group i base oils
TRANSCRIPT
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GROUP I BASE OILSDo They Have a Future?
Wayne LeikerCITGO Petroleum Corporation
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Afton Chemical
Acknowledgements
Chevron OroniteICIS LORInfineum USA
Kline and CompanyLithcon / SK
PDVSAPetroleum Trends InternationalPurvin & Gertz
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Business Environment
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Business Environment
Global Background Information
• Quality requirements vary greatly across the world markets
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Worldwide Finished Lubes Quality Requirements
NORTH AMERICA
AFRICA
M. EAST
EUROPE
FSU
Years ahead (+) / behind (-)U.S.
(8-10)
(8-10)
+ 1-3
(10-12)
(8-10)
even
evenSOUTH AMERICA
ASIA/PACIFIC
Business Environment
Source: PDVSA
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• Quality requirements vary greatly across the world markets
• Emerging country growth is expected to average 1.5-2.0%
Business Environment
Global Background Information
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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
Business Environment
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1995 2000 2005 2010 2015
MB
/D
North America Western Europe AsiaAfrica/Middle East Eastern Europe/FSU Latin America
WORLD LUBRICANT CONSUMPTION
1.9%
Period Annual Growth Rate
1.2%
1.7%
2.2%
0.3%
0.3%
Asia/China Leads Future Lubricants Growth in Demand and Volume
Source: Purvin & Gertz
Business Environment
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ASIA/PACIFIC
FSU
SOUTH AMERICA
AFRICA
NORTH AMERICA
EUROPE
M. EAST
TOTALYEAR: 2004 2008 2012
World Paraffinic Base Oil Demand Estimates (Constant Production)
Business Environment
Source: PDVSA
Includes all announced expansions including E/M GTL but not Shell or ChevTex GTL
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• Quality requirements vary greatly across the world markets
• Emerging country growth is expected to average 1.5-2.0%
• Demand in North America and Western Europe is essentially flat, with automotive sector demand declining in Europe
Business Environment
Global Background Information
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• Quality requirements vary greatly across the world markets
• Emerging country growth is expected to average 1.5-2.0%
• 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
Business Environment
Global Background Information
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Business Environment
• U.S. Finished Lubes demand is essentially flat.
U.S. Background Information
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Business Environment
0
20
40
60
80
100
120
140
160
180
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Other Automotive Oils Industrial Oils
Source: Purvin & Gertz
U.S. Lubricant Demand – MMBPD
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Business Environment
• U.S. Finished Lubes demand is essentially flat.• Number of major finished lubes competitors
is shrinking.
U.S. Background Information
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Source: Kline Data
0%
5%
10%
Shar
e of
Mar
ket
Sun Quaker State
Amoco
14 Primary Competitors with thelargest companies relatively close
in market share
U.S. Finished Lubes Only – Pre-Mergers (1998)
Business Environment
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0%
5%
10%
15%
20%
Shar
e of
Mar
ket
7 Primary Competitors with the top three having 44% share
vs 22% Pre-mergers
Quaker State
Volumes estimated from 2001 market volumes, Kline report and NPRA data. Includes finished lubricants and process oils; does not include base oils.
Business Environment
U.S. Finished Lubes and Process Oils Combined
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Business Environment
• U.S. Finished Lubes demand is essentially flat.• 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
U.S. Background Information
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Business Environment
0
20
40
60
80
100
120
140
160
180
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
Other Automotive Oils Industrial Oils
Source: Purvin & Gertz
API,SG GF-2
GF-3,API, CH-
4
GF-4, CI-4Mercon V,
Volvo,VDS III,
Dexron III-H
GF-5,MackEON 03,
Cat ECF-1,PC-10
ILSAC GF-6,HD, PC-11,Dexron X
Number and frequency of specification changes have increased dramatically.
