ASIA LUBRICANTS 2006

20-21 April 2006

THE ASIAN BASE OIL MARKET

Tony Regan TRI-ZEN International Pte Ltd Singapore

THE ASIAN BASE OIL MARKET

THE BASE OIL MARKET IN ASIA

SUPPLY & DEMAND AND HOW INNOVATIVE AND FUTURE TRENDS MAY IMPACT THE MARKET
The evolution of premium baseoil markets in the USA and Europe and likely 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

Asia Lubricants 2006, Singapore

20-21 April 2006

THE ASIAN BASE OIL MARKET

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

API SJ-SM PCMOs and CG-4 HDDO are formulated using Group II/II+ baseoils. Chevrons hydrocracking and isodewaxing technology led market towards 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)

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

Asia Lubricants 2006, Singapore

20-21 April 2006

THE ASIAN BASE OIL MARKET

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 premium baseoils. Euro refinery configuration and crude mix tended to produce a better Group I than in North America and Group II would require more severe operations 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 for HDMO. USA a likely source following Motivas expansion. Could back out substantial Group I or trigger further closures of old plants

Asia Lubricants 2006, Singapore

20-21 April 2006

THE ASIAN BASE OIL MARKET

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 from Singapore 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 and India/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 as lube producers and vehicle manufacturers seek global uniformity

Asia Lubricants 2006, Singapore

20-21 April 2006

THE ASIAN BASE OIL MARKET BASE OIL TRADE FLOWS 1995

Asia Lubricants 2006, Singapore

20-21 April 2006

THE ASIAN BASE OIL MARKET

BASE OIL TRADE FLOWS 1995

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

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20-21 April 2006

THE ASIAN BASE OIL MARKET

WORLD BASE OIL MARKET 2005

Group V (Esters), 0.1 mill 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

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20-21 April 2006

THE ASIAN BASE OIL MARKET

BASE OIL TRADE FLOWS - 2005

Group I Group II/III

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20-21 April 2006

THE ASIAN BASE OIL MARKET

BASE OIL TRADE FLOWS 2005

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.

Asia becoming a supply/trading centre with some two-way movements

ExxonMobil exporting Group II from Singapore to USA but other majors importing US Group I (particularly Brightstock) and Group II into Asia Lower Group I exports from China. Exporting some Group II but using most domestically. 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 Lubricants 2006, Singapore

20-21 April 2006

THE ASIAN BASE OIL MARKET

BASE OIL TRADE FLOWS A 2010 SCENARIO

Gp III Gp II GTL GP II/III

Group I GTL Base oil Group II/III

Asia Lubricants 2006, Singapore

20-21 April 2006

THE ASIAN BASE OIL MARKET

BASE OIL TRADE FLOWS A 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 also India and Europe Malaysian Group III production means Malaysia/Singapore become export hubs for Group II/III GTL baseoil exports have started from Qatar. Russian exports increase. Lukoil planning to double Group III production in 2007 and open new Group II+/III capacity by 2010 A global baseoil market is dominated by three major exports hub USGC for Group II, Korea for Group III and Singapore/Malaysia for Group II/III Qatar becoming the 4th hub with substantial exports of GTL baseoil

Asia Lubricants 2006, Singapore

20-21 April 2006

THE ASIAN BASE OIL MARKET

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 in 2015:
Refiners not prepared to meet the cost of upgrading old refineries to meet latest environmental and product quality standards Narrow differentials with premium baseoils and the need for more additives may make Group I based lubes less economic than Group II

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20-21 April 2006

THE ASIAN BASE OIL MARKET

WORLD BASE OIL MARKETS 2010 ESTIMATE

Group IV (PAO), 0.31 mill tonnes Group III, 3.14 mill tonnes Group II, 10.8 mill tonnes Group V (Esters), 0.06 mill tonnes

Group 1, 30.2 mill tonnes

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20-21 April 2006

THE ASIAN BASE OIL MARKET

BASE OIL CAPACITY EXPANSION 2005-2010 MID EAST/ASIA

Start up 2006 2006 2006 2007 2008 2008 2008 2008 2010 Total Country Korea Japan India Korea Taiwan Taiwan Malaysia Bahrain India Operator SK XOM BPCL GS Caltex CPC FPC Petronas Neste/Bapco MRPL Location Ulsan expansion Wakayama expan. Mumbai Yosu Kaohsiung Mai Liao Melaka Manama Mangalore Group II kt 28.5 180 228 208 300 Group III kt 85.5 68.4 456 220 312 400 250 1792

