Group II Base Oil Exporters Wait on European Tariff Decision

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Importers of Group II base oil into Europe may have to start paying a tariff if the current waiver is not extended beyond December. European production, meanwhile, could influence trans-Atlantic flows.

A working group within the European Commission met earlier this month to discuss whether to extend a tariff waiver, which currently allows Group II base oils to come into the EU without a 3.7 percent duty until December. Now that Exxon Mobil is producing Group II products at its Rotterdam refinery, the European Commission is considering amending the waiver to support domestic production.

The changes are facing opposition from industry bodies, who are in favor of extending the waivers to increase competition and to ensure enough supply for a market with increasing demand. The European Commission may settle on a quota as a compromise, which would mean only a certain amount of Group II products would be able to enter Europe free from tariffs. Discussions are still ongoing.

Tariff changes would have the biggest impact on US Group II suppliers, which deliver the largest volume of Group II products to Europe. Last year, the US exported well over 500,000 tons of Group II products to Europe. Chevron is the largest US exporter of Group II to Europe.

The introduction of Exxon’s Group II production in Rotterdam since February has had little impact on US exports to Northwest European so far. Imports from the US into Northwest Europe stood at 302,104 tons from January to August last year and are 62,452 tons higher so far this year. The volume this month is on track with September 2018 levels of 49,138 tons.

Increased demand for Group II products in Europe is in part supported by the automotive industry, which has more stringent engine performance requirements that need more complex lubricants, while the 2020 IMO sulfur cap is also supporting demand for more advanced formulas to be run alongside the new 0.5 percent sulfur fuels. The demand increases for lubricants designed to run with the new low sulfur fuels will fully kick in on January 1 when the regulation is implemented, although a significant number of shipowners will begin the switch in the fourth quarter to ensure they are fully compliant before the deadline.

The combination of increasing volumes from Exxon’s Group II Rotterdam refinery into the European market this year and the potential for Group II import tariffs into Europe from the start of 2020 could lead to declines in Group II volumes from the US to Europe next year.