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Slide 1 BASE STOCKS
Slide 1
BASE STOCKS
Slide 2
B A S E S T O C K S
BS1
Capacity utilization expected to remain low in the next 10 years
-40
-20
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20
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80‘0
00
B/D
Additions Group I Shutdowns Source: Kline
2011
2012
2013
2014
2015
2016 2017
Based on current announcements of capacity additions and Group I plant shutdowns it appears that from 2011 through to 2017 more than three barrels of base oil capacity will be added for every barrel of Group I removed. However, in recent years, global lubricant consumption has remained relatively flat at around 38 million mega tonnes per annum. Although future demand growth is uncertain, it seems likely that even with a “business as usual” scenario the market will remain long and operation rates for many plants will stay low in the coming years – with Group I plants likely to have the lowest rates of under 70%.
Slide 3
B A S E S T O C K S BS1
Capacity utilization expected to remain low in the next 10 years
-40
-20
0
20
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80Th
ou
san
ds
of
Bar
rels
pe
r D
ay
Additions Group I Shutdowns Source: Kline
2011
2012
2013
2014
2015
2016 2017
NA SHOW
Based on current announcements of capacity additions and Group I plant shutdowns it appears that from 2011 through to 2017 more than three barrels of base oil capacity will be added for every barrel of Group I removed. However, in recent years, global lubricant consumption has remained relatively flat at around 38 million mega tonnes per annum. Although future demand growth is uncertain, it seems likely that even with a “business as usual” scenario the market will remain long and operation rates for many plants will stay low in the coming years – with Group I plants likely to have the lowest rates of under 70%.
Slide 4
B A S E S T O C K S BS2
Asia Pacific40%
North America 25%
Europe21%
ME & Africa9%
South America 5%
Data Source Kline, 2013
37% Group I34% Group II/II+
82% Group I63% Group I
37% Group III
87% Group I
28% Group I55% Group II/II+
Asia Pacific is the world’s largest producer of base oil, followed by North America and Europe. However, the supply of different base stock groups varies significantly by region. While global base stock supply is forecasted to grow in the next ten years – with the most growth coming from the Middle East - Asia will still remain the largest supplier. In Europe we can expect to see a slight decline in supply as new capacity from Group II plants is unlikely to offset the effect of Group I plant closures. In North America a slight increase in supply is expected – despite Group I plant closures.
Slide 5
B A S E S T O C K S BS3
Global supply will exceed demand although product and regional anomalies exist
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100
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800
2007 2013 2023
KB
DOther
Napthenics
Group III - grows7.5%/yr 2013-23
Group II - grows3.7%/yr 2013-23
Group I - declines2%/yr 2013-23
Source Kline, 2013
The overall increase in demand for base stocks will reflect the growth in finished lubricants. However, different product groups will experience different growth rates - with the higher quality Group II and III base oils experiencing the strongest. Globally Group I and naphthenics are in tight supply and there is an increasing deficit in bright stocks. The surplus of Group II in North America is exported to EMEA and Asia to make up these Group I deficits. The surpluses of Group III in Asia and the Middle East are being exported to regions where the drive for very low viscosity lubricants and quality upgrades is increasing, such as North America and China. Despite these movements, global production will significantly exceed demand regardless of regional and product variations.
Slide 6
B A S E S T O C K S
Miguel de Angel | CEPSA – Base Oils Manager
Joe Rousmaniere | Chemlube International – Business Development Manager
Virpi Amoedo | Neste Oil – Vice President, Base Oil
BS Video A-1
BS Video A-2
BS Video A-3
Miguel de Angel: In 2015 we will see a demand for Group I base oils representing about 50% of the supply capacity. In Cepsa’s view we think that large scale Group I producers have lower costs than the smaller ones. But in 2017 with 10 million tons of surplus, we think that they will have to reduce even more their tonnage to the market. Joe Rousmaniere: The United States market is already fully saturated with Group 2. You know, we already export more than 40% of our base oil production, and that doesn’t take into account the new Pascagoula production and the Exxon production going on. Virpi Amoedo: Generally speaking, supply of Group III exceeds the demand today, but we see a very strong trend in the industry. OEMs and formulators are driving the growth in order to meet requirements for fuel economy, durability, and also cost effectiveness. And it’s very important to notice that the Group III market is tiered to approved and the non-approved products, and based on our analyses, the excess of supply is less in terms of approved Group III base oils.
