Global Base Oil Product Trends

Transcription

1 Global Base Oil Product Trends Brent K. Lok Senior Product Manager - Base Oils Mark L. Sztenderowicz Product Development Specialist - Base Oil Technology Chevron Products Company and William M. Kleiser Senior Staff Engineer, Automotive Engine Oils Oronite Global Technology Presented at the World Base Oils Conference London February, 2000

2 Page 2 Introduction For the fifty to sixty years prior to the beginning of the 1990 s, paraffinic base oil quality was very slow to change. With a few exceptions, most paraffinic stocks, regardless of location, were made through solvent extraction of selected crude oil streams. Over the last decade, however, significant changes have occurred within this industry. In the early 1990s, the changes began when European engine oil volatility specifications drove European suppliers to offer higher VI/lower volatility base oils. Those cost-effective alternatives to the only preexisting solution using expensive synthetic blend stocks such as polyalphaolefins (PAO) typically involved solvent dewaxing of a fuels hydrocracker (HC) bottoms stream to achieve a high-vi, low volatility product. Although effective as lowvolatility base stocks, these generally are limited product offerings intended only to complement existing Group I base oil slates. These first-generation Group III base oils were low-capital-cost solutions to the volatility challenge that allowed maximum use of existing Group I base oils to be retained. As a result, European base oil capacity still is almost entirely solvent refined (Group I) today, and shows few signs of making any major shift in the near future. In contrast, starting in the mid-1990s the North American base oil industry changed direction, and started to build new base oil plants or substantially modify existing plants to manufacture hydroprocessed (Group II/II+/III) base oils, recognizing their benefits in product quality, low operating costs and flexibility. The result is that in less than a decade, Group II capacity, currently at 40% of the paraffinic market, will have grown to be the dominant paraffinic base oil type in North America. While quality and base oil performance were important drivers of base oil changes in Europe and North America, in Asia supply shortfalls precipitated the building of new base oil plants, often by new players in the industry, and mostly utilizing the newer hydroprocessing technology. The result has been the creation of significant availability of higher performance base oils in a market which, ironically, generally does not yet need them. Why did Europe and North America, two interrelated base oil markets with many very similar driving forces at play, diverge in their approach to improving base oil quality and performance? Will this disparity in base oil supply capability widen or narrow in the future? Will the availability of higher-performing Group II/III base oils in Asia drive existing Group I producers to upgrade to Group II/III, as it did in North America? What further changes are in store for the base oil industry, in each of these regions, in the future? This paper will attempt to answer these questions by examining the underlying drivers for change in each of these three major regions. Because of similarities in their technical requirements, North American and European lubricant and base oil markets will be discussed first. These two markets will then be compared and contrasted in terms of how base oil suppliers have responded to these forces. Next, the Asian base oil market, where drivers are mostly commercial rather than technical, will be discussed briefly. By examining these many varied driving factors, both technical and commercial, in each of the three markets, the authors hope to shed light on why the base oil industry is where it is today, and where it may be going in the future. North American Base Oil Trends In the North American market, transportation lubricants is the primary category in which the most significant base oil changes are occurring. These changes are seen most prominently in motor oils and automatic transmission fluids, and are being driven in large part by more stringent manufacturer specifications. And while the factors affecting each type of product (e.g., passenger car motor oils, heavy duty motor oils) are somewhat different, they share the same themes of longer life, cleaner operation and lesser environmental impact. Performance levels of other lubricants, such as industrial oils and hydraulic fluids, also are moving in the direction of higher quality. This is due in part to the availability of higher quality base oils that are emerging in response to transportation lubricant requirements. Although OEM-driven performance enhancements are less common in this very broad category of lubricants, equipment users welcome performance improvements that boost profitability by reducing downtime, extending equipment life, and increasing productivity. This, plus a trend toward more severe

3 Page 3 operating conditions in some types of equipment has spurred a movement toward premium-grade industrial oils that use advanced base oils as their foundation. The major drivers for change in each of these two product categories will be discussed below, with emphasis on the base oil changes that they have spurred in North America. This is followed by some speculation on what trends may be seen in the future. Transportation Lubricants Passenger Car Motor Oil By far the most prevalent of the transportation lubricants are motor oils, generally split into passenger car motor oils (PCMO) and heavy duty motor oils (HDMO). In each arena, environmental pressure placed on engine manufacturers, in one form or another, is the key factor forcing these OEMs to create new engine oil categories that require higher performance. Along with this pressure is increasing customer demand for reducing operating costs and/or maintenance time. In the case of PCMO, the environmental pressure takes two key forms, which also fall in alignment with customerbased drivers. These are: Improved Fuel Economy: Manufacturers who sell vehicles in the U.S. are required to meet specific Corporate Average Fuel Economy (CAFE) standards, or face severe fines. With the proliferation of larger vehicles, particularly Sport/Utility Vehicles (SUVs), fleet average fuel economy has actually declined in recent years such that it is now very difficult for some manufacturers to meet CAFE standards [1]. Though most