Lube base oil business becoming crucial for local oil refiners

More and more Korean oil refiners are eyeing the lube base oil business as a potential cash cow, despite its current small proportion of the entire business.

“The lube base oil business has recently been a cash cow as the high value added market expanded globally. (The production of the lube base oil) is also nearly limited to oil refiners as it is made from by-products of refined oils,” said an official from SK Innovation. 

The firm became the world’s first to start commercial mass production of lube base oil in 1995 with its own independent production technology. The business now makes up about 7 percent of the company’s total sales.

The lube base oil, which is a source of lubricating oil, turns to lubricating oil after mixing with other substances. There are five types of lube base oil classified by the U.S. American Petroleum Institute, but most of the lubricating oil is based on the lube base oil group I, II and III.

Since the lube base oil is made from unconverted oil, a by-product made during the oil-refining process, the cost remains low.

Korean refiners mainly target the markets for group II and III.

The country’s top two oil refiners -- SK Innovation and S-Oil -- are focusing on the group III lube base oil while GS Caltex and Hyundai Oilbank concentrate on the group II.

Launching high-end lube base oil “YUBASE” under its subsidiary SK Lubricants, the company has exported the concerned oil to about 50 countries. It has also built a factory in Spain in 2014.

SK Lubricants has produced 70,800 barrels a day through the joint ventures with foreign firms. SK Lubricants is now the No. 3 in the entire lube base oil market and No. 1 in the group III market.

GS Caltex has also produced 26,000 barrels of lube base oil per day, which is a more than 50 percent rise compared to the beginning in November 2007.

Considering the rapid growth in demand for group II and III, the company is mainly focusing on the production of group II with factories that can flexibly control the production level of group II and III.

S-Oil has also put efforts into boosting the lube base oil business upon revamping the facilities. It has a capacity of producing up to 42,700 barrels of group I, II and III.

In the second quarter of this year, S-Oil’s operating profit rate of the lube base oil business hit the record high with 37 percent. Last year, it exported 76 percent of its total produced lube base oil, which amounts to 1.2 trillion won ($1.1 billion).

Hyundai Oilbank, which belatedly joined the lube base oil market, is now producing about 20,000 barrels per day since 2014, with some exported to the Asian market, including China.

By Lee Hyun-jeong (rene@heraldcorp.com)