© The Lubrizol Corporation 2006, all rights reserved
Global Baseoil Supplyand Demand Forecast
2006-2011
KSTLE MeetingSeptember 14-15, 2006Mooju, Korea
Presented by Timothy Phang – The Lubrizol Corporation
© The Lubrizol Corporation 2006, all rights reserved2
1. Global lubricants demand2. Baseoil production capacity3. Global baseoil supply and demand
Topics
© The Lubrizol Corporation 2006, all rights reserved3
1. Global lubricant demand2. Baseoil production capacity3. Global baseoil supply and demand
Topics
© The Lubrizol Corporation 2006, all rights reserved4
37.9 37.9 37.8
38.2
38.9
38.6
38
37.6
38.2
37.4 37.5
37.237.4
38.4
36
37
38
39
40
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Dem
an
d,m
tpa
Global Lubricant Demand1991-2004
source: Manfred Fuchs – Fuchs Petrolub
© The Lubrizol Corporation 2006, all rights reserved5
Global Lubricant DemandWhat has history taught us?• In every year during the period 1990-2003,
industry pundits forecasted increases rangingfrom 0.5% to 2.0%
• they were correct in only 4 of the 13 years(31%) – not a very good track record!
• Forecasters have tended to:• underestimate the uptake of lubricant
advancements and increases in efficiency• ignore the probability of economic downturns
(e.g. Global ’91, E Europe ’92, Brazil ’96, Asia ’97, global ‘01).
© The Lubrizol Corporation 2006, all rights reserved6
Global Lubricant Demand
Company To Global Asia WE NA
Kline & Co 2010 1.4% 3.8% -0.1% 1.2%2011-15 1.1% 3.1% -0.8% 2.5%
Freedonia 2008 2.2% 0.3% 1.3%
PFC Energy 2010 1.0% 3.5% -0.5% -1.1%
ExxonMobil 2011 0.5%
Addcos (2) 2010 0-0.2%
Current Forecasts (CAGR)
There are wide discrepanciesamongst forecasters!
© The Lubrizol Corporation 2006, all rights reserved7
40.0
37.4
36.0
37.0
38.0
39.0
40.0
41.0
42.0
43.0
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
mill
ion
ton
nes
pe
ra
nn
um
Global Lubricant Demand1998-2011
Freedonia2.2/1.5%
Kline1.5/1.1%
ExxonMobil0.5%
42.4
41.1
38.7
37.4
37.9Addcos0 - 0.2%
PFC1.0%
© The Lubrizol Corporation 2006, all rights reserved8
90
100
110
120
1999 2000 2001 2002 2003 2004 2005
Vehicles
Fuels
Lubes
Gro
wth
(199
9=
100%
)Vehicles, Fuels & Lubes Growth
source: ExxonMobil’s assessment of industry data
• Longer drain intervals• Smaller sump sizes• Reduced volatility loss
© The Lubrizol Corporation 2006, all rights reserved9
36.0
36.5
37.0
37.5
38.0
38.5
39.0
39.5
40.0
40.5
1998 2000 2002 2004 2006 2008 2010
mill
ion
ton
nes
pe
ra
nn
um
Global Lubricant Demand1998-2011
0.5%CAGR
38.7
© The Lubrizol Corporation 2006, all rights reserved10
1. Global lubricants demand
2. Baseoil production capacity3. Global baseoil supply and demand
Topics
© The Lubrizol Corporation 2006, all rights reserved11
37.2
38.7
37.4
36.1
35.0
36.0
37.0
38.0
39.0
40.0
1998 2000 2002 2004 2006 2008 2010
mill
ion
tonn
esp
eran
num
Global Base Oil Demand1998-2011
Base Oil Demand(net of additive chemicals)
N.B. base oil demand includes additive diluent oils
Lubricant Demand
© The Lubrizol Corporation 2006, all rights reserved12
Basestock Supply
0
15.0
30.0
45.0
1983 1987 1991 1995 1999 2003
Group I
Group IIGroup IIIPAO
Pro
duct
ion
Cap
acity
mto
nnes
Source: X.B. Cox - ExxonMobil
© The Lubrizol Corporation 2006, all rights reserved13
Supply forecasts traditionally focus on:• New capacity; both announced and likely to occur
during the period• Capacity that will be closed or mothballed
However, the refining industry has grown much morecomplex in the past two years such that the followingfactors must also be included:• Capacity creep• Impact of clean fuels investment programmes,• Ability of Group I refiners to maintain production
level in a robust fuels margin environment, and• Retrofitting of existing Group I capacity for higher
quality
Looking Forward
© The Lubrizol Corporation 2006, all rights reserved14
• Common in refining, generally occurs at maintenanceturnaround.