Slide 7
B A S E S T O C K S
Source Kline, 2013
BS4
Group I accounts for 49% of base stock production
Continued decline in Group I use• Technical obsolescence in top tier
automotive oils
• Oversupply of Group II/III
• Investment required in older plants
Plants continue to close/convert
Increased value of waxes and bright stocks may ensure survival• Napthenics can substitute bright stocks
• Some bright stock capacity additions expected
Marine and GEO shift to Group II• Rebalance of formulations is
essential as base stocks change
0
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400
600
800
2010 2013 2023
KB
D
Base stock supply
Group I Group II
Group III Napthenic
Taking a closer look at some of the product groups – starting with Group I, although their use has been in steady decline in the last ten years, Group I base stocks still account for almost half of the overall base stock supply. Market erosion will continue to be driven by three key factors: Firstly the high sulphur content, low saturates, and poor low‐temperature properties make Group I’s inappropriate for use in top tier automotive applications; second the oversupply of higher quality Group II and III base stocks are replacing Group I, and lastly the capital investment required to maintain some of the older Group I plants, in some cases, makes them uneconomical. This has forced plants to close or convert to Group II production, a trend that has put pressure on the supply of certain by-products. As the value of these specialty products increases, refineries that can optimize the production of waxes, bright stocks and other extracts have a better chance of survival. Bright stock, which is used in marine, industrial and process oils, is in very short supply in some regions, particularly in Asia Pacific – and Europe has become a net exporter - although to meet the deficit many blenders have used substitutes, to keep their formulations economical. Going forward, the bright stock supply situation is expected to ease, as companies like Luberef add new bright stock capacity, and others expand. Currently Group I base stocks are being directed to marine and gas engine applications where they add the most value. But, as logistics become an increasing issue these markets are likely to shift to Group II. Right now it is unclear if they are ready for this change, because significant reformulation is required to handle the properties of Group II’s, and testing in these markets can take several years to complete
Slide 8
B A S E S T O C K S
George W. Arndt Jr. | ExxonMobil Fuels, Lubricants & Specialties
Marketing Company – Manager, Global Base Stocks & Specialties
Miguel de Angel | CEPSA – Base Oils Manager
BS Video B-1
BS Video B-2
George W. Arndt: We have the largest lubricant base stock refinery system in the world, and, while we continue to evolve that network, our Group I base stock plants are among the largest and most efficient in the industry. We expect our Group 1 plants to continue to serve our customers’ needs for years to come. Miguel de Angel: It is confirmed the closure of the Group I base oil plant at Pernis and other plants of Group I will be closing as well, because some producers have given notice to customers in this sense. The side products are very important, and they have become today specialty products like paraffin wax and extracts, because they add value versus the vacuum gas oil, even more, in some cases, than base oils. Of course Marine will be one of the most important applications since the specifications and performance of Group I are ideal for such use. The small plants of Group I base oils in Europe will be in difficulties overall if they depend on base oil sales.
Slide 9
B A S E S T O C K S BS5
Group II/II+ sources increasing
• Hydrocracking/isodewaxing/catalytic dewaxing
• Old Group I plants
• Re-refiners
Oversupply drives use in wider portfolio of applications
• Technical need not always justified
Group III/III+ capacity increasing
BOI/VGRA guidelines a significant challenge
Time for redefinition of API categories
The demand for higher quality base stocks is clearly growing, which is driving investment in capacity. And although North America and Asia account for about 98% of Group II and II+ supply today we are still seeing capacity introductions across the globe. Because the market is long, their use is being promoted in applications where there is little technical need for such high performance products. On the other hand, it increases the opportunity for lubricant quality upgrade. Supply of Group III and III+, made by hydro‐processing of fuel hydrocracker bottoms or from GTL waxy raffinates, is also increasing. Competition for Group III will remain high and it will be an interesting market to watch as suppliers look for innovative ways to differentiate their products. In our view, the various performance features of Group II and III make the development of base oil interchange and viscosity grade read across guidelines a significant challenge. It will be increasingly important to provide data to help define these guidelines, and base stock Group alone is unlikely to be enough – particularly given the wide range of products within these two groups. Perhaps the time has come for the API (American Petroleum Institute) to address the growing need for base stock category redefinition.
