Group I Base Oils

GROUP I BASE OILS
Do They Have a Future?

Wayne Leiker
CITGO Petroleum Corporation
Acknowledgements
Afton Chemical
Chevron Oronite
ICIS LOR
Infineum USA
Kline and Company
Lithcon / SK
PDVSA
Petroleum Trends International
Purvin & Gertz
Business Environment
Global Background Information
Quality requirements vary greatly

across the world markets
Worldwide Finished Lubes Quality Requirements
EUROPE
NORTH AMERICA
FSU
+ 1-3
(10-12)
even
ASIA/PACIFIC
AFRICA
(8-10)
SOUTH AMERICA
(8-10)
M. EAST
(8-10)
even
Years ahead (+) / behind (-)U.S.

Source: PDVSA

Emerging country growth is

expected to average 1.5-2.0%
The China Factor
Economic growth spurring energy and
petrochemical demand
Accounted for 40% of the world's growth in oil demand between
2000 and 2003
Driving petrochemical production rates to 100%+ - purchasing
almost every incremental PC production pound
In 2001, only seven of every 1,000 people in China owned a car.
By 2030 half the country is expected to be driving.
China is becoming a strategic purchaser of oil, gas,

and petrochemicals
Source: Chevron Oronite
WORLD LUBRICANT CONSUMPTION
Period Annual
Growth Rate
1.9%
1.2%
MB/D
1.7%
2.2%
0.3%
0.3%
1995
2000
North America
Africa/Middle East
2005
2010
Western Europe
Eastern Europe/FSU
2015
Asia
Latin America
Source: Purvin & Gertz
Asia/China Leads Future Lubricants Growth in Demand and Volume
World Paraffinic Base Oil Demand Estimates (Constant Production)
NORTH AMERICA
TOTAL
YEAR:
2004 2008 2012
FSU
EUROPE
ASIA/PACIFIC
AFRICA
SOUTH AMERICA
M. EAST
Includes all announced expansions including E/M GTL but not Shell or ChevTex GTL
Source: PDVSA


Demand in North America and Western Europe is

essentially flat, with automotive sector demand
declining in Europe


Demand in North America and Western Europe is

essentially flat, with automotive sector demand
declining in Europe
In summary, global demand is growing at about

1.1% annually, driven primarily by Asia/China
U.S. Background Information
U.S. Finished Lubes demand is essentially flat.
U.S. Lubricant Demand MMBPD
180
160
140
120
100
80
60
40
20
Other Automotive Oils
Industrial Oils
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
Number of major finished lubes competitors

is shrinking.
U.S. Finished Lubes Only Pre-Mergers (1998)
Share of Market
10%
14 Primary Competitors with the

largest companies relatively close
in market share
5%
0%
Sun
Source: Kline Data
Quaker
State
Amoco
U.S. Finished Lubes and Process Oils Combined
Share of Market
20%
7 Primary Competitors with

the top three having 44% share
vs 22% Pre-mergers
15%
10%
5%
0%
Quaker
State
Volumes estimated from 2001 market volumes, Kline report and NPRA data.
Includes finished lubricants and process oils; does not include base oils.
Number of major finished lubes competitors is

shrinking.
US specifications rapidly changing.
PC-9 in 2003
GF-4 in 2004/05
Dexron III-H in 2005
PC-10 in 2008
GF-5 in 2009
180
160
140
120
100
80
60
API,
SG
40
20
GF-3,
API, CH4
GF-2
GF-5,Mack
EON 03,
Cat ECF-1,
PC-10
GF-4, CI-4
Mercon V,
Volvo,
VDS III,
Dexron III-H
ILSAC GF-6,
HD, PC-11,
Dexron X
Industrial Oils
Number and frequency of specification changes