• Catalytic (Group II/III) processes are easier todebottleneck than Group I separation processes
• New catalyst technology often result in substantialcapacity increases
• Motiva: 150 ktpa (14%) in 2004• S-Oil: 100 ktpa ( 9%) in 2004• SK: 100-150 ktpa (11-17%) planned for Apr 2006
• Already run its course in older Group I plants• Many can no longer achieve nameplate capacity due to
changes in availability of their design lube crude.
Capacity Creep
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Forecasted Creep %/yr ktpa*Group I 0-0.25 260
Group II 1.50 1,202
Group III 1.25 339
GTL 2.00 46
Naphthenics 0.75 199
Total 2,046
* Cumulative thru year 2011
Capacity Creep
© The Lubrizol Corporation 2006, all rights reserved16
Global Fuels Markets (2005-2015)
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Diesel Gasoline Residual Fuel
By 2015, over half of world dieselwill be less than 50 ppm Sulphur
An
nual
Gro
wth
Rat
eto
2015
source: Blake Esker – Purvin & Gertz
© The Lubrizol Corporation 2006, all rights reserved17
Fuels Refinery Additions to 2015
source: Blake Esker – Purvin & Gertz
0
10
20
30
40
50
Crude
/Vac
uum
Reform
ing
Cat Cra
cking
Hydro
crac
king
Hydrot
reat
ing
Coking
World Capacity Additions through 2015 - % of 2003 Capacity
© The Lubrizol Corporation 2006, all rights reserved18
• Some refineries will not warrant the capex spendand close; most vulnerable are the Solomon rated3rd and 4th “quartilers” (e.g. ExxonMobil–Adelaide)
• Some refineries my opt for a lower sulphur crudeslate to minimize the capex spend - most good lubecrudes tend to be high S (e.g. Imperial-Sarnia)
• Some refineries may opt to use existing lubefacilities in fuels manufacture to lessen capexspend (e.g. BP-Kwinana)
• New fuels hydrocracking facilities will providefeedstock potential for new Group II/III base oilproduction (e.g. Petronas, Formosa Petrochemical,Neste-BAPCO)
The Clean Fuels Impact
© The Lubrizol Corporation 2006, all rights reserved19
• With a robust fuel margin environment, most refinershave gone to a ‘max fuels mode’ operation, some atthe expense of Group I base oil production
• Crude slates are/have been adjusted for maxfuels margins, including heavy sour crudes)
• The base oil-fuel margin often no longer supportthe premiums paid for good Group I lube crudes
• Some Group I refiners are diverting base oilfeedstock to fuels for those volumes not required tosupport their internal lubricants businesses
• Estimates impact was much as 10% (1.1 mtpa) ofNA and WE Group I production in 2005
• Group II/III operations remain largely unaffected asmost are not crude selection dependent
The Fuels Margin Impact
© The Lubrizol Corporation 2006, all rights reserved20
-200
-150
-100
-50
0
50
100
150
200
Jan 04 Apr 04 Jul 04 Oct 04 Jan 05 Apr 05 Jul 05 Oct 05
Dif
fere
nti
alV
.C.M
arg
in*
$/to
nn
e
100N300N
source: Karl Schmidt - Citgo Dec 2005
No VGO Purchases
* margin does not include any premium paid for the lube crude
