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ASIA LUBRICANTS 2006 20-21 April 2006 THE ASIAN BASE OIL MARKET Tony Regan TRI-ZEN International
ASIA LUBRICANTS 2006
20-21 April 2006
THE ASIAN BASE OIL MARKET
Tony Regan
TRI-ZEN International Pte Ltd
Singapore
THETHE ASIANASIAN BASEBASE OILOIL MARKETMARKET
THETHE ASIANASIAN BASEBASE OILOIL MARKETMARKET

THE BASE OIL MARKET IN ASIA

SUPPLY & DEMAND AND HOW INNOVATIVE AND FUTURE TRENDS MAY IMPACT THE MARKET

The evolution of premium baseoil markets in the USA and Europe and likely evolution in Asia The globalisation of the baseoil market and its impact on Asia Pacific New Asian baseoil capacity Supply & demand in Asia Pacific to 2015 Demand drivers for premium baseoils in Asia Pacific How GTL baseoils might impact the market Conclusion

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THETHE ASIANASIAN BASEBASE OILOIL MARKETMARKET
THETHE ASIANASIAN BASEBASE OILOIL MARKETMARKET
THETHE ASIANASIAN BASEBASE OILOIL MARKETMARKET THE EVOLUTION OF PREMIUM BA SE OIL MARKETS IN THE USA
THETHE ASIANASIAN BASEBASE OILOIL MARKETMARKET THE EVOLUTION OF PREMIUM BA SE OIL MARKETS IN THE USA

THE EVOLUTION OF PREMIUM BASE OIL MARKETS IN THE USA

THE EVOLUTION OF PREMIUM BA SE OIL MARKETS IN THE USA No longer possible to produce

No longer possible to produce a full range of PCMO and HDD lubes using Group I basestocks

Extended performance and emission reduction requirements require baseoils with higher VI, lower sulphur and lower volatility. Emission requirements will require vehicles to be fitted with exhaust after treatment systems which in turn leads to lube chemical and sulphur limits.

API SJ-SM PCMO’s and CG-4 HDDO are formulated using Group II/II+ baseoils. Chevron’s hydrocracking and isodewaxing technology led market towards Group II baseoils. No Group III production in USA Group II/II+ production currently 103 k b/d (55% of North American production) and expected to reach 126 k b/d by 2010 Leading producers Chevron, Exxon Mobil, Motiva USA long Group I baseoil. Exports Group I, in particular, to S.America, and imports Group II (Singapore) and Group III (Korea and Canada)

and imports Group II (Singapore) an d Group III (Korea and Canada) Asia Lubricants 2006, Singapore
and imports Group II (Singapore) an d Group III (Korea and Canada) Asia Lubricants 2006, Singapore
and imports Group II (Singapore) an d Group III (Korea and Canada) Asia Lubricants 2006, Singapore
and imports Group II (Singapore) an d Group III (Korea and Canada) Asia Lubricants 2006, Singapore

Asia Lubricants 2006, Singapore

20-21 April 2006

and imports Group II (Singapore) an d Group III (Korea and Canada) Asia Lubricants 2006, Singapore
THETHE ASIANASIAN BASEBASE OILOIL MARKETMARKET
THETHE ASIANASIAN BASEBASE OILOIL MARKETMARKET

EVOLUTION OF THE EUROPEAN PREMIUM BASE OIL MARKET

Quality and environmental pressures arose earlier than USA. Introduction of Euro 4 emission controls triggered move to premium baseoils. Euro refinery configuration and crude mix tended to produce a better Group I than in North America and Group II would require more severe operations than in North America. Preference is to meet requirements by blending Group I & III. Ten Group I plants shut since 1990. One new refinery – Porovoo, Finland producing Group III. Current European production 7.1 mill tonnes (92% Group I) Supply currently tight as refiners are maximising fuel production. Consideration being given to importing Group II particularly for HDMO. USA a likely source following Motiva’s expansion. Could back out substantial Group I or trigger further closures of old plants

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EVOLUTION OF THE ASIAN PREMIUM BASE OIL MARKET

Substantial baseoil capacity concentrated in Japan, China and Singapore. 30% of global supply. One third of production is Group II or Group III despite technical need, outside Japan, still being mainly Group I. Substantial exports of Group III from Korea and Group II from Singapore to USA. Imports of Group II by major’s balancing their systems. Low premiums for Group II baseoils and lower additive costs has led to early take up of Group II/III ahead of technical need. Asia adopting Euro emission controls – Australia from 2006 and India/China by 2010. However by using both Group II and Group III it is developing its own model rather than that of Europe or USA. Substantial investment in Group II (India & Taiwan) and Group III (India, Malaysia, Taiwan) could lead to a faster transition to premium lubes as lube producers and vehicle manufacturers seek global uniformity

