ABSTRACT 

Gas-to-liquid (GTL) processing provides a means to convert natural gas to such products as diesel fuel, jet fuel, naphtha, base oil, wax, olefins, and alcohols. The products produced by GTL are typically exceedingly clean. In addition, they have very favorable manufacturing economics.

Lubricant base oils produced by GTL processing are expected in the market in the 2005/2006 timeframe. They are expected to initially enter the market by competing with Group III and IV in the synthetic and synthetic-blend engine oil market space. To a lesser extent, GTL base oils will also compete with Group II+ as a correction fluid for Group I in 10W-30 formulations, and as a workhorse against Group II+ in a growing market for 5W-30. Rather than reducing the value of GTL by moving down the quality continuum to Group I and II base oils, GTL base oils are expected to reside in the high-end market space of Group II+, III, and IV and be the beneficiaries of demand being pushed into this market space by more stringent specifications.

In addition to GTL competing in the emerging low viscosity passenger car motor oils markets, it will also penetrate automotive driveline applications, premium diesel engine oils, and high-end industrial lubricant applications over the next five to eight years.

ACKNOWLEDGEMENTS

This paper is based on primary research conducted by PetroTrends professional staff over the last three months. In addition, it includes information derived from such secondary resources as the Internet, and other public domain documentation. It is also supplemented by information and insights provided by Nexant Chem Systems. Nexant Chem Systems is a market research and consulting firm. The firm recently completed a multiclient study focusing on the manufacturing economics of GTL; Stranded Gas Utilization: Methane Refineries of the Future."

PetroTrends would also like to acknowledge Syntroleum for sharing its insights on some of the typical performance characteristics for GTL base oils.

BACKGROUND

The technology of converting gas to liquids (GTL), is based on the chemical process known as Fischer-Tropsch (F‑T) synthesis. The products produced by GTL include naphtha, kerosene, jet and diesel fuels. In addition, GTL plants also produce such specialty products as lubricant base oils, waxes, olefins, and alcohols.

Interest in GTL has grown rapidly over the last five years for several reasons. First, it provides a means to monetize significantly more of the world’s natural gas reserves. These reserves are estimated at over 14,000 TCF and hold the potential to produce an equivalent of several hundred billion barrels of crude oil. According to a study on GTL by Arthur D. Little, an estimated “900 TCF of gas reserves are potentially suitable for monetization by GTL technology.” A significant percentage of these reserves are located in regions where there is little to no domestic demand or too far from export markets to have much economic value.

Beyond the value of generating more equivalent crude, however, GTL provides an economically attractive means to produce fuels and specialty products far cleaner then those derived from traditional crude oil processing. This is particularly important in light of the increasingly stringent diesel fuel regulations coming into play. In the US, for example, the United States Environmental Protection Agency (EPA) will mandate a maximum of 15 parts per million (ppm) sulfur level in diesel fuel in 2006.  Even more restrictive regulations are expected in Europe. In May of this year, the European Commission proposed phasing in a 10 ppm limit on sulfur starting in 2005. Similar requirements are also on the horizon in Japan and other countries. These and other sulfur limits on the horizon will be a significant challenge for refiners to meet when one considers that the average level of sulfur in much of the diesel produced today is roughly 300 to 350 ppm.

Diesel fuel produced by the GTL process is exceedingly clean. It has no detectable levels of sulfur or aromatics. It also has significantly higher cetane numbers than its crude oil derived counterpart. Diesel produced by the GTL process can be used directly as ultra high quality fuel, or as a blend component to boost the performance of lower quality traditional diesel fuel. Similarly, GTL processing also produces high quality (e.g. low sulfur, low aromatic content) kerosene, jet fuel, naphtha and a number of such specialty products as olefins, waxes, lubricant base oils, and others.  

In addition to producing very high quality, environmentally desirable “synthetic fuels, or synfuels” and specialty products, GTL is also attracting a high degree of interest because it provides a means to eliminate flaring and/or reinjecting natural gas. Flaring is considered an environmental issue and technology that eliminates it has value. Although somewhat a longer-term issue, GTL also holds promise as a fuel source for fuel cells. Fuel cells are expected to begin penetrating the internal combustion (IC) engine market in roughly five years. The reformers used in automotive fuel cell applications will have an appetite for only the cleanest fuels, and GTL fuel can offer the desired level of purity. 

