BASE LUBE SUPPLY SET TO TIGHTEN THROUGH 2000
Darrell G. Rangnow
Wright Killen & Co.
Houston
As a result of continued base lube capacity rationalization and world economic recovery, Wright Killen & Co., a Houston-based consulting firm, expects increased tightness in base lobe supply through the year 2000.
Effective operating rates should exceed 90% of nameplate capacity for the remainder of the decade.
The majority of base lube demand growth will be in the developing countries of South America, the Asia/Pacific region, the Middle East, and Africa.
Announced and planned base lube capacity additions exceed 75,000 b/d. Capacity creep should offset the rationalization of an additional 30,000 b/d of marginal capacity. Marginal base lube plants in the U.S. and Europe are most vulnerable to closure.
In the long term (beyond 2000), traditional petroleum base lube processing technology is threatened by high-performance synthetic oils, biodegradable natural oils, low-cost re-refined oils, and severe hydrocracking technology.
To meet projected demand, Wright Killen expects another 5 to 10 world-scale base lube plants to be required toward the end of the decade. These plants will be preferentially located in the Middle East and Asia/Pacific regions.
DEMAND
Base lube demand is projected to increase from 700,000 b/d in 1994 to 810,000 b/d in 2000. This forecast is based on the assumption of no major worldwide economic downturns over the next 5 years.
Fig. 1 (32985 bytes) shows historical and projected world base lube demand by region. This forecast is based on demand projections for petroleum base lubes only and excludes additives to finished lubricants and alternative lubricant sources.
Because economic activity is the primary driver of base lobe demand, for the purpose of analyzing base lobe demand during the 1990s, three distinct economic periods will be examined: recession, recovery, and outlook.
RECESSION (1990-01)
The fundamentals of the base lube industry were rocked by an economic recession during 1990 and 1991. The worldwide recession affected base lube demand in all regions.
Demand declined 10% in the U.S. and Western Europe, as both economies entered the recession. As the economy of the former Soviet Union (FSU) readjusted to free-market conditions, it contracted significantly, resulting in a 20% decline in demand.
Central and South America were plagued by a prolonged recession as countries in the region struggled with hyperinflation and debt burden. During the 1990-91 recession, the Japanese economy began to falter, with the rising value of the yen and subsequent lower exports.
RECOVERY (1992-05)
Since the 1991 economic nadir, demand has increased in all major markets, with the exception of the FSU. This region is in a protracted period of economic contraction.
By 1995, demand will have recovered to 1990 levels in North America and Western Europe. Demand growth has been a steady 2-3%/year since 1991. The recovery in Germany and the U.K. has lagged the other developed countries.
The developing regions exhibited strong growth (34%/year for most developing countries). Central and South American countries exhibited strong growth as a result of a general move toward freer trading markets, increased fiscal and monetary responsibility, privatization of government-owned companies, and improved access to capital.
The Middle East recovered from the Gulf Wars, with demand increases in Iran, Iraq, and Saudi Arabia. In the Asia/Pacific region, most base lube markets grew, notably China, Korea, and India. The exceptions to market growth are the developed countries of Japan and Australia.
OUTLOOK (1096-2000)
The demand outlook during this period is based on the premise of sustained world economic growth. World economies are expected to be strong during this period, as a result of continued reduction in trade barriers, sustained improvements in labor productivity, and capital availability.
The demand forecast for major countries in each region is given in Table 1.(31206 bytes)
NORTH AMERICA
The North American market is dominated by the U.S. The U.S. lubricant market is mature, and overall base lube growth is projected to be 1-2%/year.
Factors affecting growth are: increased oil change intervals, additional lubricant additives, and high-value industrial synthetic lubricants. Continued encroachment is expected by rerefined oil in the low end of the crankcase-refill market segment, and by synthetic oils in the high end.
Base lube demand in Canada is expected to grow faster than in the U.S. And the peso crisis will adversely affect demand in Mexico during 1995. Wright Killen expects Mexican demand to recover by 1997, as this country restructures itself and continues to benefit from the North American Free Trade Agreement,
CENTRAL/SOUTH AMERICA
The countries of South America are expected to grow significantly during the period. Argentina, Brazil, and Chile are in a period of prolonged economic expansion.
