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The Eve of Disruption

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Even as the lubricants industry braces for the massive slugs of API Group II and III base oils coming to market this year, a new wave of refinery construction could soon crowd onto the scene, suggests refining expert Amy Claxton of My Energy. In addition to the many projects now under way, she predicts six more world-scale Group II and III base oil plants plus three major Gas-to-Liquids plants could arrive by 2020.

Global capacity for making Group III base oils will reach about 90,000 daily barrels this year, up sharply from the current 67,000 b/d, she pointed out to the recent ICIS 16th World Base Oils & Lubricants Conference in London. Before the year is over, Group III base oils will be 9 percent of the worlds roughly 1 million barrels per day of mineral oil supply, Group I will be 57 percent, Group II will be 26 percent, and naphthenics 8 percent. And by 2020, this mix will change dramatically again, Claxton estimates, as many Group I players head for the exits.

Thats fine news for makers of automotive lubricants, Claxton said, but others might worry about how to replace bright stocks, waxes and heavy base oils used in industrial lubricants and process applications, or what to do when our Group I plants all close.

Unfortunately, Claxton warned the London meeting, the flood of new capacity will be very disruptive. We now have balanced supply and demand, and its a great time to be a base oil provider. But with all the new capacity coming, somethings got to give. We will be in an oversupply situation and prices will head down.

This boom-and-bust cycle – new capacity creating oversupply, which leads to falling prices, forcing out high-cost producers until the market snugs and players build new capacity again – seems to repeat itself every nine to 13 years, she added.

Claxton, who is based in Hummelstown, Pa., applauded Shell and Qatar Petroleum for successfully inaugurating their joint-venture Pearl GTL project in Qatar last year. Pearl uses Fischer-Tropsch technology to convert natural gas to liquids, some of which is upgraded to base oils. This summer, Pearl is due to reach its full capacity of almost 30,000 b/d of base oils, a mix of 4 and 8 centiStoke Group III and a lightweight 3 cSt Group II.

Six to Watch

Besides Pearls final phase, the 2012-2014 time frame will see at least five other Group II and III hydroprocessing plants come onstream, including Takreer-Nestes project in the UAE;vChevrons new plant invPascagoula, Miss.; SK Lubricants and Repsols being built in Cartagena, Spain; and Hyundai-Shells recent deal to build in Daesan, South Korea. Together, these four will add about 60,000 b/d of new capacity by 2014, half of it Group II and half Group III.

Ahead of all these, and due for completion early this summer is the fifth project: a new Group III train being built by SK Lubricants in Ulsan, South Korea, with the backing of partner JX Nippon Oil. Peter Kim, SKs market-ing manager of Group III base oils, also addressed the London ICIS meeting. He noted that many refiners who operate fuels hydro -crackers will be tempted to bolt-on a base oil plant, because fuel hydrocracker bottoms can be upgraded and catalytically dewaxed to make excellent Group III stocks. Its one of the most economical ways we know to deal with a sizeable Group III plant, said Kim, who is based in Seoul, Korea.

Kim estimated that global Group III production in 2010 totaled 3 million metric tons, and additions will grow the yearly supply to 6.6 million metric tons in 2015. However, demand for Group III will pass 7 million tons by 2020 – so expansions need to keep coming.

To meet this demand, Kim believes some current Group II producers may upgrade their plants or add Group III units. Its also possible that Chinese oil majors (such as Sinopec, PetroChina or CNOOC) may enter the Group III market, as will new and smaller players.

Even as competition grows, Kim said, SK aims to stay ahead of it. By 2015, it will operate more than 2.5 million metric tons of Group III capacity, with two plants of its own and three with joint venture partners, including the JX Energy project in Ulsan. We also expect debottleneckings, he added.

Who Needs It?

Where is all the Group III going? At present, engine oils probably swallow 83 percent of Group III base oils, while automatic transmission fluids take another 7 percent; roughly 7 percent goes to industrial lube applications such as long-life hydraulic oils and process oils; and less than 3 percent to all other uses, Kim noted.

However, some of todays Group III demand is driven by market push, not technical pull, he conceded. Satisfying the synthetic claim in the marketplace leads blenders to adopt more Group III than actually is required, said Kim. Still, once blenders have Group III in their supply chain, it becomes easier and more cost-efficient to include it in other products.

For all the attention and excitement they generate, youd think Group III base oils dominate the world. But as base oil consultant David Wedlock reminded the ICIS conference, Its not really a Group III world – its a Group 1-2-3 world. And while they dont grab the same headlines as Group III, API Group II base oils are in fact growing at twice their rate, and also growing in importance for blenders.

Chemists know that all base oils contain paraffinic, naphthenic and aromatic molecules, but Group II has significantly more of the naphthenic molecules, giving it better solvency than Group III, said Wedlock, who retired last year from Shell Global Solutions and now consults with the company. He noted that Group II also offers processing advantages for refiners who may not have access to the best lube crudes all the time.