Driven by the opportunity to monitize natural gas, and the other issues mentioned, interest in GTL has climbed over the last few years. Currently there are 13 announced GTL projects in the world. Taken together they have the potential to produce an estimated 870 thousand barrels a day (TBD).   The most active regions in terms of number of plants are Qatar and Australia; three plants have been announced for each. Egypt is also expected to be a hotbed of GTL production with two announced plants with a combined capacity estimated at 145 TBD, as shown in Table 1.

Although much of the current interest in GTL is tied to monitizing stranded gas to produce high quality diesel fuel, it has also garnered interest due to its ability to generate high quality specialty products, including lubricant base oil, waxes, and olefins. In fact, there are two companies currently using Fischer-Tropsch reactions to produce ‘synthetic” waxes.  Schümann Sasol operates a plant in South Africa and Shell operates a plant in Bintulu Malaysia. The Shell plant uses the Fischer-Tropsch reaction in the Shell Middle Distillate Synthesis (SMDS) process to convert long-chain paraffinic feed into wax and other specialty products. Both the products produced by Shell and Schümann Sasol have very high purity and sharp hydrocarbon distributions. These products are typically hard waxes with very high melting points (e.g. above 200°F)

 Unlike petroleum wax, which is a mix of iso- and normal paraffins, F-T wax is pure normal paraffin in the C₂₀ to C₆₀₊ range.  The characteristics of F-T waxes give them a significant advantage over traditional petroleum waxes in such high-melt applications as hot-melt adhesives, powdered coatings, inks, textiles, color concentrates, and plastics. In addition, F-T waxes are also advancing into the phase change materials (PCM) market. This includes such applications as heating systems, food transportation, medical devices and therapies, and other applications where the latent heat available from phase change can be put to work. The global market in the high melt space is roughly 80 to 90 million pounds, valued at roughly $50 million, or about 1% of the total global wax demand. Although F-T waxes offer clear advantages in some applications, in others they are disadvantaged due to normal paraffin content and narrow hydrocarbon distribution. This hydrocarbon profile does not currently afford the same formulation and cut point flexibility found in petroleum waxes and in a market as diverse and diffuse as the wax business, formulation flexibility offers a distinct advantage to wax suppliers.

 Opportunities in the wax market and how GTL waxes might compete in this market space do weigh into the economics of building plants. As a result, the outlook for GTL base oil is also a function of the outlook for wax from these plants. This is not to say that one could not justify the economics of a GTL base oil plant without wax, but it does suggest that the economics of a specialty GTL plant could be improved if high-value wax were part of the product mix. As it does relate to the outlook for GTL base oil production, additional background on GTL wax and how its market space is likely to develop follows.

 GTL wax.   Most of the wax in the market today is derived from base oil production. Although certainly a valued product, technically it is a byproduct of classic solvent refining – solvent dewaxing base oil production. Unfortunately, as a byproduct of base oil production, the future of the petroleum wax business is not in its own hands. Instead, it is in the hands of the lube base oil unit, and times are changing.  

Lubricant base oil manufacturers are feeling pressure to incorporate catalytic dewaxing technology to meet increasingly stringent base oil performance requirements. The catalytic dewaxing process does not yield wax. Instead, the wax molecules are cracked and isomerized into base oil, fuels, and other fractions.  The impact of this shift has been felt greatest in the North American market.  In the last five years, a major grassroots base oil plant was built (Excel Paralubes) using catalytic dewaxing and three others replaced existing solvent dewaxing technology with catalytic dewaxing.  Others are expected to follow.  In addition, Petro-Canada added ISODEWAXING capacity to its plant in late 1996.  In addition to declines in wax supply as a result of conversions from solvent dewaxing to catalytic dewaxing, supply in North America has been further eroded by the exits of several smaller base oil producers.  These exits took wax with them.

 As discussed, how the market space for GTL base oils develops will, in part, be influenced by the business opportunities associated with the wax market and how these opportunities might compete with other interests. GTL projects are considered to have the potential to greatly increase wax supply because roughly 50% of the yield from the syngas reactor is wax. The economics of world scale GTL plants, however,  will be driven by demand for low sulfur diesel fuel, not wax and other specialty products.

