North America is the Group II powerhouse, with the ability to churn out up to 165,900 b/d-which accounts for more than half of the continents base oil capacity. The massive United States Gulf Coast refineries contribute substantially to the regions 39 percent share of global Group II capacity.

Together, Asian countries can produce 229,700 b/d of Group II. China holds 21 percent of global supply, followed closely by Japan and South Korea with a combined 20 percent, and 15 percent rests in South Asia and Pacific countries. The remaining 5 percent is in the Middle East.

A handful of refiners make nearly half of the worlds Group II oils. Saudi Aramco has an interest in 17.5 percent of the Group II market: It owns the Motiva plant in Port Arthur, Texas, with 40,300 b/d of capacity (of which some can be used to produce Group III); shares 14,200 b/d from the Luberef facility in Yanbual Bahr, Saudi Arabia, with a Saudi investment company; and has a majority ownership stake in South Koreas S-Oil (20,800 b/d).

In January, Aramco reached for a stake in yet another base oil plant-20 percent of Hyundai Oilbank, the 25,000 b/d Group II joint venture between Shell and Hyundai Heavy Industries in Daesan, South Korea. The deal was not finalized at the time of writing.

Chevron is the second major player, with 45,700 b/d in Pascagoula, Mississippi, and Richmond, California. The company also owns half of GS Caltex, which can make 23,000 b/d at its Yeosu, South Korea, site. This gives Chevron interest in about 16 percent of the worlds Group II.

Prior to the opening of its new plant in Rotterdam, the Netherlands, ExxonMobil had 11.5 percent of global Group II capacity at 49,200 b/d. Rotterdam will push it up to match its rivals at 16 percent-and it owns all of this capacity exclusively.

The Rotterdam plant, scheduled to begin commercial production this month, will have about 20,000 b/d of API Group II capacity-increasing global Group II volume by 4.6 percent. The plant will produce ExxonMobils EHC 50 and EHC 120 API Group II base oils.

Oils from Rotterdam will comply with base stock slate definitions from the American Petroleum Institute and ATIEL, the technical association of the European lubricants industry. Saudi Aramco is also working to attain global approvals, industry consultant Terrence Hoffman told LubesnGreases. The whole business is becoming more globalized with this.

A couple of years ago, Chevron was the only game in town, said Hoffman, emphasizing how Europes base oil market has changed. With ExxonMobil and Saudi Aramco on the scene, there will be plenty of supply for blenders to choose from. Aramco started marketing base oils in 2017 and began making Group II at Yanbu in early 2018.

Too Much Group II?

As demand for higher quality finished products has risen in Europe, so has demand for Group II base stocks. Theres little question that the Rotterdam plant will fill a gap in Europes base oil production. Prior to Rotterdams opening, Western Europe had 8,000 b/d of Group II capacity, 45 percent of which was rerefined.

Speaking at the ICIS Pan American Base Oils & Lubricants Conference in November, Mohamed El Assar, global development manager for ExxonMobil, predicted that Group II will steadily replace Group I to account for more than half of global demand by 2030.

But industry observers largely agree that the global market is headed toward oversupply, if it hasnt already arrived. While lubricant demand has barely budged, global base oil capacity grew by 181,680 b/d over the past decade, according to LubesnGreases Lubricants Industry Factbook. Group II increased from 21 percent to 37 percent of global capacity over that time.

Group II seems to be popping up everywhere. In addition to Rotterdam, ExxonMobil will open another 6,000 b/d of Group II capacity at its Jurong, Singapore, plant next year and will tack on even more in 2023.

China will soon have another 4,760 b/d of Group II when Hengli Petrochemicals base oil plant starts up (the refinery opened in December), and Hainan Handi Sunshine Petrochemical says it will complete an expansion of its Group II plant on Hainan island around mid-2019.

Russian producers have several plans in the works, including another 5,000 b/d of Group II from Rosneft and 1,000 b/d from Lukoil-though these have been delayed until 2020. Canadian rerefiner Gen III Oil Corp. is building 2,100 b/d of Group II and III capacity at its plant in Bowden, Alberta, that is likely to open in the next few years, and a smattering of smaller Group II additions are in the works around the globe.