U.S. Lubricant Demand – MMBPD
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Business Environment
GF-4 entering July 2004 “mandatory” 2005, GF-5 entering Mid 2008 and “mandatory” 2009Quality change forecasted on 3 year historical transition to (70% use of) new specification entering the market and considering some resistance due to backward applicability
SH & Prior
GF-3/SL
GF-4/SM
SJ
2004
GF-5/SN
SJ & Prior
GF-4/SM
SL
2008
SL & Prior
GF-5
SM
2012
PCMO Trends – Quality
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Business Environment
Viscosity grades shifts forecasted based on OEM’s 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)
5w20
Others
10w30
5w30
2004
0wX
5w20
Others
5w30
10w30
2008
5w3010w30
5w20
0wX
Others
2012
PCMO Trends – Viscosity Grade
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Business Environment
2004
CF/CF-2
CH-4 & Prior
CI-4
2008
CF/CF-2
CI-4 & Prior
PC-10 or CJ-4
2012
CJ-4 & Prior PC-11 or CK-4
CF/CF-2
PC-10 entering 2007, PC-11 entering 2011. Conversion forecasted to follow 1 year historical transition to 100% of new specificationQuality change based on projected response to future environment regulations and new engine technology such as EGR
HDEO Trends – Quality
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Business Environment
2004
10w30Others
Mono
15w40
2008
10w30 Mono5w30/40
15w40
2012
Mono 5w30/40
15w40
10w30
Viscosity grade shift primarily based on pressure for fuel saving toward the end of the forecasted period. Today OEM’s more concentrated on engine technology to meet environmental regulations
HDEO Trends – Viscosity Grade
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Business Environment
• U.S. Finished Lubes demand is essentially flat.• 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
U.S. Background Information
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Business Environment
Source: Purvin & Gertz
0
20
40
60
80
100
120
140
160
180
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
Other Automotive Oils 5 W Automotive Oil Industrial Oils
5W Effect
U.S. Lubricant Demand – MMBPD
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Business Environment
2002 Crank Case Base Oil Demand
OtherGr III
Gr II
Gr II+Gr I
2007 Crank Case Base Oil Demand
Gr I
Gr II+
Gr II
Gr III Other
Short Term Crank Case Specification Changes Impact
Total Volume = 1076 MM Gallons Total Volume = 1077 MM Gallons
Source: Petro Trends International
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North American Base Oil Capacity
0
50
100
150
200
250
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Cap
acity
(MB
PD)
API Group II,IIIAPI Group I
Source: NPRA
Business Environment
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Business Environment
For Group I Producers, This Is
Not A Pretty Picture Is It ?
What Options Do They Have?
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Future Options
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Future Options
• Exit The Business
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Future Options – Exit
Source: Purvin & Gertz
Historically, Base Oil Prices Lag Crude Moves
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Future Options – Exit
US Light Base Oil vs. WTI
0.70
0.90
1.10
1.30
1.50
1.70
1.90
2.10
2.30J-
03
F-03
M-0
3
A-03
M-0
3
J-03
J-03
A-03
S-03
O-0
3
N-03
D-03
J-04
F-04
M-0
4
A-04
M-0
4
J-04
J-04
A-04
S-04
O-0
4
Base
Oil
Pric
e ($
/gal
lon)
20
25
30
35
40
45
50
55
60
WTI
Pric
e ($
/BBL
)
US Avg Light Base Oil WTI
Source: ICIS LOR
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Future Options – Exit
Rela
tive
Cost
Pos
ition
($/B
BL)
0
Base Oil Capacity (MBPCD)
CIT
GO
Large Amount of Capacity with relative higher costs than CITGO
Lower Relative Cost
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Competitive View of Base Oil Refining - Current
0
CIT
GO
Base Oil Capacity (MBPCD)
Refineries Shut Down Since 1998 34 MBPD Capacity (19%)
Considerably less capacity with relative higher costs than CITGO
Lower Relative Cost
Future Options – Exit
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Future Options
• Exit The Business• Change Your Product(s)
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Future Options – Change
Change Product Quality– Change Crude Slate
• Base Oil Impact
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Future Options – Change
0102030405060708090
100
Dew
axed
VI (
-12o C
)
Crude Type
California Light
Alaska NorthSlopeWest TexasIntermediateArab Light
Brent
Pennsylvania
(Source NPRA FL 94-112)
Dewaxed VI Capability of Crude Oils
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Future Options – Change
Not All Group I’s Are Created Equal
65.0
70.0
75.0
80.0
85.0
90.0
14.0 15.0 16.0 17.0 18.0 19.0 20.0
NOACK Volatility, wt%
Satu
rate
s C
onte
nt, w
t%
API Group I, S120N to S170N
“Group I+”
Source: Lithcon/SK
Increasing Performance
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Future Options – Change
“Group I+” Base Oil Formulations
Group I+/II+ 5W30 GF-4 Blend
Gr II+
Gr I+
Add.