consumers in North America, particularly those who are propagating the trend to larger vehicles, care little about fuel economy, OEMs are anxious to gain improvements through any available technical means. Through proper formulation, PCMO can yield a modest benefit in fuel economy relative to today s typical oils. Moreover, due to the need to demonstrate to regulators that engine oil-derived fuel economy benefits don t disappear shortly after the oil goes into the engine, the need has arisen to develop engine oils with fuel economy retention. In addition to improved additive technology, these requirements demand better base oils. Specifically, the base oil must have lower volatility than current oils to help resist evaporative-induced thickening, and it must be more stable to resist oxidation, which also causes viscosity increase, and additive depletion, which can reduce the effectiveness of friction modifiers. Moreover, all of these changes must take place simultaneously with a shift toward lower viscosity grades; SAE 5W-30 is now the recommended oil for most 2000 model year cars, with 5W-20 proposed for the very near future. Cleanliness of Engine and Emissions Controls: - With ever more stringent limits on vehicle tailpipe emissions, vehicle manufacturers are requiring increasingly cleaner engines and systems that affect emissions performance. This requires lower oil consumption to protect catalysts and oxygen sensors, as well as to minimize direct emissions from combustion of engine oil. Also required are cleaner internal engine components, particularly the pistons and rings, which have a significant impact on cylinder sealing and thus control of blowby gases and oil consumption. Again, base oil quality plays an important role. Engine oil volatility has been shown to have a significant impact on oil consumption, and this volatility is determined almost entirely by the base oil. Thus, lower oil consumption demands lower volatility base oils. Lower engine deposits, though most strongly affected by additive formulation, also can be reduced by using more stable base stocks, which resist oxidation and therefore the formation of deposit precursors. On the consumer side, most drivers are happy to reduce the amount of maintenance that must be performed on their cars. With current tune-up and major service intervals now as great as 160,000 km, engine oil is the most frequent maintenance item on most modern cars. Also, many people now lease vehicles instead of buying them, and many of these lessees have little interest in opening their hoods between required service points, much less checking their oil and topping it off if indicated. In addition the same lubricant must suffice for both summer and winter use. Thus, an engine oil with greater life, lower oil consumption, and stable low and high temperature viscometrics is desired, again reflecting the need for base oils of lower volatility and better resistance to oxidation.

4 Page 4 The need to address most of the factors described above has been incorporated into the latest PCMO category. The International Lubricants Standardization and Approval Committee (ILSAC), made up of automotive OEMs, have worked with the oil and additive industries to arrive at their proposed GF-3 standard, which will be licensed by API also as SL, replacing current SJ oils. Nearing completion, this standard will require a significant reduction in volatility and improvement in fuel economy, as well as require fuel economy retention and an improvement in hightemperature deposit-forming propensity. Though not explicitly part of the new requirements, these changes may also provide some modest additional margin of safety when left in the crankcase for the full recommended oil change interval, particularly for those who, against good practice, tend not to check their oil level between changes. Effect on Base Oils For base oils, all of this favors a shift from conventional solvent refined (API Group I) stocks to hydroprocessed stocks (Group II) The latter stocks have demonstrated superior resistance to oxidation due to the destruction of unwanted components during processing, yielding a purer base stock that responds better to oxidation-inhibiting additives. This can be seen particularly in the Sequence IIIF engine test, which uses viscosity increase of the oil during the test as a measure of oxidation. In Figure 1, for example, it can be seen that Group II oils have substantially less viscosity increase than Group I oils despite using the same additive formulation. Group II stocks also tend to allow for better dispersancy of contaminants, leading to lower sludge and varnish levels in tests such as the Sequence VG. This difference is exemplified in Figure 2, which shows poorer sludge and varnish for Group I base stocks relative to Group II in this engine test. Several researchers have also shown that Group II stocks offer benefits in fuel economy relative to Group I stocks, and may have an edge in fuel economy retention [2-4]. All of these factors indicate that Group II stocks can provide a significant formulating advantage when attempting to meet upcoming requirements such as GF-3, a projection of which is shown in Figure 3. Furthermore, most Group II stocks tend to have modestly lower volatility relative to Group I stocks of similar viscosity, in part due to the composition of the oil but also due to the relatively modern plants where most of them are manufactured. This should help blenders meet the volatility limit of 15% evaporation in the Noack test, as proposed for GF-3. 