Shifting Sands

Market Changes in the M.East

Fuels & Lubes Asia Conference, March 8, 2016

Gerard Heaton, Sales & Marketing Manager

Saudi Aramco Base Oil Company - luberef

Agenda

• Market change drivers

• M.East region supply &

demand

• Luberef Expansion Project

The winds of change

CH-4 Implementation

Move toward cleaner fuels

Changing vehicle pool

New railwaysRoad-to-Rail

Crude price volatility

Shift toward lower viscosity oils

Geo-political disruptions

Growing global base oil surplus

Group I plant rationalisation

Heavy grade supply tightness

Gradual ODI extension

Changing supply base

New regional capacity

Weaker economic growth

Changes to fuel subsidies

M.East region lubricants and base oil demand

• M.East regional lubricants consumption is about 2.8mln mtpa,

approx. 7.5% of global lubricants demand

• Regional base oil demand is close to 10% of global base oil

demand due to lubes export activity

• Future regional growth forecast to be 1-1.2% aai

Sources: KLINE and Luberef data

ktpa

Market factors affecting lubricant demand

• Population of approx. 370mln expected to grow at 2-3% pa• large youth segment with 45% below 25 years of age

• Vehicle pool growth

• Poor road conditions and ‘dusty’ environment• high percentage of unpaved roads and ‘dusty’ environment

• Significant climate variations

• Large number of older vehicles still in operation • compatibility with the newer lower viscosity grades

• Challenging fuel quality, but moving to lower sulphur fuels

• Customer perceptions about thinner oils, the operating environment and engine protection – low drain intervals

Automotive sector dominates at around 70%

Sources : KLINE and luberef data

The move toward lower viscosity oils

• Heavy grade oils 20w/50 still dominate due to environment

• Gradual shift toward lower viscosity grades has gained traction

• This drives the market toward use of Group II & III & IV base oil

Source : Kind permission of customer X

Changing Global Supply Base

• Increase in total industry capacity significantly exceeds base oils

demand and likely demand growth

• Majority of incremental capacity is Group II and Group III

• Some capacity rationalisation has occurred and expectation is

for more with majority of capacity reduction being Group I

– Source IHS

50%

55%

60%

65%

70%

75%

80%

25,000

30,000

35,000

40,000

45,000

50,000

55,000

60,000

65,000

70,000

1995 2000 2005 2010 2015 2020 2025

Base Oil Production

Base Oil Capacity

Utilization

ktpa

Source : IHS

Changing M.East region supply base

• Base oil investments have changed the region to a net exporter:

– Major exporter of Group III

– Currently a net importer of Group I-II to meet the export lube activity

Reducing Brightstock capacity–demand gap

• Declining mono-grade automotive grade usage reduces

Brightstock demand

• Still a strong demand for a heavy viscosity base oil to use in

Industrial Oils, Marine Oils and Greases

• Luberef expansion offsets some of the global supply decline

Potential capacityat risk

CH-4 implementation in KSA

0 20 40 60 80 100 120

Mono-grade CF

Multi-grade CH4

Formulation change Additive LN HN BSS

ktpa

• HDDEO mono-grade oils approx.

100 ktpa, slightly less than 50% of

HDDEO market

• Increased cost of formulation

raises market challenge

• Supply stresses created by shift in

base oil grade consumption

• Real market inertia exists to

upgrade from CF… old equipment

• How to monitor and enforce ?

Take-aways from the CH-4 decision

• Setting a standard is one thing - implementing it is another

• Regulators and the industry can benefit from having an industry

body that represents the market to provide a platform for

engagement and consultation

– creates better understanding of the impact of regulatory decisions in

order to plan effective implementation

• Effective mechanisms need to be developed and implemented to

monitor and enforce standards

– delivers benefit for both customer and the industry

• Having an effective industry body brings value to all

Luberef Expansion Production Volumes and Product Portfolio

110N 500N230N

Group II Base Oil

70N

150BSSN150 SN500

Group I Base Oil

Future portfolio of

Group I and Group II

550 ktpa

1,100 ktpa

Note : volume is annualized average production

Luberef Expansion – The Yanbu Site Works

Legends

CT

New Flare

ET

LAB

WH

W H

B

OS

Uti

litie

s

SGUSRU

ARUHMU

HR

U

SS13

SS1

9

SS17 SS

16

SS14

SS1

6HCR

IDW

VDU & PDA Revamp

CC

R

Revamp

New

New Group II

process units

Current Group

I process units

E

W

S N

Luberef Expansion - Product Approval Program

• In collaboration with the four main additive companies, developing

a range of approved formulations to support market transition

• Primary focus on Automotive products, covering a wide range of

PCMO and HDDEO products

– performance levels API SN to SL and API CI-4 CH-4, supported by a

range of OEM claims to meet market needs

• Formulation testing work near full completion

– OEM approvals underway

– Further selective developments for Driveline and Industrial oils

underway

In Summary

• The winds of change continue

• The industry can benefit from having effective body/bodies to

represent the industry and engage with regulators and key

stakeholders at local and regional level

• Luberef’s increase in Brightstock production offsets recent

market supply decreases

• Luberef’s expansion is a driver of change in the region

Thank you for your attention

Any questions?

Contact

Gerard Heaton, Sales & Marketing Manager

heatong@luberef.com

Saudi Aramco Base Oil Company - luberef