According to analysts, the much anticipated start-up is a game changer and well timed to coincide with the evolution of regional markets toward higher specification products. Lube­ref, a joint venture between Saudi Aramco and Jadwa Investment, is also about to commission a new Group II plant in the third quarter in Yanbu, reinforcing the view that the Middle East is fast becoming a base oil hub.

Speaking at the Base Oil & Lubes Middle East 2016 conference in Abu Dhabi, Al Ammari said the growth rate of synthetic lubricants is in double digits due to demands for better fuel economy and original equipment manufacturer specification requirements. There is little doubt that access to base oils from Takreer provides a strategic platform to produce synthetic oil formulations, particularly as a significant amount of finished lubricants are exported.

Total finished lubricant market volume in the UAE is 750,000 t/y, Al Ammari estimates, and around 80 percent is exported. With revenues of AED25 billion (U.S. $6.83 billion) and 10.8 million metric tons in volume, it has the ability to establish a compelling international footprint.

Al Ammari believes Group III base oils can be considered synthetics and points to Castrols court case in the United States that ruled it is permissible to use the word for products formulated with Group III base oil. Capital investment is high, but operating costs are low compared to Group I, and feedstock need not be crude oil – gas can also be used. There is also a positive impact on formulation costs, according to Al Ammari because additive treat levels can be lower in Group III based formulations.

When it comes to synthetic oil blending, Adnoc Distribution has a number of advantages stacked in its favor, said Al Ammari. He pointed to a fully integrated lube and grease plant located at Adnocs refinery at Umm Al Nar that is quality assurance certified to ISO 9001:2008 and laboratory certified to ISO 17025:2008 for quality assurance.

Takreers Group III base oils are certified as providing consistent quality by ESMA (Emirates Authority for Standardization & Metrology). ESMA acts as a regulator, and, although its standards are voluntary, there is a drive for more rigorous enforcement, something critics of the sector have said is long overdue if the UAE is to retain a leadership position. Al Ammari is clear that quality is paramount. There are also independent quality control inspectors responsible for quality assurance reporting to laboratory.

He said new rules will specify a minimum gasoline engine oil specification of API SJ and a diesel engine oil equivalent of API CH-4. All lubricant blenders will be brought under ESMA surveillance for quality assurance. If so, that will apply pressure to smaller blenders in the UAE who have been criticized for poor quality, in some cases recycling base oils for export to markets like Nigeria. As a safeguard, ESMA approvals will be linked to licensing authorities so that blenders that do not adhere to minimum quality standards will be prevented from obtaining a trade license.

UAE Leads in Synthetic Use

Adnocs bullishness on synthetics is supported by data from the UAE market that shows growing use of low SAPS (sulfated ash, phosphorus, sulfur) engine oils in the passenger car segment as the market gravitates to higher specification products. Among the six member GCC (Gulf Cooperation Council), the UAE has a high level of awareness of OEM and API specifications, Al Ammari said.

That awareness is due in large part to the fact that 85 percent of the market is dominated by international and government-owned oil companies. Adnoc claims it controls around 30 percent of the UAE market, a figure that could rise given its increasing vertical integration as a result of local access to high quality base oils.

In the heavy-duty market, Adnoc estimates monogrades with API CF specifications account for 65 percent of the volume, and multigrades (API CH-4, CI-4 and CJ-4) make up the balance. UAE buses now use low-sulfur diesel, and buses with Euro 4 and 5 engines are fitted with exhaust system filters. To meet the emission control requirements, Adnoc markets low-sulfur diesel and low-SAPS engine oils.

Al Ammari pointed out that there is a clear shift to multigrades as a result of the GCC minimum specification of API CH-4. In addition to the automotive market, manual and automatic transmission fluids, hydraulic oils, greases, coolants, brake fluids, compressor oils, turbine oils, industrial gear oils and machine oils make the UAE a diverse market for blenders.

Although the size and diversity of the UAE market is attractive, the size of the export market provides the major opportunity. The majority of lube exports are destined for automotive markets and blended in 32 plants in the UAE. The relatively easy export procedures and tax free environment make it a strong contender to take advantage of the gradual shift to higher specification products.

