The Saudi Arabian hydrocarbons colossus will join the ranks of Bapco in Bahrain, Takreer in the United Arab Emirates and Shells GTL operation in Qatar as go-to sources for base oils, reinforcing the Gulfs supply credentials. Back in Saudi Arabia, Luberef, a joint venture between Jadwa Investments and Saudi Aramco, is due to begin producing API Group II base oils toward the end of this year, which will also see a near doubling of its brightstock capacity.

Not Completely in Transition

Although the GCC has clearly established itself as a nascent API Group II/III base oil supply hub, the domestic market has doggedly remained a predominately Group I market, with SAE 20W-40 viscosity grades in the PCMO market and monogrades in the HDMO segment. That is, until recently. Analysts say two areas are changing market dynamics.

First is the implementation of API CH-4 as the minimum specification in the GCC, although its introduction has been delayed in Saudi Arabia, the Gulfs largest market for finished lubricants. Deferment aside, the move is expected to rapidly diminish the market for monogrades in the medium term. The scrapping of older vehicles will also hasten the demise of heavier grades in the passenger car market.

Nevertheless, critics argue the Middle East is a small market, accounting for around 4 percent of global lubricant demand. But unlike other region, it is growing and from a qualitative perspective is a market in partial transition.

Market research company Kline & Co. estimated total global demand for finished lubricants last year at 39 million tons, a figure broadly in line with estimates by other industry observers. At around 1.5 million tons, the Middle East provides critical mass to lubricant marketers due to the high share of the automotive market.

Despite harsh climate conditions, low-quality monogrades remain pervasive in the heavy duty market, a fact exacerbated by the fall off in new vehicle registrations since 2010. Kline attributed the drop to low energy prices and cutbacks in infrastructure spending by governments.

Meanwhile, despite increased emission control regulations in other markets, low viscosity oils still account for a major share of the passenger car market. Although there is a shift to higher-quality oils, it is an inconvenient truth that the use of obsolete specifications continues notwithstanding the low average age of cars – typically around 5.5 years. During the Base Oils and Lubes Middle East 2017 conference in May in Dubai, Milind Phadke, director of energy at Kline & Co., told delegates that preliminary estimates showed that Group I base stocks represented almost 75 percent of the Middle East market in 2016.

According to Phadke, lubricant capacity in the Middle East far exceeds demand – split almost evenly between Group I and Group III/III+, with a small component of Group II/II+. Again, the preliminary estimate for base stock production in 2016 is just below 3 million tons, due to low operating rates for some plants, notably Group I in Iran.

Iran casts a long shadow over the Middle East base oils and finished lubricants market. Despite the partial lifting of sanctions, uncertainty remains over the short term, but there is little doubt Iran could alter markets in the region. As it upgrades its vehicle parc, demand for Group II/III could be met from Gulf refiners, but that also depends on the prevailing political climate.

Kline estimates excess capacity of Group III will be close to 1.4 million tons last year. Thus, it is easy to see how Gulf refiners could fill the market vacuum in Iran as it upgrades infrastructure. Nevertheless, Iran looks to be the exception rather than the rule, and efforts by Gulf refiners to supply new markets elsewhere are reaping benefits, notably in Europe and the United States. Qatar and Bahrain are the main sources of supply for these markets, but Kline said the unavailability of data from Takreer in the UAE prevents it from providing a comprehensive estimate of exports.

Shells Pearl GTL plant in Ras Laffan reportedly supplies Shells own internal consumption and does not market its base oils to third-parties. However, there has been speculation that Shell could begin marketing to external customers. Nureddin Wefati, head of media relations at Shells Dubai office, denied that any changes are planned to the refiners GTL marketing strategy. Shell is primarily focusing on consuming GTL base oils within our finished lubricants business, and there are no plans to offer Shell GTL base oils on the merchant market.

Although weighed down by monogrades and low viscosity oils, the region will continue to grow faster than the global market, said Phadke of Kline. With no major industrial lubricants market, the Middle East is distinctive from other markets because of its dominant automotive segment. The PCMO and HDMO market accounts for close to 60 percent of demand, said Phadke. In the heavy-duty market, short drain intervals – around 5,000 kilometers in Saudi Arabia – remain commonplace. High ambient temperatures contribute to short drain intervals as do habits, and as a result HDMO has a high market share. Even so, evidence shows a shift to better quality oils is underway, he said, pointing to forecasts of reductions in low viscosity oils and mongrades by 2026.

