The lubricant base oil businesses of Korea's four refiners outperformed their refining businesses, which include gasoline and diesel, driving strong second-quarter results this year. The effect stemmed from supply shortages after lubricant production facilities in the Middle East were destroyed in the war between the United States and Iran.
On the 19th, a compilation of earnings announcements by Korea's four refiners—SK Innovation, S-Oil, GS Caltex, and HD Hyundai Oilbank—showed that the operating margin of the lubricant base oil business in the second quarter was in the 30%–50% range. That surpasses the refining institutional sector's operating margin, which peaks in the mid-10% range. The higher the operating margin, the more the companies sold petroleum products at higher prices.
In the second quarter, the lubricant base oil operating margin of SK Enmove, which handles SK Innovation's lubricant base oil business, was 34.9%, S-Oil's was 36.7%, GS Caltex's was 52.14%, and HD Hyundai Oilbank's was 48.6%.
The refining institutional sector's operating margin is lower than that. SK Innovation recorded 4.9%, S-Oil 5.9%, GS Caltex 16.54%, and HD Hyundai Oilbank 15.54%.
SK Enmove booked 691.9 billion won in operating profit from the lubricant base oil business alone. That was up 267.1% from a year earlier. S-Oil's lubricant base oil operating profit was 477.4 billion won, accounting for half of total operating profit (965.0 billion won).
GS Caltex's lubricant base oil institutional sector operating profit was 357.7 billion won, up 213% from a year earlier. HD Hyundai Oilbank also posted operating profit of 181.4 billion won in the lubricant base oil institutional sector, up 271% from the same period last year.
Lubricant base oil, a byproduct of crude oil refining, had been treated as an ancillary business. Lubricant base oil is the raw material for finished goods lubricants such as automotive engine oil and industrial lubricants.
What caused the reversal was the former war between the United States and Iran. In March, Pearl GTL (Pearl Gas-to-Liquids), an oil joint venture facility of Shell and QatarEnergy in the Ras Laffan Industrial City in Qatar, was damaged by an Iranian attack. Pearl GTL is the world's largest GTL plant as a single site and produces petroleum products such as diesel, lubricant base oil, and naphtha using natural gas, not crude oil, as feedstock.
Pearl GTL had produced about 1 million–1.4 million tons of lubricant base oil annually. In particular, it was the facility responsible for about 30% of the global supply of "Group 3 lubricant base oil," a premium lubricant feedstock. According to QatarEnergy, it will take more than a year just to restore the Pearl GTL facilities. QatarEnergy has declared force majeure on some long-term contract volumes.
On top of that, with the Strait of Hormuz blocked, even volumes already produced have struggled to reach the market. As supply fell, lubricant base oil prices and margins jumped. The lubricant base oil spread (the price gap between crude and petroleum products) rose to the $160-per-barrel range in the second quarter this year from the low $70s a year earlier, more than doubling.
Korea's four refiners also benefited from having reorganized their businesses around Group 3 lubricant base oil. Instead of generic products, they secured production capacity for Group 3 lubricant base oil, which falls under high value-added products. In the refining industry, SK Enmove and S-Oil are estimated to account for about 40% of global Group 3 lubricant base oil production.
HD Hyundai Oilbank also entered the Group 3 lubricant base oil business. Last year, HD Hyundai Oilbank announced through its subsidiary HD Hyundai-Shell Base Oil that it would expand a Group 3 lubricant base oil plant.
However, because production of lubricant base oil cannot be ramped up sharply, it is uncertain whether current margins will continue. Even if lubricant base oil margins jump, production cannot be increased drastically. That is because the yields of diesel, gasoline, and lubricant base oil are fixed in proportion to the amount of crude input.
An official in the refining industry said, "If disruptions to lubricant base oil production in the Middle East are resolved and the blockade of the Strait of Hormuz is lifted, the margins we are enjoying now could fall back to past levels."