$0.50/bbl lube crude premium
Base Oil vs Fuel Economics
© The Lubrizol Corporation 2006, all rights reserved21
-50
0
50
100
150
200
Jan 04 Apr 04 Jul 04 Oct 04 Jan 05 Apr 05 Jul 05 Oct 05
Dif
fere
nti
alV
.C.M
arg
in*
$/to
nn
e
100N300N
source: Karl Schmidt - Citgo Dec 2005
Outside VGO Purchases
* margin does not include any premium paid for the lube crude
$0.50/bbl lube crudepremium
Base Oil vs Fuel Economics
© The Lubrizol Corporation 2006, all rights reserved22
0
10
20
30
40
50
60
70
80
90
Jan 04 Apr 04 Jul 04 Oct 04 Jan 05 Apr 05 Jul 05 Oct 05
Lub
eP
lant
Var
iab
leO
per
atin
gC
osts
*$/
ton
ne
source: Karl Schmidt - Citgo Dec 2005
* does not include any premium paid for the lube crude
Base Oil vs Fuel Economics
© The Lubrizol Corporation 2006, all rights reserved23
Refining Profitability Outlook
• US: Tight capacity should keep fuels markets strong,particularly for the high-conversion refiners. Growingreliance on imports.
• Europe: Very strong diesel market with gasoline surplusexported to the US. Market to grow still tighter
• Asia: Capacity overhang finally wearing off; need for fuelsconversion capacity will grow
The Fuels Margin Impact
Source: Blake Esker – Purvin & Gertz
© The Lubrizol Corporation 2006, all rights reserved24
Base Oil Refining Margins
-70
0
70
140
210
2000 2001 2002 2003 2004
Solvent Refining Hydrocracking
Hydrocracking (Group II/III) benefits fromstrong fuel economics
$/to
nne
ofB
ase
Oil
Group II/IIIGroup I
Source: Blake Esker – Purvin & Gertz
© The Lubrizol Corporation 2006, all rights reserved25
API Group Price Differentials
source: Blake Esker – Purvin & Gertz
-20
0
20
40
60
80
100
120
2002 2003 2004
Group II vs Group I
Group III vs Group I
Low of US Gulf Coast Postings
The Group III premium has dropped by half
Cents per Gallon
© The Lubrizol Corporation 2006, all rights reserved26
• Many large scale Group I refineries are able to economicallyjustify capex for higher quality (e.g. ExxonMobil–Baton Rouge,Total – Gonfreville, Agip - Livorno)
• Some smaller Group I refineries will invest if strategic to theiroverall lubricants business (e.g. Idemitsu-Chiba)
• By-product slack wax from Group I refineries represents asizeable source of feedstock that can be upgraded to GTL‘look alike’ quality (e.g. ExxonMobil-Fawley)
• Re-refiners are improving quality to find premium and securemarkets for their output (e.g. Viscolube-Pieve Fissiraga)
• Retrofit needs and opportunities are greatest in Europe andJapan
• 4.5 mtpa of Group I capacity may be upgraded over the next 5years to Group II thru Group III+
The Retrofitting Impact
© The Lubrizol Corporation 2006, all rights reserved27
New Capacity - ParaffinicStream Capacity, ktpa
Company Country Date Group I Group II Group IIIPuralube Germany 2Q04 80SK Korea 3Q04 30 330Motiva US 3Q04 150Orrco US 3Q04 25(r)S-Oil Korea 4Q04 100Samir Morocco 2005 10Attock/NRL Pakistan 2005 15Calumet US 2005 50Neste Finland 3Q05 30Motiva US 1Q06 690SK Korea 2Q06 150Encore Energy US 2006 25(r)Bharat India 2006/8 180+40Lotos/Glimar Poland 2007 50PetroCanada Canada 2006/7 150 50
