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September 12, 2017

Volume 7 Issue 4

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Korea Tags in on U.S. Base Oil Supply

Nature abhors a vacuum, and so do South Korea’s base oil producers. Seeing a gaping hole appear in the U.S. market in first-half 2017, they moved fast to plug it with API Group III barrels.

According to data released Aug. 31 by the U.S. Energy Information Administration, South Korea exported a total of 2.4 million barrels of base oil (about 317,000 metric tons) to the United States from January to June this year, versus 1.9 million barrels in the first half of 2016 and 1.8 million barrels in the second half. That’s a 25 percent increase compared to the earlier period, and a 33 percent increase versus the latter.

Thanks to those additional deliveries, the country captured almost 32 percent of the U.S. import market in this year’s first half, after maintaining a 27 percent share throughout 2016. The overall size of the prize was larger, too: U.S. base oil imports from January to June 2017 were 7.6 million barrels, 400,000 more than the same period a year ago.

The principal reason for this spike, sources agreed, was the ill health of Pearl, Shell Oil’s joint venture gas-to-liquids refinery with Qatar Petroleum in Ras Laffan City, Qatar. With capacity to make over 1 million tons a year of Group III, Pearl has kept the oil major largely self-sufficient in base oil since 2012. But its productivity began to slump last year, and in February the limping facility had to shut down for a major repair of its gasifier units.

The impact on the U.S. market can be read in the EIA data: In last year’s first half, Shell shipped almost 1.5 million barrels of base oil from Qatar to the U.S.; that withered to just 778,000 barrels in this year’s first six months.

Pearl’s misfortune triggered a scramble in Group III as Shell sought out alternative sources to make up the shortfall, an official with SK Lubricants in South Korea confirmed to Lube Report. Rival buyers, finding themselves displaced, in turn had to hunt farther abroad to secure the precious molecules.

South Korea was not the only Asian producer to take full advantage of Pearl’s woes, which lasted until May. Indonesia, home to the 10,000 b/d joint-venture SK-Pertamina refinery in Dumai, sent 442,000 barrels of Group III to the U.S. in the first six months of 2017. It sent zero in 2016.

Middle East producers also ramped up exports to the U.S. Bahrain sent along 500,000 barrels of Group III in the first half from its 8,200 b/d Bapco-Neste refinery in Sitra, about 20 percent more than the same period in 2016.

Adnoc, Abu Dhabi’s national oil company, also sent substantial volumes to U.S. buyers from its 10,300 b/d Group III refinery in Ruwais. Shipping data from the emirate indicate that 67,000 tons (504,000 barrels) of Group III flowed to the U.S. from January to June – and about half of that went to Shell and its subsidiaries, the EIA data indicates.

Despite the eager competition, South Korea’s trio of base oil refiners – GS-Caltex, S-Oil and SK Lubricants – were well positioned to slake the market’s thirst. They have a combined 50,000 b/d of Group III capacity (in the cities of Yeosu, Onsan and Ulsan, respectively); each has a well-established network of supply hubs that can serve U.S. customers; and their Group IIIs are approved for use in API-licensed automotive engine oils.

So although GS-Caltex had a 40-day turnaround from mid-March to late April and SK undertook its own maintenance work in June, product moved fairly seamlessly into the space vacated by Pearl.

What’s ahead? Pearl is back on line and shipping product again, so Asian refiners won’t find it easy to sustain their U.S. market share through the second half. But as base oil expert and market consultant Terrence Hoffman reminded last week, the U.S. appetite for Group III is growing, not slackening.

“The market has many moving parts, and about 20 percent of U.S. demand is now Group III – virtually all of it imported,” said Hoffman.