High Stakes in the Base Oil Market
GTL is more than just a pipe dream, and it is poised to change the competitive landscape down the road.
Barbara Saunders
Gas-to-liquids (GTL) base oils are often discussed as a potentially lower cost alternative to high-performance basestock needs. They will be primarily the domain of large, integrated companies, agreed analysts Geeta Agashe, director of Petroleum and Energy for Kline & Co., and Thomas F. Glenn, president of Petroleum Trends International Inc. However, there will be opportunities for independent lubricants marketers down the road, and companies of all sizes will be affected by the changing competitive landscape from GTL.
"Billion-Dollar Club"
Current investment in GTL technology is heavily focused within the "billion-dollar club," as Agashe terms it, referring to such large, integrated oil companies as Shell, ExxonMobil, BP, South Africa's Sasol, and the relatively medium-sized, yet integrated, Conoco. All have internal means to help finance their effort, and most have developed proprietary process technologies.
"There are very significant barriers to entry," Agashe says. "The level of capital investment to set up a GTL project requires billions, and that's just in the fuels part of the business. This does not include the incremental investment [needed]...for upgrading the plant to produce lubricant basestocks, which adds another $50 million to $300 million." Agashe's comments reflect findings of a Kline & Co. multiclient study, "GTL Specialties--High-Value Threat or Opportunity?" which is scheduled for completion later this summer.
Another factor favoring integrated firms is the logistics of transporting and storing GTL, she adds. GTL is such a pure product that it will require such specialized infrastructure as dedicated shipping vessels and pipelines and "very sophisticated" tank farms. This will be particularly costly, given that most of the stranded natural gas reserves contemplated for GTL are far from strong finished-product markets.
There are exceptions to the billion-dollar-club rule, Agashe observes, such as independent technology developers Rentech and Syntroleum. However, their future as commercial-scale players hinges on their ability to keep raising outside financing or forging alliances with partner firms.
Alliances between nonintegrated producers, and independent lubricant marketers, such as Valvoline or Fuchs, would make sense for both sets of players, she continues. A number of independent marketers lack significant refining capacity, and the smaller GTL suppliers will benefit by the ability to show investors a strong, regular customer base.
The Big "When"
Both PetroTrends and Kline foresee that GTL basestocks will only begin to make a dent in the base oil market around 2009 or 2010. While many projects are now on the drawing boards, very few would even break ground until 2006 (see table).
Of the great flurry of GTL projects that have been proposed in recent years, nobody is certain how many will actually go ahead. Only one new commercial-scale plant is currently under construction, the 34,000-bpd SasolChevron project in Nigeria, according to the latest survey by Gas-to-Liquids News, a Hart Publications/Chemical Week Associates newsletter. Four different projects are in the early discussion stages in Oman, Qatar, and Australia, and 28 more are amid feasibility study the world over.
"By 20092010, everyone will have had to switch to low-sulfur diesel," Agashe says. This should focus more attention on the potential for premiums from other high-quality products, such as GTL base oil."
"With GTL, industry is in the stage of proving and testing the technology," Glenn adds. "It will likely enter the introductory phase of its product lifecycle around 20062007, when the first commercial drops start to flow."
Critical Mass
GTL basestocks (also referred to as Group III-plus stocks) can yield finished lubricants similar to those from some types of high-performing PAO (polyalphaolefin, Group IV) base- stocks, according to test reports by Syntroleum and others. However, "you don't simply build a GTL plant designed to produce fuels and start pumping out PAO-quality GTL base-stocks at the viscosity indices [VIs] and viscosity grades needed for passenger car motor oil (PCMO), drivetrain oil, and others where PAO-quality product is valued," Glenn notes. And demand for PAO quality is limited. Kline & Co. projects that GTL basestocks will compete with Group II-plus, III, and IV basestocks. However, these grades comprise only 3% of all basestock demand, sufficient to be met by only one large GTL plant. Therefore, Kline has predicted that GTL base oil suppliers "will have to eventually chase Group II demand in order to find a home for their products."
"Why invest to produce high volumes of PAO-quality basestocks when the market does not currently demand it and will not likely pay a premium for it?" Glenn observes. He feels GTL from plants designed to produce fuels will enable a range of new high-quality formulations that do not have to perform at the same level as those from PAOs.
An important factor in reaching critical mass, both Glenn and Agashe agree, will be the acceptance of automakers. This will take evidence of "consumer pull," as well as a mix of suppliers, Glenn says. "It would be hard to imagine the autos rewriting their specs to favor the use of GTL when only one supplier can produce it."
Adds Agashe, if the introduction of GTL base oils follows the path that Group II once did, there may be discounting at first. "Look at what it took ChevronTexaco to introduce Group IIs when there wasn't yet a significant technical need for this better base-stock," Agashe says. "They pretty much had to discount it and were selling it at close to or at Group I prices until performance specifications caught up, such as with the introduction of GF-3 in PCMO and CI-4 in HDMO [heavy-duty motor oil]. There emerged a technical need for [higher quality base oils]...for PCMO 5W-30 applications. In addition, with Excel Paralubes and Petro-Canada producing Group IIs, critical mass was reached as well."