have increased dramatically.
15
20
13
20
11
20
09
20
07
20
05
20
03
20
01
20
99
19
97
19
95
19
93
19
91
19
89
19
87
19
19
85
PCMO Trends Quality
2004
2008
2012
GF-4/SM
GF-3/SL
GF-5
GF-4/SM
GF-5/SN
SJ
SH & Prior
SM
SL
SJ & Prior
SL & Prior
9 GF-4 entering July 2004 mandatory 2005, GF-5 entering Mid 2008 and mandatory 2009
9 Quality change forecasted on 3 year historical transition to (70% use of) new specification
entering the market and considering some resistance due to backward applicability
PCMO Trends Viscosity Grade
2004
2008
10w30
2012
10w30
10w30
5w30
Others
Others
5w30
5w20
0wX
5w30
5w20
Others
5w20
0wX
9 Viscosity grades shifts forecasted based on OEMs recommendation for vehicles 2004+
(5W30 and lowers) to support new warranties (7 years or 70.000 miles) and evolution of
overall vehicle population (national fleet change average age of 10 years)
HDEO Trends Quality
2004
2008
2012
CF/CF-2
CF/CF-2
CF/CF-2
CH-4 &
Prior
CI-4 & Prior
CI-4
PC-10 or CJ-4
CJ-4 & Prior
PC-11 or CK-4
9 PC-10 entering 2007, PC-11 entering 2011. Conversion forecasted to follow 1 year
historical transition to 100% of new specification
9 Quality change based on projected response to future environment regulations and
new engine technology such as EGR
HDEO Trends Viscosity Grade
2004
Others
10w30
2012
2008
10w30
5w30/40
Mono
Mono
Mono
5w30/40
10w30
15w40
15w40
15w40
9 Viscosity grade shift primarily based on pressure for fuel saving toward the end of the
forecasted period. Today OEMs more concentrated on engine technology to meet
environmental regulations
Number of major finished lubes competitors is

shrinking.
US specifications rapidly changing.
PC-9 in 2003
GF-4 in 2004/05
Dexron 3H in 2005
PC-10 in 2008
GF-5 in 2009
Result: Increasing demand for

higher quality base oils
180
160
140
120
100
80
5W Effect
60
40
20
5 W Automotive Oil
Industrial Oils
20
15
20
13
20
11
20
09
20
07
20
05
20
03
20
01
19
99
19
97
19
95
19
93
19
91
19
89
19
87
19
85
Short Term Crank Case Specification Changes Impact
2002 Crank Case Base Oil
Demand
Gr III
2007 Crank Case Base Oil Demand

Gr III
Other
Other
Gr I
Gr II+
Gr I
Gr II
Total Volume = 1076 MM Gallons

Source: Petro Trends International
Gr II+
Gr II
North American Base Oil Capacity
Capacity (MBPD)
250
API Group II,III

API Group I
200
150
100
50
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
Source: NPRA
For Group I Producers, This Is

Not A Pretty Picture Is It ?
What Options Do They Have?
Future Options
Future Options
Exit The Business
Future Options Exit
Historically, Base Oil Prices Lag Crude Moves

Future Options Exit
US Avg Light Base Oil
Source: ICIS LOR
WTI
O-04
S-04
A-04
J-04
WTI Price ($/BBL)
20
J-04
0.70
M-04
25
A-04
0.90
M-04
30
F-04
1.10
J-04
35
D-03
1.30
N-03
40
O-03
1.50
S-03
45
A-03
1.70
J-03
50
J-03
1.90
M-03
55
A-03
2.10
M-03
60
F-03
2.30
J-03
Base Oil Price ($/gallon)
US Light Base Oil vs. WTI
Future Options Exit
CITGO
Relative Cost Position ($/BBL)
Large Amount of Capacity with relative higher costs than CITGO
Lower Relative Cost

Base Oil Capacity (MBPCD)
Future Options Exit

Competitive View of Base Oil Refining - Current
Refineries Shut Down Since 1998
34 MBPD Capacity (19%)
Considerably less capacity with
relative higher costs than CITGO
CITGO
Lower Relative Cost

