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Group IIIs Fast and Furious Race


As they eye the road to 2040, oil companies could get carsick. On the one hand, OPEC projects that the global car parc will reach 2.03 billion units by then-double the number crowding todays roads. Normally that would warm the hearts of crude oil producers, base oil refiners and automotive lube sellers.

Last May, however, the International Monetary Fund forecast that oil demand for all those passenger cars will essentially be flat over the period, poking along from 26.1 million barrels per day in 2020 to just 26.4 million b/d 20 years later. The IMF working paper, Riding the Energy Transition: Oil Beyond 2040, envisions a future where oil loses its role as the main fuel for transportation, due to accelerating consumer acceptance of alternative fuels, downsizing and electric powertrains.

Of course, even if petroleum demand is stuck in idle, some players will steer safely through the twists and turns, said Norman Sheppard, base oil leader and international marketing manager at Bahrain Petroleum Co. The oil industry still has legs and will be around for many, many years, he told the ICIS Pan American Base Oils & Lubricants Conference on Dec. 1.

Lubricant suppliers do face significant headwinds, however, beginning with strict governmental controls on vehicle CO2 emissions, he continued. Gasoline-fueled internal combustion engines wont vanish overnight, but in many markets they will lose ground to hybrid electric, plug-in electric, battery electric and eventually hydrogen-powered fuel cell vehicles.

A more capricious headwind may be the many teens in developed countries who are reluctant to take up driving, a generational indifference that seems to have worsened since the introduction of Apples iPhone in 2007, Sheppard observed. The rise of smart-phone technology coincided with the global recession, which made cars less affordable just as a new crop of drivers were coming of age. Why drive when you can connect virtually? About 85 percent of U.S. 12th-graders drove cars in 1985, but fewer than 75 percent drove at all in the past year or even possessed a drivers license, he said, citing demographic data published in The Atlantic.

The challenges dont stop there, Bryan Schorzman, general manager of Motiva Base Oils, said in another ICIS Pan American Conference presentation. Ride sharing, for example, could be a blessing or a curse for lubricants. If passengers shift from rigid mass-transit to the ease of ride sharing, some expect to see both car ownership and automotive lubricant demand suffer.

Schorzman believes the opposite may occur: As ride-share vehicles see more heavy usage, theyll rack up more miles and need more frequent oil changes. Theyll also wear out faster, get scrapped more quickly, and be replaced with new vehicles requiring higher lubricant performance.

Schorzman doubts electric cars will have much short-term impact in the U.S., observing that initial cost, vehicle range and charging times are deterrents in this pickup truck-loving market. But he identified another headwind-additive manufacturing or 3D printing-which could depress demand for general industrial and metalworking lubricants. These products are largely based on Group I base oils, but we could see a big potential decrease in that market segment due to 3D printing.

Going forward, he surmised, the worlds top-tier automotive and industrial lubes will demand greater volumes of Group II and especially Group III. Thats why Motiva has officially jumped into the Group III arena at its Port Arthur, Texas, refinery, which has 40,300 barrels a day of Group II capacity. In December it began offering two Group III grades: a 4 centiStoke and 6 cSt.

In an interview with LubesnGreases, Schorzman declined to provide a capacity or production target for these products, asserting that Port Arthur can make as much as the market demands. Asked about properties such as the materials viscosity index and volatility, he again demurred, but said product data sheets are in the hands of blenders who are evaluating the material, branded as Star HVI 4 and Star HVI 6.

Elaborating a bit on Motivas market strategy though, he said, We looked at the competing Group III on the market and drew a box around the top producers key properties such as V.I. and volatility. Then we targeted a spot right in the middle of that box. So if we see others have cold-cranking numbers ranging from 1300 to 1800, we might put the Motiva target at 1600, which should give customers confidence they can get their product approvals.

Plus, our Group III already has [ILSAC] GF-5 approvals, he continued. We are working now on obtaining approvals with all the additive companies, to make it easy for customers and formulators to use.

At the ICIS meeting, Schorzman indicated that the next goal is to obtain Dexos1 approvals for General Motors vehicles and then move on to get approvals for ILSAC GF-6, the next major engine oil upgrade.

Both Schorzman and Sheppard concurred on one key point: Quality is the factor that will separate the winners from the losers in the race for global lubricant market share.

Sheppard said, There will be a lot of newly rich people in developing countries who will drive newer cars and seek conveniences such as do-it-for-me oil changes. In advanced economies, there may be fewer owner-drivers, more car-sharing fleets demanding regular and correct servicing, and cradle-to-grave management of lubricants, he added. And despite more severe operating temperatures and engine conditions, low-viscosity lubricants such as SAE 0Ws will continue to win market share because they are proven to save energy.

All these new technologies encourage the growth of high-quality lubricants and the use of API Group III base oils, Sheppard stated.

Currently, Group III refiners hold just 13 percent of global base oil nameplate capacity. The top 13 producers represent more than 90 percent of global Group III capacity, said Sheppard. Front-runner SK Lubricants can make 26,000 b/d of Group III in Ulsan, South Korea, and has additional volumes from joint ventures with Pertamina in Indonesia and Repsol in Spain.

