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Sunset of an Era


For years, Western Europe has been a reservoir for the global lubricants industry. A significant surplus of lubricating base oil created a buyers market for blenders in the region and allowed it to fill shortages in other areas by serving as an exporter to the world.

In the past year, however, that surplus shrunk significantly die to plant closures in the region. As reflected in LubesnGreases 2006 Guide to Global Base Oil Refining, Western Europe lost three plants and 11 percent of its capacity during the past year. Analysts say the trend will likely continue, pushing the region closer to balance in the coming ears. The shift is already making business more difficult for blenders both inside the region and out.

At the same time, Asia-Pacific seems ready to assume at least some of the burden relinquished by Western Europe. Refiners opened one new plant and expanded a second in recent months, and numerous other projects are in line to boost supply in the next few years.

Redrawing the Map

The 2006 wall chart, which was distributed with the print edition of Junes LubesnGreases, shows the world with 151 base oil plants and capacity of just over 927,00 barrels per day. (It does not include Bharat Petroleums 3,500-b/d Group II plant, which opened at the end of May, after the chart went to press.) The global total – including Bharats plant – is up 10,000 b/d from the aggregate capacity reported last year. Most of the increase was in North America. Motiva opened a 15,000-b/d expansion at its Group II plant in Port Arthur, Texas, and Petro Canada will this month complete a 3.100-b/d expansion at its Group II/III plant in Mississauga, Ontario.

The biggest change, though, was the decrease of capacity in Western Europe. The plants that closed were BPs 10,300-b/d plant in Coryton, U.K.; a 5,060-b/d Shell plant in Hanburg, Germany; and Cepsas 2,800-b/d plant in Heulva, Spain. Their loss lowered the regions capacity to 140,460-b/d.

Industry analysts say that still leaves the region with a net surplus. Pathmaster Marketing Ltd., the Working U.K., consulting firm that provided most of the information in the chart, estimated tht the closing of these three plants reduced the regions surplus by about half.

Pathmaster Chief Executive R. David Whitby said that still leaves Western Europe with a relatively large surplus, and he predicted that the region will remain a net exporter for the foreseeable future. He and others expect the region will see more plant closures because it has a number of aging facilities, but he noted it would take several closures to eliminate the surplus. Two other trends will tend to prolong the current tip of the supply-demand scale: moderate growth in capacity to rerefine base oils, and the steady decline of lubricant demand in Western Europe.

Still, the shrinking of the regions surplus leaves it in a more tenuous position when supply distributions occur. Indeed, the market suffered through an unusual number of problems in recent months. Totals plan in Gonfreville, France, was hamstrung by labor strikes. A fore caused damage at ExxonMobils plant in Port Jerome, France. Kuwait Petroleums plant in Rotterdam, Netherlands, and Shells facility in Petit-Couronne, France were both struck by operational problems. Nynas naphthenic plant in Nynashamn, Sweden, was also closed temporarily because of a fire. Agip Plas plant in Livorno, Italy, closed for three months for scheduled maintenance.

These problems magnified the impact of decisions by refiners to increase fuels production at the expense of base oils the past two years – steps taken to take advantage of improved fuels margins.

Shortage Stories

With the plant closures nd the issues that so many plants were dealing with, the supply situation changed pretty drastically over the past year, remarked Whitby. It was a very big concern for the market, and quite a few blenders – smaller ones, especially – had difficulty getting enough base oil.

Indeed the past year provided an eye-opening glimpse of conditions that the market may encounter periodically in the future. Rather than enjoying cheap prices created by chronic surpluses, blenders had to scramble to find the barrels they needed and to swallow much higher process. (Rising crude oil costs, of course, were the primary cause for higher base oil process.) Blenders had to import stocks from Eastern Europe and South Korea and leaned more heavily on rerefiners in the region.

The impact has been significant, particularly in the first four months of 2006, when allocations from major suppliers and multiple refinery outages caused many blenders to live hand-to-couth, said Hugh Dowding, president of the Independent Union of the European Lubricant Industry (UEIL), which is based in Brussels.

Industry sources said lubricant companies have begun to adapt to the situation but that the new environment requires agile thinking and planning.

Theyve got to be more intelligent on purchasing and also on optimizing their blending operations, said Daniel Iannuzzi, of Feedco Resources Ltd., a chemicals broker based in London. In the past they didnt have to do that because the region had so much base oil it kept prices low and guaranteed them healthy margins.

The end of Western European surpluses will also impact other regions. Blenders in Africa and the Middle East – and especially India – will see a traditional source of base oil supply become less reliable. Exports to North America will probably dwindle, reducing a force for downward pricing pressure in that region.

Rising Stars

The food news for Asian blenders is that production is on the rise closer to home. Shortly before the Bharat plants opening, SK Corp. completed a 2,700-b.d expansion of its plant in Ulsan, South Korea, in April. Moreover, a slew of additional projects are scheduled to come onstream in the region over the next four years, including two each in India and Taiwan and one each in Malaysia, Indonesia, China, South Korea, and Bahrain (see table, below).

In addition, the government of Qatar has entered into joint ventures calling for construction of three gas-to-liquids base oil plants by 2011 – one of them promising more than 30,000 b/d.

The spanking new Bharat Petroleum plant in Mumbai, India, makes highly refined Group II base oil, and is only the second in that country to do so. The $80 million plant is positively a significant project for India and will reduce to some extend Indias dependence [on foreign sources] for its base oil requirements, said P.K. Mittal, senior vice president of TotalFinaElf India Ltd., in Mumbai. However, I think Asia needs more of such projects to take care of the demand-supply gap currently existing.

The collection on oncoming plants that have been announced would probably go beyond that, even if they dont come to fruition. Altogether, Asia-Pacific has 12 projects on the drawing boards with scheduled completion dates, for a gain of 115,150 b/d of new capacity. Of course, much of this capacity is expected to be needed within that region, where lubricant demand is growing steadily. But many agree it is hard to imagine the region needing near that much base oil in the foreseeable future.

It could add up to big base oil surpluses and a new reservoir for the worlds lubricant undustry.

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