Naphthenic basestocks, classified under the American Petroleum Institute’s (API’s) Group V category, have remained a niche, yet important, basestocks category. Per a recently completed market study by Kline – Global Lubricant Basestocks: Market Analysis and Opportunities – naphthenic basestocks represented around 10% of the global demand in 2019. This market share has remained at an almost constant level over the past decade.

Naphthenic basestocks offer certain advantages including their wide range of viscosities and high additive solubility. This has helped them establish their own demand in industrial lubricants. However, owing to their low viscosity index (VI), naphthenic basestocks are rarely used in automobile applications, aside from greases.

Per Kline’s analysis, the top applications for naphthenic basestocks include rubber process oil (RPO), metalworking fluid (MWF), electrical insulation oil (EIO), and greases. Besides these, naphthenic basestocks can be used in a host of general industrial oil (GIO) applications where VI is not a key consideration. They can also be used in applications like printing inks, spray oils, adhesive and sealants, and explosives, among others.

As stated above, naphthenic basestocks are commercially available in a wide range of viscosities; they range from 35 SUS to as high as 5,000 SUS, providing them with an edge over basestocks that have a limited viscosity range. Furthermore, their high solubility makes them a preferred basestock in applications like MWF and greases, where additive solubility is critical. In EIO applications, naphthenic basestocks are mainly preferred for their good low-temperature performance compared to paraffinic basestocks. In RPO applications, they are preferred due to their non-carcinogenic nature.

Bearing the brunt of COVID-19

Some of the key applications of naphthenic basestocks, including metalworking fluids and rubber process oils, have been badly impacted due to the COVID-19 outbreak. Automobile production across the world has declined considerably, reducing the demand for MWF, which is one of the key application segments for naphthenic basestocks. Demand for RPO has also declined sharply, as tire sales are down due to the poor automobile sales. Further, naphthenic basestocks are additionally used in processing elastomers, which are widely used in automobiles.

On the other hand, demand for naphthenic basestocks in EIO applications was relatively insulated, providing a cushion to help contain the shock of the decreased demand. Per Kline’s estimates, the global naphthenic basestock market may register a decline of around 10%-15% in 2020, owing to the COVID-19 outbreak.

Potential market opportunities

Naphthenic basestocks are being considered favorably as a substitute for Group I basestocks, which have dwindled in supply over the past decade. As Group I basestocks continually become obsolete for use in automotive engine oil applications and compete against Group II and III basestocks, a dip in demand has forced a lot of capacity to shut down. This created Group I availability issues for applications where Group II and III basestocks were not technically suitable, despite having surplus availability. This void can be easily bridged by naphthenic basestocks.

Globally, the challenges for Group I plants have not subsided. Rather, they face more obstacles than ever, magnified by new developments like IMO 2020 regulations. The COVID-19 outbreak in early 2020 sent global lubricant demand southwards, severely impacting operations of Group I basestocks, which had already been operating at their historically lowest average rates globally. Thus, this demand erosion has resulted in even greater challenges for Group I plants. It is anticipated that the pace of Group I capacity rationalization will accelerate in the future, especially if Group II/II+ capacity additions continue unabated across the world.

Naphthenic basestocks can also be used in formulation with Group II basestocks to mimic Group I basestock properties. This solution, although still in its nascent stage, can greatly solve the issues arising from a Group I short supply in the future. However, this solution will be more palatable to blenders only if it does not require a high cost of reformulation and there is an imminent Group I supply disruption.

Facing challenges of its own

Over the past several years, naphthenic basestocks have cemented their position in several lubricant formulations as a key substitute to Group I basestocks, which, again, have been facing dwindling supplies. Per Kline estimates, the global supply for naphthenic basestocks stood at 3.6 million tonnes compared with a total capacity of around 5.8 million tonnes. This indicates that the global naphthenic basestocks capacity remains underutilized, at just over 60% of average operating rates. Thus, the naphthenic basestocks market has sizeable bandwidth to cater to new demand growth.

Global Naphthenic Basestock Capacity by Region, 2019

While opportunities for naphthenic basestocks exist in the market, naphthenics face several challenges of their own, with one of them being the limited availability of naphthenic crude, which limits geographic spread of naphthenic basestocks production. The bulk of the naphthenic basestock production is centered in a handful of countries, including the United States, China, Japan, Sweden, Germany, and Brazil. Venezuela also has some capacity to produce basestocks, but its lone plant has remained non-operational for a few years now. Therefore, naphthenic basestocks do not have a wide geographic production base. Moreover, only a handful of North American and European producers actively participate in the export markets. Much of the production from China and Japan is consumed within these countries. The smaller number of supply options does not sit favorably with blenders, who would like to ensure continuity in availability and plan for unforeseen exigencies and outages in supply.