Base Oil Capacity (MBPCD)
Future Options
Exit The Business

Change Your Product(s)
Future Options Change

Change Product Quality
Change Crude Slate
Base Oil Impact
Dewaxed VI (-12 oC)
Dewaxed VI Capability of Crude Oils

100
90
80
70
60
50
40
30
20
10
0
California Light
Alaska North
Slope
West Texas
Interm ediate
Arab Light
Brent
Pennsylvania
Crude Type
(Source NPRA FL 94-112)

Not All Group Is Are Created Equal
90.0
API Group I, S120N to S170N
Saturates Content, wt%
85.0
Group I+
80.0
Inc
re
75.0
as
ing
P
70.0
65.0
14.0
15.0
16.0
erf
orm
an
ce
17.0
NOACK Volatility, wt%

Source: Lithcon/SK
18.0
19.0
20.0

Group I+ Base Oil Formulations
Group I+/II+ 5W30
GF-4 Blend
Group I+/III 5W30

GF-4 Blend
Add.
Add.
Gr I+
Gr III
Gr I+
Gr II+
Allows Maximizing Group I+ Content of GF-4 Blends

Change Crude Slate
Base Oil Impact
Wax Impact

Wax Content of Crude Oils
% Wax in Whole Crude
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
SLS
Brent
WTI
Eko-Fisk
Palanca
Bancroft
Norne

Historical Pricing Information
2.25
Price ($/US Gal)
2.00
1.75
1.50
1.25
1.00
0.75
LSVGO
Avg. Base Oil
04
Se
p-
ay
-0
4
Ju
l-0
4
04
ar
M
Ju
l-0
3
Se
p03
N
ov
-0
3
Ja
n04
Ja
n03
M
ar
-0
3
M
ay
-0
3
2
ov
-0
N
02
Se
p-
ay
-0
2
Ju
l-0
2
0.50
125/140 MP Wax
Wax Market Historically Has Been A Very Stable Market

Source: ICIS LOR

Worldwide Forecast Wax Balance (MTM/Y)
TOTAL
YEAR: 2004 2008 2012
NORTH AMERICA
EUROPE/FSU/ME
CHINA
AFRIC
A
LATIN AMERICA
Source: PDVSA
ASIA/PACIFIC

Change Crude Slate
Base Oil Impact
Wax Impact
Bright Stock Impact

Historical Spot Base Oil Differentials
( Versus LSVGO/LSFO)
1.40
Differential ($/US Gal)
1.20
1.00
0.80
0.60
0.40
0.20
Ja
n-
98
A
pr
-9
8
Ju
l-9
8
O
ct
-9
8
Ja
n99
A
pr
-9
9
Ju
l-9
9
O
ct
-9
9
Ja
n00
A
pr
-0
0
Ju
l-0
0
O
ct
-0
0
Ja
n01
A
pr
-0
1
Ju
l-0
1
O
ct
-0
1
Ja
n02
A
pr
-0
2
Ju
l-0
2
O
ct
-0
2
Ja
n03
A
pr
-0
3
Ju
l-0
3
O
ct
-0
3
Ja
n04
A
pr
-0
4
Ju
l-0
4
O
ct
-0
4
0.00
Avg. Light Base Oil
Bright Stock (LSVGO)
Bright Stock (LSFO)
Source: ICIS LOR
Bright Stock Holding/Gaining Differential in 2004 Marketplace

Change Crude Slate
Base Oil Impact
Wax Impact
Bright Stock Impact
Change Extraction Level

Extraction Unit Yield Data
Volume Percent Yield
60
55
50
45
40
35
30
88
90
92
94
96
Viscosity Index (VI)
Very Expensive Alternative
98
100

Change Crude Slate
Base Oil Impact
Wax Impact
Bright Stock Impact
Fractionation Changes

