In 2006, he said, finished lube demand was 37.9 million tons; the base oil requirement to meet that demand, including additive diluent oils, was 36.5 million tons. Under the differing growth projections, the world will consume between 37.5 million and 40 million tons of base oil per year by 2012.

What has changed radically today, said Ames, is that four factors external to the lubricants industry will define that future base oil supply, both in terms of volumes and technical quality.

By far the most important factor is emissions legislation, requiring massive refinery investment for production of clean fuels, Ames said. The second factor is crude supply: Higher prices and wider spreads between different qualities of crude have pushed refiners to lower-cost barrels, many of which are less suitable for base oils.

The third factor, Ames continued, is robust fuel margins that have generated competition for the vacuum gas oil feedstock used for base oil manufacturing. And the fourth is a technology paradox, that the highest quality base oil has the lowest cost of production.

CLEAN FUELS IMPACT

To meet the growing demand for clean fuels, Houston-based consultancy Purvin & Gertz has estimated that 3.4 million barrels per day of new hydrocracking capacity will be needed by 2015, said Ames, with significant implications for base oils. Some smaller, high-cost refineries will not warrant the $700 million to $900 million capital investment necessary to install new hydrocrackers, so they will close. ExxonMobils Adelaide, Australia, refinery that shut down in 2003 and took with it the associated base oil plant, is an example.

Other refineries may opt to control capital expenses by cannibalizing facilities and equipment for other operations. For example, BPs Kwinana, Western Australia, base oil plant was victimized when its tankage and utilities proved of greater value to the refinerys new clean fuels hydrocracker; the base oil plant was closed in 2002.

Some refineries may choose a lower-sulfur crude slate to reduce capital requirements to comply with clean fuels legislation. Imperial Oil in Sarnia, Canada, did so in 2006, said Ames, but it resulted in yield losses of some 100,000 t/y of base oil.

The most important implication of clean fuels legislation is that most new clean fuels hydrocrackers produce hydrocracker bottoms suitable as feedstock for API Group II and Group III base oil manufacturing.

Purvin & Gertz say that the 3.4 million b/d of required new hydrocracker capacity will have the potential to produce 20 million t/y of Group II and III base oil, Ames said. Only about a quarter of that total has yet been announced.

Refiners installing clean fuels hydrocrackers have the option of recycling the bottoms stream to produce additional ultra-low-sulfur diesel, or they can invest in bolton facilities to manufacture Group II and III base oils, Ames explained. Base oil production coattailing on a clean fuels hydrocracker may only need a hydroisomerisation unit and a hydrofinisher, thus offering both lower capital and operating costs compared to competing base oil manufacturing schemes.

The decision is based on maximizing the value of the overall refined product barrel, Ames said. These economics were the driving force behind a number of recent decisions to enter the base oil business, for example by Petronas in Malaysia, Formosa Petrochemical in Taiwan, Neste-Bapco in Bahrain, Oil & Natural Gas Corp. in India and Takreer Neste OMV in the United Arab Emirates. These future base oil refiners have little or no in-house lubricants business. Their decisions were purely economic, Ames noted, although Petronas subsequently purchased lube blender FL Selenia.

CRUDE AND FUEL

Tighter crude supplies have widened the price spread between light, sweet crudes (that are easier to refine and are good lube crudes) and heavier sour crudes. This has prompted some refiners to move towards a more profitable heavy sour crude slate, which reduces the yield and/or the quality of feedstocks for Group I base oils. This primarily impacts Group I base oils, said Ames, as Groups II and III are generally not crude-selection dependent.

Historically, surplus refining capacity allowed fuels and lubricants to operate somewhat independent of one another. But rapid growth in fuel demand and high fuel margins have resulted in competition for feedstock. From the fourth quarter of 2004 and continuing throughout 2005, a number of refiners found it more profitable to reduce sales of base oils into the merchant market, opting for production levels to only support their internal lubricants operation, Ames noted. This appears to again be the case with a number of refiners cutting base oil production in favor of fuels over recent months.

THE TECHNOLOGY PARADOX

The last external factor driving future base oil supply is what ExxonMobil refers to as the technology paradox, Ames said. While older Group I plants require certain lube crudes, new base oil plants are not as crude-selection dependent. The Group II, III and gas-to-liquids plants provide higher-quality base oils, greater base oil yields and higher-value products and byproducts than Group I plants, he said, and they do so at lower capital and operating costs. Consequently, no new Group I refineries are apt to be built.

The impact of the paradox is even farther reaching, Ames continued. Additional Group II and III capacity will continue to be built as long as refiners see greater economic value in high-quality base oils than in ultra-low-sulfur diesel. How much more new capacity can the market accommodate? Logically, as much as there is higher-cost, older production still operating. Most vulnerable to the technology paradox, said Ames, are smaller Group I refineries, many in Europe.

NEW PLAYERS, SUPPLY

Ames highlighted 22 projects that will add to the worlds paraffinic base oil supply through 2012, including several projects that have not yet been formally announced. One, said Ames, is a very large plant to be built on the U.S. Gulf Coast.

