Asia Lubricants 2006d

8/2/2019 Asia Lubricants 2006d

1/25


2/25

20-21 April 2006

THE ASIAN BASE OIL MARKETTHE ASIAN BASE OIL MARKET

Asia Lubricants 2006, Singapore

THE BASE OIL MARKET IN ASIA

SUPPLY & DEMAND AND HOW INNOVATIVE AND FUTURETRENDS MAY IMPACT THE MARKET

The evolution of premium baseoil markets in the USA and Europe andlikely 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


3/25

20-21 April 2006



THE EVOLUTION OF PREMIUM BASE OIL MARKETS IN THE USA

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 aftertreatment systems which in turn leads to lube chemical and sulphur limits.

API SJ-SM PCMOs and CG-4 HDDO are formulated using Group II/II+baseoils.

Chevrons hydrocracking and isodewaxing technology led markettowards 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)


4/25

20-21 April 2006



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 premiumbaseoils.

Euro refinery configuration and crude mix tended to produce a betterGroup I than in North America and Group II would require more severeoperations 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 forHDMO. USA a likely source following Motivas expansion. Could backout substantial Group I or trigger further closures of old plants


5/25

20-21 April 2006



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 fromSingapore to USA. Imports of Group II by majors 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 andIndia/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 aslube producers and vehicle manufacturers seek global uniformity


6/25

20-21 April 2006



BASE OIL TRADE FLOWS 1995


7/25

20-21 April 2006




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


8/25

20-21 April 2006



WORLD BASE OIL MARKET 2005WORLD BASE OIL MARKET 2005

Group V (Esters), 0.1mill 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


9/25

20-21 April 2006



BASE OIL TRADE FLOWS - 2005

Group I

Group II/III


10/25

20-21 April 2006




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 majorsimporting US Group I (particularly Brightstock) and Group II into Asia

Lower Group I exports from China. Exporting some Group II but using mostdomestically. 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


11/25

20-21 April 2006



BASE OIL TRADE FLOWSA 2010 SCENARIO

Group I

Group II/III

Gp IIGTL

Gp III

GP II/III

GTL Base oil


12/25

20-21 April 2006



BASE OIL TRADE FLOWSA 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 alsoIndia and Europe

Malaysian Group III production means Malaysia/Singapore become exporthubs for Group II/III

GTL baseoil exports have started from Qatar.

Russian exports increase. Lukoil planning to double Group III productionin 2007 and open new Group II+/III capacity by 2010

A global baseoil market is dominated by three major exports hub USGCfor Group II, Korea for Group III and Singapore/Malaysia for Group II/III

Qatar becoming the 4th hub with substantial exports of GTL baseoil


13/25

20-21 April 2006



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 in2015:

Refiners not prepared to meet the cost of upgrading old refineries to meetlatest environmental and product quality standards

Narrow differentials with premium baseoils and the need for more additivesmay make Group I based lubes less economic than Group II


14/25

20-21 April 2006



WORLD BASE OIL MARKETS 2010 ESTIMATEWORLD BASE OIL MARKETS 2010 ESTIMATE

Group V (Esters), 0.06

mill tonnes

Group IV (PAO), 0.31

mill tonnes

Group III, 3.14 mill

tonnes

Group II, 10.8 mill

tonnes

Group 1, 30.2 mill

tonnes


15/25

20-21 April 2006



BASE OIL CAPACITY EXPANSION 2005-2010 MID EAST/ASIA

Start up Country Operator Location Group II Group III

kt kt

2006 Korea SK Ulsan expansion 28.5 85.5

2006 Japan XOM Wakayama expan. 68.4

2006 India BPCL Mumbai 180

2007 Korea GS Caltex Yosu 228 456

2008 Taiwan CPC Kaohsiung 208

2008 Taiwan FPC Mai Liao 300 2202008 Malaysia Petronas Melaka 312

2008 Bahrain Neste/Bapco Manama 400

2010 India MRPL Mangalore 250

Total 945 1792

Naphthenic

2007 China CNOOC TBN 400

2008 China PetroChina Karamay 250


16/25

20-21 April 2006



ASIAN BASE OIL CAPACITY EXPANSION


17/25

20-21 April 2006



ASIAN BASE OIL CAPACITY 2000ASIAN BASE OIL CAPACITY 2000--20102010

0

2

4

6

8

10

12

14

16

18

2000 2005 2010

Millton

nes

Group I Group II Group III GTL baseoil


18/25

20-21 April 2006



ASIAN SUPPLY DEMAND BALANCE

A very simplistic chart (excludes additives) which suggests that Asia willcontinue 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 nextdecade but growth will average only about 1.2% per annum due to the impact oflonger oil drain intervals and higher prices (assumes $55 WTI). Longer ODI will havea particularly significant impact on Chinese growth rates.