5W-30 oils will require base stocks with a VI of between 110 and 120, substantially higher than today s typical paraffinic stocks with VI of Because hydroprocessing is the preferred route for increasing VI to the necessary levels, these stocks almost certainly will be Group II. However, due to their atypically-high VI, these stocks have been dubbed Group II-Plus in lubricant industry circles [5, 6]. Heavy Duty Motor Oil In the HDMO arena, the environmental pressures are similar to those facing passenger cars, but they derive from different interests and have a different impact on formulations. As will be discussed, however, the effect on base stocks forcing a migration toward higher-quality Group II and Group III stocks is the same. Emissions Performance: New engine emissions limitations and recent enforcement actions initiated by the U.S. Environmental Protection Agency (EPA) have forced diesel engine manufacturers to find ways to dramatically reduce emissions of oxides of nitrogen (NOx), as well as particulates and hydrocarbons, from modern engines. Some of these strategies, particularly those such as retarded injection timing and EGR that are intended to reduce NOx, in most cases lead to significantly higher soot levels in the cylinder, which increases soot loading in the engine oil. High soot levels cause oil thickening, formation of sludge, and can clog filters, as well as accelerate wear of engine components through abrasion. Some loss of low-temperature pumpability can be seen also in oils with high soot loading if this soot is not adequately controlled. Fuel Economy: Though governmental pressure to produce higher fuel economy in on-highway trucks is far less than what is seen in the passenger car business, truck operators are highly motivated to minimize fuel consumption as this is a significant part of their total operating expense. In heavy duty engines, fuel economy can be improved in many cases by using lower viscosity oils, and by preventing viscosity increase during the life of the oil. Viscosity increase happens in large part due to the accumulation of soot in the oil, as mentioned above, but can be exacerbated by oil oxidation. Consumer Pressure: Another key driver in the push for higher oil quality comes from the desire of truck owners and operators to extend oil drain intervals. The majority of full-size trucks belong to fleets, where managers understand that changing oil means taking a truck out of service, and taking a truck out of service means losing potential revenue. Thus, fleet operators have pressed engine manufacturers to guarantee their

5 Page 5 engines for ever-lengthening drain intervals, and OEMs have responded both by design changes and by requiring higher-quality oil. And once again, the key effect is the requirement to handle higher levels of soot in the engine oil, since the oil will spend more time in the engine before being replaced. Naturally, this compounds the pressure brought by the need to meet more stringent emissions standards, placing extreme pressure on the lubricant. Effect on Base Oils In order to handle the ever-increasing levels of combustion-generated soot pushed into HDMO, these oils must possess high levels of dispersancy. While this has led to increased levels of dispersant additives in oils meeting the latest specifications, such as API CH-4, Mack EO-M Plus and Cummins CES 20076, it also has been found that dispersant effectiveness is enhanced in more highly saturated, low sulphur base stocks [7-10]. This is particularly evidenced in tests such as the Mack T-8 soot thickening test and the Cummins M-11 High Soot Test, where hydroprocessed Group II base stocks perform significantly better than solvent refined stocks despite using the same level of additives. This is illustrated in Figure 4, where the performance advantage of Group II stocks in sootinduced wear and sludge in the Cummins M-11 test is shown. This presents a considerable advantage to formulators striving to achieve the highest levels of HDMO performance, and is causing a rapid shift from Group I to Group II stocks in this category of lubricants. Automatic Transmission Fluid As part of the total vehicle system in modern passenger cars, the performance of the automatic transmission is subject to the same pressures of maximizing fuel economy and minimizing maintenance as were described above for PCMO. In the case of ATF, the key driver is the desire for extended, high-performance service, including fill for life capability. This requires strong resistance to oxidation, viscosity stability, and retention of fluid friction characteristics so as to both minimize wear and prevent unwanted behavior such as shudder. And to be certain that all automatic transmission functions behave as designed even during start-up in cold weather, manufacturers are now requiring even lower resistance to pumping, measured by Brookfield viscosity, compared with today s typical ATF. And for next-generation ATF, exemplified by Ford s Mercon V and DaimlerChrysler s ATF+4 fluids, Brookfield viscosity limits are decreasing to about half of current levels, while the shear stability of the fluid must increase. All of these factors are causing formulators to look to base oils to help achieve the necessary performance. Effect on Base Oils In ATF as in other lubricant applications, hydroprocessed Group II and Group III base stocks provide superior oxidation stability relative to conventional Group I oils. One effect of this is better viscosity control, as demonstrated in the Mercon Aluminum Beaker Oxidation Test, where it is seen that Group II stocks resist oxidative thickening commonly exhibited by solvent refined stocks. Another key benefit of hydroprocessed stocks, which is linked with oxidation stability, is that they allow ATF to maintain acceptable levels of friction performance for longer periods of time, since the friction modifying additives used in ATF remain effective longer. Another key benefit of Group II base stocks, particularly those made with specialized technology such as Chevron s Isodewaxing catalyst, is an improvement in low temperature pumpability relative to solvent refined stocks. This has allowed current ATF, such as that meeting General Motors Dexron III or Ford s Mercon standards, to achieve Brookfield viscosity values of less than 20,000 C while maintaining base stock viscosity at around 4.0 C. In combination with the superior oxidation stability just described, this capability has put pressure on formulators to move to Group II stocks for current ATF applications [11]. Finally, to achieve the combination of even lower Brookfield viscosity and higher shear stability demanded by the next-generation ATFs, the right very-high VI base stocks must be used. In addition to PAO, this includes some modern all-hydroprocessed Group III base stocks like Chevron s UCBOs. These products have the high VI that allows higher base stock viscosity to be used to minimize levels of viscosity modifiers and thus improve shear stability, while improving Brookfield viscosity to levels below those achievable with conventional Group II base stocks. Though relatively low now, the volumes of these ATF products are growing rapidly, and could largely displace today s most common ATF types in a few short years, especially in the factory fill and OEM service fill categories. As a result, Group III penetration into the ATF market should increase rapidly in the near future.

