Episode Transcript
[00:00:00] Speaker A: G'day, everyone.
[00:00:00] Speaker B: Welcome to lubrication experts. And today we've got a pretty fundamental topic. We're going to be talking sort of base stocks, and there is probably no better person to do it with than Mr. Jack Zakarian. So Jack was with Chevron for 37 years, has been retired for a little while now, but is an stle fellow. So he certainly got the industry chops to be able to take us through this subject.
And so I really appreciate Jack coming on. He obviously does some consulting work. So if anyone is interested, obviously reach out after this. But Jack, thanks so much for joining us.
[00:00:38] Speaker A: Well, thanks for the invite.
[00:00:40] Speaker B: All right, so maybe if we get started with kind of like the very basics of lubricant base docs, I think a lot of people in our industry at least, and people who listen to this podcast would understand the API base oil groups. So you've got group 1234 and five. That's almost like you might describe it as being the sort of the consumer facing side, but then in the base oil market, it can kind of start to confuse people because they start seeing these terms like neutral, solvent, neutral, bright stock versus them being talked about as group one, two and three. So are you able to help us kind of define these terms and maybe kind of help people link where the API based stock groups are to the base stock market?
[00:01:35] Speaker A: Sure. I mean, basically the API system is just a way to classify different base oils. So all the other terms for base oils have their own meanings and meanings and they're covered under different groups in the API. But I guess it's kind of like saying if you had a bunch of automobiles, you could put them into categories of two doors, four doors, and pickup trucks. But that's a classification, that's what API is. But then you still have all the different models of vehicle makers and things out there. And so that would be another way to describe what's there.
[00:02:22] Speaker B: And then when you say, it's like describing the car models, let's say car models within a category. So if we looked at the group ones, for example, when they distinguish based on the end product, solvent neutral versus Brightstock, is that a classification that's based on the technology that's used to produce them, or is that a classification based on the end product? So the performance specs, so how does that divide out?
[00:02:47] Speaker A: Yeah, actually Brightstock is a term that has its own special meaning, and essentially it refers to what we would call the bottom of the barrel.
So whenever petroleum is refined to make a base oil, you have the very heaviest or the highest boiling components that are found essentially as the bottoms part of the vacuum distillation tower. And that feed goes into making brightstock. So brightstock would have a higher molecular weight and higher viscosity than what we would call neutral oils. But essentially, neutral oils would be what gets distilled overhead. And bright stalks are what comes out the bottom of the column. And you can have bright stocks that are made with a group one process or a group two or even a group three process. And similarly, you can have neutral oils that are made with all the different processes, but it really refers to a split between the boiling points and the viscosities of those.
[00:03:59] Speaker B: Interesting. So why is it, and I can't speak for everyone, but when we hear about Brightstock, it always seems to be in a group one context. I mean, I heard you mention group two and group three brightstocks, but I don't think I've ever come across them in the market. Why is that?
[00:04:13] Speaker A: Yeah, it's several reasons for that. In fact, in my early years at Chevron, I was very much involved in the research and design of their lubricating oil plant at Richmond, California. And the initial plan for that base oil manufacturing site was to make Brightstock. And we would have been one of the first manufacturers to make a bright stock from a group two process. But during the course of our research, we found that essentially to make a bright stock that was stable and suitable for sale by the process that we had, which was all hydro processing, we needed more step. And at the final minute before appropriations were done, we basically decided to remove brightstock from the slate of oils we made, because it would be way too expensive to manufacture it with the additional equipment needed, and because an all hydroprocessing route, which is what we had in the Richmond complex, that route, it needs some help if it's going to make a bright stock, especially from some crude oils, which we were using, which are not very beneficial for making lubes.
It's pretty easy to make brightstock on what we'd call a solvent refining plant, because the bright stock, when it's solvent extracted, you can take a lot of the extra impurities out of it. But even before you do that, brightstock needs its own separate step, which is called solvent de asphalting. And so this is where you take the bottoms that comes out of a vacuum distillation column. It's basically tar, asphalt and some oil, and you extract that, and then the extracted material becomes essentially asphalt, and, well, the extract contains the.
I'm trying to think now they use different terms in extraction, but the raphanate would be the stock, and the extract is then asphalt.
