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High Stakes for Base Oil


2007 may turn out to be a banner year or a bummer, but it wont lack for suspense when it comes to base oil. Every major base oil type -API Group I, II and III, naphthenics and even the much-await-ed Gas-to-Liquid stocks – will offer its own gripping drama, say industry experts. And certain cuts -bright stocks and pale oils – promise even more tumult in the years ahead.

When the topic of Group I base oil supply comes up, all agree that some of these plants, which use solvent-refined processes, will be scrapped. The key questions are which ones, and how soon. Only 66 percent of the worlds base oil capacity now consists of Group I stocks, while a quarter of it is now dedicated to Group II and Group III oils. Such hydro-cracked base stocks, with their lower volatility, reduced sulfur and higher viscosity indices, have become the corner stone for modern automotive engine oils and transmissions fluids -leaving Group I in a weakened state.

So how long will the worlds Group I plants survive? I can safely predict that most will go away sometime, Terry Hoffman of Valero Marketing Supply wryly told the recent ICIS Pan-American Base Oils and Lubricants Conference in Jersey City, N.J. For along period of time, the Group I plant was ideal. It made half heavy-vis and half light-vis products. The problem now is that these plants no longer make what people want. Half of the worlds base oil is needed for automotive engine oils, but thats where Group I light cuts have been elbowed aside by Groups II and III.

The good news is that half of demand worldwide is for industrial lube products, and that means medium-to heavy-viscosity base oils, Hoffman told attendees of the two-day event, held Nov.30 and Dec.1. Theres also continued demand for process oils,which favor Group I chemistries, and for some volumes of heavy neutrals and bright stocks for gear oils and greases.

But what to do with the light barrels Group I refineries inevitably create? Base oil buyers need to find uses for these weights too, the San Antonio-based executive urged. We also need customers to be true partners, and not just opportunistic buyers, Hoffman said.

Group I still has advantages as additive diluent oils. Most additive packages are dissolved into oil to make them easier to handle, and the preferred dil oil is Group I, which has good solvency. Currently, additives are about 20 percent of ILSACGF-4 passenger car engine oils by volume, and these add packs may include 40 to 60 percent dil oil. Thats a steady chunk of business for some refiners – provided that engine oil specifications continue to allow some Group I in formulations.

The question remains whether the heavier Group I cuts, along with bright stock, waxes and aromatic extracts, will be enough to keep these plants operating profitably. The Group I plants with the best chance of surviving, Hoffman stated, are those with good logistics such as deep water access to move products anywhere worldwide. Otherwise theyll pay a financial penalty to ship products, and be shut out of some key markets.

Group II and III

Group II will continue to be a North American best-seller, but with the addition of Motivas new train early last year, the region is tipping towards being oversupplied, Tom Glenn of Petroleum Trends International in Metuchen, N.J., told the ICIS meeting. Any overhang in North America wont sit here and depress prices, he warned. Itll move to elsewhere in the world. Initially, WesternEurope will soak up these barrels, having zero Group II production of its own, he said.

Meanwhile, Group III production is set to surge, with two new plants expected to stream this year and two more next year,for again of more than 1million tons of annual capacity. Most of these newcomers are in Asia, which doesnt have a heavy need for Group III yet, so these barrels are largely destined for the merchant market -until local demand catches up. Glenn expects these to go toe-to-toe with Group II and II+ stocks to grab market share.

At the same time, Europe is probably going to see closings of smaller,older Group I refineries and perhaps some borderline Group III players, who may defer this demand to merchant players, Glenn predicted. Merchant players include South Koreas two refining giants,S-Oil and SK Corp., who have turned Group III into aglobally traded commodity.

Fading Bright

Some Group I shutdowns are inevitable, and one of the key products to feel the pinch will be bright stock, Geeta Agashe of the consultancy Kline & Company told the New Jersey meeting. The world has about 650 crude refineries, only 82 of which produce bright stock. Bright stock capacity today stands at around 75,000 b/d, with actual production running about 65,000 b/d. The 10 largest producers hold 50 percent of bright supply,led by ExxonMobil with about 15 percent of worldwide supply at seven refineries. Second is Shell, with 9percentofglobal bright stock capacity.

Group I shutdowns will erode bright stock supply 10 percent in the next 10 years, a Kline analysis shows, Agashe said. Point number one is that the supply today will not be intact tomorrow. Demand for bright stock will grow – though not at as high a rate as in the past -and the upshot will be a global shortfall. This is bad news for formulators of gear oils, heavy duty engine oils, grease manufacturers, and marine oil and hydraulic fluid suppliers.

Over 8,000 b/d of bright stock capacity already was lost in the decade from 1995 to 2005, as the global lube refining industry consolidated and rationalized facilities. Closures took their toll, as did some plants conversion from Group Iproduction to Group II, such as Motivas PortArthur,Texas, refinery. Asaresult, Asia now produces more bright than any other region, followed by WesternEurope, reported Agashe, who is based in Little Falls, N.J.

Western Europe is currently exporting bright stock, she added, and we expect them to still be exporting in 2015. Asia, however,will be under-supplied with bright stock, and will vacuum up any available barrels.

What can formulators use to replace bright? Agashe suggested a mix of mid- and heavy-grade neutrals plus a synthetic lube component, such as high molecular weight polyal-phaolefin -expensive -or more likely polyisobutylene (PIB). PIB is the most cost-effective and widely available substitute and will be used to replace avast majority of the shortfall, she predicted, pointing out that reformulation makes sense when bright costs a premium of 60 to 65 cents per gallon. Four companies – Ineos, Infineum, Lubrizol and BASF -dominate North American PIB supply,with Chevron Oronite and Texas Petrochemical also in the game.