If all are built, he noted, the world will have another 8 million tons per year of paraffinic capacity by 2012. New naphthenic projects have also been announced, for more than a million t/y of new capacity. Together, thats a total of more than 9 million t/y of new base oil capacity that will stream by 2012. Beyond that, another 4 million to 5 million t/y of new paraffinic capacity is under consideration.

But not all new supply comes from new projects. Many large Group I refineries can justify the capital expenditures to upgrade to Group II or higher levels. For example, said Ames, Motiva upgraded its Port Arthur, Texas, refinery in 1998, and ExxonMobil followed at Baytown, Texas, making Group II+ from Group I raffinate. They may well do it at a number of their larger plants over time.

Other good retrofitting opportunities are seen in Europe, Japan and elsewhere in Asia, he added, and the potential exists for some 3 million t/y of Group I capacity to be retrofitted by 2012.

Finally, capacity creep (debottlenecking) can add some 1.7 million t/y of new capacity by the end of 2012. New catalyst technology has resulted in substantial capacity increases. For example, Motiva reported a 14 percent jump in 2004; S-Oil claimed a 9 percent increase that same year at Onsan, South Korea; and in 2006 SK changed catalysts at both its plants in Ulsan, South Korea, and reported a gain of about 15 percent.

The net effect? If 9 million t/y of new capacity is streamed, and another 1.7 million t/y of capacity creep comes from existing capacity, but demand only grows by 1 to 3 million t/y, then it is highly likely that somewhere between 7 to 9 million t/y of capacity will close, Ames asserted. The only question is really whether it will be closer to 7 million or 9 million t/y.

CAPACITY SHIFTS

Using a methodology that he called forced ranking, Ames evaluated each of the worlds base oil refineries for cost structure, strategic importance, location advantage and other factors, in order to identify capacity that is most likely to be closed, through 2012. Most notable, he said, will be the marked reduction of Group I capacity by the end of the period: it is forecast to be reduced by 11 million t/y based on assumed lubricant demand growth of 0.5 percent per year (see Figure 1). Of this cutback in Group I capacity, 8 million t/y will come from plant closures and 3 million from upgrades or retrofits.

Regionally, Ames said that only Asia Pacific, the Middle East and North America will likely see net capacity increases (Figure 2). Plants most vulnerable to closure are primarily found in Europe and to a lesser degree in North America, Ames said. Many of the Group I plants in Asia that should otherwise be vulnerable are owned by national oil companies, for which providing jobs generally outweighs bottom-line economics.

In the United States, Ames found that vulnerability to closure is due less to scale and costs than to the focus on fuels of those refiners who do not have finished lubes businesses – giving Valero, Sunoco, and Marathon as examples. [Their] output is entirely destined for the domestic merchant markets and to lower netback export markets, Ames said. These base oil plants must compete for maintenance [capital] and feed-stock with the mainstay fuels operations. Look for some of these to close by the end of the decade.

Ames went on to project changes in nameplate capacity in North America, Western Europe and the Asia Pacific region through 2012.

North America, he said, will essentially become a high-saturate (Group II and III) and naphthenic base oil production area.

Western Europe will see the greatest changes; here, 10 of 18 refineries are very small scale and operate at a cost disadvantage. Moreover, the base oils from many European plants do not meet their owners quality needs, so are disposed of in the lower netback merchant markets, said Ames. Expect Europe to remain a significant and growing importer of Group II and III base oils through 2012, he said, even with Total suggesting it will bring a 180,000 t/y Group III plant online by 2012. And Europe will become a declining force in the Group I export market, with implications for supply to Africa, the Middle East and Indian subcontinent.

Asia Pacific will be home to most new capacity. High-saturate base oil production there will increase to 9.3 million t/y by 2012 and will make up more than half of the regions base oil pool. Group I closures in the region may come in Japan and at three of Sinopecs small plants. Also, Caltexs refinery in Australia may not have a longer-term role, now that GS-Caltexs plant is on stream in South Korea.

LAST WORDS

Group III supplies will be tight through the first half of this year, Ames concluded, relieved when supplies from GS-Caltex, SK-Pertamina, Petronas and others reach the market. Bright stock and heavy neutrals may become problematic by the end of the decade, prompting reformulations for noncritical uses.

Growth in high-saturate base oil capacity will be rapid, and by the end of 2012 will comprise over half of the paraffinic base oil pool, he said. This may suppress quality price premiums until such time as higher performance levels are demanded by OEMs, and/or marketers create new products that make use of the surfeit of quality.

The paraffinic base oil pool should become decidedly lighter in viscosity, sweeter in sulfur content and higher in viscosity index. Few if any new Group III or GTL plants will produce a viscosity grade heavier than 8 cSt, and virtually all of the new paraffinic capacity will be zero sulfur, aiding in the formulation of newest generations of engine oils.

Finally, said Ames, the certainty of any forecast is that it will be wrong in terms of its absolute numbers and timing. Nevertheless, the trends are valid and over a quite wide range of lubricants demand.