Richmond had a step to do that, but the amount of refining that that step was designed to do was not sufficient to make lubricating quality what we would call deasphalted oil. So that oil would then not be of a high enough quality to go to a hydrocracker. It would essentially poison the catalyst and kill it very quickly.
With group one processes, if you've got a good solvent de asphalting plant and you can make a reasonable, bright stock, then that goes to the solvent extraction step, which is the main part of group one, and then you can make brightstock. The other thing that you really need for brightstock is it's much easier to solvent de wax bright stock instead of catalytically de waxing it, because the wax molecules are so much larger in bright stock, and so many hydrocracking plants these days do not have any solvent de waxing. They all do catalytic de waxing.
Yeah. So kind of a long explanation, but the bottom line is, I don't know. Well, there have been a few new brightstock operations built in the last 30 or 40 years, but essentially, it would be highly unusual for anybody now to go and build a group one Brightstock facility. The ones making it are essentially ones that have been around for many years.
[00:08:29] Speaker B: Yeah, that's really interesting. I think a part of that discussion is that as an end user, the products just kind of come to you. You never really think about the long tail of investment decisions that might need to be made in a technology based on what feedstock is available to you, what technologies are available to you, and therefore what kind of end product you can produce. And that's all very complex design process that needs to be gone through by these base stock suppliers. So getting a window into that is really fascinating. Maybe before we get on to that question, because you did raise the idea of the fact that bright stocks are, let's say, declining or in decline. Before we get onto that, can we just step back a little bit before we get too far into the weeds and historically, maybe assess what have the base or mixes traditionally looked like? Because I know in our world, we tend to focus a lot on group one, two, and three, but obviously, there's an entire world, for example, of naphthenic base oils, which have a lot of application in transformer oils and greases.
Are we able to maybe step back and explain why does the base stock market look the way it does today? We've got group one plants that are aging group two and three plants, which continue to open at pretty regular intervals, and they're producing a pretty broad variety of different base stocks.
And then you've also got the synthetics, right, which are sort of their own category. So where you worked for know, Chevron produces base stocks, but Chevron Phillips chemicals does all the synthetics, and I think there's a similar split in ExxonMobil. So why does that all look the way it does?
[00:10:07] Speaker A: Well, actually, I would think with a little bit of bias here, I'll say that Chevron can take a lot of the credit for essentially transforming the industry to group two.
When we first built that Richmond plant, there were very few plants making group twos. And at the time, there was essentially just one licenser of the technology. That was Gulf oil. Chevron. Right. Essentially, when the Richmond plant opened, took over Gulf oil. So we had all their hydrocracking and lube technology, plus Chevron went into licensing their own technology. But in those early years, I can remember, we were the only ones in North America that were making group two. And a lot of people were very nervous about using it. The biggest thing that people worried about, other than it being just a brand new stock, was that it was a lot more saturated, with much fewer aromatics than group one oils. And many additives were designed to be more soluble in group one. And the more paraffinic an oil gets, the tougher time you have dissolving additive packages. And also, there are some applications where solvency of the oil in its end use is a desired quality. And group two s didn't necessarily make the cut there. But the reason why the market changed is probably more due to economics and also specification changes in the automotive world. That really became a huge driver for group two type technology. In fact, the specifications are changing so much that now most automotive engine oils really need a group three quality type oil or group four PAo just to meet the actual automaker specifications. So, group one, now, if you want to use it in a transportation lubricant, it's a pretty limited market. Most modern vehicles just claim cannot use the oil at all, either because it's got too much sulfur, too much nitrogen, or too many aromatics, and it won't meet specs.
And the transportation lube market is about 50% of the total product demand. So if you have a market 50% of which says, I need group two or better quality, that's a big reason why group one is shutting down. The other reason is group two is a lot more feed flexible, so you can take a lot of different crude oils, and every crude has its own starting composition, which can either be very beneficial for making lubricants, or completely undoable for making lubricants and hydrocracking. Or group two processes can handle a much wider range of feed properties from crude oil. And so a group one plant, and I guess the way I like to think of it, is group one is what I'd call a subtraction process, that you come in with a certain amount of material, and whatever's bad, you remove it. But there's no chemical transformation. So group 1 may remove a lot of aromatics, it removes some sulfur, you remove the wax, but you end up with a product that's essentially only as good as your starting crude oil. Group two is totally different. Same with three and four, where these are chemical synthesis processes. You're taking an oil from crude and you're reacting it with hydrogen at high temperatures, high pressures. You're putting it through a bunch of different chemical steps. Catalytic de waxing, what we call then hydro finishing. After that, all of these things are changing the chemistry, and that gives you a lot more control over your end product.