Group II refineries can use general purpose crudes with lower viscosity index, and can also be fed with hydrowax or hydrocracker bottoms.

By contrast, its in the nature of Group III base oils to have a much higher content of paraffinic molecules; 60 percent is typical, and helps Group III to surpass the V.I. mark of 120 that distinguishes it from other stocks. However, to get this, you either need to use a waxy crude, which is constraining for the refinery, or you need to hit the crude much harder, which translates to high yield losses, explained Wedlock, who is based in Bunbury, Cheshire, U.K.

Group II Steps Up

Since the mid-1990s, blenders have found they need Group II increasingly for its technical properties, Wedlock said. This base stocks saturates content is a vital tool for assuring soot dispersancy in modern heavy-duty engine oils; thats one technical pull that cannot be met by Group III oils.

What else can Group II do that Group III cannot? According to Wedlock:

They can be used to make SAE 40 monograde diesel engine oils. These still have a significant presence in many of the worlds markets. SAE 40 is also the preferred grade currently for natural gas engine oils. Group III cannot achieve the required viscometrics for these applications.

Group II has application in many industrial lubricants, while Group III tends to top out at the ISO 46 grade. By contrast, Group II can be used in ISO 68 and even ISO 100 grades without the need for thickeners.

Process oils, which also depend on solvency, are another area where Group II has an edge. Wherever high-solvency paraffinic base oils are required, such as additive dissolution, making viscosity modifier concentrates and in some process oils, Group II will be preferred over Group III, surmised Wedlock.

The biggest opportunity for Group II, however, may be in multigrade heavy-duty engine oils. For almost 20 years, each HDEO upgrade has increased the need for soot dispersancy, for which Group IIs saturates and solvency are ideal.

Group II also can be used to make SAE 15W-40 oils. This is the worlds largest-selling multigrade and it faces increasing demand. Only limited amounts of Group III can be included in SAE 15W-40 before the product becomes an SAE 10W-40 through having too-low cold crank viscosity, Wedlock explained.

Citing data from Kline & Company, Wedlock said demand for 15W-40 is expected to grow from around 4 million metric tons a year in 2011 to more than 5.5 million tons in 2020. This growth is likely to come at the expense of monograde engine oils, which are still in wide use in Asia-Pacific, Africa and the Middle East. These regions are beginning to embrace more fuel-conserving 15W-40s, and will need more Group II to accomplish this.

To meet 15W-40s viscometrics, blenders can use all-Group II, but not all-Group III, he noted. If you tried all-Group III, youd get a 10W-40. Nor can the growing demand for 15W-40 be met by Group I, due to its high sulfur content, so it will be served by Group II, he concluded.

Chasing Down Group I

How does all this affect the market share of various base oils, and what is and isnt available?

Before answering, My Energys Amy Claxton highlighted another disruptive force that looms: the possi-bility that more GTL base oil plants could be on the scene in the coming years. Shell, Sasol and ExxonMobil all have significant Fischer-Tropsch technologies in their portfolios, and Chevron has a massive technology portfolio for upgrading F-T fluids to base oil, she said. These represent decades of time and interest by all these companies. They wont just sit on the shelf.

The majors will try to exploit large shale gas reserves in the United States or massive natural gas reserves in the Middle East and elsewhere, Claxton pointed out, adding that several large GTL feasibility studies are under way now. No Shell Pearl equivalent plant has been announced yet, but several other F-T plants have been announced with fuels capacity from gas or coal, and I see several where putting a base oil plant on the back end would make sense.

So, three more GTL base oil plants will be built by 2020, she forecast, each likely to be on the scale of the Pearl facility.

Adding it all up, My Energy expects to see six new hydro-cracker bottoms plants making a total 60,000 b/d of base oil and three GTL plants adding another 90,000 b/d; all will be Group II and III.

Meanwhile the demand for finished lubricants will be almost flat, so when you put all this new capacity in, you will have to take the equivalent capacity out, Claxton asserted. And most of the capacity that closes will be Group I.

By 2020, the global distribution of base oil supply will be 40-30-20-10, Claxton concluded: 40 percent Group I, 30 percent Group II, 20 percent Group III and 10 per-cent naphthenics.

This should reassure those who must have Group I, she concluded. Even with very aggressive assumptions, more than one-third of the pie is going to be Group I.

Wedlock tended to agree in general with Claxtons assessment, although he split the pie differently.

He estimated global base oil production will be around 49.4 million metric tons in 2016 (essentially unchanged from today), with Group I still holding 35 percent. Group II will have become the largest by volume, at 39 percent, followed by Group III (13 percent) and naphthenics (12 percent). Only 1 percent is likely to be Group IV polyalphaolefins by then, he added.

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