Slide 10
B A S E S T O C K S
George W. Arndt Jr. | ExxonMobil Fuels, Lubricants & Specialties
Marketing Company – Manager, Global Base Stocks & Specialties
BS Video C
George Arndt: Our goal is to ensure we have the right products when and where they are needed to enable growth. Therefore, we’re increasing production capabilities of Group II base stocks at our Baytown, Texas and Singapore refineries this year. And, as recently announced, ExxonMobil plans production of Group II base stocks at the Rotterdam Refinery in Europe. This investment will be subject to receipt of appropriate permits from authorities, shareholder funding and final approval by the Board of Esso Nederland BV. Construction would begin in 2016 with production scheduled to begin in 2018. Over the past decade or so, Group II in particular is playing an ever-increasing role in helping formulators cost effectively meet growing lubricant performance requirements.
Slide 11
B A S E S T O C K S
Virpi Amoedo | Neste Oil – Vice President, Base Oil
Joe Rousmaniere | Chemlube International – Business Development Manager
BS Video D-1
BS Video D-2
Virpi Amoedo: Group III demand continues to grow globally; however, now we see differences between the regions. European and US markets continue to grow, but at a slower pace than in the past. And on the other hand, demand in Asia, particularly in China, continues to grow very strongly in terms of technical demand for Group III’s. Viscosity index is not the only driver for selecting base oil, as it does not characterize the performance in the engine. Rather, low temperature properties and NOACK volatility should be the drivers. However, it’s always the combination of the characteristics, and Group III base oils offer a great compromise between the properties and cost effectiveness. Joe Rousmaniere: How long before the technical demand catches up with Group 3? It’s going to take a good long time because the markets of China and India and Africa and South America, they have a long way to develop to absorb all of that Group 3, but remember, not all Group 3’s are alike. In the higher performance Group 3’s, we call them Group 3 Plus, they’re not in over-supply. Group 3 Plus products compete for the space in low viscosity PAO, and right now, low viscosity PAO are in short supply and the prices are really high. If the Group 3 Plus oils can compete into that space, there’s no over-supply; in fact, you could make an argument that it’s under-supplied.
Slide 12
B A S E S T O C K S BS6
Shell’s Pearl plant is the only GTL facilityproducing base stocks
GTL investments uncertain • Shell dropped its Louisiana GTL plans in 2013
• Sasol delays 96,000 b/d Louisiana plant
• Smaller investments likely near gas fields
Growth of shale gas• China, Argentina, Algeria, US and Canada
>50% of world reserves
• 10 fold increase in US production in 5 years: 1000 – 10000 billion ft3
• Other countries beginning to invest in production
Impact of gas on base oil market is unclear
Although five GTL plants are operating successfully, only Shell’s plant in Qatar produces GTL base stocks. High investment costs and market uncertainty regarding natural gas and petroleum product prices have curtailed investments in further GTL facilities. Shell has dropped its plans to build a new large scale plant in Louisiana, while Sasol has delayed its 14 billion dollar US GTL facility which was expected to start production in 2018. The excess of gas in North America has also prompted a number of companies to consider investments in smaller GTL operations. However, other uses for available natural gas - in industry, electric power generation, and exports of pipeline and liquefied natural gas - are currently more economically attractive than GTL. There are thought to be almost 7300 trillion cubic feet of shale gas resources in the world – with the top five countries accounting for more than half of these reserves. With US production forecast to grow significantly in the coming years – and with other countries also investing in extraction - what remains to be seen here is just how much impact this increase in gas supply will have on the worldwide base oil market. We can certainly expect PAO to benefit from this shale gas expansion through increased precursor feedstock availability.