Theres no silver bullet, Agashe stressed. There will be under supply,which will push prices up. But not all markets using bright stock are willing to pay a premium -mono-grade engine oils, marine oils and process oils, for example -and that should temper demand somewhat. The market will be pinched in the short term but will find away, as it always does, to come up with a solution.

Gaps in Pale Oil

Naphthenic barrels also are fated to be tight, especially at the high and low ends of the vis range, cautioned Mike Burnett of Ergon Inc., Jackson, Miss. Factors in todays tight market are the growing demand in Asia Pacific, South America and Eastern Europe, and the phasing out of aromatic extracts in rubber manufacturing, which is driving some tire manufacturers to embrace naphthenics.

If bright stock plants are rare, naphthenic refineries are rarer still, with not even two dozen operating plants worldwide, Burnett pointed out. In part, this is because naphthenic crudes are in limited supply,particularly the Grade A wax-free types from Texas and Louisiana that were popular in the past. Lots of the crudes now coming into play are low-wax types, sourced in the North Sea, Venezuela and more recently China, he explained. These all tend to be heavier crudes, with higher sulfur content making them more difficult to refine, and higher wax content making them less favorable for tradtional pale oil applications.

Sourcing and handling these harsher crudes has been more than some refiners could stomach, and the 1990s saw a steady exodus of major oil companies, such as Exxon, Chevron, Sun, Texaco and, last to go, Shell. They were the biggest in the business but naphthenics were still too small a part of what they did, Burnett said. Their departure snipped naphthenic capacity,but did leave North American survivors such as Ergon, San Joaquin Refining, Calumet, Cross, Valero and Lyondell with abetter crude supply picture.

Today,were in a fairly balanced situation, Burnett said, with world supply at 20.5 million barrels a year,just enough to meet demand of 19.6 million barrels. However, thats very close to being short, he added, and imbalances already exist between where this supply is located versus where its needed. New plants and upgrades in China should add to the supply side, but demand will grow even faster,and he foresees a coming shortfall of about 2million barrels a year worldwide.

Even now, he emphasized, supply and demand are not balanced across viscosity grades. The opposite ends of the viscosity scale -very light oils and very heavy grades – are in the highest demand, particularly the 60 Second grade which is prized for electrical transformer oils, and the 2,000 Second and higher grades that will be needed for tire and rubber manufacturing. Europes tire industry,he pointed out,produces around 300 million tires a year,and uses 250,000 metric tons of oils to facilitate the processing of rubber compounds. The U.S. tire industry is expected to soak up another 100 million gallons ayear around 2009. For lubricants, this means there will be less naphthenics available than in the past, and pricing can be expected to be higher as well.

The best advice he has for lubricant formulators, Burnett added, is to begin to use the mid-range viscosity grades where possible, but this will require that you reformulate, because theyre not just a drop-in replacement. Ergon is encouraging formulators to tackle this development work now,because despite some capacity increases, demand is going to outpace supply before 2010.

GTL Going To Lag

The toughest call is Gas-to-Liquids, originally promised for market in 2008 but now looking less pinned to the calendar. Their debut is likely to be 2010 or -equally likely – 2015, warned Amy Claxton of My Energy, Hummelstown, Pa. That five-year gap requires that base oil buyers and sellers have not one but two business plans in place for coping with the market fallout, the meeting heard from Claxton and her co-presenter, Kline & Co.s William Downey Jr.

Other [conventional] grassroots lube plants are under construction in Asia, so there will be a period of base oil oversupply, Claxton said. Then as much as 80,000 barrels per day of GTL supplies could flood the market in 2010 or in 2015, meaning a different sort of upheaval.

Claxton pointed to Qatar, where the largest GTL projects are planned. The Middle Eastern country in 2005 decided it was over committed to GTL, after rethinking its options. As a result, only three of six previously announced GTL ventures are going to move forward, the ones involving Sasol Oryx, Shell Pearl and ExxonMobil.

Meanwhile, the cost of investing in GTL has risen, especially versus other ways to exploit natural gas such as pipe lining to market or liquefying it, and the price of intellectual property and technology licensing for GTL has become daunting. The upshot is that the three green-lighted plants might get built on schedule, but delay seems equally likely for at least one or two of them, Claxton said.

Klines Downey described the impacts this would present. A delay to 2015, for example, could mean more Group III plants would be built, and a longer profitable life for existing ones. World-scale Group III projects are already under way in Taiwan (GS Caltex), Malaysia (Petronas), Bahrain (Neste-Bapco), and Indonesia (SK-Pertamina), which together will add about 50,000 b/d of capacity before 2010.

Another possibility is that instead of gushing forth wildly,GTL will come to market as a premium stock for top-tier brands such as ExxonMobils Mobil 1and Shells Helix engine oils. Given that two of the companies with global top-tier brands also have equity positions In GTL plants, we expect there would be brand positions that emerge based on GTL, Downey said.

By contrast, if big slugs of GTL base stocks arrive in 2010, the market wont be ready for it with enough high-performance applications. An early arrival would also shorten the lifespan of Group I and Group III plants, while transforming the Middle East into amajor supply point for the worlds markets.

Given what we know about the GTL world, all base stock buyers and sellers need two business plans, Downey concluded. One plan, braced for GTLin2010, must address less demand for GTL barrels, more rapid adoption of stricter performance standards by automakers, and shortened lives for competing base stocks. The second plan, for GTLin2015, should expect to see more Group III plants built in Asia, slower engine oil upgrades, and strategic positioning of premium brands.

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