The final thing is group one is very pollution intensive, that you're dealing with a lot of solvents, and it's very hard to contain the solvent totally within the plant. And so you have high emissions from both the solvent extraction step and solvent dewaxing. And so when you look at it and you look at the cost, it actually is less expensive to build a group two plant.
Probably the biggest downside of group two is it needs a lot of supporting equipment. In particular, you need a source of hydrogen. So if your refinery has good hydrogen manufacturing capability, then you're pretty much set for group two for all those reasons. Flexibility, specifications, cost, less, pollution.
That's the reason why essentially, group two has dominated.
I don't think you'll ever see another group one plant actually get built from the ground up. Everybody announcing plants now are doing group twos and threes.
In fact, I didn't mention one other thing that's very indicative. Now that I looked over the 2023 base oil global capacities for different types of oils, and this year, group two has surpassed group one in terms of global capacity only as far back as maybe 2017. Group one still had a slight edge, but now there's a pretty big gap. And group two is now the predominant base oil in the market.
[00:16:36] Speaker B: If you head over to the website lubrication expert, I'm building a platform to make the job of a lubrication expert that much easier. There's a range of application based training modules, as well as certificate preparation, including ICML's MLA one, MLT one, VIM, and VPR. MLA two and MLA three are coming later this year, as well as, hopefully, CLS. There are tools for lubricant and viscosity selection, and I'm starting to run biweekly Zoom meetings where we can all just catch up and share our experiences as lubricant professionals. Best of all, while a range of certification courses are in the order of $1,000 each, all of this is available for $100 a month. Yeah, interesting. And that's certainly what I think we see as end users is very much that shift from those group one formulations up to group two.
When you talked a little bit about the way that a plant is constructed and the different types of technologies that are available, does that mean that there's very little flexibility in being able to adjust the kind of products that come out at the back end? So is the quality, well, let's say the quality or the specifications of the product that are produced, is that pretty much baked in at the design stage for a plant?
[00:17:54] Speaker A: Well, two ways to answer that. One, there is definitely some flexibility on any design. You have to have the ability to adjust to maybe a slight change in feedstock or some customer demands for different volumes of your products.
So there is that. But I'd say that group one plants are pretty hardwired.
It would be hard to do something different in a group one plant without putting significant capital in. In group two, you can certainly do different things. I mean, I remember at Chevron, we ended up making group three from the same plant that we were using to make group two. And the major thing that was involved on that was we just had to get a higher quality feedstock. We needed a crude that had a higher wax content because we were isomerizing a lot of the paraffins into isoparaffins, and that was the basis for the high vis on the group three.
So you have the flexibility. But oftentimes, even with a group two or a three plant, you may need to put a fair amount of capital in even to make what a customer might think of is a minor change, because just changing a distillation column, as an example, can be tens of millions of dollars depending on your throughput.
So you do have flexibility, and it's just within probably a smaller window.
[00:19:44] Speaker B: Yeah, that's interesting. And then when we talk about products that are produced, to what extent should we think of them as being kind of commodities. And by that, what I mean is, again, from the end user side, because we understand base docs in terms of API base groups, right? So you think of all group ones as basically being the same. All group twos are basically the same. All group threes are basically the same. But if I have two different group two plants, how different can their output be?
[00:20:19] Speaker A: Yeah, by and large, the oils are commodities, and part of that is due to the API system, as you just mentioned, that a customer is going to say, well, gee, this other guy selling group one at this price, why is your group one different?
And so the, but with group ones, because the plant is hardwired, like I said, where you have a certain feed coming in, you're just subtracting what's in that feed. So you're left with the same chemicals day in and day out. You don't have a lot of handles. Change that. So with group one, you'll find that stocks from different manufacturers can behave fairly differently in your blends. And that's especially true for brightstock. Brightstock, because it's the highest viscosity piece, it has the most molecular variation, it's the most difficult to work with.