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THETHE ASIANASIAN BASEBASE OILOIL MARKETMARKET BASE OIL TRADE FLOWS 1995 Asia Lubricants 2006, Singapore 20-21
THETHE ASIANASIAN BASEBASE OILOIL MARKETMARKET
BASE OIL TRADE FLOWS 1995
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THETHE ASIANASIAN BASEBASE OILOIL MARKETMARKET

BASE OIL TRADE FLOWS 1995

Europe the “swing supplier” About 90% of “traded” baseoil originated in Europe Substantial flows from Europe to North East Asia Limited exports from USA to Asia and S.America South East Asia broadly balanced Local balancing activity – S.E. Asia & N.E. Asia Australia exporting Group I to S.E & N.E Asia New Asian capacity in 1997 took region from balanced to long 1998 financial recession reduced Asian lube demand resulted in exports of Asian baseoil

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WORLDWORLD BASEBASE OILOIL MARKETMARKET 20052005

Group V (Esters), 0.1 mill tonnes

Group IV (PAO), 0.4 mill tonnes
Group IV (PAO), 0.4 mill
tonnes

Group III, 0.95 mill tonnes

Group II, 7 mill tonnes

Group 1, 34 mill tonnes

Source: Neste

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THETHE ASIANASIAN BASEBASE OILOIL MARKETMARKET BASE OIL TRADE FLOWS - 2005 Group I Group II/III
THETHE ASIANASIAN BASEBASE OILOIL MARKETMARKET
BASE OIL TRADE FLOWS - 2005
Group I
Group II/III
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BASE OIL TRADE FLOWS 2005

Europe still the “swing supplier”. India remains the major importer Group II/III capacity is 20% of world capacity whilst technical demand only 16%. Regular Group I supplies from US into Asia, West Africa and S.America Korea becomes a major source of baseoil:

Substantial exports of Group III to US to such an extent that Korea becomes prime source of Group III in USA Korea Group II/III also moving to Europe, India and South East Asia.

ExxonMobil exporting Group II from Singapore to USA but other majors importing US Group I (particularly Brightstock) and Group II into Asia Lower Group I exports from China. Exporting some Group II but using most domestically. Majors importing some Group II. China effectively balanced Russian supplies to Asia substantial but moderating due to stronger competition from Iran. Iran become substantial suppliers into India and S.E. Asia Sizeable trade flows balancing N.E. Asia and S.E. Asia

Asia becoming a supply/trading centre with some two-way movements

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THETHE ASIANASIAN BASEBASE OILOIL MARKETMARKET BASE OIL TRADE FLOWS – A 2010 SCENARIO Gp III
THETHE ASIANASIAN BASEBASE OILOIL MARKETMARKET
BASE OIL TRADE FLOWS – A 2010 SCENARIO
Gp III
Gp II
GTL
GP II/III
Group I
GTL Base oil
Group II/III
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THETHE ASIANASIAN BASEBASE OILOIL MARKETMARKET BASE OIL TRADE FLOWS – A 2010 SCENARIO Motiva Port Arthur,

BASE OIL TRADE FLOWS A 2010 SCENARIO

Motiva Port Arthur, the largest base oil plant in the world (40,000 b/d). USA becomes a substantial exporter of Group II, particularly to Europe Imports of US Group II into Europe back out Group I. This goes to Eastern Europe, Africa, South America, Middle East and India. Korean expansion leads to even more exports of Group III to USA but also India and Europe Malaysian Group III production means Malaysia/Singapore become export hubs for Group II/III GTL baseoil exports have started from Qatar. Russian exports increase. Lukoil planning to double Group III production in 2007 and open new Group II+/III capacity by 2010 A global baseoil market is dominated by three major exports hub – USGC for Group II, Korea for Group III and Singapore/Malaysia for Group II/III Qatar becoming the 4 th hub with substantial exports of GTL baseoil

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THETHE ASIANASIAN BASEBASE OILOIL MARKETMARKET WHITHER GROUP I? Global group I capacity has fallen steadily from

WHITHER GROUP I?