items highlighted in red indicate change or addition from previous forecast(r) indicates re-refined Group I quality
© The Lubrizol Corporation 2006, all rights reserved28
Stream Capacity, ktpaCompany Country Date Group I Group II Group IIIOsilub France 1Q07 120(r)Formosa Pet. Taiwan 2007 400 100eShell Pernis 2007/8 300GS-Caltex Korea end-2007 500e 350ePetronas Malaysia 2Q08 350Neste-BAPCO Bahrain 1H2008 400SK-Pertamina Indonesia 2008 350ePemex Mexico 2008 250Chinese Pet. Taiwan 2008 250Sasol Chevron Qatar (GTL) 1Q2009 425Total France 2009 300 200Shell Qatar (GTL 2009/10 500ONGC India 2010 250ExxonMobil Qatar (GTL) 2011 1,500
Total (8,720 ktpa) 195 3,490 5,035
New Capacity – Paraffinic (cont’d)
items highlighted in red indicate change or addition from previous forecast(r) indicates re-refined Group I quality
© The Lubrizol Corporation 2006, all rights reserved29
Stream Capacity, ktpaCompany Country Date Group VSan Joaquin US 2004 105Valero/Nynas US 2004 60Ergon US 2005 65CNOOC China 2007 400
Total 630
New Capacity – Naphthenic
items highlighted in red indicate change or addition from previous forecast
© The Lubrizol Corporation 2006, all rights reserved30
CapacityCompany Location Year ktpa Reason(s)Astra Ploiesti, Rom 2005 325* Economics (F&L)BP Coryton, UK 2005 350* ROACEShell Grasbrok, Ger 2005 260* Quality/scaleCepsa Huelva, Spain 2006 150* Fuels focusImperial ** Sarnia, Canada 2006 50*(est) LSD programmeValero Paulsboro, US 2006/7 590* Hvy crude flexibility
N America (3) 2006/9 930W Europe (5) 2006/10 1,170C/E Europe (6) 2006/9 980Asia Pacific (1) 2007 200PAO/PIO (5) 2009-12 300 GTL replacement
Total (26 plants/trains) ~5,300 (11% of 2004 capacity)
Closure Candidates (2005-2010)
* denotes closures already announced * * reduction in capacity, no closure
More likely to close due to ‘Fuels related’ decisions
© The Lubrizol Corporation 2006, all rights reserved31
GTL Base Oil Projects
CapacityCompany Location ktpa On-stream
Sasol Chevron Qatar 425 1H2008
Shell Qatar 500 2009
ExxonMobil Qatar 1,500 2011
Total 2,425
As Originally Announced
early 2009
Current Status
2010
© The Lubrizol Corporation 2006, all rights reserved32
1. Global lubricants demand2. Baseoil production capacity
3. Global baseoil supply anddemand
Topics
© The Lubrizol Corporation 2006, all rights reserved33
0
10
20
30
40
50
2004 2005 2006 2007 2008 2009 2010 2011
mill
ion
tonn
espe
ran
num
PAOGTLGroup II/IIIRetrofitted Group IGroup I
data source: SBA Consulting LLC
Global Capacity ForecastParaffinic
© The Lubrizol Corporation 2006, all rights reserved34
34.131.5
29.227.2
25.9 25.7 25.5 25.6
7.37.7
9.3 12.6 13.8 14.6 15.0 15.2
2.52.3 2.8
3.7 5.0 5.2 5.5 5.6
0.4 0.92.5
0
10
20
30
40
50
2004 2005 2006 2007 2008 2009 2010 2011
mill
ion
tonn
espe
ran
num
PAO/PIOGTLGroup IIIGroup IIGroup I
Global Base Oil Supply ForecastParaffinic
