NEW ORLEANS – The loss of market share that API Group I base oils have experienced for many years will likely continue and accelerate, and the rationalization pressure on small Group I plants in Europe and Asia will continue as Group II and III supply makes further inroads globally, an industry insider said at a conference here.
“The advantages the Gulf Coast, Middle East and parts of North Asia have in terms of Group II and III production will give them incentive to increase utilization, and certainly the world has plenty of capacity to make up for that loss of Group I,” Blake Eskew, IHS Markit‘s vice president for oil markets, midstream, downstream and chemicals, said at Active Communication Internationals U.S. Base Oils and Lubricants Summit in New Orleans, on Aug. 28. “Economic pressure to replace uneconomic Group I plants with Group II and Group III has been a constant for the past decade. We see that maintaining that same relationship going forward.”
Trade wise, the company sees European exports continuing to remain under pressure. “Group II from the Gulf Coast will be taking a bigger and bigger share of the European market, the African market and Latin American market,” he said. “And also penetration of Asian and Middle Eastern Group III really into every part of the world.”
One long term trend is that fewer and larger exporting complexes serve more and more of the world. “So as were seeing the fuel supply industry being concentrated in regions and hubs, were seeing the base oil industry go through that same transition as well,” Eskew said, citing examples such as the U.S. Gulf Coasts role as a large hub for Group II and the Middle East a large hub for Group III. These hubs reach out and export base oil products all over the world, he noted, which causes traditional base oil suppliers in those export markets to come under pressure.
Global base oil production capacity has grown from a little under 50 million tons in 2000 to around 60 million tons today, Eskew estimated, with another 5 million on the books expected to startup over the next five years. The base oil capacity mix has shifted during that span, with Group I dropping by a third, Group II tripling and Group III growing by a factor of nine. Naphthenic grew by a third over that time but from a small base.
Eskew said that in IHS Markit’s view, Group I producers will continue to face very strong headwinds, even without taking into consideration the impacts of a looming marine fuel regulation. Effective Jan. 1, the International Maritime Organization’s 2020 regulations will impose a global limit of 0.5 percent limit on sulfur content in marine fuels, compared to the 3.5 percent limit that currently applies in most parts of the world. “Ship operators can use fuels that meet that requirement or install exhaust scrubbers that reduce emissions of pollutants. And the IMO impacts are going to exacerbate those problems Group I producers have,” he said. “The marketers are moving away from Group I neutrals.”
Bright stock remains a key, important product, he said; being mostly a product of Group I base oil plants, its supply is decreasing, but demand remains strong. As a result, interest has arisen in meeting that demand – either by boosting bright stock output or by supplying other products that match its performance characteristics. “We’ve had this transition from solvent processing to hydroprocessing, which totally transforms the neutrals market. Is there opportunity to do that on the bright stocks side?” Eskew asked.
He noted that naphthenic producers have invested to make naphthenic bright stock, which he described as an interesting product with interesting advantages and disadvantages when compared to paraffinic bright stocks. Are naphthenic producers going to continue to spend that money?
Waxes will remain important to Group I producers economics, he said. But there are lots of alternative ways to get wax, Eskew pointed out, noting that supply from Fischer-Tropsch plants, specialty refiners of waxy crude oils, biobased and polymer waxes can make up for shortfalls from Group I plants. “The world has lots of waxy crudes not really utilized to produce wax because the scale of the typical refinery is so out of proportion to the size of the wax market,” he said. “We’ll see-maybe one of those products will actually go forward in the next 10 years or so,” he added.
The biggest driver for the market for Group III and polyalphaolefin will be the continued trend toward lower viscosity for passenger car motor oils, he said. “That’s the uptake not only of 0W-20s and 0W-30s, but 0W-8s and 0W-16s that are going to be the lions share of [PCMO viscosities for] new vehicles in advanced markets over the next few years,” Eskew said.
The outlook for use of Group III and PAOs (which are categorized as Group IV) in heavy-duty motor oil formulations is less certain. “At this point, it looks like it will stay more on the Group II side, but it is still up for grabs,” he added.
Group II should remain the workhouse base oil grade, able to service most automotive and industrial market sectors, Eskew said.
“Group II producers can really supply the whole market – lights, mediums, heavy,” he said. “Group II producers can take advantage of the flexibility they have to manage their grade output to maximize value of their facilities and supply the markets where they are, where the product is needed.”
Global overcapacity is expected to provide advantages to low-cost suppliers in the U.S. Gulf Coast, the Middle East and some Asian locations. “We’ll see more global trade and long-distance trade characterize the base oil market,” Eskew said.