Ins and Outs of U.S. Base Oils

During that same 2003-to-2014 period, U.S. consumption of finished lubricants decreased 17.8 percent, according to SBA Consulting – which means that imports and exports have shown huge growth in a shrinking market.

This increase in both the coming and going of base oils is due to the specialization and segmentation of the base oils business, to where the United States – home to five of the worlds top 10 paraffinic base oil refineries – is now the worlds dominant producer and exporter of Group II. Meanwhile, the United States is also the worlds largest user and importer of Group III, with 33 percent of global demand for this base oil but having zero capacity to make it, as Anuj Kumar of Kline & Co. has observed.

What base oils are involved in this commerce, where are they shipped, and by whom? Chemlube has made a study of U.S. imports and exports by analyzing data from a variety of public and private sources for the period from Oct. 1, 2013 to Sept. 30, 2014, and this article is drawn from that analysis.

It should be noted that a failure of this study is that it does not include base oils shipped in packaged form, including drums, iso-tanks and flexitanks – modes of transport which so far have flown under the radar of existing databases tracking foreign trade of base oil. This is a significant failing as these shipments, especially in flexitanks, are quickly growing to play a large role in the international transport of base oils.

It also should be observed that our figures vary from U.S. government data because EIA makes no distinction between base oils and finished lubricants. To exclude the latter, we focused on shipments carried in parcel tankers. Finished lubes never move in bulk tankers in our experience; only base oils do.

What and Where?

In the 12 months of the study, 1.1 million metric tons (approximately 22,000 barrels per day) of base oils were transported by ship into U.S. Gulf Coast ports, with lesser amounts landed at East and West Coast ports. Import supply arrangements in the United States are almost exclusively done under long-term contracts that necessitate permanent storage facilities and the carrying of inventories. The high cost of such operations lends itself to large organizations, and 95 percent of these imports are managed by six major importers.

All types of base oils were imported, including small quantities of Group I from Brazil and Western Europe, Group II from Canada, naphthenics from Europe and Latin America. But the greatest quantity by far – 82 percent – was Group III from Asian and Middle Eastern sources. The United States is the worlds largest Group III base oil market, and its continued growth in demand is of critical importance to such refiners.

Outgoing Barrels

The U.S. exports via bulk tanker during the study period were 2.1 million tons – far outpacing the imports. Many exports are spot sales which do not require long-term contract commitments nor inventories, making the business more open to a greater number of traders and intermediaries.

With the exception of Shell and Nynas, which are active in both importing and exporting base oils, exports involve a much different cast of both players and products, including Group I, naphthenics and, most notably, Group II. The largest markets for U.S. exports are Mexico and the rest of Latin America, which have no Group II production of their own (excepting one small rerefinery in Brazil).

Notable by their absence are shipments to China, the worlds largest importer of base oil, where U.S. suppliers once played a very prominent role. Similarly in India, the worlds second largest importer of base oils, U.S.-made Group I, Group II and naphthenics – while still prominent – are playing a markedly reduced role.

Notable by their presence are large shipments to Europe, largely of U.S. Group II. In years past this trade route was characterized by huge volumes of Russian and European Group I traveling the opposite direction to reach the United States, the Americas, Africa and beyond. For many years the great surplus of European and Russian Group I capacity served as a base oil warehouse to the world, with regular deliveries to North and South America, Africa, the Middle East, India and Southeast Asia.

Now, with ever more stringent lube oil standards coinciding with greater availability of competitively priced Group II, lubricant blenders formerly supplied by European Group I are quickly turning away from Group I to embrace Group II. We anticipate Group I demand shall continue to dissipate at a fast rate as more and more Group II comes into the market.

It should be noted that the period under study, concluding on Sept. 30, 2014, saw little of the export potential from Chevrons new Pascagoula, Miss., Group II refinery that started up midyear, and of course included none of the exports anticipated from ExxonMobils new Baytown, Texas, Group II+ expansion starting up early this year. It appears that both refineries are very much export-oriented and any similar study done at year-end 2015 will likely show a huge increase in export volumes, especially to formerly Group I dominant markets in Latin America and Europe.

Global Implications

Our study of U.S. trade focused on the massive inflow of Group III and the even larger outflow of Group II. We also identified two important implications for the global base oil trade.

The first implication involves the division of Group II markets. Over the past five years there have developed four major global clusters of new base oil supply:

1) North Asia, including South Korea and Taiwan

2) Melaka Straits, including Malaysia, Indonesia and Singapore

3) Middle East, including Qatar and Bahrain, plus soon to add Abu Dhabi and Saudi Arabia

4) U.S. Gulf Coast, from Baytown, Texas, to Pascagoula, Miss.

Outside of these four main supply centers there are two large Group II/III outliers: Petro-Canada in Mississauga, Canada – which has a major role in U.S. base oil trade – and the new Repsol-SK Lubricants joint venture refinery in Cartagena, Spain, which has yet to make an impact as of this writing.

The Asian centers combined have an effective monopoly of Group III production and supply globally. All four centers also produce Group II, which is increasingly being supplied regionally: to the markets West of Suez or to those East of Suez.

Geographic proximity and logistic advantages make the Asian refiners the preferred suppliers to markets East of Suez, and U.S. Gulf refiners the preferred suppliers to markets West of Suez. The logistic advantages include lower tanker freights from the U.S. Gulf to Europe or Brazil (typically $30/ton lower than from Singapore and North Asia). Similarly, freight rates from South Korea and Singapore to Chinese and Indian ports are much lower than from the U.S. Gulf. Closer proximity also makes for shorter voyages, more frequent sailings, and the availability of a greater choice of tanker fleet.

This segmentation of world Group II markets is just now in early 2015 taking shape, as large new refining units came on stream in the United States, Spain and Korea in the second half of 2014; it shall become even more pronounced with further additions of Group II and Group III capacities in Singapore, the Middle East and the U.S. Gulf in this years first half.

A Rush to Quality

The second implication in our analysis is that a rush is on to adopt quality base oils in India and North America. It is well established that global lubricants demand is sluggish and with it has come a decline in overall base oil demand. Yet some markets are booming.

The past five years have shown explosive growth in U.S. demand for Group III, all imported from Asian and Middle Eastern producers, and in India for Group II, a huge majority of which is imported from South Korea. These two huge opportunities will not escape the attention of new Group II and Group III refiners which are bringing capacity on stream this year and in 2016.

Thus, many U.S. and Indian lube oil blenders will find the advantages of being buyers in a buyers market.

With more than 30 years in the base oil business, including experience in setting up marketing operations for top-tier base oil products, Joe Rousmaniere is business development manager at Chemlube International, Harrison, N.Y. For infor­mation, e-mail him at jrousmaniere@chemlube.com or phone (914) 381-5800.