Chemical Profile: Europe base oils

USES

Base oils are the main component of finished lubricants and are derived from heavy crude oil fraction in vacuum distillation. They are refined to impart physical and chemical properties that will make a good lubricant. Most base oils are combined with small amounts of chemical additives to form the finished lubricants such as motor oil.

SUPPLY/DEMAND

During 2015 there were a number of Group I capacity closures in Europe because competition with newer Group II and Group III base oils had resulted in squeezed margins.

Colas closed its refinery in Dunkerque, taking 260,000 tonnes/year of Group I and Group III base oils out of the market. The company focus turned to bitumen production instead.

Shell closed its refinery at Pernis at the end of 2015, which took 370,000 tonnes/year of Group I base oils out of the market.

Elsewhere, Total halved Group I base oil production at its refinery in Gonfreville in November 2015, bringing it down to around 260,000 tonnes/year to focus on higher quality base oils.

Gunvor acquired the Europoort refinery in 2015 and closed base oil production there at the end of 2015, ridding the market of up to 1.7m bbl/year of base oils.

Most had expected these closures to result in extremely tight market conditions, especially for brightstock, potentially making it a niche product as it can only be produced via Group I production processes. However, in stark contrast to expectations, supply of lighter solvent neutral grade base oils in Europe has in fact been tighter than that of brightstock throughout a large part of 2016.

It seems that producers may have focused their production on creating more brightstock to capitalise on expectations that it would have a niche status, and this is thought to have brought about tight conditions for the lighter grades.

There has been difficulty exporting base oils to Nigeria from Europe this year, amid problems acquiring US currency in the country. Although there is demand from the region for heavier grade base oils, players in the European and Baltic markets have been cautious about exposing themselves to the financial risk of shipping product to the country.

The Baltic Sea export market has seen extremely different ideas about supply for most of the year, with players supplied by one refiner in particular experiencing healthy levels of supply, whereas those not supplied by this refiner have experienced far tighter conditions, with the Baltic almost becoming a two-tier market.

Elsewhere, in the Black Sea Export market, conditions had been well-supplied for most of the year amid quiet demand from the key Turkish market amid a weak Turkish lira, political uncertainty and tightened base oil import regulations.

However, towards the end of the year, the largest supplier to the region had few, if any, volumes to offer on the spot market, which caused overall market availability to decrease significantly.

Group II base oil supply is generally thought to be balanced but there is currently suggestion of tightness in Europe amid a lack of supply from a US producer.

The Group III market is fairly balanced in terms of OEM-approved product, but additional unapproved volumes from Russia and Abu Dhabi are said to be entering the market and are priced very attractively, which could put pressure on Group III prices in Europe.

PRICES

Prices for Group I base oils began the year with a decrease both on domestic and export markets amid quiet conditions and weaker vaccum gasoil prices. However, following a weak first quarter, prices on the European domestic and European export market were largely stable until tight supply of lighter SN150 and SN500 grades took hold in November and prices saw some upward pressure.

Despite this, lengthier brightstock conditions meant that its prices remained steady, with some even hearing suggestions of discounts. A great deal of stability was seen in the Baltic and Black Sea markets throughout the year until the fourth quarter, when tight supply from a major refiner impacted availability of SN150 and SN500 in both markets, with prices gaining upward momentum.

TECHNOLOGY

The traditional method of making base oils involves solvent extraction to remove aromatic compounds and solvent dewaxing to take out unwanted waxes.

More recently hydroprocessing techniques employing hydrogen and catalysts have been used to make base oils.

Group I base oils, which are mostly produced by solvent processing, are used in less demanding applications.

Group II and III base oils are produced by hydroprocessing and used in higher performing lubricants. Group IV base oils are synthetic oils typically based on polyalphaolefins (PAOs). Group V oils are used in the formulation of oil additives.

OUTLOOK

Long term, with the large amount of consolidation seen in the Group I base oils market during 2015, the market is not expected to shrink further in 2017.

Group II and Group III base oils are in healthy supply and as a result their prices are attractive, prompting some to switch from Group I product to Group II/III base oils.

Furthermore, regulations and original equipment manufacturer approvals are all leaning more towards Group II and Group III product, so it is possible that the Group I market will gradually shrink further.

However, this is likely to be over a long period of time.