Early signs of "consumer pull" are already in motion. "European specs are more mature. They're already comfortable with 0W [motor oil], while we are just beginning to see 5W-30," Glenn says. "When European standards migrate here by around 2010 or 2011, GTL [basestocks] will enter the growth phase."
Competitive Considerations
While Agashe does not think the market will be limited to large integrated companies, some are very well positioned to lead the transition to GTL basestocks. These include Shell, which is in the process of acquiring Pennzoil-Quaker State; BP, with its Castrol unit; and ExxonMobil. The strong finished-lubricants businesses of such companies would provide a ready outlet for their GTL basestocks.
"Someone like a Shell or ExxonMobil would very rarely buy something on the merchant market from one of their competitors," Agashe says. "If one of the smaller technology providers, like Rentech and Syntroleum, come on-stream and can make their product on a commercial basis, they will have to get into some sort of alliances with the some of the larger, independent finished-lubricants marketers," she emphasizes. For independents, such alliances would provide an additional supply source that can help prevent problems common to overly concentrated markets.
Agashe also sees several segments of the industry particularly risked by the entry of GTL. The most significant adverse effects, she believes, will be on those conventional Group I and II refiners who are the high-cost producers. The second tier she sees at risk is "the finished-lube marketers who chose not to align themselves with some of these GTL producers."
Another set of players facing uncertainties could be the refiners with a large stake in PAO. ExxonMobil and BP hold the largest estimated market shares, at about 35% each, while Fortum and ChevronPhillips Chemical Co. each hold about 15% shares, according to a BP estimate.
"If you move to GTL basestocks, wouldn't that cannibalize your own Group III and IV basestocks? Agashe asks. "However, the answer in most cases will be 'Let me be the one who introduces Group III-plus, as opposed to someone coming in an eating my lunch.'"
Agashe also believes that a niche will remain in industrial applications for PAO of 8 cSt and above. Those base- stocks that lie in the 3.5- to 7.5-cSt range will be adversely affected, because GTL performance quality will more likely be "quite similar at lower cost."
Few industry watchers disagree that GTL will bring the next major wave of change to base oil markets. Sums up Agashe: "It's not just something for the big guys. It's something everybody's going to participate in and consider, because like it or not, it's going to impact their businesses."
Lubricants World
[ August 08, 2002, 02:43 PM: Message edited by: BOBISTHEOILGUY ]
GTL is more than just a pipe dream, and it is poised to change the competitive landscape down the road.
Barbara Saunders
Gas-to-liquids (GTL) base oils are often discussed as a potentially lower cost alternative to high-performance basestock needs. They will be primarily the domain of large, integrated companies, agreed analysts Geeta Agashe, director of Petroleum and Energy for Kline & Co., and Thomas F. Glenn, president of Petroleum Trends International Inc. However, there will be opportunities for independent lubricants marketers down the road, and companies of all sizes will be affected by the changing competitive landscape from GTL.
"Billion-Dollar Club"
Current investment in GTL technology is heavily focused within the "billion-dollar club," as Agashe terms it, referring to such large, integrated oil companies as Shell, ExxonMobil, BP, South Africa's Sasol, and the relatively medium-sized, yet integrated, Conoco. All have internal means to help finance their effort, and most have developed proprietary process technologies.
"There are very significant barriers to entry," Agashe says. "The level of capital investment to set up a GTL project requires billions, and that's just in the fuels part of the business. This does not include the incremental investment [needed]...for upgrading the plant to produce lubricant basestocks, which adds another $50 million to $300 million." Agashe's comments reflect findings of a Kline & Co. multiclient study, "GTL Specialties--High-Value Threat or Opportunity?" which is scheduled for completion later this summer.
Another factor favoring integrated firms is the logistics of transporting and storing GTL, she adds. GTL is such a pure product that it will require such specialized infrastructure as dedicated shipping vessels and pipelines and "very sophisticated" tank farms. This will be particularly costly, given that most of the stranded natural gas reserves contemplated for GTL are far from strong finished-product markets.
There are exceptions to the billion-dollar-club rule, Agashe observes, such as independent technology developers Rentech and Syntroleum. However, their future as commercial-scale players hinges on their ability to keep raising outside financing or forging alliances with partner firms.
Alliances between nonintegrated producers, and independent lubricant marketers, such as Valvoline or Fuchs, would make sense for both sets of players, she continues. A number of independent marketers lack significant refining capacity, and the smaller GTL suppliers will benefit by the ability to show investors a strong, regular customer base.
The Big "When"
Both PetroTrends and Kline foresee that GTL basestocks will only begin to make a dent in the base oil market around 2009 or 2010. While many projects are now on the drawing boards, very few would even break ground until 2006 (see table).