Group I+/III 5W30GF-4 Blend
Gr III
Gr I+
Add.
Allows Maximizing Group I+ Content of GF-4 Blends
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Future Options – Change
Change Product Quality– Change Crude Slate
• Base Oil Impact• Wax Impact
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Future Options – Change
Wax Content of Crude Oils
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
SLS Brent WTI Eko-Fisk Palanca Bancroft Norne
% W
ax in
Who
le C
rude
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Wax Market Historically Has Been A Very Stable Market
Source: ICIS LOR
Historical Pricing Information
0.50
0.75
1.00
1.25
1.50
1.75
2.00
2.25
May-02
Jul-0
2Sep
-02Nov-0
2Ja
n-03Mar-
03May
-03Ju
l-03
Sep-03
Nov-03
Jan-04
Mar-04
May-04
Jul-0
4Sep
-04
Pric
e ($
/US
Gal
)
LSVGO Avg. Base Oil 125/140 MP Wax
Future Options – Change
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NORTH AMERICAEUROPE/FSU/ME
AFRICA
LATIN AMERICA
CHINA
ASIA/PACIFIC
Worldwide Forecast Wax Balance (MTM/Y)
Future Options – ChangeTOTAL
YEAR: 2004 2008 2012
Source: PDVSA
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Future Options – Change
Change Product Quality– Change Crude Slate
• Base Oil Impact• Wax Impact• Bright Stock Impact
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Bright Stock Holding/Gaining Differential in 2004 Marketplace
Source: ICIS LOR
Historical Spot Base Oil Differentials ( Versus LSVGO/LSFO)
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
Jan-98
Apr-98
Jul-9
8Oct-
98Ja
n-99Apr-9
9Ju
l-99
Oct-99
Jan-00
Apr-00
Jul-0
0Oct-
00Ja
n-01Apr-0
1Ju
l-01
Oct-01
Jan-02
Apr-02
Jul-0
2Oct-
02Ja
n-03Apr-0
3Ju
l-03
Oct-03
Jan-04
Apr-04
Jul-0
4Oct-
04D
iffer
entia
l ($/
US
Gal
)
Avg. Light Base Oil Bright Stock (LSVGO) Bright Stock (LSFO)
Future Options – Change
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Future Options – Change
Change Product Quality– Change Crude Slate
• Base Oil Impact
– Change Extraction Level
• Wax Impact• Bright Stock Impact
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Extraction Unit Yield Data
30
35
40
45
50
55
60
88 90 92 94 96 98 100
Viscosity Index (VI)
Volu
me
Perc
ent Y
ield
Very Expensive Alternative
Future Options – Change
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Future Options – Change
Change Product Quality– Change Crude Slate
• Base Oil Impact
– Change Extraction Level
• Wax Impact• Bright Stock Impact
– Fractionation Changes
![Page 48: Group I Base Oils](https://reader035.vdocuments.mx/reader035/viewer/2022081716/5440131fafaf9f80338b45b7/html5/thumbnails/48.jpg)
Future Options – Change
Not All Group I’s Are Created Equal
65.0
70.0
75.0
80.0
85.0
90.0
14.0 15.0 16.0 17.0 18.0 19.0 20.0
NOACK Volatility, wt%
Satu
rate
s C
onte
nt, w
t%
API Group I, S120N to S170N
“Group I+”
Source: Lithcon/SK
Increasing Performance
![Page 49: Group I Base Oils](https://reader035.vdocuments.mx/reader035/viewer/2022081716/5440131fafaf9f80338b45b7/html5/thumbnails/49.jpg)
Future Options – Change
“Group I+” Base Oil Formulations
Group I+/II+ 5W30 GF-4 Blend
Gr II+
Gr I+
Add.
Group I+/III 5W30GF-4 Blend
Gr III
Gr I+
Add.
