The Low Viscosity Engine Oil Challenge

The 2017 ILMA Management Forum

April 22, 2017

Carlsbad, CA

H. Ernest Henderson, PhD

President

K&E Petroleum Consulting, LLC

Engine oils require low viscosity

for fuel economy contributions

High quality base oils assist with

achieving both low temperature and

volatility requirements

The selection of high quality base

oils has continued to increase with

new qualities and supply sources

This presentation will look at the

available options to blenders, based

on domestic and import alternatives

Abstract

The Move to Lower Viscosity Oils➢ Global Demand

➢ Technical Considerations

➢ Current Progress

How to Formulate Low Viscosity Oils➢ The Role of Base Stocks

➢ Options to the Formulator

Low Viscosity Oils in the Americas➢ Readiness to Move Forward

➢ Challenges and Opportunities

➢ Education

Summary and Conclusions

Presentation Outline

Global Lubricants From 40,000 Feet

The lubricants industry is in the midst of change

despite the appearance of “no change”➢ Global demand flat to slightly increasing

➢ Regional demand shifting▪ Asia growth offset by declines in North America and Europe

➢ Technical changes significant

▪ Automotive industry driving change

▪ Industrial oils along for the ride!

➢ Base oil industry changing to meet technical demands

Region 2004 2016

North America 30.2%

Europe 29.1%

Asia 29.1%

Demand, MMT 37.8 38.6

Asia-Pacific now represents largest region

with continued growth (China, India influence)➢ North America shows some decline but more due to

use of higher quality lubricants (and reduced usage)

Global Lubricant Demand in Process of Redistribution

Technical Demands Automotive Focused

Low SAE grades

Low visc base stocks

Friction modifiers

Group II, III, III+, IV, V

Low Sulfur, SAPS

High Saturates

Low Noack

Group II, II+, III,

III+, IV, V

High Saturates

Low volatility

A/O, dispersants

Group II, II+, III, III+,

IV, V

Technical changes impacting automotive lube design➢ New SAE grades, additive chemistries, complimentary base stocks

Achieving Fuel Economy

Improvements to fuel economy associated with basic viscometrics

Lower viscosity improves fuel economy➢ Reduced friction

➢ Also expressed as reduced emissions (CO2)

Lower viscosity creates challenges➢ Increased wear

➢ Increased volatility

Challenges can be met➢ Improved additive chemistry

➢ Higher quality base stocks

▪ VI the key!

40 100

Slope = VIHigher

VI

Temp, °C

Vis

cosity

Lower

VI

20

30

40

50

60

70

2000 2005 2010 2015 2020 2025

Miles p

er

Gallo

n

USA

European Union

Japan

China

South Korea

Fuel Economy is Global and Rapidly Rising

Fuel economy expressed by mpg or CO2 emissions

Lubricants only one part of the fuel economy challenge

Base Oil Quality Aligning with Finished Demand

Technical Needs

Group II-III capacity shows significant and sustained

growth to support automotive industry demands➢ Group III supporting PCMO and fuel economy

➢ Group II supporting HDEO and emissions-durability

➢ Excess supply spills into other product applications

0

100

200

300

400

500

600

700

2004 2006 2008 2010 2012 2014

Rate

d C

ap

acit

y,

kb

d

Group I

Group II

Group III

PCMO/MCO21%

HDEO23%

Process Oils15%

MWF6%

Hydraulic Fluids

9%

Gen'l Industrial

7%

Grease2% IEO

8%

Other Auto9%

Capacity Changes Demand by Application

Sources – LNG, KEPC

50%

44%

North American PCMO Demand Has Shown

Significant Change to Meet FE Challenge

0

25

50

75

100

1985 1990 1995 2000 2005 2010 2015 2020

Sh

are

, %

Low Viscosity

High Viscosity

Change however takes time!➢ Nearly 20+ years for low viscosity demand to exceed high

viscosity demand

Sources – AFPM, KEPC, Infineum

Low Viscosity ≤ SAE 5W-XX

High Viscosity ≥ SAE 10W-XX

2007 the year

of conversion

How Has Formulations Changed to Meet the Fuel

Economy Challenge

VM +

PPD

DI95 VI

Group I

Base oil qualities changing to meet the fuel

economy challenge

➢ API Groups established (1992-1995)

➢ Solvent processing changing to hydroprocessing

2015

Advanced DI, VM,

PPD

Group II, III

Special Fluids

1985

How have they changed?

