The Survival of Group I
Group I base oil has been around a long time, and its demise has been predicted for years. But recent tightness in the market shows this old category still has some life left in it.
It seems that the industry has come a long way, with Group II being deemed the “workhorse” base oil and revolutionizing the lubricant scene. The assumption has been that progress means the replacement of outdated Group l production, starting with older facilities that would require substantial reinvestment to maintain. These units are uneconomical, with lower demand and dwindling uses for their output.
This scene is set against a backdrop of investment in new Group II and Group III facilities with their own dedicated feedstock streams and technology. These processes have allowed maximized return on capital investment and the development of a new generation of finished lubricants.
Some refineries converted Group l production into Group ll, but many refinery projects were too expensive. So started the decline of Group I base oils, which seemed a natural progression. However, sectors such as marine and process oils voiced concerns that viscosity and solvency requirements made them dependent on Group l products. A switch also involved higher investment costs along with the higher prices levied on Group II and Group III base oils.
In some markets where there was ample Group l supply, such as in Europe, Group lll base oils were initially employed as a diluent, promoting the continuation of Group l production, much of which was owned and operated by state oil companies. Commercially run refineries were first to cut Group l production, only maintaining output to cover sectors that could not use Group II.
With this in mind, the question remains: Will Group l base oils survive?
In the years running up to 2020, there was reason to continue Group l production. One of those was the marine sector’s need for high-alkalinity lubricants to counter high-sulfur fuels.
The International Maritime Organization’s newest marine pollution restrictions, implemented in January, require international sea-going vessels to use fuel with max sulfur content of 0.5%. This legislation reduced demand for marine cylinder oils with high total base number, as only ships outfitted with scrubbers will now need them. A new generation of lower TBN marine lubricants has evolved, meaning that Group II base oils can be used in marine formulations—a blow to the Group I camp.
In the United States and Europe especially, rising performance demands for passenger car and heavy-duty motor oils have steadily shrunk formulary windows for those products, increasing reliance on Group II, Group III and even Group IV polyalphaolefin base stocks—continuing to crowd out Group I.
The automotive sector has a massive influence on lubricants and the base oils used in blending them. This has pressured lube producers in developed regions to abandon Group l base oils. The emergence of electric vehicles will force revision of lubricant requirements again, with Group II and Group III being used in gear oils and other transmission lubrication systems. Will this be another nail in the coffin for Group I?
In defense of Group I, one of the products resulting from its production is paraffin wax, which is a growing market with positive demand. Waxes are high margin products for refiners, and with continuing demand from a number of sources, there is pressure for producers to maintain supply.
Other sectors that favor the retention of Group I are greases, process oils, compressor oils and certain gear oils, all of which favor higher sulfur content.
Early in the pandemic in East Asia, Middle East and Europe, some blenders had difficulty accessing suitable Group I material for military and health services.
The use of Group I has also varied regionally with traditional “export” markets like those in Africa, the Middle East, India and farther east, where economic factors and logistical constraints play a part in preventing a move to higher-performance lubricants. Older vehicles on the roads and existing machinery in factories dictate that an older generation of lubricants can still be employed in these locations.
Globally, we are in the grip of possibly the worst health and wealth disaster to hit this planet. Nations are reacting to the pandemic with lockdowns, curtailment of industry and the movement of people. The situation has created a tranche of unknowns, which has blown forecasts for return on investment in capital projects and delayed or cancelled investment in many industries.
With this uncertain future, producers of all types of base oils have trimmed production levels to accommodate reduced demand, and it will take time to return to pre-pandemic levels. Group I producers have probably cut back output the most. Even before the pandemic, demand for Group I base oils had decreased, prices were under pressure and numbers in some regions fell below breakeven.
This has changed in recent weeks, with reports of shortages of Group I grades including solvent neutral 500. Early in the pandemic in East Asia, Middle East and Europe, some blenders had difficulty accessing suitable Group l material for military and health services. This situation is continually evolving, with buyers struggling to obtain supplies and prices rising. Nonetheless, it is increasing incentive for refiners to turn on the taps again.
Looks like Group l may be here to stay.
Ray Masson is director of Pumacrown Ltd., a trader and broker of petroleum products in London, U.K. Send him comments or topic suggestions at email@example.com.