Allows Maximizing Group I+ Content of GF-4 Blends
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Future Options – Change
Change Product Quality– Change Crude Slate
• Base Oil Impact
– Change Extraction Level
• Wax Impact• Bright Stock Impact
– Fractionation Changes– Add Hydroprocessing Facilities
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Current Hydroprocessing Project Economics are Declining
Source: ICIS LOR
Group II/II+ Posted Differentials Over Group I (100 to 150 Vis)
0.000.050.100.150.200.250.300.350.400.45
Oct
-01
Dec
-01
Feb-
02
Apr
-02
Jun-
02
Aug
-02
Oct
-02
Dec
-02
Feb-
03
Apr
-03
Jun-
03
Aug
-03
Oct
-03
Dec
-03
Feb-
04
Apr
-04
Jun-
04
Aug
-04
Oct
-04
Diff
eren
tial (
$/ U
S G
al)
Group II Differential Group II+ Differential
Future Options – Change
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Future Options
• Exit The Business• Change Your Product(s)• Adapt to Different or New Markets
![Page 53: Group I Base Oils](https://reader035.vdocuments.mx/reader035/viewer/2022081716/5440131fafaf9f80338b45b7/html5/thumbnails/53.jpg)
Adapt to Different and/or New Markets– Replace Group II’s in Some Markets
Future Options – Adapt
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Future Options – Adapt
2002 Crank Case Base Oil Demand
Gr IGr II+
Gr II
Gr III Other
2007 Crank Case Base Oil Demand
Gr I
Gr II+
Gr II
Gr III Other
Short Term Crank Case Specification Changes Impact
Total Volume = 1076 MM Gallons Total Volume = 1077 MM Gallons
Source: Petro Trends International
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Future Options – Adapt
2007 Other Base Oil Demand
Gr I
Gr II+Other
NaphGr III
Gr II
Total Volume = 890 MM Gallons
Source: Petro Trends International
![Page 56: Group I Base Oils](https://reader035.vdocuments.mx/reader035/viewer/2022081716/5440131fafaf9f80338b45b7/html5/thumbnails/56.jpg)
Future Options – Adapt
2007 Metal Working Fluid Base Oil Demand
Gr I
Gr II
Naph Other
Total Volume = 229 MM Gallons
Source: Petro Trends International
![Page 57: Group I Base Oils](https://reader035.vdocuments.mx/reader035/viewer/2022081716/5440131fafaf9f80338b45b7/html5/thumbnails/57.jpg)
Adapt to Different and/or New Markets– Replace Group II’s in Some Markets– Replace Naphthenics/Aromatic Extracts in
Process Oil Markets
Future Options – Adapt
![Page 58: Group I Base Oils](https://reader035.vdocuments.mx/reader035/viewer/2022081716/5440131fafaf9f80338b45b7/html5/thumbnails/58.jpg)
NORTH AMERICA
SOUTH AMERICA
EUROPE FSU
ASIA/PACIFIC
AFRICA
TOTAL
YEAR: 2004 2008 2012
M. EAST
Worldwide Forecast Naphthenic Base Oils Balance, (MBD)
Future Options – Adapt
Source: PDVSA
![Page 59: Group I Base Oils](https://reader035.vdocuments.mx/reader035/viewer/2022081716/5440131fafaf9f80338b45b7/html5/thumbnails/59.jpg)
Future Options – Adapt
Source: Petro Trends International
2007 Process Oil Base Oil Demand
Gr I
Arom ExtOther
Naph
Gr II
Total Volume = 631 MM Gallons
![Page 60: Group I Base Oils](https://reader035.vdocuments.mx/reader035/viewer/2022081716/5440131fafaf9f80338b45b7/html5/thumbnails/60.jpg)
Adapt to Different and/or New Markets– Replace Group II’s in Some Markets– Replace Naphthenics/Aromatic Extracts in
Process Oil Markets– Develop Niche Market Applications
Future Options – Adapt
![Page 61: Group I Base Oils](https://reader035.vdocuments.mx/reader035/viewer/2022081716/5440131fafaf9f80338b45b7/html5/thumbnails/61.jpg)
• Develop Niche Market Applications– After Market Applications (Unlicensed)
• PCMO• HDEO• ATF
Future Options – Adapt
![Page 62: Group I Base Oils](https://reader035.vdocuments.mx/reader035/viewer/2022081716/5440131fafaf9f80338b45b7/html5/thumbnails/62.jpg)
• Develop Niche Market Applications– After Market Applications (Unlicensed)
• PCMO• HDEO• ATF
Future Options – Adapt
– New Markets Such As High Mileage Products That May Not Require Licensing
![Page 63: Group I Base Oils](https://reader035.vdocuments.mx/reader035/viewer/2022081716/5440131fafaf9f80338b45b7/html5/thumbnails/63.jpg)
Adapt to Different and/or New Markets– Replace Group II’s in Some Markets– Replace Naphthenics/Aromatic Extracts in
Process Oil Markets– Develop Niche Market Applications– Enter and/or Increase Export Business
• Finished Lubricants• Base Oils
Future Options – Adapt
![Page 64: Group I Base Oils](https://reader035.vdocuments.mx/reader035/viewer/2022081716/5440131fafaf9f80338b45b7/html5/thumbnails/64.jpg)
Future Options – Adapt
Worldwide Finished Lubes Quality Requirements
NORTH AMERICA
AFRICA
M. EAST
EUROPE
FSU
Years ahead (+) / behind (-)U.S.
