The global base oil market is going through a period of great changes and challenges. First, the rationalization of Group I production is not anymore a possible scenario, but has become reality. Secondly, the global capacity of Group II and Group III base oils has significantly increased during the last years and new capacity has been announced to come on stream in the coming years. In the unpredictability of global events, one thing appears quite likely and that is that the future base oil market will be very different from the way it looks today. But how is the base oil market changing? And why?
The impact of “external factors” on the base oil industry
The changes in the base oil market can be understood more easily if we start from a basic consideration. In the past the base oil industry was strictly linked to the lubricant industry, and base oil supply has been driven, both volumetrically and technically, by the lubricant demand. However, if we look at the trends in the base oil industry, it clearly appears that the link between base oil supply and the lubricant industry has become weaker and is going to be largely overruled in the coming years. This means that if we want to understand the changes in the global base oil market, we have to look outside the lubricant industry and evaluate the impact and the consequences of “external” factors.
The first, and probably most important, factor to be considered is the impact of mandatory clean fuel investments. The growth in demand of diesel fuel, combined with the increasingly stringent regulations on sulphur content will have a strong impact on the global refining capacity, with significant new investments on new refinery hydrocracking capacity. The implications of the mandatory clean fuel investments on the base oil market are numerous, but probably the most relevant way in which clean fuel related investments are impacting and altering the global base oil landscape is linked to the synergy between hydrocracking investments and Group II and Group III base oil production. In fact, most of the new hydrocrackers produce potential feedstock for Group II and Group III base oil production and a significant portion of new Group II and III capacity is indeed coat-tailed on clean fuel investments.
Another factor that is also “favouring” Group II and III production is crude selection. Due to availability and price issues, several refiners have moved away from light and sweet crudes (e.g. crudes with high API gravity and low sulphur content) towards heavy sour crudes (e.g. crudes with low API gravity and high sulphur content). Unfortunately, this shift poses serious problems to base oil production. In fact, light crudes are good “lube” crudes, or in other words, crudes that give high yields of base oil feedstock, while heavy crudes are “non-lube” crudes, that is crudes with low base oil yields.
Figure 1 shows how the crude selection impacts the yield of base oils. The Arab Light is a typical “lube crude” and is used as reference. We can see that going from a “lube” to “non-lube” crudes results on a total loss of base oil yields of roughly 50%.
But there is another aspect that can be seen from the data reported in Figure 1 that is also important: the shift from a “lube” to a “non-lube” crude is a problem primarily for Group I base oil production. The reason for this is that Group I base oils are produced mainly by separation processes, which means that the “lube” molecules must be present in the distillate. Instead, Group II and III base oils are produced by conversion processes, which means that new (lube) molecules can be formed and the chemical composition of the final product can be influenced.
Figure 1. Impact of crude selection on base oil yields (Source: ExxonMobil).
There is another factor that has impacted Group I production in the past and will most likely do so again, after the recession impact will be over. Under fuel shortfalls conditions, as refiners were operating at maximum capacity, in order to increase fuel output, the only choice was to divert VGO from base oil production to fuel production, a decision motivated by the higher production costs and lower margins offered by base oils. Once again, this is a threat especially for Group I production, as Group II and III plants are higher margin operations.
Finally, the last external factor driving future base oil supply is commonly referred to as ‘the technology paradox”, which is that the highest quality base oil has the lowest cost of production. Group II and III base oil plants produce high quality base oils, higher base oil yields and higher value products and by-products than Group I plants and have lower capital and operating costs.
To summarize, Group I plants are more sensitive to crude selection, have bad economics and do not present any synergy with a fuel strategy. On top of this, if we look at the demand, which is historically driven by the automotive industry, we observe an increasing use of Group II and III base oil and a decreasing use of Group I base oils.
For this reason, as the announced oncoming Group II and III capacity will most likely lead to a large oversupply, several market analysts agree that Group I refineries will close to compensate for new G II and G III capacity. The refineries that are more likely to close are higher costs and small scale operations. Another factor that will be determining is whether the operations are strategic to the overall business. Also, refineries with excess fuel hydro-cracking capacity are more likely to close down the base oil line. The time frame of the closures will be mainly decided by the time of the coming on stream of the new capacity. However, as we are already seeing, the recession will have an impact and accelerate closures, as a result of lower demand and lower prices leading to shrinking margins and promoting rationalization of operations.
Base oil market: how will it change?