6 Page 6 Gear Oils As with all of the transportation lubricants discussed so far, gear oils are being driven also to achieve longer life. This means better oxidation stability and good shear stability, and for the lightest grades that meet 70W and 75W requirements, low Brookfield viscosity. Gaining OEM approval for extended drain intervals is critical in this field, and the current benchmark is Eaton/Meritor approval for extended warranty. Effect on Base Oils Again, extended life requires a significant improvement in oxidation stability, and this in turn favors allhydroprocessed Group II stocks. In the Eaton-approved category, most current products are PAO-based synthetics, but Group II stocks are beginning to demonstrate the ability to achieve this high level of performance [12]. Group III stocks also are good candidates for certain applications, especially the lighter multigrade products, where the combination of high VI and oxidation stability can be used to achieve superior performance. Industrial Lubricants While OEM-driven performance enhancements are less common in the industrial lubricants segment, performance levels are nonetheless increasing in a number of applications. The obvious driver here is that end users and maintenance managers of industrial equipment encourage anything that improves profitability, and they recognize that performance improvements in their lubricants can reduce downtime, extend equipment life, minimize maintenance costs, save energy, and/or allow greater production rates. In some types of equipment, for example turbines, compressors and industrial gear boxes, there is a trend toward more severe operating conditions such as higher speeds, temperatures and loads, often compounded by reduced oil reservoir volumes. All of these call for lubricants with greater oxidation stability, as this can both improve equipment function (e.g., reduce wear and deposits) as well as increase the useful life of the lubricant. And since most industrial equipment does not experience wide swings in operating temperatures very frequently, oxidation stability is by far the most important aspect of industrial lubricant base stocks. Effect on Base Oils To achieve higher levels of oxidation stability, formulators of industrial oils have found that Group II base stocks have a significant advantage over Group I stocks in many different applications. In Figure 5, for example, the oxidation life in the RBOT test (ASTM D 2272) for hydraulic oils formulated with different base stocks but the same additive package shows a clear advantage for hydroprocessed stocks, in this case both Group II and Group III. This has led many lubricant manufacturers to develop and offer industrial lubricants based on these hydroprocessed stocks, converting products that formerly were blended with solvent refined stocks. Fortunately, this has been facilitated to a significant degree by the rapid expansion of Group II base oil capacity that has emerged in response to transportation lubricant requirements. Although VI is not nearly as important a base stock property as it is in the engine oil and ATF sectors, there are cases in which industrial lubricants can take advantage of higher VI, including the very high levels offered by Group III stocks. These applications typically are those that require performance over a wide temperature range, such as all-weather hydraulic oils. Thus, Group III base stocks are beginning to see application in some areas of the industrial oil segment, and should continue to grow. Synthetic Lubricants Until recently, synthetic lubricants have been blended predominantly with polyalphaolefins or PAO/ester blends. Although widely available, these stocks are made in relatively small volumes. However, with the latest developments in hydroprocessing technology, some all-hydroprocessed Group III stocks fairly can be considered synthetic, since their composition clearly shows them to be man-made [13-14]. Just as important, these stocks possess properties and exhibit performance comparable to PAO in key areas such as oxidation stability, VI, and volatility. As a result, they are viable alternatives to PAO for formulating synthetic lubricants in both transportation and industrial applications. Moreover, the potential capacity for manufacturing such stocks is quite large, as much of the technology now deployed in making Group II stocks can be applied to manufacturing Group III. Therefore, substantial growth in the Group III market is expected as formulators take advantage of this new opportunity, leading to a significant acceleration in the growth of the synthetic market.