One major factor recently impacting the naphthenic basestocks market was the restrictions faced by Nynas owing to Venezuela Sanctions Regulations by the United States government. Petrόleos de Venezuela S.A. (PDVSA) had a majority stake in Nynas, resulting in Nynas falling under the purview of these sanctions. This created not only crude availability issues for Nynas, which operates two naphthenic plants in Europe, with a total production capacity of 730-740 kilotonnes per year, but also banking issues, which came bundled with the sanctions. To escape the sanctions, Nynas restructured its ownership by reducing PDVSA’s share to around 15% from the previous 50%. In addition, Nynas has completely switched away from Venezuelan crude as they increased share of other sources in their crude oil mix. This development, involving normalization of operations, is positive for the naphthenic market, as the supply availability prospects are strengthened. During the period of sanctions, several lubricant blenders who used naphthenic basestocks started becoming wary of the looming uncertainty.

Earlier last year, LyondellBasell shut its naphthenic plant in the United States following the expiration of its sales contract with Calumet. The plant had a capacity to produce around 180 kilotonnes per year of naphthenic basestocks. Petrobras, which operates a naphthenic plant in Lubnor, Brazil, with a capacity of 65-70 kilotonnes per year, had been considering selling this refinery as part of its divestment plan. However, the outbreak of the COVID-19 pandemic could delay these plans.

The road ahead

It is widely expected that the global finished lubricant market, after registering a sharp decline in demand in 2020, will gradually inch toward recovery. In fact, the trough created due to lockdowns across the world is well past and the markets have already begun their recovery, though it may take some time before the market demand normalizes to reach pre-COVID-19 levels. Furthermore, the market is replete with uncertainties that may impact the road to recovery. Nonetheless, the long-term market prospects for naphthenic basestocks are stable owing to the anticipated vacuum created by Group I supply reduction and the recovery in finished lubricant demand.

Some applications that are in nascent stages are also being looked upon as potential new growth segments for naphthenic basestocks. One such application is in the production of battery separators. This application specifically holds the key, given the growing thrust on adoption of electric vehicles across the world.

One of the most critical factors for growth in naphthenic basestocks going forward will be the assurance of a continuous supply. To ensure continued growth, naphthenic basestock suppliers will need to make sure that blenders remain confident about this aspect.

The significant drop in lubricant demand expected in the first half of 2020 and the prospect of a prolonged and weak recovery—all due to the COVID-19 pandemic—has the potential to profoundly transform the basestocks industry.

For a decade, lubricant basestock supply has been characterized by significant surplus capacity. Static basestock demand, and the continuing addition of new capacity, translated into lower capacity utilization and a decline in profitability. Simply put, the basestock industry was in financial difficulty even before 2020. Now, while the COVID-19 pandemic and concurrent drop in crude oil prices has created more short-term pain, it may force some sanity into the industry in the long term.

A sharp decline in basestocks demand

Overall lubricant basestock demand is closely tied to finished lubricant demand, as lubricants account for more than 90% of the basestocks market. At the time of this writing, Kline estimates that global finished lubricant demand could decline by 15% to 30% in 2020 compared to 2019 due to the COVID-19 pandemic and related containment efforts. (See The Impact of the COVID-19 Pandemic on the Global Lubricants Industry.) As a result, overall lubricant basestocks demand is likely to see a similar drop in consumption, though the impact on different API Groups will be different.

With restrictions on people’s movement in lockdown situations, consumer automotive lubricants will be impacted immediately. However, in the event of prolonged lockdowns, significant reductions in demand will be experienced by commercial and industrial lubricant markets as well.

A contraction in the consumer lubricants market is having an immediate impact on demand for Group III/III+ basestocks, especially in markets with higher penetration of high-quality passenger car motor oils (PCMO). For example, the United States and much of Western Europe have lockdown conditions affecting personal mobility and hence PCMO demand. Both regions have a high share of high-quality PCMO blended with Group III/III+ and PAO. Therefore, these basestocks will see the most significant drop in demand. In contrast, due to the typical formulations used in the Asia-Pacific region and in the rest of world, the impact of reducing PCMO demand will be experienced by Group II/II+ and Group I basestocks in these regions.