5W-308%

10W-3071%

10W-4011%

20W-504%

Other MG0%

Mono-grade6%

10W-309%

15W-4037%

Other M/G1%

Mono-grade53%

PCMO - 1985

HDEO - 1985

ISO 221%

ISO 3231%

ISO 4618%

ISO 6831%

ISO 1004%

ISO 1504%

ISO 2204%

ISO 3204%

ISO 4602% ISO

680+1%

Industrial - 1985

Average Base Oil Quality Needs - 1985

PCMO HDEO Industrial

KV @ 40°C, cSt 37.5 50 85

KV @ 100°C, cSt 5.9 7.9 9.8

SUS @ 100°F 195 310 445

VI 97 95 93

Industrial = hydraulic, compressor, gear, general purpose

Sources – AFPM, Infineum, KEPC

The Lubricants Industry is ChangingNorth America - 1985

0W-xx7%

5W-2027%

5W-3044%

10W-3016%

10W-404% 20W-50

2%5W-XX

4%10W-30

10%

15W-4079%

Other3%

Mono-grade

4%

PCMO - 2015

Industrial - 2015

HDEO - 2015

ISO 221%

ISO 3231%

ISO 4618%

ISO 6831%

ISO 1004%

ISO 1504%

ISO 2204%

ISO 3204%

ISO 4602%

ISO 680+1%

Average Base Oil Quality Needs - 2015

PCMO HDEO Industrial

KV @ 40°C, cSt 25 38 80

KV @ 100°C, cSt 4.8 6.1 9.5

SUS @ 100°F 130 200 410

VI 113 103 96

Industrial = hydraulic, compressor, gear, general purpose

Sources – AFPM, Infineum, KEPC

The Lubricants Industry is ChangingNorth America - 2015

Key events

Multi-grade introduction - HDEO

Growth of low SAE grades - PCMO

North American Base Oil Industry Has

Changed to Meet Automotive Needs

Hydroprocessing now represents major source

for North American paraffinic base oils

PCMO Base Oil Quality Changes

1985 2015 Change, %

KV @ 40°C, cSt 37.5 25.0 -33.3

KV @ 100°C, cSt 5.9 4.8 -18.6

SUS @ 100°F 195 130 -33.3

VI 97 113 +16.5

0.0

50.0

100.0

150.0

200.0

1984 1990 1995 2000 2005 2010 2015

NA Base Oil Capacity, kbd

Group I

Group II/III

Despite changes, NA is not a major Group III source

Sources – AFPM, LNG, KEPC

Base Stock Composition Changing for

Automotive Industry

Hydroprocessing (Group II, III) eliminates aromatics

and large ring naphthenes; increases saturates

Hydroprocessing creates iso-paraffins

➢ Iso-paraffins Viscosity Index

0

10

20

30

40

50

60

70

80

Group I Group II Group II+ Group III Group III+

Co

nc

en

tra

tio

n b

y M

S,

%

Iso-paraffins

Monocycloparaffins

Polycycloparaffins

Aromatics

Thiophenes

Aromatics/Thiophenes Polycycloparaffins Monocycloparaffins Iso-paraffins

Formulating Engine Oils

Engine Oils and Formulation Sciences

Engine oils formulated from three main components

➢ Finished oil properties represent contributions from each

component

➢ e.g. CCS, Noack volatility

Viscometrics and volatility characteristics can be

managed through base oil selection

PCMO

Base Oils

VM + PPD

DI Package

0.0

5.0

10.0

15.0

20.0

25.0

30.0

0 1,000 2,000 3,000 4,000 5,000 6,000

No

ac

k V

ola

tility

, w

t%

CCS Viscosity, cP @ -20°C

Group IGroup IIGroup II+Group IIIGroup IV

Source – KEPC

Each SAE grade has a target base oil quality

Key properties - Noack volatility, CCS viscosity

Engine Oils and Formulation Sciences

SAE 5W-20

SAE 5W-30 SAE 10W-30

SAE 10W-40

SAE 15W-40

How Do I Get the Right Base Oil Properties?

Each SAE viscosity grade has a

target base oil quality➢ KV, VI, CCS, Noack volatility

➢ Additive dependent

Challenge is to find correct base

stock combination to meet

target qualities in the most cost

effective manner

What is blended base oil quality

target for SAE 5W-20/30?➢ KV @ 100°C ~4.8 cSt

➢ VI ~113 to 116

➢ CCS @ -20°C ~1,000 cP

➢ Noack Volatility ~15 wt%

➢ Group II (saturates, sulfur, VI)

10.0 15.0 20.0 25.0 30.0

CC

S @

-xx°

C

Noack Volatility, %

Base

Stock C

Base

Stock B

Base

Stock A

Formulating Thin Engine Oils - Options

II+

III

III+

IV

Hig

h Q

ua

lity

Ble

nd

Sto

ck

1.Group II+ and Group II ➢ Reference (base case)