Other leading players include the Shell-Qatar Petroleum joint venture in Qatar; S-Oil in Onsan, South Korea; and Adnocs facility in the U.A.E. Seventh place goes to the 55/45 j.v. plant of Bapco and Neste in Sitra, Bahrain.

Ten years ago, South Korea was the heavyweight champ in Group III supply, but its share has slipped since 2011. Three companies-Shell, Adnoc and Bapco-Neste-today account for 30 percent of global Group III capacity, and all are within a few hundred kilometers of each other in the Middle East Gulf, Sheppard pointed out. Bapco itself, with its 55 percent equity share in the Sitra operation, owns roughly 6 percent of the worlds Group III capacity, he emphasized.

Additionally, not all Group IIIs are equal, and some are now Group III+ quality, Sheppard went on, adding, In fact, some Group II+ oils performance-wise are very competitive with Group IIIs. Group II+ and III+ are informal marketing terms indicating the material has higher-than-typical viscosity index, usually 112 to 119 V.I. for Group II+ and 130 and greater for III+.

Turning to base oil trade flows, he observed that the U.S. is a huge exporter of Group II base oil, led by refiners Chevron, ExxonMobil and Motiva. Naphthenic suppliers Ergon and Nynas also are major players, and other top 10 exporters include Chemlube (which re-exports Sitras BAPbase brand Group III), Calumet, Feedco, SK and Linland.

Group III dominates U.S. imports though, with the biggest volumes coming from Shells Qatar facility-about 400,000 tons a year, according to Sheppard. Similar volumes come from SK Lubricants, trailed by S-Oil, Bapco-Neste and Adnoc.

In the case of Bapco-Neste, about 110,000 to 120,000 tons of what we make each year has been coming to the U.S. Gulf Coast, he remarked. Why? Well, the Middle East is particularly cost-effective with the type of hydrocracked, back-end processing we have. Lower energy and labor costs in the region also help Middle East Group III producers to enjoy stronger net margins than either European Group I producers or U.S. Gulf Coast Group II plants, he said.

Prices for Group III have been weak for the last few years, Sheppard conceded, due to both poor crude oil fundamentals and to investment decisions made back around 2007, when base oil prices were riding high and Group III margins were mouth-watering. That spurred a flurry of base oil construction projects that began streaming around 2011 (including Bapco-Nestes 8,200 b/d plant in Sitra), and promptly swamped the market. Naturally prices began coming down, Sheppard said, squeezing margins and disappointing investors.

A look at U.S. Gulf Coast price postings from Lube Report confirms this. From a high of almost $2,000 per metric ton in mid-2012, Group III prices tumbled to around $1,200/ton in 2016, before finally ticking up again.

Group IIIs shellacking in price-sensitive Asia was equally painful. Citing data from ICIS and Argus, Sheppard noted that competition and oversupply drove prices there from around $1,050/ton during 2014 down into the dismal range of $650/ton in late 2016.

Prices are turning around now, he said hopefully. A lot of this has to do with crude prices recovering, but even in China prices have been rising since November 2016. And since then, the margin has been wider, too, so maybe were getting back to making money on our investment.

The Sitra Group III plant now is running at over 90 percent of its actual capacity, while others in the industry have averaged about 85 percent, Sheppard reported. Assuming no big capacity changes and Group III demand growing at 3.5 percent a year, the global Group III oversupply could shrink to 1 million tons this year and to about 500,000 tons by 2020.

However, most forecasters including Kline and Co. are now saying the growth rate will be about 6 percent a year, added Sheppard. Under this scenario, which also assumes no big capacity changes, the Group III market will reach supply/demand equilibrium by 2020.

And if demand spins faster, propelled by surging thirst for low-viscosity SAE 0W-XX engine oils and higher-performing industrial lubricants, the supply of Group III could suddenly snug up and fall short of need as soon as this year, he said.

Meanwhile, were running flat-out, but dont ask me for any barrels, Sheppard declared. All of the molecules that were making for 2018 are committed, and the capacity is already sold out. This, he later clarified, means that Bapcos share of Sitras supply has been handed off to others for use or resale.

Until recently, all of Sitras output was marketed by Neste, Bapcos Finnish partner in the facility. Although the base oil manufacturing partnership has another 15 years to run, the marketing arrangement ended last year. Neste now markets its own 45 percent of the output plus a portion of Bapcos, rather than all of it. The remainder (about 35 to 40 percent of Sitras output, according to sources with inside knowledge of the operation) will be parceled out in 2018 between a global major, for its own use, and a large base oil marketer for resale in North America.

Awkwardly, the data supporting Sitras existing engine oil approvals are solely owned by Neste, not both partners. To get top dollar for its Group III, Bapco will need to run engine tests and secure its own approvals in the API and ACEA systems. According to product licensing rules, Bapco cannot simply ride on Nestes coattails for its product approvals, even though the material obviously is drawn from the same refinery pipes and tanks. Bapco is working with a major additive supplier and hopes to secure an approval early this year, Sheppard told LubesnGreases on the conference sidelines.

Sheppard added that the plant is running very well under Bapcos management. Sitra was built in 2011 using the latest process technology from Chevron Lummus Global. The catalysts in our two reactors are changed out on a five-year schedule, and were changed in 2016, so they have years of life ahead.

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