 Beyond the big picture economic realities of a world scale GTL plant, a number of the major oil companies (those with the resources to build a world scale GTL plant) would also have to look across their businesses before heading into the wax market. Many of the majors still produce wax from solvent dewaxing.  These companies will likely face the prospects of cannibalizing their existing wax business should they decide to market wax from a GTL plant. For some, this may prove to be a losing proposition where every pound of wax moved into the market from the GTL plant displaces a pound of wax they have already placed in the market and produced from its solvent dewaxing unit. 

 The next likely new entrant into the F-T wax supply pool would be a specialty products supplier with its eyes on base oils, wax and other specialty GTL products. This would likely be a producer with no ties to a conventional solvent-refining/ solvent-dewaxing lube base oil plant.  Such a player would not have to consider the issue of cannibalization and could develop the high-melt wax market competing aggressively in an effort to grab market share. Although a specialty products GTL player could potentially do this, the value of this effort is questionable since the high-melt point wax market is fairly well balanced. It is also important to note that a new entrant into the F-T wax market in the high-melt market space would be competing with entrenched suppliers. They would also be competing with PE wax suppliers. PE wax is already a formidable competitor with F-T in the high-melt market space.

 A new F-T wax producer could also decide to target the large market spaces occupied by mid- and low- melts petroleum waxes. This, however, is not a straightforward process.   F-T wax suppliers would likely find it necessary to fractionate the wax because the C₂₀ to C₆₀ range of normal paraffins is too wide for most applications.  They may also find it necessary in many applications to blend F-T wax with petroleum waxes in order to match performance requirements with existing expectations. Even with the cost burden of fractionation and blending, the cost structure for F-T wax could prove an advantage.   In assessing the magnitude of this advantage, however, one would have to remain grounded in the fact that a decision to compete in this market space is a decision to compete with a large volume of byproduct coming from lubricant base oil production. 

In summary, this means that the primary driver for GTL plants today is high-quality, environmentally friendly diesel fuel, not lubricant base oils, waxes, and other specialty products. The catalysts used in a plant designed to produce GTL fuel and the alpha value of its products do not readily lend themselves to base oil production.                  

BASE OIL MARKET SPACE DEVELOPMENT

 Few question if the market for GTL base oils will develop. The primary questions asked today are when, where and how will it develop, and who will develop it first. In addition, there is a good deal of interest in the economics of these plants. Insight into these and other questions starts with an understanding of what GTL base oils are and what level of performance they offer.

 GTL base oils are products synthesized by a Fischer-Tropsch reaction. These base oils have no detectable levels of sulfur, nitrogen, or aromatics, and they are water white. They have a very narrow hydrocarbon distribution and excellent oxidation stability characteristics. In addition, the lower viscosity products (e.g. less than 4cSt) are typically biodegradable. GTL base oils with viscosity grades used in automotive engine oil applications (4.0 to 9.0 cSt) are expected to have a Viscosity Index in the range of 140 to 155. By comparison, PAO has a VI of 120 to 138 for the same viscosity range.

 Another very important attribute of GTL base oils and one that will shape its place in the market is its volatility. GTL base oils reportedly have NOACK volatilities significantly lower than API Group I, II/II+ and III base oils. A 4 cSt product, for example, is reported to have a NOACK volatility several percentage points below 10, as compared to a typical Group III with a NOACK in the low- to mid- teens. These performance attributes position GTL base oils well to compete with PAO and Group II+ and III in the automotive lubricants market space. It also suggests that the greatest value for GTL base oils will be realized in the automotive lubricant viscosity grade ranges of 2 cSt to roughly 10 cSt and that alpha values for specialty GTL product producers will likely optimize on these grades.  

 GTL base oils also have excellent low temperature properties.  In fact, they appear to be only slightly disadvantaged when compared to PAO’s cold crank viscosities.  The pour point of GTL base oils is, however, much closer to that of a Group II/III than it is to a PAO.  This can be addressed by the use of pour point depressant and GTL base oils are reported to have excellent responsiveness to methacrylate -based pour point depressants.