7 Page 7 Base Oil Trends for European Motor Lubricants Significant changes are occurring in transportation lubricants in Western Europe. As in North America, one of the areas of most significant and rapid change is in lubricants for trucks and passenger cars. The changes to the requirements being placed on the finished lubricant are having an impact on the desired properties of the base oil used in these fluids. New sources of Group III stocks have entered the marketplace in the last several years. At the present time, Group III stocks have become a cost effective way to meet the physical and performance requirements of European engine lubricants while still allowing usage of the major quantity of Group I stocks manufactured in the region. This trend is continuing as new demands on the finished lubricant continue to highlight the advantages provided by higher VI, highly saturated base stocks. These trends impact both the light duty (passenger car) and heavy duty (trucks) lubricant formulations, although some differences exist in the driving forces. Heavy Duty Motor Oil There are a variety of driving factors that are impacting the base oil needs for heavy duty motor oils in Western Europe. These include: Emission Regulations, Environmental concerns, Vehicle operating costs, Lubricant formulation cost and supply. Increasingly stringent exhaust emission regulations are being placed on heavy duty engines within the European Union. The Euro-3 regulations went into effect this year and the next stage, Euro-4, is planned for These regulations are having significant impacts on engine design and consequently lubricant performance requirements. In addition there are indirect environmental concerns beyond the emission regulations cited above. One of these is the reduction of CO 2 emissions. The most direct way to reduce CO 2 emissions is to reduce fuel consumption. Disposal of used engine oil is another environmental issue. Reducing drain frequency reduces the amount of waste oil generated. Some of the concerns highlighted by European truck manufacturers for lubricants include: Soot related wear and viscosity increase, Oxidation resistance, High temperature deposit control, Fuel Economy. Operating costs in commercial truck fleets is an ongoing issue. Truck manufacturers are striving to reduce fuel consumption because this is critical to their competitive position. In addition, they are increasing the vehicle service intervals. Drain intervals have increased from the range of 30,000km several years ago to as much as 100,000km today. These increases have been linked to new generations of engine hardware and are allowed by increased performance and durability from the lubricant. Further extensions of drain interval are anticipated in the near future, again coupled with higher performance lubricants. Unlike the American HDMO market, the European market has a degree of segmentation. This segmentation has paralleled the different levels of ACEA and OEM approval performance levels. At the lower end of the market are mixed fleet oils designed to meet the needs of both passenger cars and heavy duty trucks. A typical profile is ACEA A2/B2/E2 API CG-4, Mercedes Benz 228.1, Volvo VDS, and MAN 271. At higher performance levels the lubricants are typically products dedicated to HDMO application without gasoline engine performance claims, although some retain some level of claims for gasoline engines. These are typically mineral based 15W-40 or semisynthetic 10W-40 grades and would claim ACEA B3/E3 API CG-4, Mercedes Benz 228.3, MAN 3275, and Volvo VDS 2. At the top of the market are the top-tier diesel-only products claiming the highest levels of OEM approvals. These products are either semi-synthetic 10W-40 or synthetic 5W-30s claiming ACEA E4, Mercedes Benz 228.5, and Volvo VDS 2. Recently the US API CH-4 and ACEA E5 specifications have entered the market. These products represent a further improvement in soot handling requirements.

8 Page 8 At least as important as the technical drivers related to lubricant performance demands, supply and cost issues are major drivers on current and future base oil needs. As usage of high performance base stocks increases, an assured supply of cost effective, high performance, base stocks is essential. The impact of an interruption of supply of high performance base stocks was observed recently when one of Europe s major Group III base stock suppliers was unable to supply product. This situation fueled the realization that additional supplies of such base stocks were required. Effect on Base Oils Performance factors identified above are increasing demands on lubricant formulations. Many of the current advances in overall engine oil performance are as much related to improvements in base stock properties as to improvements in additive chemistry. Issues specific to HDMO include: Soot related viscosity increase control Soot related wear control High temperature oxidation stability Reduced volatility Higher viscosity Index Desirable base stock properties to address these needs include: High level of saturation Very low sulphur Improved oxidative stability and response to oxidation inhibitors Increased viscosity index Reduced volatility Large volume availability Reasonable cost-performance Significant advantages can be shown for lubricant formulations based on Group II or Group III base oils compared to Group 1. In particular: Soot related wear and viscosity increase. As shown in North America, the additive requirements to meet specifications such as ACEA E5-99 and API CH-4 are significantly lower for highly saturated, low sulphur base stocks, such as Group II and III stocks. Improved oxidation stability is observed in finished lubricants using Group II or III base stocks. Advantage can be taken of this by either the use of a more cost optimized inhibition system or by improved overall lubricant stability. Higher viscosity index base oils such as Group II+ or Group III (or Group IV) allow the blending of lower viscosity oils whilst continuing to meet viscometric and volatility requirements. While the majority of HDMO in Europe are presently SAE 15W-40, we anticipate a move towards SAE 10W-30 in order to offer improved fuel economy. Unlike North America, there is only limited capacity for Group II base stocks in Europe. Due to the excess capacity of solvent refined Group I stocks, there has not yet been a large-scale shift in base oil processing technology towards hydroprocessing for 100VI base stocks. However, this situation could potentially change in the near future, with a new refiner having recently announced plans to build an all-hydroprocessing lube plant. Petrola Hellas S.A., a Greek refiner, has licensed Chevron s hydrocracking and Isodewaxing technology to make Group II, Group II+ and Group III base oils in Greece by 2003, and market them in Europe and elsewhere exclusively through Chevron. The pressure to utilize Group II base stocks in conventional viscosity grades such as 15W-40 may increase sharply if other base oil suppliers follow this lead and invest in hydroprocessing technology. In the mean time, there has been considerable expansion in the supply of Group III stocks in the region. The increasing availability of these stocks make lower viscosity HDMO a more attractive possibility, since mixing Group I and III stocks provides the required viscometric properties as well as some level of performance benefit.

