1. 2 presentation overview group iii base oil characteristics market forces and demand drivers for...

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Presentation Overview

Group III base oil characteristics

Market Forces and Demand Drivers for Group III Base Oil

SK Energy introduction

Group III base oil supply / demand forecast

Summary

3

Energy & ChemicalsEnergy & Chemicals

51%51%

Telecomm-Telecomm-unicationsunications

30%30%

Trading & Trading & ServicesServices

19%19%

SKGroup

SK Group

One of the largest enterprises in Korea “Most preferred company to work for” in Korea

50

75

Reven

ue (

US

B$)

50

‘03 ‘04 ‘05 ‘06

25

56

61

71

86

‘07

4

SK Energy

Refining & Marketing Upstream Petrochemicals

Reserves: 500 Mil. Bbl

Production: 22,000 B/D

CDU: 1,115,000 B/D

RFCC: 117,000 B/D

H/C: 45,000 B/D

Lubricant: 4,000 B/D

Base Oil: 28,000 B/D

Ethylene: 730,000 Ton/Yr

Propylene: 840,000 Ton/Yr

BTX: 2,607,000 Ton/Yr

• Founded in 1962 as Korea’s first oil refiner • Continues to be the nation’s leading player• Third-largest refining capacity in Asia-Pacific region

5

Ulsan

Incheon Daejeon

Seoul (HQ)

Employees:

5,661Gas Stations:

4,519Storage Terminals:

11

Domestic Global

SK Energy

London

Moscow

Almaty

Kuwait

Singapore

Guangdong

Shanghai

Beijing

TokyoHouston

New Jersey

BranchSubsidiary

Dubai

Exploration

LNG Business

• Two production facilities, Ulsan and Incheon• Operates in more than 20 Countries

6

윤활유

As-IsAs-Is Spin-off (‘09.10.1)Spin-off (‘09.10.1)

SK Energy unships Lubricants Biz.

in a form of physical division.

Newly established company

“SK Lubricants” will be launched

(100% SK Energy owned subsidiary)

Lubricants business exist as one of

SK Energy’s biz units

SK Energy

Chemical E&P LubricantsRefining

SK Energy

Chemical E&PRefining

SK Lubricants

According to the BOD resolution on 16th July, Lubricants business of

SK Energy split off to a new company “SK Lubricants (tentative name)”

100% subsidiary

Spin-off Structure

7

SK Energy plans to enhance value of the company through separation of competitive individual business units such as

lubricants biz.

Create Create

CorporateCorporate

ValueValue

Corporate

Governance

Corporate

Governance

Business

Structure

Business

Structure

Financial

Structure

Financial

Structure

BOD Focused

Management

Increasing

Competitiveness of each

business

Developing

Growth Options

Enhance flexibility of biz.

structure

Maintaining

Credit Rating

‘09 『 Best corporate governance 』 , 『 Best audit system 』

Secure liquidity and maintain proper investment level

Biz structure improvement

through spin-off

- Active response to environment changes

- Acquire appropriate management system for the individual

business

- Responsible management through performance separation

- Create value as a lubricants specialized company

Background

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Summary

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Base Oil Classification

API Category

Viscosity Index (VI)

Saturates(%)

Sulfur(%)

Group I 80-120 < 90 and/or ＞ 0.03

Group II 80-120 ≥ 90 and ≤ 0.03

Group IIIGroup III 120 +120 + ≥≥ 90 and90 and ≤ ≤ 0.030.03

API Base Oil Classification

GRP II+

GRP III+

Group IV PAO

Group V All others

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Properties of Group III Base Oils

ItemASTM

Method

HC Residue

HC Residue (High Waxy)

Slack Wax

(1)

GTL

(2)

KV @ 100°C, cSt D 445 4.2 4.15 3.9~4.1 3.8~4.2

Viscosity Index(VI) D 2270 122 134 136 135

NOACK Volatility, wt% D 5800 15.2 13.0 <14.8 12.0

Pour Point, °C D 92 -15 -18 <-18 <-30

CCS Vis @-30°C, cP D 5293 1590 1130 <1000 <1000

4 cSt Grades

Source: (1) ExxonMobil website, (2) The 3rd Fuel & Lube Asian Pacific Conference

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YUBASE Physical Properties

Physical properties, YUBASE slate

YUBASE 4 YUBASE 4+ YUBASE 6 YUBASE6+

Vis. @40 , cSt℃ 19.5 18.4 36.9 35.4

Vis. @100 , cSt℃ 4.22 4.20 6.48 6.65

Viscosity Index 124 134 130 146

Pour Point, ℃ -15 -18 -12 -12

CCS @-25 , cP℃ - - 2920 2420

CCS @-30 , cP℃ 1590 1190 5200 4160

Noack (A), wt% 15.2 13.5 7.5 4.1

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Summary

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Group III Production Capacity

Most Group III supplier production is located in Asia

60% (3 largest suppliers)

Source: 2008 Lubes ’N’ Greases

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How is the capacity of Group III base oil growing and evolving?

Group III Production Capacity

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Base Stock Availability Interdependence

Source: Lubes N Grease 2008 Announced upcoming capacities.

