Made in China: A Chinese perspective on the poly alpha olefin (PAO) market
By Vicky Villena-Denton
A new report from California-based market research company Grand View Research predicts strong growth in PAO usage, forecasting a 3.5% compounded annual growth rate to 2025, resulting in global PAO market demand of 815.2 kilo tonnes (KT) and USD1.58 billion in value. PAO demand in 2015 was estimated at 582.4KT.
North America is the driving force behind global PAO production. An SBA Consulting presentation at the 12th Annual ICIS Pan American Base Oils and Lubricants Conference in December suggested North America accounts for half of global production and 75% of high viscosity capacity. In fact, the region possesses a surplus of all API base stocks, aside from group III. The United States, in particular the Gulf Coast region, is a favoured location for new PAO capacity. It boasts the lowest cost PAO production, availing of low natural gas prices and a strategically advantageous location, with a number of new ethylene and LAO projects under construction.
The three largest global PAO producers, according to Milind Phadke of Kline Group, are INEOS, ExxonMobil Chemical and Chevron Phillips Chemical. Phadke estimates INEOS produces 216 KT, followed closely by ExxonMobil at 200KT, per year. ChevronPhillips rounds out the top three with an estimated 110 KT capacity.
While North America is the largest producer of PAO, the majority of demand is fuelled by Europe. Europe accounted for 40% of global volume in 2015, according to Grand View Research’s September 2016 report, followed by North America at 30%. Regulation supporting biodegradable products in Europe, including The Blue Angel Scheme and The White Swan Scheme, are contributors to growth in the region.
Only 12% of total PAO volume is attributed to Asia Pacific (2015), although the region is experiencing the fastest worldwide growth in PAO, fuelled by growing automotive demand in emerging markets, and regional powerhouse China. Historically this demand has been serviced from outside of China, although trade flows are changing. Y.D. Wu claims that NACO is the first Chinese company to produce high viscosity PAOs. Another Chinese company, Shanghai Fox, has since closed down.
I first met Wu in Shanghai in early 2000. At that time, he and his partner, Liu Zhongwen, had just left Sinopec to start their own distribution company called DowPol. DowPol represented foreign companies like U.S.-based additive company Lubrizol and South Korean Group III base oil producer SK.
In 2003, Wu and his partner established NACO to manufacture synthetic-based lubricating grease. But in 2005, NACO changed direction, opting to enter the business of producing PAO, the synthetic base stock used to blend high-quality lubricants. “At that time, we were the agent for ChevronPhillips, so we know very well low viscosity PAO,” said Wu. Anticipating future demand for PAO in Asia, they started R&D in 2005. “In 2008, we got the first successful pilot for PAO 40 and 100,” he said.
It took six years to put together the USD50 million required to establish NACO’s first PAO plant. “In 2011, we finally got the investment and started the first plant at Shanghai Chemical Industrial Park. That plant finished construction in 2014. At that time, nobody believed us. They didn’t think ‘Made-in-China’ quality can be the same.”
I caught up with Wu recently at the China Interlubric show in Guangzhou, where he proudly shared NACO’s new product that was launched last year. A long-drain heavy-duty diesel engine oil he says competes with Shell’s RimulaR6 and ExxonMobil’s Mobil 1.“We used PAO 150 to replace OCP and ordinary VII [viscosity index improver],” Wu suggesting the quality is much higher and they can increase the oil drain interval for trucks by three times, from 20,000km to up to 60,000km.
Wu represents how the lubricants market in China has evolved over the past 20 years. His company, which is proudly Chinese, nonetheless emulates Western companies like ExxonMobil and uses global industry leaders like Shell and ExxonMobil to benchmark its success.
NACO started with one PAO plant in Shanghai, with a capacity of 25,000 metric tonnes, half the capacity of ExxonMobil’s plant in Baytown, Texas, U.S.A., using technology that Wu said was developed organically, but with linear alpha olefin (LAO) feedstock imported from Shell, Chevron Phillips and SABIC.
