But the capacity changes will also have unintended consequences that may create challenges for the indus-try. As speakers at two recent confer-ences noted, the shift toward Group II and III production means lower volumes of heavy base oils and poor-er solubility, which hamper formula-tion of some lubricants. Naphthenic base oil producers argue that they can help provide solutions.

Capacity Pipeline

According to Valentina Serra-Holm, marketing director of Nynas Naphthenics, Stockholm, Sweden, global capacity of API Group II and III base oils is expected to increase significantly in the next five years. Group III capacity will double from 4.1 to 8.2 million metric tons per year, and Group II capacity will grow by more than 60 percent from 13.8 to 22.4 million t/y.

Speaking in April at the UNITI Conference in Stuttgart, Germany, she said, In total, there will be over 12 million t/y of new capacity, and the question is whether base oil de-mand will grow at the same pace.

Geeta Agashe, of Kline & Co., Par-sippany, New Jersey, said, In theory, supply should equal demand, at least over a period of time. If there is too much of a supply overhang, high cost producers will be forced to shut down or dial down their production, bringing down capacity utilization. On the other hand, if the market is undersupplied, this creates incentives for new entrants or current players to expand production. Today, with a global supply of 38.2 million tons and demand of 34.6 million tons, the market appears in surplus. But the situation could be quite different.

Speaking in April at the Base Oil and Lubes Middle East Conference in Abu Dhabi, the senior vice presi-dent of Klines Energy Practice said, Supply and demand estimates are developed independently; thus, some differences are to be expected. Also, supply is usually overstated because it is based on the average production rate at a given time and extrapolated for the full year.

Actual production may be lower due to unplanned outages, feedstock changes and the final product slate. Also, demand does not capture consumption outside the lubricants industry – brake fluids and process oils being two examples.

Serra-Holm said, The evolution in demand will depend on the balance between conflicting drivers. Factors working against an increase include reduced demand due to longer lasting lubricants, lower in-use losses due to better equipment design and smaller sump sizes.

Factors working to boost demand include a growing vehicle population, expanding industrial production and increased mechanization in growth economies. Different analysts proj-ect different growth scenarios, vary-ing from a compound annual growth rate of 0.5 to 3 percent, she said.

However demand develops, up-coming capacity increases will lead to excess supply, unless some plants close, said Serra-Holm. As a result, the evolution in lubricant demand will only determine the size of the overcapacity.

In the most optimistic growth scenario, excess capacity reaches 6 million t/y. In the most pessimistic growth scenario, excess capacity would be more than 10 million t/y. Serra-Holm added, The only ways for the market to balance are through Group I rationalization or a smaller increase in new Group II and III capacity. With a growing market and [base oil projects having] a good fit with fuel strategies and rather good crude flexibility, it is unlikely that the announced mid-term Group II and III investments will be cancelled.

Rather, she noted, with a shrinking market and production disadvantages compared to Group II and III, Group I plants will likely close to compen-sate for new Group II and Group III capacity. This will impact the lubricant industry through shifting market dynamics and may raise some technical issues.

In the changing market, Group I rationalization will push big Group I producers with in-house lubricant manufacturing to focus mainly on production for captive use. Almost 90 percent of the global Group I pro-duction comes from producers that have an in-house lubricant business, said Serra-Holm. As an alternative, some Group I producers will opt to focus on specialty products such as treated distillate aromatic extracts or methane sulfonic acid.

Technical considerations arise from differences between base oil categories in viscosity range, oxida-tion stability, volatility, solvency, sulfur content and low-temperature properties. Accommodating these differences will require some creative approaches to formulating.

There is a certain amount of col-lateral damage caused by the shift in paraffinic quality, said Serra-Holm. First, Group II and III paraffinic oils are excellent base stocks for formu-lating modern engine oils; however, they have lower solvency compared to Group I oils. Moreover, Group II and III plants have a lower yield of high viscosity products because there is a limit to the maximum viscosity they can produce. This may be an issue in the formulation of industrial lubricants where higher viscosity or better solvency is needed.

The Viscosity Challenge

Typically Group II and III plants do not produce bright stocks, and Group III plants do not produce heavy neutrals. Usually, the yield of heavy neutrals in Group II plants is lower than that in Group I plants. Therefore, the shift from Group I to Group II and III capacity will lead to a net loss of bright stock and heavy neutral capacity.