Base tube growth is projected to be in excess of 7%/year for the region. Demand will increase from 42,000 b/d in 1995 to 61,000 b/d in 2000.
WESTERN EUROPE
Sluggish growth is projected for Western Europe. Base tube demand in France, Italy, Germany, and the U.K. is expected to grow at 1.0-1.5%/year.
Growth is expected to be stronger in the developing countries of Western Europe such as Spain, Portugal, an Turkey.
EASTERN EUROPE/FSU
The outlook for demand in the FSU is bleak over the next several years. Demand is projected to continue declining through 1997 an begin a modest increase of 1-2%/year after 1997.
Eastern European Countries, such as the Czech Republic, Croatia, Romania, Poland, and Hungary, should experience healthy growth.
MIDDLE EAST/AFRICA
Base tube demand will exhibit continued strength in the Middle East. Iran and Iraq are recovering from the Gulf Wars.
Base tube demand in Saudi Arabia and Egypt will continue to grow as their respective economies improve. South Africa should be a bright spot as trade sanctions are lifted and South Africa joins the global economy.
Demand growth of 45%/year is projected in the region.
ASIA/PACIFIC
Continued strong growth is projected for the major countries in this region, with the exception of Japan and Australia. Regional growth is projected to exceed 3%/year, with the highest volume growth in Korea, India, and China.
Southeast Asia should be one of the strongest growth areas in the world for base tubes.
SUPPLY
Current world nameplate capacity for virgin base tubes is 825,000 b/d, with another 20,000 b/d of re-refined tubes capacity. Base tube capacity currently is concentrated in the developed countries; however, the shift is toward adding capacity in high-growth areas (developing countries).
Regional supply capabilities, as a percentage of total capacity, are:
- North America, 28%
- Eastern Europe/FSU, 23%
- Asia/Pacific, 19%
- Western Europe, 17%
- South America, 7%
- Middle East/Africa, 6%
A detailed, plant-by-plan listing of base lube capacities is given in Table 2.(142889 bytes)
Table 3 (19038 bytes) presents a listing of re-refined lube capacity for major countries.
Wright Killen has identified 152 virgin base lube plants worldwide. Media plant size is 5,000 b/d. The distribution of plants, by size, is shown in Fig. 2.(23581 bytes)
Announced capacity additions for virgin base lubes and re-refined oils are, respectively, 57,000 b/d and 17,000 b/d, for a total of 75,000 b/d (Table 4).(42266 bytes) About half of the announced capacity is in developing countries (Table 3).(19038 bytes)
HYDROCRACKING
The two largest planned additions, by Petro-Canada Inc. and a joint venture of Conoco Inc. and Pennzoil Products Co., will employ severe hydrocracking technology. This technology produces a superior base lube for most applications.
Hydrotreated lubes generally have better viscosity characteristics than solvent-refined lubes, although not as good as those of polyalphaolefins (PAO) synthetic lubes.
As performance requirements become more stringent and additive technology reaches its technical limits for solvent-refined lubes, hydrotreated base lobes will continue to penetrate traditional solvent-refined lobe markets.
RE-REFINED LOBES
The re-refined lobes market continues to grow as re refiners educate consumer about the suitability, quality and performance characteristics of re-refined oils Advances in processing an additive technology hay provided re-refiners a opportunity to penetrate low-end market segment that are price-sensitive.
Marketers of re-refined oils hope to appeal to the environmentally conscious consumer by stressing the environmental recycling attributes of these oils.
NATURAL OILS
Solvent-refined Tubes also are under attack by natural oils in biodegradable, low-temperature applications. Western Europe is the pacesetter, well ahead of the U.S., in mandating biodegradation specifications for lubricants.
Vegetable oils are penetrating low-temperature market segments - such as metalworking fluids, hydraulic fluids, or two-cycle engine oils - that require a high degree of biodegradability.
SYNTHETIC LUBES
Synthetic lubricants represent less than 1% of the U.S. market, but this is a high-growth segment of the market. PAOs and perfluorinated polyethers (PFPE) are major synthetic lubricants in use today.
