Russia and Eastern Europe continue to embrace API Group II and Group III base oils, with a number of refinery upgrades having started up recently or getting ready to stream. A number of projects, however, are tracking more slowly than originally hoped, as general economic and financial woes have turned down the pressure a bit.
While Germany has the largest industrial base of any European country, Russia is by far the largest market in Europe, points out an industry insider, and both countries will drive the continents lubricant demand in the future.
With 0.5 percent annual growth rate, Russia is expected to consume around 679,000 barrels per day of base oils and lubricants during the next 15 years, while Germanys demand is expected to stay flat at around 380,000 b/d, Chevron Lummus Globals Ivan Katashev, business development manager for Russia and the Commonwealth of Independent States, told a gathering in Moscow earlier this year.
After those two, Europes third-largest lubricant market is the United Kingdom, the CIS Base Oils, Lubricants and Fuels conference heard in May. Lube demand in the U.K. is around 256,000 b/d, followed by France with annual demand of 216,000 b/d, Italy (156,000 b/d), Spain (133,000 b/d) and Poland (76,000 b/d of lubricants demand). Except for Russia and Germany, though, all of these counties will see lube demand contract by 1.0 to 1.5 percent a year through 2035, Katashev forecast.
Technology Drivers
Chevron Lummus Global and its rival ExxonMobil Research and Technology are the largest process technology providers for base oil operations worldwide. The former is ahead on the count, Katashev pointed out, with 12 competitively bid contracts awarded in the last 10 years for Group II and III base oil units, plus ones for Chevron (a partner in the CLG joint venture).
Many of these refineries are already in operation, using CLGs trademarked Isodewaxing and Isofinishing catalysts, but other bookings stretch out to 2020 and beyond. Total operating capacity is 10 million tons/year, the company said.
As elsewhere, higher specification automotive lubricants are driving demand for premium Group II and Group III base oils in Eastern Europe and Russia. Wider availability is also promoting their use. At refineries, hydroprocessing and hydrocracking technologies have been installed that help feed base oil units; in turn, Group II and III base oil manufacturing processes offer lower operating costs and less emissions, according to Katashev.
Modern finished lubricant specifications cannot be achieved without higher viscosity index, lower volatility and better oxidation and thermal stability, as well as extended drain intervals and more fuel economy, he said.
On the other hand, higher operating costs and decreasing global demand are sealing the fate of Group I refineries. First of all, a Group I plant restricts crude oil flexibility much more than Group II/III plants, and significantly hinders the refinerys ability to optimize its crude slate, Katashev said.
Another factor is the higher energy cost of making Group I, which squeezes revenue and margins for plant operators. In catalytic dewaxing processes, operating costs are equally distributed among labor, energy and maintenance, he explained, while in solvent dewaxing production, operating costs increase with the price of energy.
In all, base oil plants using catalytic dewaxing have 25 percent lower capital investment and 30 percent lower operating expenses compared to the solvent dewaxing units that produce Group I base oils.
Demand Trends
CLG expects premium base stocks to capture 42 percent of global paraffinic base oil demand by 2020, from a current 30 percent share. Key factors here are GDP growth, which spurs industrial lubricant usage, and increased vehicle mileage, which drives transportation lubricants demand. Total base oil demand is projected to grow by 1.4 percent annually by 2020. While the global base oil demand growth from 1970 until 2005 was 1.8 percent annually, it is projected to be 1.4 percent through 2020, with a bottom that passed in 2009, Katashev said, adding that Group I base oil demand is expected to decline 1 percent year-on-year by 2020, while the demand for Group II and Group III base oils could grow 7 percent.
The company also finds that as the demand for Group I base oil declines in Europe and North America, these regions will continue to rationalize Group I production. This will be accompanied with flat or slight Group I demand growth in Asia-Pacific, South America, Middle East and Africa, but demand for higher-tier base oils will grow in every region.
Group II and Group III base oil availability facilitates higher quality lubricant specifications, which then drives the demand for them, Katashev observed. He proclaimed: Market trends are simply forcing refiners to produce higher quality base oils.
Projects Underway
Currently, CLG has three ongoing and one completed catalyst unit projects for Russian customers. The first of these is Slavnefts modernized base oil production in Yaroslavl, Russia, with 3,170 b/d of operating capacity by 2016. (Slavneft is a joint venture between Gazprom Neft and Rosneft.) Another is Rosnefts Novo-Kuibyshev Group II/III hydrocracking unit, with 9,600 b/d of operating capacity slated to go online by 2017, followed by Gazprom and NISs refinery in Novi Sad, Serbia, which is getting ready for a 3,000 b/d Group II/III upgrade by 2018.
A 5,000 b/d hydrocracker in Nizhnekamsk, Russia, operated by the Russian oil major Tatneft, commenced base oil production in December. At the moment it is the only large Group II and Group III provider in Russia. (Lukoil operates a much smaller Group III unit with 600 b/d capacity in Volgograd, Russia.) Tatneft is working on an additional project at a refinery in Shymkent, Kazakhstan, which is operated by Hill Corp. It is expected to stream Group II and Group III base oils by 2018 and to have 10,000 b/d, the largest premium base oil capacity in the region.
Zarubezhneft, the Russian company that operates Rafinerija ulja Modrica in Bosnia and Herzegovina, is another player in the region that expects to expand its Group III base oil production, from a current 1,600 b/d to 4,100 b/d. The company hasnt replied to LubesnGreases repeated questions about the technology provider and the expected commencement date for this project.
Business as Usual?
Economics woes continue to batter at optimistic timelines for many projects. The Greek bailout drama shocked many euro member economies such as Germany. The international sanctions imposed on Russia over its military actions in Ukraine hurt the countrys economy and fiscal policy, but have not yet hampered Russias base oils and lubricant industry, according to InfoTek, a Moscow-based consultancy.
We dont see any problems with feedstock or raw materials supply used in base oil production. Business interests always prevail [over political disputes], Tamara Kandelaki, Infoteks head, told the conference.
Conditions are the same for finished lubricant manufacturing, she continued. [Russian] oils are produced with imported additives such as those of Infineum, Lubrizol and Afton. Besides, Russia has its own sufficiently improved additive production in Belarus, she said, adding that lube producers still expect their 2015 profits to be slashed, prompting them to demand price cuts from their additive suppliers.
Companies on the sanctions list feel a lack of long money from their own funds or through Russian banks that are also under the western embargo, according to InfoTek. It can result in delays in realization of their investment plans such as base oil modernization. The general domestic consumption is impacted by the sanctions, but it depends on what industry we are talking about, Kandelaki said.
In Russia, it is more profitable to export crude oil than to produce and export petrochemical products, including base oils and lubricants, and as a result oil majors such as Lukoil or Rosneft are not in a hurry to modernize their base oil production, Kandelaki said. In recent years, the Russian oil industry has been a main source for filling state coffers, she declared. So all large state funds such as those for national welfare or for defense depend on the countrys oil industry. Thats why in the last few years the government is increasing oil export duties.