“At that time, many friends in China questioned us. You don’t have LAO, so if you produce PAO you have limitations,” Wu confided. So Wu and his partner searched and found CTL (coal-to-liquid) alpha olefin produced by the Lu-an Group in Shanxi province using the Fischer-Tropsch process. In 2013 NACO embarked on a joint venture with the large national company. NACO provided the technology, Lu-an the money and the resources. “So we built up [our] number two plant in Shanxi province. That plant finished at the end of 2015,” said Wu.
While the first plant in Shanghai produces 25,000 metric tonnes of alkylated naphthene (AN) and PAO 40 and 100, the second plant in Shanxi province produces 10,000 metric tonnes of PAO 150 and 200. “In our view, the China market needs a high level of lubricant quality very urgently. You can see every company has big plans to increase capacity. But China has no technology. Fortunately we are the first company to get that,” he said.
Wu believes China has enough capacity to make high viscosity and low viscosity PAO, but has opted to start his business with high viscosity first. The process is simpler, and for NACO, more convenient. He said in the future they will build a new plant, also in Shanxi province, for low viscosity PAO also with the Lu-an Group. “I think everything will be finished in the middle of 2018.”
To support its finished lubricants business, NACO built a 50,000-metric-tonne lube blending plant in Shanghai, next to its PAO plant. Today, NACO has sales offices in Japan, South Korea, the U.S.A., Europe, Singapore and India, Wu proudly stated.
Wu pinpoints a competitor as the leader in the PAO market, stating “ExxonMobil is number one because they have PAO and they have AN. And they have PAO 300 and 1,000. That’s the key.” However, he believes “China can be the same [as ExxonMobil], even better.”
Competition between PAO producers is set to change markedly over the next few years, with a number of new PAO capacities announced.
Last September, INEOS Oligomers announced plans to significantly grow its low viscosity PAO supply. A new 120 KT facility, the world’s largest single train low viscosity PAO plant, is expected to be functioning in the first half of 2019.
Bob Learman, INEOS Oligomers CEO, said“The industry needs an increased supply of high quality base oils, such as PAO, to formulate the next generation of advanced lubricant products.” He suggested that “INEOS is making the commitment to invest in both the PAO capacity and the necessary LAO feedstock supply to ensure PAO is a viable and secure long-term formulation option for our customers.”
INEOS Oligomers has also increased its global low viscosity PAO capacity by approximately 15% through a debottleneck of its La Porte, Texas plant, and the optimisation of production at its Feluy, Belgium location. A project to mechanically debottleneck the Feluy plant provides an option to extend capacity by a further 15%. The company previously announced plans for a new 20 KT high viscosity PAO unit at its La Porte facility, to be commissioned in early 2017.
Another key player, Chevron Phillips, also announced plans to expand low viscosity PAO capacity at Cedar Bayou, Texas, by 20%. Casey Cook, PAO business manager, confirmed this will provide an additional 10,000 metric tonnes (MT) per year, and expect expansion to be commercial in mid-2017. The recent 100,000 MT expansion of normal alpha olefins (NAO) capacity at the Cedar Bayou plant will supply the feedstocks for this expansion.
Brad Rinderknecht, synthetics global marketing manager for ExxonMobil Chemical, was similarly optimistic about PAO growth. He suggested PAO demand continues to outstrip supply, normally growing at a rate of a “couple of times GDP.” When quizzed about plans to increase capacity, Rinderknecht suggested it was a matter of “When, not if” ExxonMobil would expand capacity. The company was also very optimistic about growth in China.
China to ‘go their own way’ on engine oil specifications
Today, China is primarily using engine oil specifications developed in the U.S.A. and licensed by the American Petroleum Institute (API). But Wu believes this is all about to change. “China needs to develop our own way. [The] China government thinks we should do our own standard,” he told F&L Asia.
On September 13, 2016, 15 local companies, including state-controlled Sinopec and PetroChina, four private companies, including NACO, and five major Chinese truck manufacturers which represent 90% of the domestic heavy-duty diesel engine market, banded together to develop the first ‘Chinese-owned’ heavy-duty diesel engine oil standard in 2019 called D1/2019.
A presentation on D1/2019 will be made by Xie Jingchun, senior engineer at Lanzhou Lubricant Research and Development Institute, during F+L Week 2017 organised by F&L Asia Ltd., at the Four Seasons Hotel, Singapore, on March 10.