(8-10)
(8-10)
+ 1-3
(10-12)
(8-10)
even
evenSOUTH AMERICA
ASIA/PACIFIC
Source: PDVSA
![Page 65: Group I Base Oils](https://reader035.vdocuments.mx/reader035/viewer/2022081716/5440131fafaf9f80338b45b7/html5/thumbnails/65.jpg)
1995 2000 2005 2010 2015
Net ImportsProduction
Thou
sand
Bar
rels
per
Day Consumption
Source: Purvin & Gertz
Latin America Lubricant Supply/Demand Balance
Future Options – Adapt
![Page 66: Group I Base Oils](https://reader035.vdocuments.mx/reader035/viewer/2022081716/5440131fafaf9f80338b45b7/html5/thumbnails/66.jpg)
Future Options – Adapt
Historical Global Light Base Oil Prices
0.60
0.80
1.00
1.20
1.40
1.60
1.80
Jan-95Ju
l-95
Jan-96Ju
l-96
Jan-97Ju
l-97
Jan-98Ju
l-98
Jan-99Ju
l-99
Jan-00Ju
l-00
Jan-01Ju
l-01
Jan-02Ju
l-02
Jan-03Ju
l-03
Jan-04Ju
l-04
Pric
e ($
/US
Gal
)
AP Light Avg Europe Avg US Light Avg
Source: ICIS LOR
![Page 67: Group I Base Oils](https://reader035.vdocuments.mx/reader035/viewer/2022081716/5440131fafaf9f80338b45b7/html5/thumbnails/67.jpg)
Historical Global Bright Stock Prices
1.00
1.20
1.40
1.60
1.80
2.00
2.20
Jan-95Ju
l-95
Jan-96Ju
l-96
Jan-97Ju
l-97
Jan-98Ju
l-98
Jan-99Ju
l-99
Jan-00Ju
l-00
Jan-01Ju
l-01
Jan-02Ju
l-02
Jan-03Ju
l-03
Jan-04Ju
l-04
Pric
e ($
/US
Gal
)
AP Europe US
Source: ICIS LOR
Future Options – Adapt
![Page 68: Group I Base Oils](https://reader035.vdocuments.mx/reader035/viewer/2022081716/5440131fafaf9f80338b45b7/html5/thumbnails/68.jpg)
• 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
Conclusions
• Numerous factors will improve Gr I plant viability:– Crude Source (“Group I+”, Wax, Bright Stock)– Hardware (“Group I+”, Yields, Operating Costs)– Location (Marine Capabilities)
![Page 69: Group I Base Oils](https://reader035.vdocuments.mx/reader035/viewer/2022081716/5440131fafaf9f80338b45b7/html5/thumbnails/69.jpg)
• “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
Conclusions
• 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
![Page 70: Group I Base Oils](https://reader035.vdocuments.mx/reader035/viewer/2022081716/5440131fafaf9f80338b45b7/html5/thumbnails/70.jpg)
• Replacement opportunities may develop for Group II base oils in:– Industrial and other oil markets– Process oil markets– Niche markets
Conclusions
• If global growth estimates are valid, export opportunities should be available for:– Finished lubricants of older(lower) quality requirements– Base oils
![Page 71: Group I Base Oils](https://reader035.vdocuments.mx/reader035/viewer/2022081716/5440131fafaf9f80338b45b7/html5/thumbnails/71.jpg)
UNTIL…
Conclusions
![Page 72: Group I Base Oils](https://reader035.vdocuments.mx/reader035/viewer/2022081716/5440131fafaf9f80338b45b7/html5/thumbnails/72.jpg)
GTL