9 Page 9 However, the wholesale shift to take advantage of the benefits of fully-hydroprocessed stocks must await the emergence of a critical mass of such stocks in Europe, an event that seems on the verge of occurring. Passenger Car Motor Oil Key driving factors that are impacting base oil trends in Europe include: Emission and environmental regulations Trend toward reduced service intervals Market segmentation OEM-specific oils Emission and environmental regulations are putting even greater pressure on passenger car fuel consumption. This is driven both by the regulatory drive for lower exhaust emissions, including CO 2, as well as consumer pressure due to increasing fuel taxes. In addition to this there is a strong move by a number of European passenger car manufacturers to extend service intervals to as much as 30,000 km. Unlike North America, the passenger car engine oils market in Europe has several distinct tiers of performance. The performance claims, viscosity grade, and type of base stock used differentiate these. A major part of the market is driven primarily by ACEA performance requirements. A large portion of this market is driven by SAE 10W-40 products claiming ACEA A3/B3 along with some OEM requirements, such as VW 500 (though now obsolete) and 505, which are similar to this performance level. A higher tier of products are typically considered to be semisynthetic and normally are 5W-40 or 5W-30 products. These products claim ACEA performance but also add a number of upper tier OEM approvals such as BMW, Porsche, and DaimlerChrylser. Finally, at the top of the market are fully synthetic products that are now moving to grades such as 0W-40. A distinguishing feature of almost all of these products is the maintenance of a high temperature high shear rate (HTHS) viscosity of 3.5 cp in order to meet the majority of European OEM requirements. In addition to consumer products, a recent phenomenon is the development of OEM-specific factory fill lubricants meeting the unique requirements of the OEM. What distinguishes these new generation factory fill oils is that they are focusing on providing top level performance designed specifically for the OEM s engine. The first generations of these oils have been low viscosity products with reduced HTHS viscosity in order to improve fuel economy. The current Volkswagen factory fill specification is an example of such oil. This OEM requirement specifies a high performance 0W-30 for factory fill purposes. Both Mercedes Benz and Opel are also targeting similar specific high performance fluids for factory fill application, although the specific requirements of each are designed to meet the needs of the specific OEM. To date, the market impact of these products is unclear. Effect on Base Oils Mainline PCMO products claiming ACEA performance are typically SAE 10W-40, 15W-40, or 15W-50. The 10W- 40 grade in Europe is typically comprised of a mixture of Group I with 10-20% Group III or Group IV in order to meet volatility requirements. Group III is favored over Group IV for this purpose because it is a more cost-effective product for volatility control. The alternative to mixtures of conventional Group I and Group III stocks is the production of specific, low volatility solvent extracted neutrals. However, by nature, these base stocks are expensive to manufacture via solvent extraction. In North America we have observed the introduction of Group II+ stocks to address a similar issue. However, the trend in Europe, for the time, is to combine the existing Group I stocks with the increasingly-available Group III base oils. This trend could begin to change, though, when Petrola comes into the market in the near future with hydroprocessed Group II+, as well as Group II and Group III base stocks. In the past few years we have seen the 5W-30 and 5W-40 products evolving from Group IV/V blends to mixtures which comprise high levels of Group III stocks. As with the 10W-40 products, the motivation is reduced cost whilst maintaining most rheological properties. The 0W-30/40 products remain blended with Group IV and V stocks at this time.