Not All Group Is Are Created Equal
90.0
API Group I, S120N to S170N
Saturates Content, wt%
85.0
Group I+
80.0
Inc
re
75.0
as
ing
P
70.0
65.0
14.0
15.0
16.0
erf
orm
an
ce
17.0
NOACK Volatility, wt%

Source: Lithcon/SK
18.0
19.0
20.0

Group I+ Base Oil Formulations
Group I+/II+ 5W30
GF-4 Blend
Group I+/III 5W30

GF-4 Blend
Add.
Add.
Gr I+
Gr III
Gr I+
Gr II+
Allows Maximizing Group I+ Content of GF-4 Blends

Change Crude Slate
Base Oil Impact
Wax Impact
Bright Stock Impact
Fractionation Changes
Add Hydroprocessing Facilities

Group II/II+ Posted Differentials Over Group I
(100 to 150 Vis)
Differential ($/ US Gal)
0.45
0.40
0.35
0.30
0.25
0.20
0.15
0.10
0.05
Group II Differential
Group II+ Differential
Source: ICIS LOR
Current Hydroprocessing Project Economics are Declining
Oct-04
Aug-04
Jun-04
Apr-04
Feb-04
Dec-03
Oct-03
Aug-03
Jun-03
Apr-03
Feb-03
Dec-02
Oct-02
Aug-02
Jun-02
Apr-02
Feb-02
Dec-01
Oct-01
0.00
Future Options
Exit The Business

Change Your Product(s)
Adapt to Different or New Markets
Future Options Adapt

Adapt to Different and/or New Markets
Replace Group IIs in Some Markets

Short Term Crank Case Specification Changes Impact
2002 Crank Case Base Oil
Demand
Gr III
2007 Crank Case Base Oil Demand
Other
Gr III
Other
Gr I
Gr II+
Gr I
Gr II

Gr II+
Gr II

2007 Other Base Oil Demand
Gr III
Naph
Gr II+
Other
Gr II
Gr I


2007 Metal Working Fluid
Base Oil Demand
Naph
Other
Gr I
Gr II

Replace Naphthenics/Aromatic Extracts in
Process Oil Markets

Worldwide Forecast Naphthenic Base Oils Balance, (MBD)
TOTAL
NORTH AMERICA
YEAR:
EUROPE
2004 2008 2012
FSU
ASIA/PACIFIC
AFRICA
SOUTH AMERICA
Source: PDVSA
M. EAST

2007 Process Oil Base Oil Demand
Arom Ext
Other
Gr I
Gr II
Naph


Process Oil Markets
Develop Niche Market Applications

After Market Applications (Unlicensed)
PCMO
HDEO
ATF

After Market Applications (Unlicensed)
PCMO
HDEO
ATF
New Markets Such As High Mileage

Products That May Not Require Licensing

Process Oil Markets
Enter and/or Increase Export Business
Finished Lubricants
Base Oils

Worldwide Finished Lubes Quality Requirements
EUROPE
NORTH AMERICA
FSU
+ 1-3
(10-12)
even
ASIA/PACIFIC
AFRICA
(8-10)
SOUTH AMERICA
(8-10)
M. EAST
(8-10)
even
Years ahead (+) / behind (-)U.S.

Source: PDVSA

Latin America Lubricant Supply/Demand Balance
Net Imports
Thousand Barrels per Day
Production
Consumption
1995
2000
2005
2010
2015
n9
Ju 5
lJa 95
n9
Ju 6
lJa 96
n9
Ju 7
lJa 97
n9
Ju 8
lJa 98
n9
Ju 9
l-9
Ja 9
n0
Ju 0
l-0
Ja 0
n0
Ju 1
lJa 01
n0
Ju 2
lJa 02
n0
Ju 3
lJa 03
n0
Ju 4
l-0
4
Ja
Price ($/US Gal)