 In addition to high quality, GTL base oils also have very favorable manufacturing economics. According to a multiclient study recently completed by Nextant Chem Systems, the manufacturing costs for GTL delivered in the US market are comparable with that of Group I, II, and II+. Even more importantly, ChemSystems' analysis reveals that the economics for GTL are more favorable than that of high VI Group III, as shown in Figure 1.

 Considering the manufacturing cost position of GTL base oils and its performance characteristics, a starting point to begin modeling market space development for GTL base oils is one that looks at how the market space for API Group II and III developed. These products also entered the market as high performance base oils with attractive manufacturing economics. An analysis of how the market space for Group II and III base oils developed is provided as a backdrop for how the market space for GTL base oils might also develop.

 Group II and III base oils.   Group II and III base oils are product definitions that have emerged over the last decade. The American Petroleum Institute (API) developed the API base oil group categories in an effort to differentiate the various levels of base oils quality in the marketplace. In addition to placing polyalphaolefin (PAO) in a class of its own (GROUP IV). The system established three groups of paraffinic base oils. These groups were based on saturates, sulfur, and viscosity index (VI), as shown in Table 2.

Group II and III base oils are generally considered superior to Group I because they have a lower aromatic content and higher viscosity index. Aromatic fractions tend to be more unstable than saturated hydrocarbons, and as a result, Group II base oils have superior thermal stability and resistance to oxidation over Group I. In addition, as you move up the continuum from Group II to III, you move from base oils with a minimum VI of 95 to Group III base oils with minimum VI over 120. This higher VI, together with aromaticity and other issues, makes Group III base oils an ideal blend stock to meet the more stringent volatility requirements in passenger car motor oil. In addition, it gives these base oils an advantage in heavy-duty motor oil, and ATF. 

Although the API Group classifications do provide clear guidelines to differentiate conventional and unconventional base oils, it is important to consider the differences between API Groups as a quality continuum based primarily on saturates and VI, as shown in Figure 2.

The importance of this continuum gave rise to the “Group II+” designation. Although Group II+ is not an official API definition; it emerged out of the need to describe base oils with a meaningfully higher viscosity index than the 100 than is typical of most Group II base oils. Group II+ base oils typically have VI in the range of 108 to 115. These base oils offer performance advantages over Group II in some passenger car motor oil applications, specifically related to balancing volatility with low temperature viscometrics.

 Where GTL base oils will fit in the API base classification system has yet to be determined. Based on some of the performance data currently being developed, however, it is believed that GTL base oils would likely be handled in one of three ways. One possibility is that another API group will be established to accommodate it. Another possibility is that it will simply fall into a Group III designation because it does, in fact, meet the criteria for a Group III. Another possibility is that GTL base oils will follow the path of Group II+. This is likely to result in a market-place designation of Group III+.  As shown in Figure 3, the performance of GTL is considered nearly equal to Group III, however, it could enjoy significantly lower manufacturing costs. The cost and performance of GTL base oils suggest it will likely track a market space development path similar to that of III, and to a lesser extent, Group II+.

 The market space for Group II+ and Group III was developed on several fronts, including: 

• Direct competition with PAO
• Low volatility base oil solution for 5W-xx engine oils         
• Blend stock/correction fluid for other base oils

 How the market space for Group III and II+ developed in each of these areas and how GTL market development might follow it is discussed below:

 Direct competition with PAO.   Group III base oils are typically produced by incorporating isomerization of wax fractions from the base oil into the overall process. The isomerization process changes the geometry of wax molecules to structures with acceptable low temperature performance characteristics (they don’t form wax and solidify at cold temperatures). In addition, the isomerization of wax can significantly boost the VI of the base oil. In fact, if run under more severe conditions the VI of a paraffinic base oil can be pushed up to a level that parallels that of PAO. Pushing VI up does, however, come at the expense of yield. The high VI, together with very low aromatic content of Group III, put it in an excellent position to compete with PAO, and that is exactly what it did when it entered the market.  

