The global base oils market is going through a structural change in the face of more advanced emissions and quality requirements across numerous markets including the shipping, industrial and automobile sectors.
Base oils are used alongside additives to produce lubricants for engines. The lubricants primarily come from Group I, II and III base oils, with the quality of the base oil improving as the group number increases.
Group I base oils are the cheapest of the base oil grades and are produced through solvent refining, while Group II are formed through hydrocracking and Group III through severe hydrocracking.
Advanced emissions and quality requirements are causing a move away from Group I lubricants, the cheapest but lowest quality base oil grade, towards higher quality Group II and Group III grades.
As a consequence, the global base oil market is changing its traditional trade routes around the world, particularly now that ExxonMobil started Group II base oil shipments from its Rotterdam refinery in the first half of this year. Traditionally, European suppliers have imported Group II product from Chevron in the United States, but competitive pricing and higher European availability are encouraging buyers to secure European product instead.
Group I plants have been closing across the global market in recent years because of the reduced demand for lower quality base oil formulations. Production costs for Group II and Group III grades have also dropped in recent years, making the price saving of Group I base oils less appealing.
Group II and III base oils have a wider range of uses than Group I because they have lower viscosity, lower sulfur content and have a higher saturation of chemical bonds. Higher bond saturation gives a base oil better anti-oxidation properties, which reduces wear on engine components and results in an extended range before changing lubricants.
Falling demand for Group I base oils and increasingly competitive prices in the global Group II market are creating downward pressure on Group I prices.
Recent legislation changes in the automobile and shipping sector have also had a major impact on Group I demand.
The European Automobile Manufacturers Association has set efficiency and emissions regulations for car manufacturers in Europe, which led to higher demand for Group II and Group III lubricants. The Group II and III formulations have a lower sulfur content, allow for increased engine efficiency and extend the period between lubricant changes.
The shipping sector has seen a similar push to reduce harmful emissions. The International Maritime Organization’s 2020 0.5 percent sulfur cap means the world’s shipping sector is moving away from high sulfur and high viscosity fuel oils and towards lower sulfur and lower viscosity distillates. These fuel changes call for new lubricants that are low in sulfur and that work correctly with a range of fuels that vary in viscosity. Suitable lubricants are largely found in the Group II base oil sector.
ExxonMobil has expanded into the Group II market through a $1 billion dollar hydrocracker expansion at their Rotterdam refinery, which has significantly improved Group II availability in Europe.
Exxon’s Group II push in Europe means the oil major has Group II product available from their main hub in Rotterdam and smaller hubs in Valencia, Vado, Liverpool and through distributors in Dubai and Durban.
Despite the world’s base oil industry progressing towards more advanced Group II and III formulations, Group I is not completely finished as a market because the less-advanced grade has some unique properties.
Group I has viscosity and solvency properties that Group II and III struggle to meet, and demand will remain for Group I so long as it is still the cheapest grade to buy.
Group I production produces a high-viscosity base oil grade called brightstock, which Group II and Group III production are unable to create. Brightstock is required as a blending component for specialist applications, such as a thickener for marine fuel lubricants, for use in older engine types as well and many other niche applications. A consequence of reduced Group I production is that brightstock supplies are facing greater levels of global tightness.
Brightstock demand is diminishing, but not at the same rate that production is falling. This shortfall leaves a number of Group I suppliers expecting to maximize brightstock production in the future as the market tightens further.
Looking forward, expect to see more Group II product within Europe as Exxon steps up production, which is likely to slow demand for Group II product from the United States.