© The Lubrizol Corporation 2006, all rights reserved35
34.1
25.6
7.3
15.2
2.5 5.6
2.50.4
0.2
0
10
20
30
40
50
2004 2011
mill
ion
ton
nes
per
ann
um
PAOGTLGroup IIIGroup IIGroup I
Global Base Oil Supply ForecastParaffinic
© The Lubrizol Corporation 2006, all rights reserved36
3.5 3.6 3.5 3.9 4.0 4.0 4.0 4.1
34.131.5
29.227.2 25.9 25.7 25.5 25.6
7.37.7
9.3 12.6 13.8 14.6 15.0 15.2
2.52.3 2.8
3.7 5.0 5.2 5.5 5.6
0.4 0.92.5
0
10
20
30
40
50
60
2004 2005 2006 2007 2008 2009 2010 2011
mill
ion
ton
nes
per
ann
um
PAO/PIOGTLGroup IIIGroup IIGroup INaphthenics
Global Base Oil Supply ForecastTotal Base Oil (inc Naphthenics)
© The Lubrizol Corporation 2006, all rights reserved37
35.0
37.5
40.0
42.5
45.0
47.5
50.0
52.5
55.0
2004 2005 2006 2007 2008 2009 2010 2011
mill
ion
tonn
esp
eran
nu
mGlobal Base Oil Supply & Demand
Base Oil Demand
Sustainable Capacity
Nameplate Capacity(inc naphthenics)
5.4
9.6
3.1
© The Lubrizol Corporation 2006, all rights reserved38
35.0
40.0
45.0
50.0
2004 2005 2006 2007 2008 2009 2010 2011
mill
ion
tonn
esp
eran
nu
mGlobal Base Oil Supply & Demand
Demand – Exxon Mobil
Sustainable Capacity
9.6
Demand – Kline & Co.
Demand – Freedonia
6.1
5.4
© The Lubrizol Corporation 2006, all rights reserved39
35.0
37.5
40.0
42.5
45.0
47.5
2004 2005 2006 2007 2008 2009 2010 2011
mill
ion
tonn
esp
eran
nu
mGlobal Base Oil Supply & Demand
Changes in Sustainable CapacityMar 2005 – Mar 2006
• Increased diversion to fuels• Impact of USGC hurricanes• China price controls• Closure of Cepsa Huelva• Cut-back at Imperial Sarnia
• Neste BAPCO – 400 ktpa• GS Caltex – 850 ktpa• Pemex – 250 ktpa• SK debottleneck – 150 ktpa• SK-Pertamina JV – 350 ktpa• ONGC – 250 ktpa
Mar 2005
Mar 2006
© The Lubrizol Corporation 2006, all rights reserved40
Global Base Oil Supply & Demand
• Global demand should increase by ca1.1 mpta (3.1%)
• Global supply to keep pace with demand; but withtightening in 2005/6 due to feedstock diverted to fuels,impact of hurricanes, China price controls on fuels• 2006 will be a crucial period, growing supplies from
2007/8 becoming abundant in later years with GTL
• European market to undergo greatest flux
• High saturate base oils should grow rapidly; comprising>45% of the paraffinic pool;• supply ‘push’ driven; new suppliers• supply well in excess of technical demand;• may have dampening effect on quality premiums
Summary
© The Lubrizol Corporation 2006, all rights reserved41
• Pool viscosity to become ‘lighter’; brightstockavailability may become problematic• switch from mono to multi-vis grades• heavy naphthenics• opportunities for non-base oil solutions
• Blend plant economics could force migration fromGroup I faster than quality demands alone wouldotherwise dictate
• If ExxonMobil finished lubricants demand forecast isaccurate, the developing base oil supply overhang in2008-11 should prompt additional refinery closures.
Global Base Oil Supply & DemandSummary (cont’d)
© The Lubrizol Corporation 2006, all rights reserved42
Thank You