Ernie Henderson, president of K&E Petroleum Consulting, pointed out that there is a market segment that can use either Group I or Group II oils, making the choice based on price and supply availability. The lower Group II prices have provided opportunities for companies to upgrade from Group I to Group II without realizing a cost increase with their finished oils, he told LubesnGreases.

No one can pin down the exact amount of Group II oversupply, but Hoffman estimated it could be as much as 15 percent when the Rotterdam plant begins production. One potential reason for Group IIs popularity among producers is that it is perceived as better quality and can be made at roughly the same cost as Group I, he explained.

The only way Hoffman sees the market rebalancing is the elimination of some Group II capacity. Typically, refiners shut down base oil plants because of a capital event, he said, citing Citgos Group I plant in Lake Charles, Louisiana, which closed in 2008 after vacuum tower problems. Which plants might ultimately fold depends on capital decisions that will have to be made five to 10 years from now, Hoffman speculated.

In the midst of dire predictions, Brent Lok, Chevrons global business development manager, base oils, takes a rosier view. ExxonMobil is so big, the market goes where they go, he said. Lok believes the flood of new local capacity in Europe will spur more customers to make the transition to Group II and expand demand for it in the region.

In the past, Group II demand was considerably lower in Europe than other developed regions like North America and Asia, as the region favored blending API Group I and Group III to meet its technical demands, according to Henderson. This made sense, given the availability of Group III from regional producers like Neste, SK-Repsol and ExxonMobil, he observed.

But now, Europe is ripe to have a dramatic transition from Group I to Group II, said Lok. If the size of the Group II pie increases quickly enough, it may entice more producers to come into Europe.

Reflowing Trade

As Group II demand rises in Europe, Lok expects more term barrels of Group II oils to arrive where spot cargoes had been quite common when Group II pricing was advantageous. People want security of supply, he stated.

According to Argus Media, the U.S. and Asia accounted for 86 percent of API Group II base oil supplied to Europe in 2017. Fifteen percent of U.S. base oil exports went to Europe in the first half of 2018, according to U.S. Energy Information Administration data, making it one of the top two regions for U.S. base oil exports-especially Group II.

Rotterdam may push some Group II from U.S. producers back into the Americas, said Hoffman, and the region seems receptive to more. Latin America has no local Group II production and has a growing appetite for higher quality finished lubes. The region took 45 percent of U.S. base oil exports in 2018s first half, EIA data show.

North America will also look to supply Group II to other regions where there is a shortage of Group II capacity, like the Middle East and Africa, Henderson said. This is particularly true for producers like Chevron, ExxonMobil and perhaps Saudi Aramco, who will want to establish a regional supply chain strategy to support their Group II global slates.

For Asia-Pacific, Henderson expects that continued growth in demand volume as well as a thirst for higher-quality finished lubricants will allow some of the oils previously sold in Europe to be absorbed within the region.

Marpol 2020 Ships in Changes

Engine oils arent the only products that influence the base oil industry. Overall refinery economics also play a major role, and a significant change may be on the horizon with the International Maritime Organizations 2020 marine fuel sulfur cap.

According to John Leavens, director of oil markets midstream and downstream for IHS Markit, rising demand for low-sulfur marine fuel will have a knock-on effect for base oils. Low-sulfur byproducts of the hydrocracking process, such as low-sulfur diesel, will increase the profitability of hydrocracked Group II and III base oils, he said at the European Base Oil and Lubricants Summit in Florence, Italy, in November. As a result, refiners are likely to boost capacity utilization at Group II and Group III plants to take advantage of higher prices for the byproducts. (See graph on Page 32.)

On the other hand, Group I base stocks that are produced from higher-sulfur crude oil do not have the same low-sulfur byproducts. The resulting economics of Group I base oil production from sour crude are expected to be poor, said Leavens.

According to Chevrons Lok, these changes will primarily disadvantage older, standalone Group I plants that are dependent on specific types of feedstock. Such producers are already losing market position in their regions and are increasingly turning to exports, which carry a higher cost of transportation that will be passed on to customers.

The additional Group II and Group III volumes available are likely to depress demand for Group I at the same time as the economics of Group I production worsen, Leavens added. As a result, Group II is likely to pick up even more speed.