Setting aside the political complexities, Iran offers an obvious market for synthetic oils in the medium term, as analysts expect a flurry of investment from Europe. Also, the expected upgrading of the vehicle fleet will see increased consumption of higher grade oils. One executive who asked not to be identified due to the sensitivity of the matter said the proximity of the UAE to Iran and its understanding of the country place it in an advantageous position for knowledge transfer and early investment after sanctions are lifted.

Adnoc is setting up a base oil storage and delivery terminal in one of its northern facilities since Iran is only 140 miles from the UAE. Besides Iran, Adnoc may challenge traditional Group II and III base oil suppliers in Korea and Malaysia. At the moment, Adnocs only regional competitor is Bapco (Bahrain Petroleum Co.) and that companys marketing relationship with Finnish marketer and refiner Neste Oil.

How Adnocs base oils marketing strategy plays out will be interesting because it ruled out a similar agreement with Neste, deciding instead to go it alone. Adnoc is currently in discussions with additive suppliers over formulation approvals, it said during the Abu Dhabi conference.

Adnoc Distribution has also announced it will bolster its position in the finished lubricants market by building a state-of-the-art lube and grease plant. The new fully automated plant will be located at Khalifa Port and will occupy 90,000 square meters. The first phase is due to be completed by 2020, with an initial capacity of 100,000 tons; the second phase is due to be completed by 2025, with a total capacity of 200,000 tons.

Buoyant Outlook

Adnocs prediction of the growing use of synthetics is supported by recent research. Globally, excluding process oils, synthetic and semisynthetic lubricants account for close to 14 percent of total demand, according to Kline Group. One reason is that the supply of high performance base stocks has significantly increased in the last decade. In the last five years, the share of Group II/III in overall supply has increased from 30 percent to just below 50 percent in 2015, Kline said.

Factors influencing the use of synthetic lubricants are a complex combination of supply push and demand pull dynamics. Access to high performance base stocks has undoubtedly changed the market, but demand has also forced the adoption of synthetic lubricants.

Clearly, environmental and regulatory factors have pushed OEMs to demand high specification lubricants with a cleaner outcome. Economics also plays a part as cost optimization has quickly risen up the agenda. In addition, synthetic PCMO is also no longer the exclusive domain of global majors said Kline, noting that national oil companies, OEMs, retailers, distributors and independents are encroaching on the market.

Base stock usage in different applications is driven by suitability of physical and performance characteristics with lubrication requirements, availability and economics also weighing in. Kline said synthetic base stock demand will be driven by growth in consumption of synthetic lubricants, itself a function of finished lubricant growth and the penetration of synthetics.

Within the category, competition between base stocks is driven by their performance, price and availability. Kline cites as examples Group III/GTL versus PAO, synthetic esters versus alkylated naphthalenes and other products.

Despite predictions of flat growth in the lubricants market, synthetic and semisynthetic lubricants will see strong growth. That is due to OEM technical requirements and increasingly onerous fuel economy and emission standards. The widespread closure of Group I plants and the spread of modern manufacturing is also supportive of the category, as will be marketing and promotional activity by synthetic lubricant marketers and marketers of synthetic base stocks.

Group III/GTL base stocks will also grow as they find higher use in synthetic PCMO and other automotive applications. Due to better availability and lower prices, Group III/GTL will capture the dominant share of this new demand Kline believes. It adds that while PAO will lose a small portion of market share to Group III, its consumption will grow due to growth in high viscosity applications – where it does not face competition from Group III base oils – and high performance automotive applications. Many applications currently using PAO will continue to do so, and new applications will increasingly favor Group III/III+.

The Middle East is a complicated neighborhood, and the ebbs and flows of the political backdrop can never be ignored. Even so, the UAE has forged a reputation for stability and a business friendly environment. Adnocs strategy of carving out a niche in synthetic lubricants looks like a promising bet as both regional and global markets deal with overcapacity and the spreading commoditization of the sector.

At a time of unprecedented competition in the finished lubricants sector, marketers are increasingly pressed to find ways to differentiate their brands. Adnoc looks like it has gone some way toward reaching that objective.