Synthetic lubricants are penetrating high-end industrial market segments, such as sealed-for-life bearings, aviation turbines, and industrial compressors. PAO is penetrating the crankcase market by positioning the oil as adding value through reduced engine wear and fewer oil changes.
The primary constraint to PAO growth may be the availability of the raw material (C10 alphaolefins), unless alternative olefins can be used for PAO production, or a more selective linear alphaolefin process is developed to produce C10 alphaolefins.
PFPE will continue to penetrate low volume, high-value-added market segments.
REGIONAL BALANCE
Fig. 3 (29248 bytes) shows world supply and demand based on nameplate capacity. The data include announced expansions, capacity creep, and Wright Killen's assessment of plant shutdowns. Effective capacity is plant-specific and, for the purposes of this article, only nameplate capacity is presented.
The outlook for base lubes, on a worldwide basis, is robust. There are, however, significant differences among the regions, with respect to effective capacity.
NORTH AMERICA
There has been a significant excess of capacity in North America. The region historically has been a net exporter of base lubes, primarily to Asia/Pacific and South America.
The Petro-Canada and Conoco/Pennzoil additions will account for an additional 23,000 b/d of capacity. In addition to the base lube expansions, 10,000 b/d of additional re-refined lubes capacity is planned.
After the new capacity comes on stream, 16,000 b/d of existing capacity will be at risk. These old, inefficient plants are relatively easy to shut down.
North America's base lobe supply/demand is shown in Fig. 4.(23696 bytes)
The region will continue to be long on capacity and a major exporter, with increasing exports to South America and Asia/Pacific.
Analysis of North American capacity is complicated by naphthenic base lube capacity.
Naphthenic base lube processing capacity represents 50,000 b/d out of a total 250,000 b/d of capacity in North America. Naphthenic lubes plants can operate at lower rates than paraffinic base tube plants while remaining economical.
Naphthenic lube processing can be accomplished at a lower cost than paraffinic tube processing, because of its lower level of complexity and processing intensity. Naphthenic lube plants also are older, fully depreciated facilities that require minimal sustaining capital investment.
Demand for naphthenic lubricants is expected to decline because of safety and environmental concerns, and encroachment by natural oils and paraffinic lubes into traditional naphthenic markets. Operating rates for naphthenic plants are expected to decline, in spite of the capacity remaining on stream.
CENTRAL/SOUTH AMERICA
As the economies of Central and South America recover, the region is expected to rely increasingly on imports. Announced capacity additions will be insufficient to meet the needs of the growing market (Fig. 5).(24670 bytes)
Most of the shortfall will be met by imports from North America and by incremental expansions in the region.
WESTERN EUROPE
With modest base tube growth and capacity rationalization, Western Europe's operating rates should improve by the late 1990s (Fig. 6).(24819 bytes) Over the next 2 years, 15,000 b/d of base lobe capacity is expected to be rationalized.
Western Europe will continue to be a major exporter to Africa, South America, and Asia/Pacific.
EASTERN EUROPE/FSU
There will be a significant excess of capacity in the region through 2000 (Fig. 7).(25435 bytes) Between 1998 and 2000, 15,000-20,000 b/d of capacity rationalization is expected at old, inefficient base tube plants.
The timing and extent of the economic turnaround in the FSU is the subject of considerable speculation.
MIDDLE EAST/AFRICA
This region will continue to be chronically short of base tubes (Fig. 8).(25946 bytes) Capacity expansions are planned in Iran, Saudi Arabia, and Egypt.
Another major base lube facility is expected to be constructed in the Middle East by the end of the decade.
ASIA/PACIFIC
This region will continue to be a net importer of base tubes through 2000 (Fig. 9).(26193 bytes) Capacity additions are planned for China, Korea, and Indonesia.
As additional refining capacity is constructed in the region, several of the new refineries are expected to include medium-sized base lube plants (2,000-4,000 b/d) in their expansion plans.
FUTURE
Base lubes will present opportunities for some refiners to enhance performance. The refiners most likely to benefit are those that can incrementally expand with minimal capital and have strong feedstock and marketing positions.
Grassroots base lube plants will be limited to expansions in countries or regions that are growing rapidly, have adequate infrastructure to support base lubes operation, and are importers of base lubes.
Copyright 1995 Oil & Gas Journal. All Rights Reserved.