15 February 2013 09:52 [Source: ICB]
Investment in new base oils capacity continues to be centred on Groups II and III as demand grows around the world for higher-grade lubricants.
The shift towards high-performance lubricants, and therefore high-quality base stocks, is being driven by tighter emission regulations and rising economy specifications such as longer oil changes (or drain intervals) and better fuel efficiency.
Most of the emerging markets are increasingly using mid- to top-tier lubricants for which Groups II and III are required. It is this area which will undergo maximum volumetric growth, says Milind Phadke, director, energy practice at US consultancy Kline & Company. In addition, Group II can safely replace Group I in some industrial applications, offering more growth opportunities.
Neste Oil/Bapco brought 400,000 tonnes/year of Group III capacity onstream in late 2011 in Bahrain
The excess was mainly directed towards markets in North America and Western Europe, where demand for Group III base stocks is strongest, says Phadke.
However, he adds that the easy availability of Group III product in Asia-Pacific has accelerated the penetration of top-tier lubricants and Group III is being targeted towards non-core applications such as electrical transformer oil.
SK Lubricants has also reconfigured its Ulsan plant to produce 11,300 bbl/day of Group II base oils instead of Group III.
In the US, Heritage-Crystal Clean started its 2,000 bbl/day oil re-refinery at Indianapolis to produce Group II. There were other minor enhancements by Group I players around the world to produce Group II/III base stocks.
Based on project announcements to date, Phadke expects more than 150,000 bbl/day of new base stock capacity will go onstream in the next 10 years. One major project scheduled to start production this year is US-based Chevron's 25,000 bbl/day Group II plant at Pascagoula, Mississippi. As this capacity comes online, some Group I capacity may go offline in the US, as well as in other regions too, notes Phadke.
About 10,000 bbl/day of Group I capacity is tipped to go offline in China too, as refiners there reconfigure production processes to Groups II and III. State-owned Sinopec is investing in new Group II and III capacity at Yanshan, as well as expanding Group II output at Jingmen. Both projects are expected to be completed in 2013. Sinopec expects that by around 2015, its production will account for at least 70% of China's total Group II/III base stock output.
Other key facilities due to start up in the coming years include SK-Repsol's 9,600 bbl/day Group III plant in Cartagena, Spain (which will be Europe's largest); Hyundai Oilbank-Shell's 14,000 bbl/day Group II plant in Daesan, South Korea; and Takreer Neste's 12,000 bbl/day Group II/III plant in Ruwais, Abu Dhabi.
In Saudi Arabia, Saudi Aramco Lubricating Oil Refining Company (Luberef) is planning to expand its refinery in Yanbu and start producing Group II base oils for which capacity will be 708,000 tonnes/year. These new plants will increase the pressure on Group I producers and more casualties will ensue, predicts Phadke.
For new Group II capacity appearing in North America, the domestic market and Latin America are the natural outlets, but Kline also expects an increased effort in exporting to Europe.
New Group II production in Asia-Pacific will largely remain within the region itself, where demand is strongest. Asia-Pacific and developing countries have yet to adopt lighter grades of engine oils.
For Group III plants located anywhere in the world, North America and Western Europe are the most attractive markets, with their severe supply deficit and potential to absorb a lot more Group III volumes. The Middle East, with its huge additions of Group III capacity, will emerge as another key exporter to these two regions.
Although the US will continue to import Group III base stocks, more investment is proposed in the country. HollyFrontier has plans to set up a Group III plant at its Woods Cross refinery in Utah by 2016, although capacity has yet to be finalised. The US market will also witness more re-refining activity, with a flurry of investment announcements made. Additional capacity includes several new plants planned by existing re-refiners, plus a number of new players entering the sector.
Driving the trend towards more re-refining, a process that takes used motor oils and distils contaminating factors out to return to the original base stock, is an improving North American collecting system for used motor oil, strong regulatory support and technological advances in processing. In 2012, North American re-refining capacity was slightly less than 800,000 tonnes/year, spread between re-refiners in the US and Canada, says Kline. By 2017, if all new capacities come on stream, North America's re-refining capacity is expected to reach more than 1.2m tonnes/year.
In Western Europe, more new capacity is unlikely because of the region's high production costs, although it is expected some Group I plants will be reconfigured to produce Group II/III base stocks. There will be new Group II and III capacity in Eastern Europe, including Russia. There are plans by companies such as Lukoil to set up or upgrade base stock facilities but, again, this will be at the cost of Group I which will be substituted by new Group II/III production. Plans have also been made in countries such as Bosnia to set up new facilities.
Elsewhere, Africa could be the next frontier for new investment. Base stock and lubricant quality levels are low but with potential to improve. Plus, the region has a growing car population. But Phadke believes a new base stock facility in Africa is unlikely, with South Korea, North America and the Middle East well placed to supply the continent from their own surplus.
South America has a huge deficit for base stocks and Brazil's Petrobras has announced plans to set up a Group II refinery at its Comperj complex in Rio de Janeiro by 2016. But, given the supply overhang in North America, especially after Chevron's Pascagoula plant goes on stream later this year, any new capacity in the region may become unattractive.
It is clear that investment is continuing in Group II and II base oil capacity, despite global oversupply. The market is expected to remain in surplus, putting pressure on marginal plants, particularly Group I, to shut operations. It is not unlikely, either, that some of the announcements for new capacities will be shelved.
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