Historical Global Light Base Oil Prices
1.80
1.60
1.40
1.20
1.00
0.80
0.60
AP Light Avg
Source: ICIS LOR
Europe Avg
US Light Avg
n9
Ju 5
l-9
Ja 5
n9
Ju 6
l-9
Ja 6
n9
Ju 7
lJa 97
n9
Ju 8
lJa 98
n9
Ju 9
lJa 99
n0
Ju 0
lJa 00
n0
Ju 1
lJa 01
n0
Ju 2
lJa 02
n0
Ju 3
lJa 03
n0
Ju 4
l-0
4
Ja
Price ($/US Gal)

Historical Global Bright Stock Prices
2.20
2.00
1.80
1.60
1.40
1.20
1.00
AP
Source: ICIS LOR
Europe
US
Conclusions
Group I Base Oils are here to stay.
Significant production will remain in place globally
Preferred base oil for most Industrial and Grease
formulations
Developing country quality requirements will allow
continued use
Numerous factors will improve Gr I plant

viability:
Crude Source (Group I+, Wax, Bright Stock)
Hardware (Group I+, Yields, Operating Costs)
Location (Marine Capabilities)
Conclusions
Group I+ base oils will continue to be
useable:
Large degree in GF-4 oils and possibly some into GF-5
oils
100% in CI-4 oils and possibly some into PC-10 oils
Better diluent oil for additives. VM and DI packages
tend to be more soluble in Group I than Group II
Maximizing other products will improve plant

viability:
Wax market projected to be in a deficit
Bright Stock market will continue to tighten w/plant
closures
Conclusions
Replacement opportunities may develop for
Group II base oils in:
Industrial and other oil markets
Process oil markets
Niche markets
If global growth estimates are valid, export

opportunities should be available for:
Finished lubricants of older(lower) quality requirements
Base oils
Conclusions
UNTIL
GTL

Group I Base Oils

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GROUP I BASE OILS

Do They Have a Future?

Quality requirements vary greatly

Years ahead (+) / behind (-)U.S.

Quality requirements vary greatly

Emerging country growth is

China is becoming a strategic purchaser of oil, gas,

Source: Chevron Oronite

Source: Purvin & Gertz

Asia/China Leads Future Lubricants Growth in Demand and Volume

2004 2008 2012

Quality requirements vary greatly

Emerging country growth is

Demand in North America and Western Europe is

Quality requirements vary greatly

Emerging country growth is

Demand in North America and Western Europe is

In summary, global demand is growing at about

U.S. Finished Lubes demand is essentially flat.

Other Automotive Oils

Source: Purvin & Gertz

U.S. Finished Lubes demand is essentially flat.

Number of major finished lubes competitors

14 Primary Competitors with the

Source: Kline Data

7 Primary Competitors with

U.S. Finished Lubes demand is essentially flat.

Number of major finished lubes competitors is

Other Automotive Oils

Number and frequency of specification changes

CI-4 & Prior

CJ-4 & Prior

U.S. Finished Lubes demand is essentially flat.

Number of major finished lubes competitors is

Result: Increasing demand for

Other Automotive Oils

Source: Purvin & Gertz

2007 Crank Case Base Oil Demand

Total Volume = 1076 MM Gallons

Total Volume = 1077 MM Gallons

API Group II,III

For Group I Producers, This Is

Exit The Business

Future Options Exit

Historically, Base Oil Prices Lag Crude Moves

Future Options Exit

US Avg Light Base Oil

Source: ICIS LOR

WTI Price ($/BBL)

Base Oil Price ($/gallon)

US Light Base Oil vs. WTI

Future Options Exit

Relative Cost Position ($/BBL)

Large Amount of Capacity with relative higher costs than CITGO

Lower Relative Cost

Future Options Exit

Lower Relative Cost

Exit The Business

Future Options Change

Future Options Change

Dewaxed VI (-12 oC)

Dewaxed VI Capability of Crude Oils

Future Options Change