10 Page 10 Overall there is a trend to lower viscosity products. This is seen both in the factory fill and service requirements. These requirements can vary from manufacturer to manufacturer, but it is becoming clear that reduced viscosity in order to improve fuel efficiency is a common one. This is coupled with the maintenance of current volatility limits as well as increased performance standards. For example, the TU5JP test being developed as a replacement for the TU3MH is expected to put further pressure on oxidation and volatility performance requirements. In addition, a split on HTHS viscosity requirements among OEMs in Europe has developed. Some OEMs are promoting low HTHS viscosity products (2.9 cp) while others still require 3.5 cp minimum. As viscosity grades are reduced and performance requirements increase, it is becoming necessary to use increasing amounts of high VI base stock in combination with less Group 1 in order to meet the expanding, and often conflicting combinations of requirements. Tests that are developed to demonstrate long drain capabilities are stressing the volatility and oxidative stability of base oils. In these tests, such as the VW PV1449 and VW TDi, the performance benefits of Group III base stocks versus Group I become evident. Some of these test requirements stress volatility to the point where the Group 1 stocks comprise a minority of the base stock blend. While Group IV performs well, in many cases Group III can offer a cost-effective alternative. Summary Several performance and environmental issues are impacting the future of base oils in Europe. The significant treat cost benefits for top tier HDMO products related to Group II or III base stocks is well known to oil marketers. In addition, increasing pressure on oil durability and reduced viscosity demands use of higher quality base stocks. Group III stocks have been used in Europe for a number of years but have recently increased in importance as commercial supply and performance demands have increased. These Group III stocks have been used in lieu of the introduction of widespread use of Group II or Group II+ stocks because they allow the continued utilization of the existing Group I manufacturing infrastructure. However, we see pressures on both the HDMO and PCMO sides which could in the longer term put such combinations at a disadvantage versus base stock mixes comprised entirely of highly saturated, low sulphur base stocks such as those resulting from hydroprocessing technology. Several of these factors are discussed above, including improved soot handling which allows lower additive treatment costs, improved deposit formation tendency, greater oxidation stability, and better ability to tailor volatility. In addition, in the future we recognize the increasing concern about the contribution of lubricant sulphur to after-treatment durability. Since a Group I stock is a significant source of the lubricant-based sulphur, it may become necessary to reduce these levels as the next generation of emission control systems begin to enter the market place in the last half of this decade. At least one refiner, Petrola Hellas, has seen the writing on the wall and has made plans to introduced all-hydroprocessed Group II/II+/III base stocks in Europe beginning in This signals that the beginning of a widespread change in the European base oil industry may be just around the corner. Comparison and Contrast: The North American and European Markets The base oil market, especially in North America, is going through unprecedented change today. This switch to fast-changing base oil product specifications, which started in the early 1990s, was initially met with modest changes in existing hardware and introduction of specialty supplemental products, especially in Europe. But as the specifications transitioned from upgrades in physical properties, such as volatility, to chemical performance upgrades, such as oxidation stability, fundamental changes in the way producers met the challenge were seen. Recognizing the inherent inflexibility of solvent technology, and the substantial investment in that technology needed just to make the next hurdle vis-a-vis the better cost position of the newer technologies, producers started building Group II/II+/III plants - but mostly in North America. Why, given the similarity in direction and underlying driving factors did this same shift in manufacturing not take place in Europe? The answer lies largely in timing. As has been discussed, Europe introduced stringent volatility requirements in the early 1990s that could be met cost-effectively by bringing fuels hydrocracker bottoms streams into an existing solvent plant for processing to what we now call Group III base oil. With some notable exceptions, these oils were designed mostly to address volatility. In North America, the drive to improved volatility was slower in coming and coincided with development of engine tests, such as the Mack T8, that preferred highly-saturated base oils, typically Group II or greater. The higher

11 Page 11 saturates content also brings better oxidative and thermal stability that brings many other desired benefits described earlier. Simultaneously, in the mid 1990s base oil processing technology advancements, mostly led by Chevron, offered a solution to these and other problems by offering: Better volatility through higher VI, Better oxidative/thermal stability through higher saturates, Better low temperature performance through catalytic dewaxing, e.g. Chevron s ISODEWAXING technology, More flexibility to meet the changing needs of the base oil market through modern plant design and the capability to move from Group II to III or anywhere in between, Greater crude source flexibility, Much lower operating cost to run a Group II plant critical in a mature market with flat growth. Thus, the concomitant availability of technology for licensing, the need for flexibility to manufacture Group II and Group III base oils, and the development of specifications that demanded such oils drove North American suppliers to build new Group II/III plants rather than follow the European solution of just a few years earlier. In addition to these events, three other factors made this move to Group II/III plants gain momentum in North America: The prior existence of Chevron s, Petro Canada s, and Sun s Group II plants in North America meant that many formulators were already familiar with how to work with these types of base stocks. Conoco and Pennzoil s new joint venture plant, Excel Paralubes, meant that the largest PCMO supplier in North America was going to Group II. Group II technology licensing became practical and competitive, with more than one supplier. As a result, Group II/III capacity expanded so rapidly that now, after only a few short years, these base stocks are approaching half of the paraffinic base oil capacity in North America. With such a critical mass of these stocks now here, movement of specifications to take advantage of these higher quality base stocks has accelerated, as evidenced by both GF-3 and PC-9. It would have been inconceivable just a few years earlier that a 15% Noack volatility specification would have survived the various industry committees that develop and approve these specifications. Industry s rapid and cost-effective commercialization of Group II+ base stocks made this possible. While the extensive availability of Group II stocks facilitates rapid change in lubricant specifications, there are also supply chain drivers that slow them down in North America: Incumbent Group I suppliers find themselves falling farther and farther behind, with little opportunity to upgrade due to low industry margins and high capital costs, and the promise of very high remediation costs preventing them from exiting the business. Independent lubricant manufacturers, who are dependent on purchased base oils, see specifications that would require higher-priced Group III base oils as an unfair advantage to the majors who are basic in those stocks. Evidence of this position can be seen in their apparent acceptance of GF-3 volatility specifications requiring lower-priced Group II+ base oils, but their recent opposition to inclusion of Group III base oils in the upcoming PC-9 precision testing matrix. Short product life cycles demonstrate how quickly drivers of base oil quality are changing, and serve notice of things to come. For example, Chevron introduced Neutral Oil 100RLV for use as a low volatility engine oil component coincident with ILSAC GF-2 in In preparation for GF-3, that product was discontinued in 1999, just three short years after it s inception - even less than the life cycle of the specification for which it was designed. In the future, such short lifetimes will become more common, with our industry behaving much more like the additives industry by quickly responding to changing customer needs with new product offerings tailored to address those needs.