In my formulating days at Chevron, there were some bright stocks. Oh, we loved working with those. And then there were others that we would say, tell purchasing, don't ever buy this bright stock again.
And you would do that less often for the solvent neutral oils. But with group two, and this is another big advantage, group two is more of a homogenizer when it comes to making the base oil, because you're doing extensive hydrocracking, hydrogenation, catalytic de waxing, the products are more similar than dissimilar, especially if you compare them to group ones. And with group threes, it's even more refining, and the products can be more similar. The big difference in group threes now is there are some significantly different processes for how the stocks are made. Probably the biggest difference would be the gas to liquids process, which shell uses, where you're starting essentially from natural gas, and building a lubricant up from that. That's a lot different than starting with petroleum. And the other thing that's different is a lot of the group three manufacturers have kind of made a split between what they call regular group three and group three plus, where the plus means it's been refined more and it has a higher vi. And so once you start getting over about 100 and 3135 vi, then those group threes tend to be different compared to the typical group three.
But again, by and large, group threes are very similar because they're essentially 99% saturated hydrocarbons. In fact, I'll say 100% because there's almost no aromatics. There are cycloparaffins, but they're largely isoparaffins.
[00:23:34] Speaker B: Yeah, that's really interesting. So given that kind of landscape of the base stock market, where we have, I'd say, a pretty robust supply, especially of group two and group three, what's the significance of group one disappearing from the market? So I think we've seen a lot of news articles and things being published about, particularly the european group one refineries kind of starting to shut down. And there's obviously, like you mentioned, very little new investment in that style refinery. Now, my understanding this is a very basic level, has always been that group ones tend to be available in higher viscosities than the group two and group three counterparts. And so while you might not see many changes in the automotive formulations because they've already moved to group two and three formulations, that there might be a bit of change in industrial, as an example, industrial gear oils, or maybe like the higher viscosity hydraulics market or something like that. But how do you see it?
[00:24:39] Speaker A: Yeah, I think when people say that group one tends to be higher viscosity, it's pretty much only higher viscosity because of brightstock. So if you include Brightstock in the group one slate, then you see, I think there's maybe two plants in the world today that make a bright stock. That's a group two. And there is maybe one or two more plants that make a bright stock that is essentially from a nafthenic crude. So you can't make the very heaviest oils essentially anything more than an iso 320 or maybe a 460, depending on how it's blended. Once you go above those, you need a lot of bright stock. Now, people have been loaning for years that bright stock is disappearing, and we're going to lose the high viscosity stock to blend with. But kind of what's happened, at least from my viewpoint, is that the demand for brightstock has dropped considerably because of the automotive specifications. So even though Brightstock's supply has gone down, the demand for the product has gone down quite a bit.
The big issue is if you didn't have any bridestock at all, then you would have to formulate some of the products, like industrial gear oils, certain greases. You would then have to find a synthetic counterpart. The most popular one would be polybutane, because it's the least expensive of most synthetics, and it's well known for lubricant formulas. So you could replace brightstock. It may cost you a little more, but as the supply of brightstock has gone down, the price of it has gone up. And so brightstock is a lot more expensive than all of the other neutral oils out there. And that is making it a little easier for people to consider a synthetic heavy stock. You might still use the neutral oils and lighter stocks that are petroleum derived, but you may need a synthetic substitute to get extra viscosity.
[00:27:06] Speaker B: Yeah, that's interesting. And that's certainly a shift, I think, that we've already started to see.
So then, as we kind of wrap up these discussions, I always like to ask a question about the future, and what do you see as being the future of the base stock market? So there's some overall trends that we're seeing. So an example would be the decline of group one and bright stocks. And we've got this situation where group two and three kind of dominates, and then you've obviously got the polyafa olephants kind of sitting out there as their own thing.
Do you see the future just being an extension of the status quo, or is there some big change that you see looming over the base stock market?
[00:27:53] Speaker A: Yeah, I wouldn't say there is any big changes, unless you would call the removal of group one a big change. I mean, I think ultimately, over time, group one plants will continue to shut down and you pretty much won't see group one on the market.