945 Naphthenic 400 250

2007 2008

China China

CNOOC PetroChina

TBN Karamay

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20-21 April 2006

THE ASIAN BASE OIL MARKET

ASIAN BASE OIL CAPACITY EXPANSION

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20-21 April 2006

THE ASIAN BASE OIL MARKET

ASIAN BASE OIL CAPACITY 2000-2010

18 16

14

12

Mill tonnes

10

0 2000 Group I Group II 2005 Group III GTL baseoil 2010

Asia Lubricants 2006, Singapore

20-21 April 2006

THE ASIAN BASE OIL MARKET

ASIAN SUPPLY DEMAND BALANCE

Mill tonnes Lube demand Base oil supply Base oil surplus 2005 12.31 12.59 0.28 2010 13.50 14.97 1.47 2015 13.88 14.97 1.09

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

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20-21 April 2006

THE ASIAN BASE OIL MARKET EMISSION LEGISLATION CARS

USA Japan EU Australia Bangladesh China (BJ & SH China (Others) Hong Kong India (main cities) India (others) Indonesia Malaysia Philippines Singapore Thailand Vietnam (diesel) 2000 2001 500 ppm sulp 500 ppm sulp Euro 3 350 ppm sulp Euro 1 Euro 1 Euro 1 Euro 1 Euro 2 Euro 1 Euro 1 Euro 2 Euro 1 Euro 1 Euro 1 Euro 2 Euro 2 Euro 4 Euro 3 Euro 1 Euro 2 Euro 4 E3 E4 2002 2003 2004 2005 2006 2007 15 ppm sulp 50 ppm sulp 10 ppm sulp Euro 4 50 ppm sulp Euro 3 Euro 4 Euro 3 Euro 2 Euro 4 Euro 3 Euro 2 Euro 1 Euro 2 Euro 4 Euro 4 Euro 3 2008 2009 2010

Euro 5 10 ppm sulp

Euro 2 Euro 2 Euro 2 Euro 3 Euro 2

Euro 4 Euro 3

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20-21 April 2006

THE ASIAN BASE OIL MARKET

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 avoid harming the after treatment devices. Emission regulations/hardware require lube upgrades to API SM (PCMO) and PC-10 (HDEO) These lubes require premium baseoils 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 unfavourable comparisons with international majors. Low premiums for Group II/III and lower additive costs has led to early take up in Asia

Commercial drivers

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20-21 April 2006

THE ASIAN BASE OIL MARKET

GTL BASE OIL PRODUCTION - QATAR

Operator Sasol/QP Sasol/Chevron Shell/QP ExxonMobil/QP Total bbls/day Mill tonnes Start up 2005 2009 2010 2011 Oryx Oryx Pearl Name Capacity b/d 34,000 73,500 140,000 154,000 401,500 Baseoil production b/d 10% 0 7,350 14,000 15,400 36,750 1.90 15% 0 11,025 21,000 23,100 55,125 2.87

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 production but this depends on diesel netback.

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20-21 April 2006

THE ASIAN BASE OIL MARKET

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 to 200 mill tonnes in 2010. GTL diesel is the perfect product for the ultra low sulphur diesel market Thus GTL plants may start up in max diesel mode with the main market being Europe. Some exports to USA and Japan. GTL base oil production may be cautious, say 10%, to lessen its impact on a market with adequate supplies of premium base oils. Initial market for GTL base oil is likely to be Europe

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20-21 April 2006

THE ASIAN BASE OIL MARKET

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 of Group II+ and Group III

In practice a number of factors will influence the netbacks GTL producers 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 GTL products e.g. waxes, white oils

Asia Lubricants 2006, Singapore

20-21 April 2006

THE ASIAN BASE OIL MARKET

CONCLUSION
Global lube growth may only average 0.2% per annum over next ten years as longer drain intervals impact demand. Asia, the largest market, will also be fastest growing aai 1.2% Base oil prices currently firm as global surplus reducing. However Group II/III capacity is expanding faster (2005-2010) than Group I shutdowns. All grades in surplus for next ten years Asian premium baseoil capacity growing much faster than technical need Globalisation of baseoil business around three trading hubs Technical need for premium base oils in Asia grows substantially over next 4 years. Asia will be using similar lube grades to rest of developed world by 2010. GTL base oil will need careful marketing. May not capture a premium.

Asia Lubricants 2006, Singapore

20-21 April 2006

THE ASIAN BASE OIL MARKET Thank you

Tony Regan, Principal Consultant TRI-ZEN International Singapore
and Shanghai Jakarta Hanoi Bangkok Mumbai Los Angeles Vancouver Melbourne Perth

A business consulting company providing advisory services to the upstream and downstream energy, power, oil and gas industries in Asia Pacific.

Asia Lubricants 2006, Singapore

20-21 April 2006