PAO had enjoyed a nearly unrivaled position as the “synthetic” base oil of choice in automotive and industrial lubricant applications.  It captured an estimated 2% of the total lubricants market. Although PAO offered excellent oxidation stability and unparalleled low temperature performance it had a weakness that Group III exploited. Its weakness was manufacturing cost. The cost to produce PAO was fairly well studied and many were aware that the minimum costs to produce PAO were significantly higher than that to produce Group III. It was also well known that although Group III could beat PAO on a cost basis, PAO still had the virtually exclusive right to bear the valued “synthetic” label, and PAO could far outperform Group III in a cold crank simulator (CCS).  This advantage, however, virtually vanished overnight when Castrol replaced PAO in its synthetic engine oil formulation with extra high VI paraffinic base oil. This represented a significant cost saving in the formulation. It also resulted in a challenge from Mobil regarding the use of the term “synthetic” by Castrol. The challenge was brought to the National Advertising Division (NAD) of the Council of Better Business Bureaus (CBBB). On April 5, 1999 the NAD announced that Castrol North America could continue to advertise its product as “synthetic” motor oil even though Group III was being used. Group III now had the right to wear the “synthetic” lubricants label. Many lubricant manufacturers switched from PAO to Group III shortly after this ruling was announced to take advantage of the reduced cost of the “synthetic” base oil.

 In addition to market opportunities as a replacement for PAO in automotive applications, Group III has and will continue to displace PAO in some industrial lubricant applications. Its leverage in this space is, however, weaker than it is in automotive engine oils. The automotive engine oil segment ascribes high value to the term “synthetic.” The industrial segment places far less value on the term “synthetic” and much more value on the performance advantages they offer. Although the oxidation stability of Group III is similar to PAO, PAO significantly outperforms Group III in low temperature applications. As a result, market share capture by Group III in the industrial lubricants space has come much more slowly than in the automotive segment.

 GTL base oils have an opportunity similar to the one Group III capitalized on in the PAO market space. The primary difference, however, is that it will now be competing with both PAO and Group III. Group III only had PAO to contend with.  

The challenge for GTL in this market space, specifically in synthetic and synthetic-blend automotive applications, will be cost. Formulators switched from PAO to Group III in automotive engine oils due to the cost savings one could enjoy by blending with Group III. Any switch from Group III to GTL would either have to represent a relatively significant cost savings, and/or measurable boost in performance. The performance advantages of GTL over Group III will likely be found on several fronts. On one front, GTL will promote the superiority of its volatility over that of Group III. It is believed that GTL will also use additive responsiveness and total formulation costs as a tool to capture market share from Group III and PAO.  GTL base oils may also provide “environmentally friendly” solutions to the industrial lubricants market due to its biodegradability and its absence of sulfur and aromatics.

 Base oil solution for low volatility in passenger car motor oil.    In addition to going head to head with Group III and PAO in the high performance segment of the automotive lubricants business, GTL is expected to compete with Groups II+ and III with a model similar to the one used by Group II, II+ and III to capture market share from Group I in passenger car motor oil. It did so by responding to OEM interests in fuel economy and the fact that the use of lower viscosity engine oils can improve fuel economy. The use of lower viscosity engine oils (e.g. 5W-30) did not, however, come without concerns. In addition to the market’s reluctance to embrace lower viscosity engine oil grades, technical hurdles existed in regard to the ability of the engine oil to stay in grade during use. Engine oil can thicken and come out of grade when subjected to the high operating temperatures in an engine due to the light end boiling off. This meant that although engine oil would yield desirable fuel economy performance on an engine test stand, it did not necessarily reflect what was actually delivered in service once the oil is exposed to heat and aged in operation. In an effort to address this issue, the International Lubricant Standardization and Approval Committee (ILSAC) introduced volatility into its GF-2 standard in the mid-1990s.

 The first iteration of GF-2 included a comparatively stringent specification for volatility in multigrade passenger car motor oil. It was tough, and the volatility of many of the base oils on the market at that time did not offer the performance necessary to meet GF-2. Base oil manufacturers had several alternatives. One option was to narrow the cuts in an effort to compress the hydrocarbon distribution in the base oils. This solution was considered relatively costly because, although it would reduce volatility by effectively cutting off light ends, it also cut off longer chained hydrocarbons at the other end of the distillation curve. This approach placed a significant penalty on yields and as a result, was costly. Another option that could have been used to meet the first iteration of GF-2 was to blend conventional paraffinic base oil with polyalphaolefin (PAO). This too, was considered a costly solution because PAO was over four times the price of conventional base oil. A third option was to work with ILSAC and other industry stakeholders in an effort to relax the specifications for volatility in GF-2 and give the industry more time to prepare. The base oil industry argued that it was not ready for such a restrictive specification.  Agreement was reached to relax the volatility specification for GF-2 and most base oil manufacturers were then in a position to meet the requirements.