Slide 13
B A S E S T O C K S
Brad Rinderknecht | ExxonMobil Synthetics – Global Marketing Manager
BS Video F
Brad Rinderknecht: The good news, if you look at North America, the shale gas revolution that’s been going on has attracted over 200 different projects that are adding up to about $100 billion worth of capital investment. A handful of those projects are full-range OAO units, so we’re pretty confident that there will be additional decene made available to the industry to support PAO growth in the future.
Slide 14
B A S E S T O C K S
Data source: Lubes'n'Greases / CPChem
BS7
• Emissions reduction and fuel economy drive PAO use in automotive applications
• Technical advantages over mineral base oils
• 75% global PAO consumption is in automotive applications
• PAO needed to formulate SAE 0W-X in severe viscometricsenvironment
• Low viscosity PAO supply tight
• Impact of GTL and use of esterstill unclear
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NorthAmerica
AsiaPacific
Europe
KT/
A
PAO global production
High viscosity Low viscosity
With emissions and fuel economy standards driving the need for higher performance automotive lubricants, the demand for low viscosity PAO base stocks is increasing. Lower friction and better energy efficiency make them increasingly popular for the formulation of fuel economy lubricants, while oxidation stability, thermal conductivity and lower volatility deliver lower oil degradation and improved durability. Additional PAO is likely to be required in passenger car oils to formulate SAE 0W grades when stringent viscometrics are required. This increased demand comes at a time when the PAO market is very tight and that means plants must run at optimum utilization rates, aligned with availability of feedstocks. However, limited access to feedstock will continue to constrain production. It is still unclear what impact Group III+, and the use of ester or other chemicals as an alternative to PAO, will have on demand.
Slide 15
B A S E S T O C K S
Brad Rinderknecht | ExxonMobil Synthetics – Global Marketing Manager
BS Video G
Brad Rinderknecht: The trends that we’re seeing in the auto industry, with increased fuel economy and reduced emissions, are causing additional strain and pressure on the lubricant formulation itself. So things like NOACK volatility, low viscosity capabilities, oxidative stability, cold temperature performance; all those requirements are being placed onto the lubricant and at that point, PAO becomes technically required to be able to support some of those lubricant formulations. The market for PAOs has tightened in the last couple of years. If you look at the growth of PAO we see that between 3 to 4% per year. And if you look at the last low viscosity grass roots PAO facility that was built, it was back in the 1990’s, so it’s been quite a while since a new facility has been brought on-stream. We’ve got a long history of investing for this industry, 50 years at this point in time, and in fact, just last year we brought on-stream our 50 KT high viscosity metallocene facility in Baytown, Texas, and we’re putting the finishing touches on our new Group 5 facility in Baton Rouge, Louisiana.
Slide 16
B A S E S T O C K S
Re-refined base stocks • Deliver Group II/III performance
• Difficult times in oversupplied market
• Action needed to increase pace of wider adoption
Bio-synthetic base stocks • Deliver Group III/IV performance
• Likely to remain a niche in automotive applications
• Some interest in marine, agricultural and metalworking fluids
• Construction of production capacityis biggest barrier to broader use
Environmental pressures could push green base stocks into mainstream formulations
BS8
The green oil market is experiencing difficult times in this oversupplied market. Re-refineries take used oils and turn them into high quality Group II and in some cases, Group III base stocks. However, this new capacity comes at a time when virgin base stock supply is plentiful, which is putting significant pressure on re-refiners as the price differential is reduced. Bio base stocks – which are derived from renewable sources such as animal and vegetable fats - can deliver performance characteristics comparable to Group III and Group IV base oils. Although activity is increasing, we do not expect these products to be more than a niche application in the transportation sector for the foreseeable future. However, applications where lubricants can end up in the environment or come into contact with workers - both target areas for regulators - could present opportunities for bio lubricants. The largest near term barriers to the wider use of bio synthetics is the scaling up of production capacity to meet demand and the reduction of production costs. In the next five to ten years we would expect environmental pressure to push green base stocks into mainstream automotive applications.