You'll always see some nafthenic oil out there. It's got its own niche applications, and there are enough nafthenic crude still left. That right now is probably 10% of the global base oil supply. And it's pretty much been that way forever. And you may see a slight drop off, but again, you're not going to see nathenic disappear.
Ultimately, what's happened, and I mentioned this earlier, group two is now the new group one. Group two will be the workhorse stock. And what's going to happen as more group one shuts down is group two will take over those applications that are not as demanding, maybe as the latest automotive new car specification would demand. And so it'll do a lot of the industrial and other oils out there, and you'll see still an increase on basically group threes and paos only because of the quality demands. Now, the huge unknown, which has a lot of people worried and a lot of people trying to make predictions, is how fast electric vehicles will essentially overtake internal combustion in market share. And I think there's no question that electric vehicles will continue to increase.
They don't use engine oils, and so that cuts a lot of lubricant demand. As I mentioned earlier, 50% of all oil sold is essentially motor oil. But evs still need some lubricants, and more importantly, they need coolants. And you still will see a fair amount of liquid petroleum type going into those applications, especially on the gear case. Every electric vehicle still needs a gearbox.
And for most of those applications, because they're essentially filled for life, you'll probably see group three, or PAo, as the de facto standard for those applications. So I think over time, you're going to see the amount of base oil being made decrease and group one disappear. So that decrease may just be handled by group one disappearing, and you'll see more of a shift to some higher quality stocks, but it'll be more gradual than sudden.
[00:31:02] Speaker B: Yeah, that's really interesting. And obviously, there's a lot of discussion going on about electric vehicles and even how does that affect the commercial vehicle space, I think is somewhat unknown at this stage. You've got multiple factors with regulation also stepping in, particularly in the EU and California. So it's kind of this. Watch this space, right?
[00:31:28] Speaker A: Well, yeah, I mean, the thing when you talk about regulation, don't get me started on this, but you already did.
The thing that I always hate is when there's two things about regulation. Regulation certainly needed. I'm not anti regulation, but what I really despise is when regulators come in with a technology solution where they say, you have to do it this way. A regulator could say, we have these technical criteria for performance and give us something that does that.
The big issue with electric cars is that people look at emissions, and obviously an electric vehicle has no emission, but an electric vehicle that's powered by electricity made from fossil fuel, especially if it's a hybrid vehicle, it essentially has the same or even a better carbon footprint compared to just a full battery electric vehicle. And so if you only look at the tailpipe, you're missing the big picture. And in my view, I really think that what we call e fuel, which are gasoline, diesels and jet fuels made essentially from biomass, so it's renewable. Those are essentially co2 neutral. And if regulators were a little more open minded, what you'll find is that there could be a huge market for those stocks and you're still co2 neutral. And I think that over time, people are going to find out that, well, we already know, I mean, there's no way you can continue air transportation if you want to go electric.
No way you're going to be doing. You could do railroads, it'd be pretty tough. You could do heavy duty trucks. You're adding more weight in battery than it's worth to do that. But that's a prime area where you need a higher density fuel, and a battery is just nowhere close to liquid fuels for energy density.
It's orders of magnitude difference. So I wish the regulators would just look at what is technically needed is to reduce co2. It's not technically needed to have battery electric vehicles, although that's a great way to reduce co2 if your electricity is produced cleanly.
[00:34:09] Speaker B: Yeah, definitely. Interesting.
I think it's relatively obvious, especially for air transport and probably the marine sector as well, that they're not going to get away from liquid fuels anytime soon. And I think in some ways, the EU regulation seems to have recognized that they might have overstepped a little bit. Right? Where at first the decree was everything must go battery electric. And now they've kind of stepped back and said, well, if the solution is hydrogen combustion or if it's e fuels, we're willing to look at that as well. So hopefully there is some sense put to some of this stuff. But I don't necessarily hold out hope. But Jack, thanks so much for coming on the podcast to discuss some of the real basics of base oils. I think it's enlightening for people on my end of the business who don't necessarily see all those decision points that go into the creation of the base oils and base stock categories and things like that. So it's really nice to hear from an expert who knows a lot about that field. So, Jack, thank you so much.
[00:35:15] Speaker A: Okay, well, thanks for the invite brief, and we'll maybe catch you at a future meeting or in some industry event.
[00:35:24] Speaker B: Take care. Like.