Mill tonnes 2005 2010 2015

Lube demand 12.31 13.50 13.88

Base oil supply 12.59 14.97 14.97

Base oil surplus 0.28 1.47 1.09


19/25

20-21 April 2006



EMISSION LEGISLATION CARS

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

USA

Japan

EU

Australia Euro 1 Euro 2 Euro 3 Euro 4

Bangladesh

China (BJ & SH

China (Others) Euro 2 Euro 3

Hong KongIndia (main cities) Euro 1 Euro 4

India (others) Euro 3

Indonesia

Malaysia

PhilippinesSingapore Euro 1

Thailand Euro 1

Vietnam (diesel) Euro 1 E 3 E 4

Euro 2

Euro 1

Euro 4Euro 2

Euro 4

15 ppm sulp

Euro 4

Euro 2

Euro 1

Euro 2

Euro 1Euro 2

Euro 4

Euro 4

Euro 2

Euro 3Euro 2

Euro 1

Euro 2

Euro 3

10 ppm sulp

Euro 5 10 ppm sulp

50 ppm sulp

Euro 4 50 ppm sulp

500 ppm sulp

500 ppm sulp

Euro 3 350 ppm sulp

Euro 1

Euro 2 Euro 3

Euro 1

Euro 2 Euro 3


20/25

20-21 April 2006



DEMAND DRIVERS FOR PREMIUM BASE OILS IN ASIA

Technical drivers:

Asia introducing Euro 4 emission standards between 2006-2010 OEMs required to introduce new emission control systems for diesel

vehicles

Sulphated ash and sulphur (SAPS) in lubes must be reduced to avoidharming 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

PCMOs in Asia at same time as other markets ahead of technical need

Other lube marketers offer premium grades to avoid unfavourablecomparisons with international majors.

Low premiums for Group II/III and lower additive costs has led to early takeup in Asia


21/25

20-21 April 2006



GTL BASE OIL PRODUCTION - QATAR

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 productionbut this depends on diesel netback.

Operator Start up Name Capacity b/d

10% 15%

Sasol/QP 2005 Oryx 34,000 0 0

Sasol/Chevron 2009 Oryx 73,500 7,350 11,025

Shell/QP 2010 Pearl 140,000 14,000 21,000

ExxonMobil/QP 2011 154,000 15,400 23,100Total bbls/day 401,500 36,750 55,125

Mill tonnes 1.90 2.87

Baseoil production b/d


22/25

20-21 April 2006



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 to200 mill tonnes in 2010. GTL diesel is the perfect product for the ultralow sulphur diesel market

Thus GTL plants may start up in max diesel mode with the mainmarket being Europe. Some exports to USA and Japan.

GTL base oil production may be cautious, say 10%, to lessen its impacton a market with adequate supplies of premium base oils.

Initial market for GTL base oil is likely to be Europe


23/25

20-21 April 2006



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 ofGroup II+ and Group III

In practice a number of factors will influence the netbacks GTLproducers 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 GTLproducts e.g. waxes, white oils


24/25

20-21 April 2006



CONCLUSIONCONCLUSION

Global lube growth may only average 0.2% per annum over next tenyears as longer drain intervals impact demand. Asia, the largestmarket, will also be fastest growing aai 1.2%

Base oil prices currently firm as global surplus reducing. HoweverGroup II/III capacity is expanding faster (2005-2010) than Group Ishutdowns. All grades in surplus for next ten years

Asian premium baseoil capacity growing much faster than technicalneed

Globalisation of baseoil business around three trading hubs

Technical need for premium base oils in Asia grows substantially overnext 4 years.

Asia will be using similar lube grades to rest of developed world by2010.

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


25/25

20-21 April 2006



Thank youThank you

Tony Regan, Principal Consultant

TRI-ZEN International

Singaporeand

ShanghaiJakarta

Hanoi

Bangkok

Mumbai

Los Angeles

Vancouver

Melbourne

Perth

A business consulting companyproviding advisory services to theupstream and downstream energy,power, oil and gas industries in AsiaPacific.

Documents

Asia Lubricants 2006d