Group I Base Oils

GROUP I BASE OILSDo They Have a Future?

Wayne LeikerCITGO Petroleum Corporation

Afton Chemical

Acknowledgements

Chevron OroniteICIS LORInfineum USA

Kline and CompanyLithcon / SK

PDVSAPetroleum Trends InternationalPurvin & Gertz

Business Environment


Global Background Information

• Quality requirements vary greatly across the world markets

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


• 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


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


ASIA/PACIFIC

FSU

SOUTH AMERICA

AFRICA

NORTH AMERICA

EUROPE

M. EAST

TOTALYEAR: 2004 2008 2012

World Paraffinic Base Oil Demand Estimates (Constant Production)


Source: PDVSA

Includes all announced expansions including E/M GTL but not Shell or ChevTex GTL



• 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. Finished Lubes demand is essentially flat.

U.S. Background Information


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


U.S. Lubricant Demand – MMBPD


• U.S. Finished Lubes demand is essentially flat.• Number of major finished lubes competitors

is shrinking.


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)


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.


U.S. Finished Lubes and Process Oils Combined


• 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



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


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.



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


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


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


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


• 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




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



2002 Crank Case Base Oil Demand

OtherGr III

Gr II

Gr II+Gr I


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

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



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


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


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

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 The Business• Change Your Product(s)

Future Options – Change

Change Product Quality– Change Crude Slate

• Base Oil Impact


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


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


“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



• Base Oil Impact• Wax Impact


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

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


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



• Base Oil Impact• Wax Impact• Bright Stock Impact

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)




• Base Oil Impact

– Change Extraction Level

• Wax Impact• Bright Stock Impact

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




• Base Oil Impact



– Fractionation Changes


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


“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



• Base Oil Impact



– Fractionation Changes– Add Hydroprocessing Facilities

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

• Exit The Business• Change Your Product(s)• Adapt to Different or New Markets

Adapt to Different and/or New Markets– Replace Group II’s in Some Markets

Future Options – Adapt



Gr IGr II+

Gr II

Gr III Other


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



2007 Other Base Oil Demand

Gr I

Gr II+Other

NaphGr III

Gr II

Total Volume = 890 MM Gallons



2007 Metal Working Fluid Base Oil Demand

Gr I

Gr II

Naph Other



Adapt to Different and/or New Markets– Replace Group II’s in Some Markets– Replace Naphthenics/Aromatic Extracts in

Process Oil Markets


NORTH AMERICA

SOUTH AMERICA

EUROPE FSU

ASIA/PACIFIC

AFRICA

TOTAL

YEAR: 2004 2008 2012

M. EAST

Worldwide Forecast Naphthenic Base Oils Balance, (MBD)


Source: PDVSA



2007 Process Oil Base Oil Demand

Gr I

Arom ExtOther

Naph

Gr II



Process Oil Markets– Develop Niche Market Applications


• Develop Niche Market Applications– After Market Applications (Unlicensed)

• PCMO• HDEO• ATF


• Develop Niche Market Applications– After Market Applications (Unlicensed)

• PCMO• HDEO• ATF


– New Markets Such As High Mileage Products That May Not Require Licensing


Process Oil Markets– Develop Niche Market Applications– Enter and/or Increase Export Business

• Finished Lubricants• Base Oils



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

1995 2000 2005 2010 2015

Net ImportsProduction

Thou

sand

Bar

rels

per

Day Consumption


Latin America Lubricant Supply/Demand Balance



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

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


• 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)

• “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

• 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

UNTIL…

Conclusions

GTL

Documents

Group I Base Oils