As a consequence of the growth of Group II and III capacity, and decline of Group I capacity, it is likely that by 2020 Group I base oils will represent 40% or less of the global base oil pool.
If we look at the typical properties of the different type of base oils, summarized in Table 1, we can see that the differences between Group I, Group II, and Group III base oils are quite marked, and not necessarily all of them positive from the point of view of a grease producer.
Two main aspects should draw the attention: one is viscosity, the other is solvency.
Let’s start from solvency. Compared to Group I, Group II and III base oils have a much higher degree of saturation, meaning that their aromatic content is extremely low. Moreover, in Group III production, the severity of hydrocracking leads to an opening of the naphthenic rings leading to an even lower solvency compared to Group II oils. Solvency is an important property in several industrial lubricant applications, as it impacts the capacity of the oil to dissolve additives and to form stable solutions. Also the ability of the lubricant to dissolve deposits is strongly related to the solvency of the base oil. In greases the base oil solvency affects the soap yield during grease production and the interaction between the oil and the soap matrix. The technical challenges of replacing Group I with Group II paraffinic base oils in the grease cooking stage are reported in a paper presented at the NLGI Annual Meeting in 20001, where it was underlined that “A switch to Group II typically drops the aromatic content of base oils to less than 1%, down from nearly 10% in a Group I. This drop could leave grease manufacturers scratching their heads, because although they had not made any perceived changes in the product or production processes, grease yields are down and additive solubility is now an issue.” An alternative to Group I base oils is represented by naphthenic oils. Naphthenic base oils are produced by selective hydrotreating that leads to the hydrogenation of polycyclic aromatic compounds, while keeping the naphthenic rings, of which naphthenic crude is particularly rich, unchanged, leading to a high solvency, in spite of a low aromatic content. Naphthenic oils can be used as an alternative to Group I oils for grease production. Moreover, naphthenic oils can be used in combination with Group II or III oils as solvency providers.
Table 1. Typical properties of paraffinic base oils.
If we look at viscosity, we can see that the shift from Group I to Group II and III oils causes further problems to grease producers. In fact, when moving from Group I to Group II and III, there is a major limitation in the maximum viscosity of the base oils that can be produced. Not all Group II producers can produce heavy neutrals and moreover, the typical yields of heavy grades in Group II plants are lower compared to a Group I plant. In Table 22, the typical yields of different viscosity grades for Group I, II and III plants are reported. It can be observed that neither Group II nor Group III plants can produce bright stocks.
Table 2. Typical yields of paraffinic base oil plants.
With a limited decrease in demand the heavy neutral supply-demand balance will be tight to problematic; while with a more substantial decrease in demand the supply-demand should be in balance. However, the future supply-demand outlook of heavy neutrals will be strongly dependent on the situation on the bright stock front.
Naphthenic heavy neutrals have been traditionally used in the grease industry and can represent a valid alternative to paraffinic heavy neutrals. The global naphthenic heavy neutral capacity is more than half a million tons and is going to grow due to expansion projects.
If we look at bright stocks, the future looks less... bright. The global demand of bright stocks is expected to be stable or slightly decreasing through 2020, with the growth expected in marine oils, industrial lubricants and process oils partly compensating for the decrease in demand in PCMO (Passenger Car Motor Oils) and HDMO (Heavy Duty Motor Oils) linked to the shift from monograde to multigrade.
Based on the supply considerations made earlier, by 2020 there may be a global bright stock deficit of more than one million Mt/y. This gap will most likely not be replaced by a single alternative product, but, taking into consideration performance, cost and availability aspects, it is likely that the biggest share of the market will go to PIBs and heavy naphthenics. Heavy naphthenic oils represent a valid alternative to bright stocks in grease formulations. Although heavy naphthenic oils have a lower VI compared to bright stocks, in several industrial applications there is not a wide temperature variation justifying the need of a high VI. Moreover, naphthenic oils display an excellent response to VI improvers.
The restructuring of the paraffinic capacity will create supply issues for heavy neutrals and, more markedly, for bright stocks. Also, the shift from Group I to group II and III capacity will have an impact on the average solvency of the paraffinic pool. Both the lack of viscosity and the lack of solvency will pose problems to grease producers. Naphthenic oils, alone or in combination with Group II and III paraffinic oils, can represent a valid alternative to Group I paraffinic oils.
Valentina Serra-Holm is a Manager at Nynas AB, Sweden. Her contact information can be found in our member database.
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