Of the great flurry of GTL projects that have been proposed in recent years, nobody is certain how many will actually go ahead. Only one new commercial-scale plant is currently under construction, the 34,000-bpd SasolChevron project in Nigeria, according to the latest survey by Gas-to-Liquids News, a Hart Publications/Chemical Week Associates newsletter. Four different projects are in the early discussion stages in Oman, Qatar, and Australia, and 28 more are amid feasibility study the world over.
"By 20092010, everyone will have had to switch to low-sulfur diesel," Agashe says. This should focus more attention on the potential for premiums from other high-quality products, such as GTL base oil."
"With GTL, industry is in the stage of proving and testing the technology," Glenn adds. "It will likely enter the introductory phase of its product lifecycle around 20062007, when the first commercial drops start to flow."
Critical Mass
GTL basestocks (also referred to as Group III-plus stocks) can yield finished lubricants similar to those from some types of high-performing PAO (polyalphaolefin, Group IV) base- stocks, according to test reports by Syntroleum and others. However, "you don't simply build a GTL plant designed to produce fuels and start pumping out PAO-quality GTL base-stocks at the viscosity indices [VIs] and viscosity grades needed for passenger car motor oil (PCMO), drivetrain oil, and others where PAO-quality product is valued," Glenn notes. And demand for PAO quality is limited. Kline & Co. projects that GTL basestocks will compete with Group II-plus, III, and IV basestocks. However, these grades comprise only 3% of all basestock demand, sufficient to be met by only one large GTL plant. Therefore, Kline has predicted that GTL base oil suppliers "will have to eventually chase Group II demand in order to find a home for their products."
"Why invest to produce high volumes of PAO-quality basestocks when the market does not currently demand it and will not likely pay a premium for it?" Glenn observes. He feels GTL from plants designed to produce fuels will enable a range of new high-quality formulations that do not have to perform at the same level as those from PAOs.
An important factor in reaching critical mass, both Glenn and Agashe agree, will be the acceptance of automakers. This will take evidence of "consumer pull," as well as a mix of suppliers, Glenn says. "It would be hard to imagine the autos rewriting their specs to favor the use of GTL when only one supplier can produce it."
Adds Agashe, if the introduction of GTL base oils follows the path that Group II once did, there may be discounting at first. "Look at what it took ChevronTexaco to introduce Group IIs when there wasn't yet a significant technical need for this better base-stock," Agashe says. "They pretty much had to discount it and were selling it at close to or at Group I prices until performance specifications caught up, such as with the introduction of GF-3 in PCMO and CI-4 in HDMO [heavy-duty motor oil]. There emerged a technical need for [higher quality base oils]...for PCMO 5W-30 applications. In addition, with Excel Paralubes and Petro-Canada producing Group IIs, critical mass was reached as well."
Early signs of "consumer pull" are already in motion. "European specs are more mature. They're already comfortable with 0W [motor oil], while we are just beginning to see 5W-30," Glenn says. "When European standards migrate here by around 2010 or 2011, GTL [basestocks] will enter the growth phase."
Competitive Considerations
While Agashe does not think the market will be limited to large integrated companies, some are very well positioned to lead the transition to GTL basestocks. These include Shell, which is in the process of acquiring Pennzoil-Quaker State; BP, with its Castrol unit; and ExxonMobil. The strong finished-lubricants businesses of such companies would provide a ready outlet for their GTL basestocks.
"Someone like a Shell or ExxonMobil would very rarely buy something on the merchant market from one of their competitors," Agashe says. "If one of the smaller technology providers, like Rentech and Syntroleum, come on-stream and can make their product on a commercial basis, they will have to get into some sort of alliances with the some of the larger, independent finished-lubricants marketers," she emphasizes. For independents, such alliances would provide an additional supply source that can help prevent problems common to overly concentrated markets.
Agashe also sees several segments of the industry particularly risked by the entry of GTL. The most significant adverse effects, she believes, will be on those conventional Group I and II refiners who are the high-cost producers. The second tier she sees at risk is "the finished-lube marketers who chose not to align themselves with some of these GTL producers."
Another set of players facing uncertainties could be the refiners with a large stake in PAO. ExxonMobil and BP hold the largest estimated market shares, at about 35% each, while Fortum and ChevronPhillips Chemical Co. each hold about 15% shares, according to a BP estimate.
"If you move to GTL basestocks, wouldn't that cannibalize your own Group III and IV basestocks? Agashe asks. "However, the answer in most cases will be 'Let me be the one who introduces Group III-plus, as opposed to someone coming in an eating my lunch.'"
Agashe also believes that a niche will remain in industrial applications for PAO of 8 cSt and above. Those base- stocks that lie in the 3.5- to 7.5-cSt range will be adversely affected, because GTL performance quality will more likely be "quite similar at lower cost."
Few industry watchers disagree that GTL will bring the next major wave of change to base oil markets. Sums up Agashe: "It's not just something for the big guys. It's something everybody's going to participate in and consider, because like it or not, it's going to impact their businesses."
Lubricants World
[ August 08, 2002, 02:43 PM: Message edited by: BOBISTHEOILGUY ]