Since Group II/II+ basestocks are the leading materials used to formulate heavy-duty motor oil (HDMO), a declining commercial segment will have the biggest impact on these basestocks. Of course, there will be regional variations, with North America and Asia-Pacific witnessing much higher declines in Group II/II+ in contrast to other regions that have relatively higher shares of Group I in HDMO formulations.

Demand for other automotive products including gear oils and automatic transmission fluids (ATF) is more dependent on factory-fill (driven by automotive production) than service-fill (driven by automotive population). Amid severe lockdown conditions, during which automobile prduction is halted, demand for these products is impacted more severely than engine oils. Decline in demand for ATFs will primarily impact demand for Group III/III+ and PAOs as these basestocks are used to blend fill-for-life ATF products.

A decline in demand for industrial products will see the biggest decline in demand for Group I basestocks since Group I accounts for the majority share in the formulation of industrial lubricants on a global basis. A decline in demand for industrial products will also result in demand loss for naphthenics.

Overall, the basestocks market could lose between 5.0 to 10.0 million tonnes of demand in 2020. Group I basestocks will account the most to this loss in demand (1.7 million to 3.6 million tonnes), followed very closely by Group II/II+ (1.7 million to 3.4 million tonnes), together accounting for at least two-thirds of the global basestock demand loss in 2020. The loss in Group III/III+ is expected to be around 0.7 million to 1.4 million tonnes, while the balance would be accounted for by Group IV and Group V (including naphthenic) basestocks.

Estimated Decline in Global Lubricant Basestocks Demand Due to Covid-19 Containment Efforts, 2020

Impact on basestock supply

The outbreak of COVID-19 can potentially reduce basestock supply in several ways:

• Basestock producers adjust their supply to match the declining basestock demand. This can either happen in the form of reduced run rates for basestock plants or the temporary/permanent shutdown of operations.
• Some basestock producers may use this time to do a maintenance turnaround.
• Crude oil refineries will run at a lower rates as demand for fuel will decline. This invariably will result in constrained availability of feedstocks to run basestock units.

In response to a decline in demand of 5.0 million to 10.0 million tonnes, there will clearly have to be an impact on basestock supply. From preliminary estimates, the global basestock production in 2019 was around 40 million tonnes, representing an average effective operating rate of approximately 77%-78% (calculated as a fraction of effective capacity after taking into account planned and unplanned outages). If the basestock availability were to drop by 5 million tonnes to match the reduction in demand, the global average operating rate would be reduced to under 70%. Clearly, basestock margins will suffer tremendously at such a steep reduction in operating rates. Therefore, it is anticipated that to adjust basestock availability, both effective capacity and average operating rates will have to drop.

Impact of Covid-19 on Global Basestock Supply under No Change in Capacity, 2020

Such changes in basestock supply can potentially alter the basestock landscape permanently. For instance, basestock supply disruption in Europe will reduce Group I availability, motivating blenders in Europe and AME to search for alternatives— most likely, Group II. Such formulation shifts are permanent because of the cost associated with the shift.  

An inevitable fallout of the current turmoil will be the deferring or shelving of planned basestock capacities. Such plans have been impacted by a double whammy of plummeting basestock demand and unfavorable economics arising because of the decline in crude oil prices. In many instances, basestock addition/expansion was a part of the overall refinery expansion plans. In a low crude oil prices scenario, several of these plans may have been rendered economically unviable. Any plan which hasn’t yet moved to the construction phase is likely to be re-evaluated. Around 3.5 million to 4.0 million tonnes of new basestock capacity was planned to be added globally over the next five years. Of this, more than half is in the planning stage. Thus, at least 2.0 million to 2.5 million tonnes of new capacity plans may be deferred or canceled.  

Conclusion 

A sharp decline in basestock demand is expected due to COVID-19. The actual magnitude of this decline will depend on the length and severity of the lockdown. While the decline in demand will be first borne by Group III/III+, owing to its higher usage of PCMO products, in the longer lockdown situation, Group I demand will suffer the most; it will be closely followed by Group II. This decline in demand will be accompanied by a decline in availability of basestocks. The supply disruptions could significantly alter trade positions for various regions, and blenders in some regions could face availability issues. This could potentially alter blending preferences and approaches followed in these regions as well. Because of the global supply-demand situation, much of the new planned capacity plans could be put on hold until the market environment improves. Further, the current market situation will result in some of the excess basestocks capacity being retired.  

Anuj Kumar is a project manager for Kline’s Global Lubricant Basestocks study, scheduled to be published in July 2020. Request more info.

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