Most engine oils on the market at that time did come in under the wire for the final version of GF-2. The process, however, sent a clear message to the industry that volatility would be revisited in the next passenger car motor oil specification (GF-3), and that something other than “conventional” base oil would likely be required in the near future for those interested in competing in the automotive lubricants business.

Although most of the base oil in the US market was “conventional” when GF-2 emerged, there was one exception; Chevron.  Chevron’s Richmond plant operates with manufacturing schemes based on hydrocraking and wax isomerization, specifically Chevron’s ISODEWAXINGÔ technology. Rather than removing impurities with solvents and hydrotreating, this process uses a hydrocracking process with special catalysts to literally break the bonds of aromatics and saturate the remains of these and other constituents in a high temperature, high-pressure atmosphere that is rich in hydrogen.  Unlike “conventional” solvent refining where the aromatic content of the base oil is roughly 10%, hydrocracking typically reduces the aromatic content of paraffnic base oils to less than 1%.  In addition, it typically produces a more refined cut in terms of hydrocarbon distribution. These attributes, with the catalytic dewaxing process that increases viscosity index, resulted in base oils that could meet the more stringent volatility requirements initially proposed in GF-2 and beyond.

Interestingly, although Group II base oils have been in the North American market for close to 15 years and demonstrate superior performance capabilities, they didn’t receive much attention until about the last seven years.  The primary reason was limited supply. As discussed, there were only two producers in North America when GF-2 emerged – Chevron and later Petro-Canada.  This changed, however, when Excel Paralubes (a joint venture between Pennzoil and Conoco) built a grassroots Group II plant that came on stream in 1997. The Excel plant increased supply of Group II by nearly 20 TBD. This additional supply gave Group II the critical mass necessary to help convince automotive OEMs that the lubricants industry now had the technology in place required to meet more stringent specifications around volatility. The new specification represented a step change in PCMO volatility, as shown below in GF-3.

Table 3

NOACK Volatility

This specification would clearly favor the use of Group II and pull through demand based on technical need. In fact, for some grades, the specifications virtually required the use of Group II and II+.  In addition, Group II was also showing promise as value-added base oil in heavy-duty motor oil applications and ATF. This too resulted in pull-through demand.

As discussed later in this paper, GTL base oils likely will be the beneficiaries of the momentum in pull through demand established by Groups II, II+, and III in automotive engine oil applications.

BLEND STOCK/CORRECTION FLUID FOR OTHER BASE OILS

Although base oil manufacturing is clearly shifting from Group I to Group II in the US and Canada, Group I base oils are expected to remain an important part of the supply pool. These base oils are favored as the low cost workhorses for a wide range of price sensitive industrial lubricant applications.  Some lubricant blenders use Group I because they have captive supply, others use it because it aligns well with their product portfolios. In many cases, blenders heavily reliant on Group I base oils will find it necessary to bring in such high quality base oils as Groups II+, III, and IV as a means to enhance the performance of the workhorse Group I. An example of how a blender could use a Group II+ to enhance the performance of a Group I can be seen in a 10W-30 PCMO formulation. Although there are many ways to meet the volatility requirements for GF-3 in a 10W-30, an economical option is to blend with roughly 70% Group I base oil, 10% Group II+, and additives. 

GTL base oils are expected to compete with Group II+, III, and IV as a blend stock to enhance the performance of Group I base oils. Its ability to displace these competing stocks is expected to be based primarily on performance and its impact on total formulation costs.

GTL BASE OIL MARKET SPACE DEVELOPMENT

GTL base oils are positioned to track the footsteps already established by Group II and II+ as the workhorse in some multigrade engine oils and as a correction fluid in others. The challenge for GTL base oils in the US, however, will be the relatively sluggish market penetration of 5W-30. In addition, Group II and II+ base oils have already established themselves as the solution for 5W- and 10W-30 engine oils. This means that additives are well on their way to being optimized, blenders are comfortable working with these stocks, and product development costs have been invested.

