And yet in 2005, the United States became a net importer of base oils for the first time ever. Furthermore, this looks to be a continuing trend, and Lithcon Petroleum expects greater and greater base oil trade deficits in the future.

This conclusion came from analyzing U.S. import and export data from 2005 and prior years. It should be noted that our data does not include import or export trade with Mexico or Canada, and so the great quantity of trade with those two markets is not included in our totals. That said, we do not see that there was any significant change in the amount of trade within North America. The great changes – those that turned an exporting market into an importing market – occurred in trade between the United States and the rest of the world.

Over the years and through 2005, we have seen a consistent level of U.S. exports. However, imports now have grown so dramatically as to change the balance of trade. A detailed comparison of the data for the years 2004 and 2005 shows what products, geographic markets and suppliers have been involved in this change.

Outward Bound

U.S. base oil exports included all types of products in 2005, with the very notable exception of Group III.

The largest-quantity exports, as for many years past, were Group I base oils being shipped to South America. These are almost entirely shipments from U.S. majors to their affiliated companies in the southern hemisphere. Such exports ebb and flow with the tide of South Americas own refineries production capabilities, and in 2005, U.S. exports to this region were on the rise.

Just as significant as the gain in Group I exports was the 67 percent cutback in Group II exports, from 57 million gallons exported in 2004 to only 19 million gallons in 2005. Some telling statistics: In 2004 there were some 18 million gallons of Group II exports from Port Arthur, Texas, to India and the Middle East, which shriveled to practically nil in 2005. Likewise, Richmond, Californias 11 million gallons of exports to the Far East in 2004 were whittled to just 3 million gallons in 2005. This drop in supply to Asia may well account for the significant shortage of base oils that developed in Singapore in late 2005.

We expect to see a continued increase in Group I exports and reduction in Group II exports. The U.S. market is now predominantly a Group II market, and with the implementation of the ILSAC GF-4 passenger car engine oil upgrade, Group I base oils are losing ground in this key application in favor of Group II. So it is logical that Group IIs will stay home and more Group I be exported to motor oil markets abroad.

Europes Thirsts

This comes with the caveat that foreign markets, particularly Western Europe, may well develop a need for Group II in the coming few years. As European refiners have been reluctant to build up their own capacities, it is a given that European buyers will look for barrels from the U.S. Group II refiners. Shell International, for example, recently anounced it would target Europe as a market for Group II made in Texas by its Motiva joint venture.

Asian suppliers, on the other hand, are announcing one new Group II project after another to meet the anticipated demand for these oils in Asia. So if there are to be Group II exports, they will tend to go to Europe.

Another significant change was the sharp upswell – 156 percent! – in U.S. naphthenic exports in 2005.

Its worth noting that naphthenic exports to Europe surged from 1.8 million gallons in 2004 to 10 million gallons in 2005, while naphthenic exports to the Far East doubled, going from 4.8 million gallons in 2004 to 10 million gallons last year. This esclation is at least partially attributable to huge transformer oil needs in the Far East and substitution of heavy naphthenic lubes for high-priced bright stock in some applications.

The main actor in the turning tide of U.S. base oil trade is South Korea, which shipped enormous amounts of Group III oils. In 2005 the United States imported 102 million gallons of Group III from outside of North America – about 6,600 barrels a day – and more than 99 percent came from SKs and S-Oils refineries in South Korea. (This figure does not include any imports of Group III from Canada).

Spotlight on Imports

2005s growth in Group III imports can be attributed to the full implementation of GF-4; strong growth in lubricants such as full synthetics, synthetic blends and long-life motor oils; and demand for very high-end fluids for heavy-duty and automatic transmissions, all of which favor the use of Group III oils. There is no reason to think that future demand for Group III will slacken, and only restricted supply may limit further growth. Supply from South Korean refiners may well be limited through the end of 2007, as both are at full capacity, and strong demand in other world markets is now competing with the United States for available supplies of Group III.

There are three existing or potential Group III refiners in North America who may step up if demand outstrips supply from abroad. Failing that, additional supply will not become available until late 2007, when the first of a number of planned new refineries comes on stream in Asia. Bharat Petroleum and Mangalore Refineries (in India), Petronas (Malaysia), Formosa Petrochemical (Taiwan), GS Caltex (South Korea), and Neste and Bahrain Petroleum (Bahrain) are among those saying theyll build new Group II or III capacity.

Those projects still must make the leap from drawing board to reality. But by 2010 there could be at least three new Group III Asian refineries, producing upwards of 40,000 b/d of Group III, in addition to current suppliers. Also by 2010, gas-to-liquids (GTL) plants in the Middle East will add a whole new dynamic to the international Group III base oil business.

Aside from Group III stocks from South Korea, the other large-volume U.S. imports are Group I from Russia and Group II from Singapore. However, both are shipping lesser volumes than in 2004 and previous years, as they find higher-priced markets closer to home. Russian oils are increasingly welcomed into Europe, and Singapores Group IIs are staying in the Far East and India.