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Koreas Dynamos


SEOUL AND ULSAN, South Korea – From the United States to Japan, in Europe and Australia, use of high viscosity index, API Group III base oils is growing throughout the developed world. With demands on lubricant performance being raised ever higher, industry observers say the trend is bound to continue and even spread to other regions.

Group III production, however, is startlingly concentrated in a tiny corner of the globe, along a 30-mile stretch at the tip of the Korean peninsula. Here is where two companies, SK Corp. and S-Oil Corp., manufacture more than two-thirds of worldwide Group III supply.

The reasons for this remarkable development have as much to do with the twos oil refining operations as with base oils or lubricants. But lube companies worldwide have clearly benefited, because the Korean duo brought Group IIIs to market in volumes and at prices that have made it practical for many more blenders to use them.

Both based in Seoul, SK and S-Oil are among South Koreas top three oil companies (the third being the LG-Caltex joint venture). SK was the first of the two to enter the Group III market, although it was not driven by a desire to make premium base oils. S-Oil had for years operated South Koreas only base oil plant, meaning that SK had to buy base oil for its finished lubricants from S-Oil and from foreign suppliers.

Observers say it galled SK to depend upon its rival. SK officials simply say the company preferred not to. In any case, the company decided in the early 1990s to build a base oil plant of its own.


At first management leaned toward a facility that would make Group I or Group II oils, but upon investigation it saw that the large volume of fuel hydrocracker bottoms generated at the companys refinery in Ulsan, South Korea, would make it unusually inexpensive to produce higherquality base stocks here.

It turned out that we could build a Group III plant for less than what it normally cost to build a Group I plant, said Y.M. Park, general manager of SK E&P Co., the companys affiliate in the United States. He added that the company built its Group III plant for less than $100 million. We believed we would be able to charge a premium for these base oils because of their quality. But the biggest thing was just to have our own base oil.

Construction began in 1993, and SKs first plant opened two years later. Initially it had capacity to produce 3,500 barrels per day, although it has since swelled to 10,000 b/d.

S-Oils plant in the nearby Onsan industrial district of Ulsan had been making Group II oils since 1981, but the company decided two years ago that it wanted to enter the Group III market, too. Fortunately, a 1995 project that installed a fuels hydrocracker was engineered to accommodate future base oil expansion and upgrade. When S-Oil decided to proceed with that plan in 2002, it simply had to change catalyst in part of the fuels hydrocracker to increase base oil capacity by 16,000 b/d – 9,000 of it Group III. The plant now has total capacity of 24,000 b/d, the company says, making it the second largest in the world.

Two years later, it was SKs turn to expand. This past June it opened a second plant at Ulsan, raising capacity to 17,000 b/d – 16,000 of it Group III. Together, the companies now have Group III capacity of 25,000 b/d – 72 percent of the worldwide total.


That SK and S-Oil would supply such a large proportion of the globes Group III base oil prompts the question: Why did they do this when other companies did not? The world has a number of much bigger oil companies, including ones that produce much more base oil. Numerous companies were making Group IIIs for years ahead of the South Koreans. So why did these two concentrate so heavily on such premium products?

The answer lies largely in the makeup of their overall refining operations. To begin with, their refineries are the two largest in the world. SKs has a daily crude throughput of 840,000 barrels, S-Oils 570,000 barrels. Officials say land costs in South Korea are so high that oil companies prefer building one large refinery rather than two or more smaller ones as would their counterparts, for example, in the United States.

The refineries also have the worlds two largest hydrocrackers – 45,000 b/d at SK; 75,000 b/d at S-Oil – resulting in large volumes of hydrocracker bottoms that can serve as base oil feedstock. Moreover, fuels operations in South Korea are focused on diesel, which requires hydrocrackers to operate at higher severities compared to gasoline. As a result, their hydrocracker bottoms make better Group III feedstock than those produced at North American refineries.

Both SK and S-Oil have the advantage of an ideal feedstock coupled with scale, making them amongst the lowest-cost Group III producers in the world, said Stephen B. Ames, of SBA Consulting LLC in Pepper Pike, Ohio. This more than offsets the logistics penalty in getting their product to the premium U.S. And European markets.

It is worth noting that North America has a significant amount of potential additional Group III capacity. Plants in the United States and Canada could convert Group II production to Group III, but operators generally choose not to because they would sacrifice yields. In contrast, SK and S-Oil maintain that they would lose yield by switching to Group II.