Rather than potentially giving away value by competing with Groups I and II base oil in the 10W-30 PCMO market and others, a more likely scenario is one that allows GTL to maintain its value by waiting for the direction of specifications to mature the market into the market space currently occupied by Group III and IV, and to a lesser extent Group II+. The direction of specification has already moved a significant volume of base oil demand out of the Group I space and into the Group II and II+ space in the US market.  Future specifications will continue to push demand through the Group II and II+ space into the space occupied by Group III, Group IV and GTL, as shown in Figure 4.

The challenge for GTL in this approach, however, is that the market will take time to evolve into its space. This evolution will be tied in a large way to market acceptance of 5W- and 0W-xx engine oils.  The most significant pull-through demand for GTL base oils in PCMO will, however, likely be tied to 0W-xx. Meeting the volatility requirements in this grades is expected to be attainable only with PAO and likely GTL. Although the low temperature performance of GTL base oils could be an issue, data exist to suggest that this issue can be overcome by GTL’s favorable responsiveness to additives. It is also important to consider, however, that even with OEMs promoting the use of 0W-xx, consumers have the final say. If market acceptance of 5W-30 is any indication, consumers are slow to accept lower viscosity grades even when OEMs recommend them.

What this means is that GTL will not likely be a significant demand event in the US for at least the next eight to ten years. From a product life-cycle perspective, we will likely see GTL entering the supply pool in the 2005/2006 timeframe. If one uses the GTL plant completion schedules currently tabled, the supply build model of Group II/II+ and III, and the grade switching rates of 5W-30 as a guide to model with, the introduction phase of the GTL life cycle will likely begin in 2005 and take about five years before it advances into the growth phase, as shown in Figure 5. Initially it will do so at the expense of Group III and IV base oils by capturing market share in the synthetic and synthetic-blend automotive lubricant market space. It will also penetrate the ATF and automotive driveline market space at the same time. Market acceptance of GTL is, however, expected to be modest during this introductory phase of its life cycle due to a limited number of suppliers.

GTL is expected to transition into a growth phase by capturing demand away from Group II, II+, III, and IV as demand for 5W- and 0W-xx PCMO increases. As additional supply comes on line it will give OEMs and blenders the assurances they need that supply lines are adequate and secure. This will catalyze growth-phase demand by moving it into a push-demand scenario similar to that currently occurring with Group II base oils. Push marketing will drive up demand for GTL in heavy-duty engine oil and industrial high performance industrial applications.

GTL is also expected to capture significant market share of the automotive driveline segments over this same period due to fill-for-life initiatives.

It is also important to consider that although GTL may not be a significant event in the US over the next eight years, it will enjoy more aggressive growth in Europe and Asia. The lubricants market in Europe is more mature than that in the US and market acceptance of 5W- and 0W-xx is further along. 

 CONCLUSION

Although the primary focus of gas-to-liquid (GTL) technology is currently on opportunities in diesel fuels, base oils derived from this technology could also be in place by 2005. Base oils produced by GTL processing are expected to deliver quality superior to Group III and at very competitive costs.

 Base oils produced by GTL processing are expected to initially enter the lubricants market by competing with Group III and IV in the synthetic and synthetic-blend engine oil market space. They will compete with these base oils primarily on performance and secondarily on price and total formulation costs. To a lesser extent, GTL base oils will also compete with Group II+ in a growing market for 5W-30. Rather than reducing the value of GTL by moving down the quality continuum to Group I and II base oils, GTL base oils are expected to park themselves in the high-end market space of Group II+, III, and IV and be the beneficiaries of specification pushed demand into its space. This will occur by increasingly stringent performance requirements and market acceptance of 5W- and most importantly 0W-xx PCMO.

 In addition to GTL competing in the emerging low viscosity passenger car motor oils markets, it will also penetrate automotive driveline applications, premium diesel engine oils, high-end industrial lubricant applications, and white oil applications over the next five to eight years. Adoption of GTL base oils is expected to occur at a faster rate in Europe than in the US due to the rate of market acceptance of 0W-xx engine oils. In addition, GTL will penetrate the Asian market.

  Copyright © Petroleum Trends International, Inc. 2002