The global base oil picture is more complicated than simply saying API Group I capacity will shut down, points out consultant Amy Claxton of My Energy. Jamie Brunk of Solomon Associates agrees. Some of the best-run refineries in the world are Group I plants, and these can outperform their hydroprocessing brethren, he says. Further, each said, Group I plants generate a range of valuable byproducts that can lift their operating margins into the same range as Group III producers.

In presentations to Decembers ICIS Pan American Base Oils & Lubricants Conference, both Claxton and Brunk stopped short of saying no Group I refineries will close – thats probably unavoidable, attendees heard – but they noted that todays Group I players are tough and flexible, especially in North America.

Things are in a bit of turmoil now, but refiners today compete on a global basis, said Brunk, who is manager of lube studies at Solomons offices in Houston, and a specialist in analyzing base oil operations. The world should expect to see continuing oversupply, he warned, as new Group II and III plants come onstream in the United States, Abu Dhabi, Spain, South Korea and elsewhere.

High Cost = Losers The market will seek equilibrium, but when it will reach equilibrium is anyones guess, Brunk said. The guy who makes base oil at the lowest cost will win, and the high-cost producer inevitably will fall out of the market.

North Americas Group I producers, especially those in the Central U.S. states, have been greatly advantaged in recent years on crude costs, he continued, and they produce a wide range of byproducts such as bright stock, foots oil, waxes, intermediates, asphaltenes and extracts, to help support their operations. The biggest operating expense for many refineries is their energy costs, and here too, North America has an edge. Low-cost natural gas in the United States and Canada has made a big difference in these refineries operating costs, Brunk noted.

In its 2012 global benchmarking study, Solomon sorted the worlds base oil plants into four quartiles. The top tier includes refiners that outclass all others; the second and third quartiles are the pack; and the fourth quartile are those deemed at risk. Of the plants that had fallen into this basement, about 10 percent were not making money at the time of the survey.

The typical Group I refinery tends to land somewhere in the second or third quartiles, towards the back of the pack, Brunk said. But the first quartile does include Group I plants. And the best conventional Group I refiner actually does better than the average hydroprocessor. This suggests that other Group I plants can learn to step up their game, too. What were now seeing is people moving production away from light neutrals wherever they can, to make wax, heavy neutrals and bright stocks – Group I products with healthy demand and enviable margins.

Out Go the Lights New capacity is changing the landscape, concurred Claxton, who is based in Hummelstown, Pa. Its stating the obvious to say opportunistic base oil capacity from fuels hydrocracker bottoms is creating oversupply. The glut is especially acute for light neutrals, but its not a Group I problem, she added emphatically. Its a base-oil-viscosity-grade-imbalance problem.

Hydroprocessing can make excellent base oils, but the output is mostly light grades. And it unfortunately creates collateral damage by converting the feedstocks heaviest molecules out of the lube range. It also works by branching and isomerizing the wax molecules and leaving them in the base oil, so you dont have this separate byproduct, she explained.

Every type of base oil is useful, stressed Claxton, and that includes Group I. There are three main reasons why those pesky Group I plants keep hanging around, she said wryly. Reason number one is margins. If you look at the prices for the various types of base oils – Group I versus II versus III – youll see theres not that big a gap, especially from Group I to Group II. But if you can add in bright stock and wax to the refinerys product mix, their overall price per barrel of output is trending about the same as Group III.

Reason two, she went on, is that the next engine oil upgrade (ILSAC GF-6 and API SP) is likely to reduce Group III supply, especially if it requires refiners to crank up their base oils viscosity index into the range of 126 to 128, to meet new Noack volatility targets. What if GF-6 drives us to 13 percent Noack volatility? Claxton pondered. If youre going up in V.I., refiners will pay a penalty in yield… Many see this as leading to a 15 to 20 percent yield reduction in Group III plants. For the same reason, Group II plants may be looking at reduced yields, too, from the hydrodewaxing side of their operations, she added.

The third reason is global demand; in one word, China. China has about a 40,000 barrel per day shortfall right now in base oil. Of the base oil made by the countrys three major base oil producers (PetroChina, Sinopec, Cnooc), 60 percent of the Group I, and 30 percent of the Group II falls into the range of 85 to 95 V.I., Claxton observed. In China, a high-V.I. product is a 95 V.I. – which would not be consider a high V.I. elsewhere, she noted.

China imports a lot of opportunistic wet barrels, with no price differential paid for Group I, II or III. Quality isnt an issue – they just want the cheapest available base oils. Its pretty much anything they can get their hands on, she added. And while new plants are going up in China, they are barely keeping pace with rising demand; they are not closing the gap on imports.

Still at Risk Group I refiners are not out of the woods, Solomons Brunk reminded. Its going to be tough for base oil refiners for the foreseeable future. These issues are worldwide, not just localized, and everyone is bringing on new plants. Meanwhile, finished lubricant consumption is not rising, so demand wont solve the problem of oversupply, he added. Some refiners have throttled back production to match demand, but that just makes it tougher to keep the units running at optimal rates, further undermining their chances to make money.

Always the low-cost producers will be profitable, and both conventional and hydroprocessing refiners can be low cost – but the high-cost producers do tend to be the conventional ones, Brunk reiterated.

Finished lubricant blenders are always going to use the lowest-cost base oil that meets the finished lubricant specifications, Claxton concurred. And whats more, the type of base oil available locally influences local formulators. For example, most of the world is not filling up their cars with SAE 0W-multigrade engine oils, so they have no technical need for Group II and III – yet.

Group I is fine stuff, and it works OK for passenger car motor oils that are used in over half of the world, she said. Will these cars migrate away, towards hydrocracked base oils? Absolutely. But it wont be overnight. Group I is also fine for most heavy-duty, industrial and process oils.

So the Group I sky is not falling – at least not any time soon, Claxton concluded.