Talking base stocks with ExxonMobil

If you go back 2019 timeframe this past year, the estimate was about 50,000 barrels a day of excess capacity. And by our estimates, these have been publicly shared, we expect it could grow to 100,000 barrels a day by 2023. Now, that does presume very little rationalization and very modest demand growth and that well could change.

The world is getting more complex, especially for finished lubes blenders who are going to, need a multitude of base stock and component options to be able to supply the breadth of applications that they want to sell into. So, they're going to need partners with them that actually have that capability of helping them simplify that complexity, by offering a breadth of types of technologies that they're going to need into the future.

Some people question why in this very difficult environment are we investing. It's really all about customers and making sure we have the right product at the right time and the right place for the customers so we can help them grow their businesses in the future.

This business runs in long cycles and again, we're in a fairly challenging one currently. But if you look across to multiple timeframes, decades if you will, this is the type of planning that's required to be well aligned with your customer base, particularly where their growth is intended to occur. And in the case of new products, whether quality demands may move towards

It's still clear to us that Asia is a very important market as you look around the world. There will be substantial growth even though it's been less than perhaps expected here of late. And accordingly, we're planning our next investment for the Singapore complex and we hope to stream that in the 2023 timeframe.

There are applications where Group I is either preferred or even required. I think those applications will continue well into the future. If you look at the automotive space, that's about 40% of the overall base oil volume. The 60% is the industrial marine and everything else. I think Group I has a big place to play in that other part. We think we can be a good supplier in those markets, and we think our assets are well positioned both geographically and with the right technology to be able to maximize the molecules and the value of the molecules coming through our refineries.

Not only do you have the base stocks which are technically fit for purpose for certain applications that require viscosity or solvency, but you have the co-products.

I think as we look to the future with let's say a successful Group I provider, it will be important to have a well integrated site with world scale so you have the efficiencies of size and scope. I think you'll need to be really partnered with chemical plant and other processing so you can let's say address the co-product streams that don't have good use or may have content that needs to be destroyed or repurposed.

And then finally, you need the ability to make and merchant the valuable co-products. Examples would include wax, process oils and extracts. Another example would be engineered woods, so the construction board typically in the walls of many homes. And then finally, flexible packaging whether it's around foodstuffs or other materials. All of these are part and parcel to rising standard of living and paraffin waxes are one of the ways to manufacture them, along with other alternatives but still that tends to be a fairly preferred product.

My point in sharing that is that if a producer can effectively provide the base oils and still have technical merit in the marketplace, and can provide the co-products that have a value profile in benefiting use, and can do so efficiently because it does require I think scale and a high complexity site in order to manage all the co-streams. Particularly now with IMO 2020. Then we believe that the confluence of those conditions is a viable path forward.

We believe that the larger amount of builders are going to make the choice to go to low sulphur fuels, and that is what is going to cause a ripple effect in the base oil business because in that type of environment the pricing mechanisms, it's going to value low sulphur products and co-products and devalue high sulphur fuels and lubricants and other co-products. Refineries that don't have the capability of dealing with sulphur components effectively are going to struggle economically.

There's no really good economic choices for somebody who doesn't have the capabilities of refining the high sulphur crudes and producing low sulphur types of... either fuels and other co-products today. The impact on the industry is going to be significant. A lot of people who produce Group I today are going to find it challenging if again they don't have that molecule deconstruction and hydrodesulphurization capabilities and capacities. That's part of what's going to help drive I think the rationalization of the base stock market

As much as Group III has a place and Group III plus has a place in the market, it's not the only option there. That's part of why Group II is heart of the market these days. It actually has the wider viscosity capabilities of doing some industrial applications, plus the automotive space. The point is that there's more than just Group III that can fill that void and that need for the low viscosity engine oils. Going forward, we see again Group II continuing to play a big role in that space as well.

I think it's fair to suggest that the entire array of base stock options as component possibilities is important, and the OEM requirements will cause that to continue to shift. But I think it's also important to understand where heart of market is. And I think to Tim's point in that regard, we think Group II and II plus, along with Group III, where required depending on the viscosity profile and the performance attributes, will all be thoroughly in play as we look forward.

So the expectation is the energy efficiency is going to improve by about 2% per year going forward. That's a big reduction in overall energy use, even though the demands, the number of people going places both commercially transport of products and people, and individual is going to increase. And a lot of what's going to help the world manage that is going to be new technology that increases energy efficiency, decreases energy use.

On the EV side, EVs are expected to continue to grow into the future, surpassing 20% of the car park by about 2040 and be about 30% of the actual new car purchases by that point in time. EVs being the plug in hybrid, the full EVs as well as fuel cell type of vehicles and technologies.

I think again, governments have a hand in it in terms of supportive policy or prohibitive policy for older technologies as well as where the consumers go. I think if we were to be candid, electrification is coming more slowly than had been predicted, but there's also a thought that it may accelerate at some point in the future more rapidly than it has previously. All of these are estimates and foresight as best we know them. But I think we are keenly convinced it's going to have a big impact on our future as far as energy consumption, and importantly the lubricants trade.

We've talked about increasing energy demand and things, but a big shift here is in the transportation sector where you're seeing a significant increase in energy needs and transportation. That's both personal mobility and commercial mobility. That space is expected to grow about 25% in the next 20 or so years. So that creates a lot of opportunity, especially on the commercial space, in terms of for suppliers to make sure that they have the right fit for purpose products to support that kind of growth.

But that converse opportunity with the commercial vehicles is really an area of future focus I think for many of the lube marketers as it grows in increasing importance. And bringing that back now to base stocks, in today's world we see Group II as the workhorse. In the recent timeframe, it's become the single largest category of Group I through V usage and by 2040, we expect that it will reach more than half.