➢ Group II+ “unofficial” (API, ATIEL)

➢ Described as 110 to 119 VI

➢ Originally designed for North American

PCMO market in mid 1990s▪ ILSAC GF-2 initially; still applicable

with ILSAC GF-6

2.Group III and Group II (I)➢ Combination simulates Group II+

➢ Ideal for companies with Group II

production capacity

➢ “Synthetic” labelling opportunity

➢ Concept can be extended to Group I▪ Saturates and sulfur limitations

▪ Remains a NA opportunity

Higher blend stock

quality aligns with

increasing Group II

demand for given

formulation

GTL

Group II Requirement, %

Formulating Thin Engine Oils - Options

II+

III

III+

IV

Hig

h Q

ua

lity

Ble

nd

Sto

ck

3.Group III+ and Group II➢ Group III+ “unofficial” (API, ATIEL, ≥130 VI)➢ Combination simulates Group II+

➢ Reduced availability (vs Group III)➢ Higher quality allows formulation of lower

and future SAE grades➢ “Synthetic” labelling opportunity

4.GTL and Group II➢ GTL classified as Group III (i.e. III+)

➢ Limited opportunity (one source, internal

use)

➢ Other potentials (e.g. NA shale gas)?

5.Group IV and Group II➢ Combination simulates Group II+

➢ Highest quality option, formulation impact➢ Highest component cost option ➢ “Synthetic” labelling opportunity

Higher blend stock

quality aligns with

increasing Group II

demand for given

formulation

GTL

Group II Requirement, %

How Does Choice Affect Economics?

Each option has its advantages

Challenge is to find the lowest cost formulation

with the highest return value

➢ Includes technical value, marketing value, logistical value, etc.

If Group II+ and Group II is the base line, why

consider alternatives if blended costs are higher?

➢ Extend formulation flexibility

➢ Synthetic, part synthetic marketing

➢ Increase internal base oil usage if a producer has a finished oil

business

➢ Target future qualities, performance levels beyond NA (e.g.

Europe approvals including OEMs)

Running the Economics

Case Study

➢ Use ICIS market (versus posted) pricing from December 2016

▪ Group II 100N and 220N

▪ Group II+ 110N

▪ Group III 4 cSt

➢ Estimate quality differential for Group III and Group III+

▪ Historical postings not applicable

➢ Incorporate quality changes as VI increases

▪ Lower CCS, lower Noack, lower KV @ 100°C

➢ Target a consistent blended base oil quality

▪ KV @ 100°C, VI, CCS, Noack

Can the economics work?

Running the Economics

Case Study

➢ Use ICIS market (versus posted) pricing from December 2016

▪ Group II 100N and 220N

▪ Group II+ 110N

▪ Group III 4 cSt

➢ Estimate quality differential for Group III and Group III+

▪ Historical postings not applicable

➢ Incorporate quality changes as VI increases

▪ Lower CCS, lower Noack, lower KV @ 100°C

➢ Target a consistent blended base oil quality

▪ KV @ 100°C, VI, CCS, Noack

Can the economics work?

YES!

Preparing for Thinner Oils?

Need to look at this from several perspectives

1. Do you have the raw materials?

2. Do you have the correct approvals?

3. Do you have the correct demand?

4. Do you have the correct logistics?

5. Are the customers properly educated?Raw

Materials

Approvals

DemandLogistics

Education

Thinner

Oils

Is North America Ready for Thinner Oils?

1. Raw Materials➢ North America has multiple sources for Group II and II+

➢ US has no Group III production

▪ Imports required from Canada, Asia-Pacific (South

Korea, SE Asia), Middle East (UAE, Qatar, Bahrain),

Europe and most recently Russia

Raw Materials

Group I, 60,650

B/D

Group II,

165,900 B/D

Group III,

4,000 B/D

South Korea30%

Qatar20%Bahrain

7%

Canada Group II,

III31%

Europe, ROW12%

2015 US Imports

26.5 Million Barrels

Source - LNG

2016 Rated Capacity

Sources - AFPM, LNG

US Group III Supply Sources

27

From South Korea

From SE Asia

From W. Europe

From C/EEurope

From Middle East

From Canada

From SE Asia

From South Korea

Numerous Group III sources targeting US market US trade agreements may impact future sourcing

Raw Materials➢ Wide selection available (Group II+, Group III, Group III+)

➢ Most medium and heavy viscosity grades Group III+ quality (i.e. ≥130)

Preparing for Thinner Oils?