Global group I capacity has fallen steadily from about 45 mill tonnes in 1997 to 36 mill tonnes in 2005 However, market not “collapsing* and may still account for about 65% of supply in 2015:

Still the main grade in South America, Middle East, Africa and Asia Group 1 the only source of Brightstock and the base oil of choice for greases and most marine and industrial applications

Most forecasts expect a continued steady decline of Group I production of about 2-2.5% per annum over next decade. However – it could be faster and could be down to 50% of market in

2015:

Refiners not prepared to meet the cost of upgrading old refineries to meet latest environmental and product quality standards Narrow differentials with premium baseoils and the need for more additives may make Group I based lubes less economic than Group II

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WORLDWORLD BASEBASE OILOIL MARKETSMARKETS 20102010 ESTIMATEESTIMATE

Group IV (PAO), 0.31 mill tonnes

Group V (Esters), 0.06 mill tonnes
Group V (Esters), 0.06
mill tonnes

Group III, 3.14 mill tonnes

Group II, 10.8 mill tonnes

Group 1, 30.2 mill tonnes

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BASE OIL CAPACITY EXPANSION 2005-2010 MID EAST/ASIA

 

Start up

Country

Operator

Location

Group II

Group III

 

kt

kt

2006

Korea

SK XOM BPCL GS Caltex CPC FPC Petronas Neste/Bapco MRPL

Ulsan expansion Wakayama expan. Mumbai Yosu Kaohsiung Mai Liao Melaka Manama Mangalore

28.5

85.5

2006

Japan

68.4

2006

India

180

2007

Korea

228

456

2008

Taiwan

208

2008

Taiwan

300

220

2008

Malaysia

312

2008

Bahrain

400

2010

India

250

Total

945

1792

Naphthenic

2007

China

CNOOC

TBN

400

2008

China

PetroChina

Karamay

250

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THETHE ASIANASIAN BASEBASE OILOIL MARKETMARKET ASIAN BASE OIL CAPACITY EXPANSION Asia Lubricants 2006, Singapore 20-21
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ASIAN BASE OIL CAPACITY EXPANSION
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THETHE ASIANASIAN BASEBASE OILOIL MARKETMARKET
18 16 14 12 10 8 6 4 2 0 2000 Mill tonnes
18
16
14
12
10
8
6
4
2
0
2000
Mill tonnes
18 16 14 12 10 8 6 4 2 0 2000 Mill tonnes 2005 Group I
18 16 14 12 10 8 6 4 2 0 2000 Mill tonnes 2005 Group I

2005

Group I Group II Group III GTL baseoil

Group I

Group I Group II Group III GTL baseoil

Group II

Group I Group II Group III GTL baseoil

Group III

Group I Group II Group III GTL baseoil

GTL baseoil

tonnes 2005 Group I Group II Group III GTL baseoil 2010 20-21 April 2006 ASIAN ASIAN

2010

2005 Group I Group II Group III GTL baseoil 2010 20-21 April 2006 ASIAN ASIAN BASE

20-21 April 2006

ASIANASIAN BASEBASE OILOIL CAPACITYCAPACITY 20002000--20102010

April 2006 ASIAN ASIAN BASE BASE OIL OIL CAPACITY CAPACITY 2000 2000 - - 2010 2010

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ASIAN SUPPLY DEMAND BALANCE

 

Mill tonnes Lube demand Base oil supply Base oil surplus

2005

2010

2015

 

12.31

13.50

13.88

12.59

14.97

14.97

0.28

1.47

1.09

A very simplistic chart (excludes additives) which suggests that Asia will continue be a net base oil exporter and that export volumes will grow

Lube demand forecast (Infineum)

 

Asia will be by far the fastest growing lubricant market in the world over the next decade but growth will average only about 1.2% per annum due to the impact of longer oil drain intervals and higher prices (assumes $55 WTI). Longer ODI will have a particularly significant impact on Chinese growth rates.