According to Agashe, As Group II and III displace Group I oils, the relative scarcity of heavy neutrals and bright stock is increasing. As a result, heavy grades are commanding premium prices in the marketplace. In addition, she said, the premi-um for Group III and II+ over Group II for light grades has increased consistently since 2004 because the former are preferred for blending 5W-20 and 5W-30 engine oils. She added, Global Group III and III+ supply will grow by more than 80 percent in the next 10 years.

If only one half of the reduction in Group I refining capacity includes a loss of bright stock capacity, that reduction would be between 480,000 and 800,000 tons per year, assuming an average bright stock yield of 16 percent, Serra-Holm said.

Group I rationalization would lead to a bright stock deficit, even in a sce-nario showing a net decline in bright stock demand. Depending on the growth forecast used, the bright stock deficit would be between 600,000 and 800,000 t/y by 2018, she concluded.

Bright Stock Alternatives

Serra-Holm said that heavy naph-thenic oils and naphthenic bright stock offer a possible alternative to paraffinic bright stock. Both can be and are used as replacements for paraffinic bright stock in a number of applications, including lubricat-ing greases, metal forming fluids and process oils.

In addition, both heavy naphthen-ics and naphthenic bright stocks also could be used in marine applications such as trunk piston engine oils and mariner diesel cylinder oils. The key for success in marine applications are supply security, competitive pricing and a wide distribution network.

Solvency is an important property for many industrial lubricants. In general, base oil solvency affects the oils ability to dissolve additives and deposits. In grease, base oil solvency affects the soap yield and the oil-soap interaction. In emulsions, base oil solvency affects stability. Serra-Holm said, Tests show that naphthenic oils can be used to enhance solvency either as straight oils or in combina-tion with Group II or III oils.

Naphthenic oils also contain virtu-ally no n-alkanes; therefore, they have lower pour points than paraffinic oils of equal viscosity. This provides bet-ter pumpability at low temperatures. In transformer oils, low pour point provides a low cold-start energizing temperature, said Serra-Holm.

Serra-Holm said, The solution is to blend naphthenics with Group II or III base oil. The main advantage of these blends is the ability to tailor properties to provide a great deal of flexibility to the end user. The pri-mary applications of such blends are lubricating greases, soluble and neat metalworking fluids, additive carriers and process oils such as rubber, ther-moplastic elastomer and antifoam processing. In comparison, the main applications for straight naphthenic base oils are greases, soluble metal-working fluids, additive carriers and process oils.

Developing blends is not without challenges, though. The main chal-lenge to using naphthenics is a higher volatility compared to paraffinic oils. Also, they have a lower viscosity index than Group I oils, although it is sufficient for industrial applications such as metalworking fluids, quench-ing oils and transformer oils.

The Flexibility of Blending

Flexibility can be achieved by varying the blending ratio between naphthenic and hydrocracked paraf-finic oils and by using several naph-thenic oils with different degrees of refining, Serra-Holm noted. This allows users to target different prop-erties such as:

pour point, to adjust low-tempera-ture properties;

aniline point, to control solvency;

viscosity index;

aromatic content, to provide oxi-

dation stability;

flash point, to control volatility;

viscosity, to provide a wide viscos-ity range.

Blend tests with naphthenic oils and several Group II and III oils show a number of benefits over Group I oils. First, the blends have equivalent solvency but higher purity than Group I oils, said Serra-Holm. They also have better low-tempera-ture properties and better oxidation stability than Group I oils.

The viscosity index of the blends is slightly lower and volatility slightly higher; therefore, they are not recom-mended for automotive applications. However, they are suitable for several industrial applications and as process oils.

Look to the Future

Regional supply and demand imbalances drive trade and make the industry global because base stocks frequently are made where they are not consumed or needed, said Agashe. For instance, Group III is made in Asia but largely used in North America, Europe and the Middle East. Group I is made in Europe but consumed in South Asia, South America, the Middle East, Russia, China and Africa.

Ongoing developments in the global base oil industry will lead to a significant change in the base oil pool, Serra-Holm concluded. In particular, the global availability of Group I paraffinic base oils will decline in favor of Group II and III oils. This will primarily impact industrial lubricant producers, due to reduced availability of oils with the required solvency and viscosity.

The evolving demand-supply balance will affect relative prices for different categories, she added. Historically, the premium for Group II over Group I has been low to encourage its use by blenders that would otherwise use Group I. As the market for Group II is established and blenders realize supply chain cost savings from using Group II, Group II has been able to increase its premium over Group I. However, large additions to Group II capacity run the risk of narrowing Group II premiums. I think it is as important to look at viscosity grade balances across the various API grades in addition to API grade balances, Agashe said.