Once SK started making Group III oils, its challenge was to sell them as Group IIIs. Even with just the first plant, output exceeded internal consumption, so it had oil for sale. Wherever the buyer needed the product for its high-performance characteristics, SK stood to receive an attractive price premium. But any barrels that were not sold for Group III applications – and this is still the case for SK and S-Oil – ended up dumped in Asia-Pacific for Group I applications, at little better than Group I prices.

SK officials said it took a lot of work to develop customers because there was not much of a market at first. The American Petroleum Institute had not even defined the various base oil groups at that time; marketers referred to oils that would later be called Group III as VHVI, for very high viscosity index. Although several companies were making these fluids, little was changing hands, except in Europe.


We had done a pilot plant first, so while construction was under way, we were going around and explaining to people that this was the base oil we were going to produce, Park said. And most of the responses we got were, What is this stuff? We dont need it.

But Park and others add that formulators and product developers liked experimenting with the oils to see what they could do. SK gave out lots of free samples to encourage this process and give a nudge to the search for applications. As uses were identified for applications such as passenger car motor oils or automatic transmission fluids, the company worked to obtain industry certification for products using its oils.

At the same time, the company was trying to determine the appropriate price for its products. When SKs first plant started producing in 1995, Group IIIs were selling in Europe for $1,000 or more per metric ton, Park said.

Wed play this big game with those early customers, where we would start off talking in the $900 to $1,000 range, and then we would work our way down, maybe to $600 or $700, Park said. It was something we had to go through to find out what the market would pay.

By the time S-Oil entered the market, SK had managed to place nearly all its output for Group III applications. Now the neighbors from back home started competing in markets around the world. In April 2003, S-Oil entered an agreement for ConocoPhillips to distribute its oils in North America, similar to the role that Lithcon Petroleum USA Inc. served for SK. S-Oil also set its posted prices some 20 cents per gallon lower than SK. (S-Oil maintains the posted prices show a bigger difference between the companies prices than actually exists. It says that SKs postings are significantly higher than the prices it really receives, whereas S-Oils reflect its actual prices.) It also exported to Japan and Europe, where SK already was selling.

But S-Oil acknowledges it is still catching up when it comes to obtaining approvals. Lube additive companies are less inclined to foot bills to test products, it says, when an alternative formula with SK base stock has already been certified. We realize now it would have been better if we had started [getting European approvals] earlier, said Kitae Joseph Kang, manager of S-Oils Lube Base Oil Export Team, in Seoul.


Prices for Group III stocks have dropped significantly since the South Korean companies entered the market. At the start of 2004, before sky-high crude oil costs started driving base oils upward, Group IIIs from SK and S-Oil were selling for around $700 per ton in the United States – at least $300 cheaper than in 1995. Observers agree the two companies have had their biggest impact in the United States, which is receiving the biggest share of their exports.

SK and S-Oil have certainly been instrumental in bringing Group III base oils to the U.S., even though [other refiners] are also able to manufacture them, said consultant David Whitby, of Pathmaster Marketing Ltd. in Surrey, U.K. SBAs Ames said S-Oil pushed SK to lower prices and Group III premiums in the market have shrunk to the point that some suppliers have stopped making Group III in favor of Group II, or are considering doing so.

Analysts say the South Koreans have also become the major suppliers of Group IIIs for Japan, which has plants that can make Group III but not as cost effectively; for China; and for Australia, which is a smaller market. Both companies also export to Europe, although Whitby maintains they have had less of an impact there. He notes that Group III production began in Europe in the 1970s and that the region had a half-dozen suppliers by the 1980s.

Europe got used to formulating many types of high-performance automotive and industrial lubricants with Group III base oils a long time before SK and S-Oil started production, Whitby said. Others note, however, that most European operations are much smaller scale than those of SK and S-Oil. They contend the South Koreans have helped push down prices in Europe, too.

Kang said demand in the United States and elsewhere has skyrocketed in recent months and that S-Oil is nearly sold out for Group III applications. SK officials said the company was sold out for Group III applications before its second plant opened, but of course it now has much more oil to place. Moreover, SK officials say the company is already considering construction of a third lube plant somewhere in Asia.

Sounds as if South Koreas refiners are prepared to continue bringing affordable Group IIIs to the developed world.

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