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SK Base Oil Production Plan

World largest Group III base oil manufacturer

Hydro-cracked / CDW / All hydro processing routeTotal Group III production capacity is 1.1 million MT/YAdditional new plants will be available in 2012 & 2014 with revamping of current plant(#1~3 plant)

1s

t

2n

d

3r

d+10 KBD

4th

+10 KBD

5th

+4.5 KBD

1~3rd

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Group III Supply/Demand Forecast

2003 2007

75,000

50,000

25,000

Global SupplySupply by SK energy

[BPD]

2008

100,000

125,000

....... 2009 2010

* O : Other Suppliers

2013

SK

GTL

SK

O

O

2014

GTL

SKSK

O

O

SKNew Plants- SK & Pertamina- PETRONAS/GS

2011

SK

O

GTL

2012

GTL

O

SKSK

A : Technical Demand A for Group III (16% annual increase)

A

B

B : Technical Demand B for Group III (21% annual increase)

C

C : Technical(B) + Commercial Demand for Group III

Technical Demand

Commerical Demand

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Main Issues to be concerned for the future

Invisible releasing timing of announced new plants - GTL, New Group III plants....(?)

When 0W-20/5W-20 will become the main-grade in the After-Market (Service Fill)? - 2013 after GF-5 ? - Movement toward top tier product

Emerging new markets

The economics of Group I plants

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Summary

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Market Forces Driving the Use of High Quality Base Oils

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OEMs Continue Shift From 10W-30

OEM 0W-20 5W-20 5W-30

Toyota*2AZ-FE engine:Camry, Solara,

Highlander & RAV4

Genuine Oil grade since 2006

1.5 L, 3.5 L

Ford Cars and Trucks

Main grade

Honda Main grade 2.0 L

Nissan 2.5 L, 3.5 L

Hyundai 2.0 L, 2.4 L, 3.3 L

BMW 3.0 L

Chevrolet Cars and Trucks

2.2 L, 3.9 L, 4.3 L, 4.8 L

GM 2.4 L, 3.8 L,

5.3 L

* Source:Toyota TSB EG018-06

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Grade Shift in US Sales

Top Selling Grades ‘06 MM gals

% Change ‘06 vs ‘05

Gasoline

5W-20 65.3 +22 %

5W-30 231.1 +6 %

10W-30 235.0 -14 %

10W-40 58.3 -13 %

20W-50 22.5 -14 %

Diesel

5W-40 1.9 +22 %

10W-30 10.5 +12 %

15W-40 299.7 0.7 %

Source: NPRA Sales Report

Higher

Fuel

Efficiency

% Change‘07 vs ‘06

+11 %

+ 5 %

-13 %

-14 %

-19 %

+34 %

-24 %

-0.2 %

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US Gasoline Engine Oil Sales

0

50

100

150

200

250

300

350

2003 2004 2005 2006 2007 2008

10W-30

5W-30

5W-20

0W-20

Source: NPRA US Sales Reports

Mill

ion

Gal

lon

s

-16 %

+11 %

+20 %

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Demand Drives the Use of High Quality Base Oils

•Better Fuel

Economy

• Durability

5W-205W-200W-200W-20

Base Oil/ Base Oil/ Formulation Formulation TechnologyTechnology

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The changes of standard from GF-4 to GF-5

Source: Lubrizol,[www.gf-5.com]

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ILSAC GF-5

API will announce the new GF-5 specification by the end of 2009, at the earliest; car manufacturers have to use GF-5 for year 2011 vehicle models.

Higher fuel economy expectations will increase demand for low viscosity SAE grades: 0W-20, 5W-20.

Sequence VID (6D) will be the method used to test for fuel economy Currently developed by a consortium of OEMs, marketers and additive

companies. ILSAC GF-5 proposes higher fuel economy specifications than GF-4 limits. The new Sequence VID still to be benchmarked against the existing

Sequence VIB test. VID test isn’t ready so comparisons between VIB and VID limits are

premature.

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America’s Outlook for 2010 to 2015

Gasoline Engine Oil

- Expect growth of SAE 0W-20 grade for Gasoline Engine Well accepted that SAE 0W-20 will increase fuel economy Honda and Toyota already announced SAE 0W-20

requirements for current (since 2006) and future engines

OEMs will want to steer away from SAE 15W-40 oils to gain fuel economy

Look for SAE 5W-30 and 5W-40 grades, if not 0W-30 and 0W-40, to maximize fuel economy

Light Duty Diesel Engine Oil

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2011MY CAFE(Corporate Average Fuel Economy) standard may be 27.3mpg, ~8% above current, and 35mpg by 2020

Key Market Trends – Fuel Economy

100% Group III

Group III < 10%

Group III demand increases with increased fuel economy demands -

GF-5 will cause 0W-20 and 0W-30 oils to become mainstream OEMs recommend lower viscosity grades for CAFE and fuel economy marketing

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What do these market shifts mean for the Group III Marketers and the Group III base oil markets?

Fuel economy

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Summary

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Summary

Market forces continue to increase the demand for Group III base stocks

SAE 5W-20 and 0W-20 grades will grow and increase demand for Group III base stocks

Global Group III new supply from 2011 to 2014 may experience a surplus, depending on announced project schedules

Higher VI Group III base stocks enable product differentiation

1. 2 presentation overview group iii base oil characteristics market forces and demand drivers for...

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