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EMISSION LEGISLATION CARS

 

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

USA

500ppmsulp

 

15 ppm sulp

 

Japan

500ppmsulp

 

50 ppm sulp

10

ppm sulp

 

EU

Euro3350ppmsulp

 

Euro 4 50 ppm sulp

 

Euro 5 10 ppm sulp

 

Australia

Euro1

Euro2

Euro3

Euro4

 

Bangladesh

Euro1

Euro2

China (BJ & SH

Euro1

Euro2

Euro3

Euro4

China (Others)

Euro1

Euro2

Euro3

HongKong

Euro2

Euro3

Euro4

 

India(maincities)

 

Euro1

Euro2

Euro3

Euro4

India (others)

 

Euro1

Euro2

Euro3

Indonesia

 

Euro1

Euro2

Malaysia

Euro2

Euro4

Philippines

 

Euro1

Singapore

Euro1

Euro2

Euro4

Thailand

Euro1

Euro2

Euro3

Euro4

Vietnam(diesel)

 

Euro1

Euro2

E3

E4

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DEMAND DRIVERS FOR PREMIUM BASE OILS IN ASIA

Technical drivers:

Asia introducing Euro 4 emission standards between 2006-2010 OEM’s required to introduce new emission control systems for diesel vehicles Sulphated ash and sulphur (SAPS) in lubes must be reduced to avoid harming the after treatment devices. Emission regulations/hardware require lube upgrades to API SM (PCMO) and PC-10 (HDEO) These lubes require premium baseoils

Commercial drivers

Lube majors now operate global businesses and have introduced API-SM PCMO’s in Asia at same time as other markets – ahead of technical need Other lube marketers offer premium grades to avoid unfavourable comparisons with international major’s. Low premiums for Group II/III and lower additive costs has led to early take up in Asia

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GTL BASE OIL PRODUCTION - QATAR

 

Operator

Start up

Name

Capacity b/d

Baseoil production b/d

 
 

10%

15%

Sasol/QP Sasol/Chevron Shell/QP ExxonMobil/QP Total bbls/day Mill tonnes

2005

Oryx

34,000

0

0

2009

Oryx

73,500

7,350

11,025

2010

Pearl

140,000

14,000

21,000

2011

154,000

15,400

23,100

401,500

36,750

55,125

 

1.90

2.87

Depending on the technology being utilised a GTL plant can produce 0-30% base oil. Most forecasts expect base oil to represent 15-20% of production but this depends on diesel netback.

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POSSIBLE IMPACT OF GTL BASE OILS

Qatar GTL base oils are likely to come onto the market at a time of increased capacity of Group II and Group III. Asian demand will still be primarily met with Group I as the full impact of Euro 4 will only have begun to kick in by 2010 However diesel market is expected to be very firm. European (EU 17) gasoline, heating oil and fuel oil demand is declining but diesel demand is expected to grow strongly from 140 mill tonnes in 2000 to 200 mill tonnes in 2010. GTL diesel is the perfect product for the ultra low sulphur diesel market Thus GTL plants may start up in max diesel mode with the main market being Europe. Some exports to USA and Japan. GTL base oil production may be cautious, say 10%, to lessen its impact on a market with adequate supplies of premium base oils. Initial market for GTL base oil is likely to be Europe

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POSSIBLE GTL BASE OIL MARKETING STRATEGIES

 

Two emerging marketing strategies for GTL base oil:

Position GTL base oil as Group III+ and as an alternative to PAO Blend GTL baseoil and Group II baseoil to meet equivalent performance of Group II+ and Group III

In practice a number of factors will influence the netbacks GTL producers will be able to achieve when production comes on stream:

Refinery conversion economics – fuels versus base oil Strength of demand for ultra low sulphur diesel Prevailing premiums for Group II & III base oils Ability of marketers to develop a range of new products & outlets for GTL products e.g. waxes, white oils

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CONCLUSIONCONCLUSION

 

Global lube growth may only average 0.2% per annum over next ten years as longer drain intervals impact demand. Asia, the largest market, will also be fastest growing – aai 1.2% Base oil prices currently firm as global surplus reducing. However Group II/III capacity is expanding faster (2005-2010) than Group I shutdowns. All grades in surplus for next ten years Asian premium baseoil capacity growing much faster than technical need Globalisation of baseoil business around three trading hubs

Technical need for premium base oils in Asia grows substantially over next 4 years. Asia will be using similar lube grades to rest of developed world by

2010.

GTL base oil will need careful marketing. May not capture a premium.

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THETHE ASIANASIAN BASEBASE OILOIL MARKETMARKET Thank Thank you you Tony Regan, Principal Consultant TRI-ZEN International

ThankThank youyou

Tony Regan, Principal Consultant

TRI-ZEN International Singapore

and Shanghai Jakarta Hanoi Bangkok Mumbai Los Angeles Vancouver Melbourne Perth

A business consulting company providing advisory services to the upstream and downstream energy, power, oil and gas industries in Asia Pacific.

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