Klines estimates indicate that the Middle East finished lubricants market could exceed 1.8 million tons by 2026, characterized by a richer vein of higher quality engine oils. As a result, Kline says Group I demand in Middle East will decline at a rate of 3.0 to 3.5 percent per year, heaping pressure on Group I plants. The regions regulators in the two largest markets, Saudi Arabia and UAE, are also upping the ante by imposing more stringent standards. In Saudi Arabia, Saudi Standards Metrology and Quality Organization is driving the upgrade to a minimum standard of API CH-4 in the kingdom, although its implementation has taken longer than expected.

In the UAE, ESMA (Emirates Authority for Standardization and Metrology) has won plaudits for its regulations governing quality assurance for blenders. The regulator also works closely with local blenders, including Enoc and Adnoc, to build qualitative awareness. Analysts expect ESMAs reach to force consolidation in an already overpopulated market, especially among blenders with inefficient quality controls. The UAE has become the Gulf hub for reexports of base oils and lubricants, some of which include substandard quality shipments to markets in Africa. However, although analysts expect the introduction of the Emirates Quality Mark for manufacturers to stamp out inferior products.

Underpinning assumptions that the market will evolve to higher quality base oils and lubricants is that crude oil prices will return to an upward trend. Anything less than U.S. $50-55 per barrel may prolong austerity measures Gulf states have invoked to curtail spiraling deficits. The strong correlation between oil prices and economic growth could disrupt consumer activity if prices fall again. Such a recurrence could slow the expected adoption of higher quality lubricants and prolong the life of Group I base oils.

UAE in Focus

When it comes to blending capacity, the UAE far outstrips its GCC counterparts, making it well placed to supply new markets. Indeed, it is common industry knowledge that the UAE is the Middle Easts manufacturing hub, and Dubais investor friendly strategies have attracted international lubricant marketers. The UAE has also garnered a reputation for innovation. For example, Enoc was the first lubricant marketer in the Middle East to introduce API CK-4 performance standards for HDMO.

Speaking at the BLM conference, Rashid Al-Ameeri, general manager Eppco Lubricants at Enoc, said the UAE accounts for roughly 66 percent – about 2.42 million tons – of the GCCs total blending capacity, but only about 50 percent of that is currently utilized. More than 110 lubricant brands are sold in the UAE, a combination of international, government owned, OEM and local/private brands.

Al-Ameeri said 90 percent of lubricants manufactured in the UAE are exported to Africa and other MENA countries. The stellar export performance of the UAE is in contrast to Saudi Arabia, where only around 10 percent is exported. Demand in the domestic UAE market equates to 140,000 tons, with the automotive market accounting for 55 percent and the balance consumed by the industrial sector. The diversity of the UAE market is reflected in the number of segments where lubricants are consumed.

Several factors drive the UAE market. The country has invested heavily in infrastructure, and the run-up to Dubais hosting of Expo 2020 will see large-scale projects that will boost lubricant consumption. Al-Ameeri added that other factors also impactdemand. A population that has grown to around 9.2 million, increased tourism and traffic through airports in the UAE have also influenced consumption.

The UAE port of Fujairah has also firmly established itself as a supply hub for marine lubricants and has gained a 7 percent share of the global marine market. It is not all about growth, however, as environmental considerations and a push for sustainability increasingly take center stage at a time of engine downsizing. With that outcome, Al-Ameeri expects UAE lubricant demand to grow less than 3 percent in the next five years, but in a global context that is counter to trend.

Lower oil prices have hammered home the necessity for economic diversification in the Gulf states, and to varying degrees those plans should presage greater industrialization. Saudi Arabia, one of the most hydrocarbons-dependent economies in the region, has unveiled the most ambitious plan for economic transformation, but it has already encountered headwinds. The pace of change may be erratic and could falter, but unpredictability will be the new normal for lubricant marketers in the Middle East. In an environment of contraction elsewhere, that still seems like an attractive proposition.