Slide 17
B A S E S T O C K S
Joe Rousmaniere | Chemlube International – Business Development Manager
BS Video H
Joe Rousmaniere: It is in everybody’s interest to encourage and support efforts to properly handle waste oils. And it’s been proven that the best way to handle waste oils is to turn them into new base oils. And in the last few years, the re-refining industry has done great work and they’ve developed techniques that now make waste oils into virgin Group 2 quality base oils. It’s perhaps unfortunate for them that at the same time there’s been this vast new flood of Group 2 virgin base oils coming in the market in the United States and Korea and elsewhere.
Slide 18
B A S E S T O C K S
Virpi Amoedo | Neste Oil – Vice President, Base Oil
BS Video i-1
Virpi Amoedo: We recognize an appetite in the industry for a top quality renewable base oil, which can be an alternative for polyethylene in the future. As NESTE Oil is a leading supplier of renewable diesel, based on proprietary technology, renewable base oil is a natural, long-term research area for us.
Slide 19
B A S E S T O C K S
Jeffrey Brown | Novvi, LLC – CEO
BS Video i-2
Jeffrey Brown: Our base oils are classified as an API Group 3. This allows us to drop into the existing infrastructure, from additive technology, use at a blend plant, and finished lubricant applications. You couple that performance with the environmental benefit we drive around renewability, biodegradability, and toxicity, we bring a very unique value and performance, differentiation, as unique in the marketplace.
Slide 20
B A S E S T O C K S
Base stock proliferation brings complexity
More base stocks may need approval in industry and OEM specs
The need for base oil interchange rules is clear, the path to get there is not
BS16
The increased availability of higher quality base stocks will more than satisfy the demand for higher quality finished lubricants. But, the increase in the number and type of base oils in the market brings a new level of complexity - because this wider portfolio of base stocks needs approval in the latest industry and OEM specifications. This means the development of base oil interchange and viscosity grade read across guidelines will be a significant challenge.
Slide 21
B A S E S T O C K S
Virpi Amoedo | Neste Oil – Vice President, Base Oil
Joe Rousmaniere | Chemlube International – Business Development Manager
Bruce Royan | Infineum UK Ltd – Lubricants Technology Manager
BS Video J-1
BS Video J-2
BS Video J-3
Virpi Amoedo: Base oil interchangeability should be based on facts and transparency so that OEMs can be convinced that the certain quality level is maintained. In NESTE Oil’s view, Group III industry does not yet have the fact base that would support base oil’s interchangeability. Joe Rousmaniere: The industry’s already under tremendous stress because we’ve got the testing, the cost, the money of GF-6, we’ve got PC-11, we’ve got many different OEM standards coming up. And if we put on top of that the restructuring of BOI to cover Group 3’s and Group 3 Pluses, that’s an awful lot to ask, and I think it’s going to take years and years to do that. Bruce Royan: Infineum supports the existence of base oil interchange and viscosity grade read-across guidelines. However, from our perspective, it is very important that the guidelines are appropriately developed and carefully thought through. If they do not exist, it will be challenging for mainstream technologies to have the base stock and viscosity grade coverage that customers have become accustomed to with previous generations of products.
Slide 22
B A S E S T O C K S BS9
Base stock proliferation brings complexity• More base stocks may need approval in industry and OEM specs
Balance of PAO, Group II/II+ and III/III+ base oils in formulations varies depending on required outcomes
• Performance specifications
• Fuel economy performance
Cost effective and supply reliable solutions are required
Complexity in the global base stocks market will continue
The increased availability of higher quality base stocks will more than satisfy the demand for higher quality finished lubricants. But, the increase in the number and type of base oils in the market brings a new level of complexity - because this wider portfolio of base stocks needs approval in the latest industry and OEM specifications. This means the development of base oil interchange and viscosity grade read across guidelines will be a significant challenge. The balance of Group I, II, III, PAO and the marketing grades of Group II and III Plus used in future formulations will depend on the specific mix of engine oils, industrial oils, marine and process oils that a blender produces for their target markets and the attributes that need to be delivered. Our role is to provide the most cost effective and supply reliable formulation solution to the market It seems highly likely that this fast changing market - driven by global demand patterns, raw material costs and regional supply and demand imbalances – will continue to present significant challenges for some time to come.