12 Page 12 Fortunately, North America is capable of creating new base oil products to meet the changing needs of formulators largely because of the inherent flexibility of the new generation of hydroprocessing-based plants. The creation of Group II+ base oils in North America is a good illustration of this adaptability. None of these products existed prior to the first GF-3 specification proposal. Yet, once the goal was defined, the new breed of base oil suppliers independently worked with additive suppliers and lubricant customers to develop products to address the volatility challenge of GF-3. The results were in every case a VI Group II base oil, now commonly called Group II+. These products are the most cost-effective solution for the industry, bringing maximum value to the consumer. With future specifications we will continue to see the base oil industry in North America respond to technical challenges by offering custom designed base oils to meet an industry need, and do so quickly. The North American base oil industry has woken up and became dynamic in responding to ever-tightening specifications. That is not to say that the European base oil market is not also dynamic and responsive to specification challenges, because it is. However, due to the relative inflexibility of the dominant Group I facilities and even much of the firstgeneration Group III facilities, the options available to European producers are more limited at the moment. The fact that most of the Group III facilities have limited capacities and cannot make Group II or Group II+ stocks limits the rapid upgrading of mainstream motor oils. Whatever can be achieved with additives in combination with existing Group I stocks, supplemented with modest Group III volumes, determines mainstream performance. While current mainstream specifications can be met through this combination, the question is can future specifications? In North America, key majors stepped out and made the plunge to manufacture Group II stocks. Now, this seems to be on the verge of happening in Europe, with Petrola planning to offer Group II, II+ and III base stocks in the near future. Until now, the dominant producers have appeared to be content with their current Group I plants, despite the movement of their North American counterparts to Group II production. With the expected introduction of hydroprocessed Group II by a new supplier in Europe, the pressure to move to modern Group II/III capability may soon begin. The globalization of motor oil specifications in recent years, though slow and far from complete, has brought North American bench and engine tests to Europe and vice versa. With substantial Group II/III capacity to address these new tests that often prefer Group II/III base oils, many North American suppliers are well positioned to take advantage of these stocks, resulting in lower additive treat rates for those who have access to these components. In Europe, since there is minimal Group II capacity, the playing field is even, with all blenders using higher additive treats and/or Group III or IV base stocks to meet the most stringent specifications. Two situations promise to disrupt this equilibrium: 1) a new Group II supplier offers these products at competitive prices to the European market, and 2) top tier or OEM specifications become so demanding that Group I base stocks are effectively excluded from that segment of the market. It is no surprise, then, that the transition to hydroprocessing in Europe is starting. Fortum (formerly Neste) has successfully built a Chevron licensed Group III plant in Finland, and are marketing their stocks effectively. Petrola Hellas, as mentioned before, has recently announced plans to build a Chevron-licensed Group II/III base oil plant in Greece by Although their product slate could change, plans are to offer a 5cSt Group III product, and two grades of Group II, likely 150N and 500N, all of which will be marketed by Chevron. Thus, the tide in Europe seems poised to shift toward Group II/III stocks with the question now more a matter of speed, not whether. Asian Base Oil Product Trends Product trends in the Asian base oil market are substantially different than those in Europe and North America. While the two mature economies discussed above are driven to upgrade based to a significant extent, though not entirely, on ever increasing product performance hurdles, the Asian base oil product trends are minimally driven by performance needs. In Asia the current mainstream motor oils are API SE, SF, SG and/or CC, CD quality where almost any Group I base oil meets the need, and where Group II/III are completely unnecessary. Transportation lubricants dominate the total lubricant market, though industrial oils and marine oils are growing. In addition, approximately 75% of the motor oil market is reported to be single grade motor oils, which is about opposite of the multigrade/monograde ratio found in North America and Europe. This bias towards single grades, inspired by warmer climates and widespread perceptions that thicker is better, results in base oil products heavily