110

115

120

125

130

135

140

145

150

A B C D E F G H I J K

Vis

co

sit

y I

nd

ex

Group III Slate

4 cSt

6 cSt

8 cSt

Source – KEPC

Is North America Ready for Thinner Oils?

2. Approvals➢ Most new base oil slates fully tested

and approved in multiple products and quality levels▪ API, ACEA, OEM, etc.

➢ Lack of testing and performance demonstration limits value, profit and marketability (to producer)▪ Buyers/formulators can benefit

➢ Testing is expensive▪ Who’s responsible for approvals?▪ Base oil supplier, additive company,

customer, combination?

Approvals

Is North America Ready for Thinner Oils?

3. Market Demand

➢ Growth in synthetic and part synthetic engine oils growing

▪ How much mineral oil is really part synthetic?

➢ Gradual transition beginning with HDEO

Market Demand

0

25

50

75

100

North America Europe

Mineral Part Synthetic Synthetic

Source - IHS

SAE 0W-2017%

SAE 5W-2022%SAE 5W-30

37%

SAE 5W-4017%

SAE 10W-303%

SAE 15W-403%

Other1%

NOLN – 2016 Oil Change

Plus Demand

Is North America Ready for Thinner Oils?

4. Logistics➢ Blenders have expanded base stock options to meet

finished product offering➢ Options require analysis (cost, marketing strategy, etc.)➢ Tank management a challenge but also an opportunity

Choices - 1985 Choices - 2016 3 Tank Saga

Logistics

S150N S500NS150

BS S150N S500N S150

BS

110

HC

220

HC500

HC

4

cSt6

cSt

8

cSt

Special

Group I Group I, II, II+, III, III+

PAO, Bio-Base, etc.

What do I use?

Group I

Group II

Group III

Group IV – V

Bio-Base, etc.

GroupII+

Group IIMid

Viscosity

4.8 cSt @ 100°C KV114 VI15 wt% NOACK1820 cP @ -25°C CCS

SAE 5W-30 Conventional

70%

30%

Balancing Base Oils – Value of Group III–III+

100% SAE 5W-20Conventional

Base CaseGroup II+

Group II+ used to meet viscometrics-volatility (110N – 120N)➢ Group II+ not synthetic

➢ Resultant products “conventional”

➢ Blend ratios are estimates

▪ Will change with quality of Group II Mid Viscosity base oil (220N)

and DI/VM

➢ With Group I, blend ratios would be different

GroupIII-III+

4.8 cSt @ 100°C KV114 VI15 wt% NOACK1820 cP @ -25°C CCS

4.9 cSt @ 100°C KV115 VI15 wt% NOACK~1750 cP @ -25°C CCS

SAE 5W-30 Conventional

SAE 5W-30 ConventionalSAE 5W-30 Part Synthetic

SAE 5W-20/30 SyntheticSAE 0W-20/30 Synthetic

70%

30%

30%-50%

50%-70%

100%

50%-70%

30%-50%

100% SAE 5W-20 Conventional

SAE 5W-20ConventionalPart Synthetic

Base CaseGroup II+

Advanced CaseGroup III-III+

GroupII+

Group IIMid

Viscosity

Balancing Base Oils - Switching Group II+ to III-III+

Group IIMid

Viscosity

Red = New product options

Is North America Ready for Thinner Oils?

5. Customer Education

➢ Need to make customers aware of thin oils and when to use

➢ API one of many groups to educate the industry

Do you use thin or thick oil? Do you use thin or thick oil?

Customer Education

Source – Norm Shephard

Thin Thick

Is North America Ready for Thinner Oils?

Scorecard results

Raw Materials

Approvals

DemandLogistics

Education

Thinner

Oils

Item Ready? Comments

Raw

Materials

Yes Many sources

(Group II domestic,

Group III import)

Approvals Yes In most instances

Demand Yes Strong and growing

Logistics Yes Case by case review

required

Education Yes Region adopting use

of thin oils

KEPC - Yes

Conclusions

Automotive industry leading the shift towards the

use of thinner oils

Higher quality base stocks required to meet the low

viscosity requirements of fuel economy

specifications➢ Several viable options available to the customer

➢ Separate analysis of logistics, cost and marketing required

North America has components to blend thin oils➢ Finished oil demand strong and growing

➢ Group II+ available domestically from several sources

➢ Availability of Group III and III+ imports

➢ Customer education advanced but still necessary

Thank you

H. E. Henderson, PhD

kepetroleumconsult@yahoo.

com

K&E Petroleum Consulting

, LLC

Base Stock Strategies

Supply Chain Management

New Product Development

Education

Market Research