U.S. $1,200 per ton, compared production costs of $1,000 per ton for large Group I plants, Leavens said.

Base oil plants along the U.S. Gulf Coast have even lower production costs of around $800 per ton, similar to that for Asian opportunistic Group III base oil plants that have a lube train attached to a fuel hydrocracker, providing technical advantages, according to IHS. It shows that hydroprocessing creates higher quality base oils for lower costs and that low-cost production routes will eventually win out over high-cost routes, he said. IHS found Asian Group II base oil plants have the same level of operating costs as large European Group I plants.

Group II and III capacity additions will further impact global Group I utilization rates and will eventually lead to Group I rationalization, according to IHS. By 2018, the global Group I capacity utilization rate is expected to drop to 36 percent from the current 54 percent, while the Group II/III capacity utilization rate could well be 80 percent by then. Almost 9 million t/y of Group I capacity worldwide would have to shut down to boost Group I utilization back to 70 percent [as it was in the past decade], he said.

Rationalization & Closures

The situation in Europe is very different from the global picture. Leavens cited three recent and one pending large European closures. Already closed are Petroplus 320,000 t/y Group I base oil plant in Petit Couronne, France; Essar Energys 260,000 t/y Group I plant in Stanlow, England; and TNK-BPs 275,000 t/y Group I base oil plant in Ryazan, Russia. Shells 375,000 Group I plant in Pernis, Netherlands, is scheduled for closure in 2015.

In 2014, the European Group I utilization rate was only 42 percent with total Group I capacity of almost 7 million tons, while production stood at 3 million tons and technical demand at a little less than that, Leavens said.

In the meantime, Europes 2014 Group II/III utilization rate stood at 80 percent, with total capacity of about 1.5 million tons, while technical demand stood at 1.5 million tons. Even after the Cartagena start-up, Europe is still short of Group II/III base oil, Leavens observed.

Finally, IHS found that Europehas moved from being a major net base oil exporter to a net importer. Net imports are expected to increase due to increased Group II/III imports and a reduction in Group I exports, Leavens said. He added that imports of Group II and III base oils will continue to rise as demand growth outstrips European production capacity. The Group II base oil trade balance is expected to rise from around 600,000 tons in 2013 to 1.1 million tons in 2020, while Group IIIs trade balance is expected to stay at 550,000 tons by the decades end.

In 2013, Europes trade balance for Group I base oil stood at a negative 900,000 tons. It is expected to shrink to a negative 200,000 tons by 2020 due to reduced global Group I demand and reduced European production. Looking at recent Group I capacity losses, all analysis suggests that further significant rationalization is inevitable. The question that now lingers is, who will be next? Leavens concluded.