Global Base Oil Product Trends

Brent K. LokSenior Product Manager - Base Oils

Mark L. SztenderowiczProduct Development Specialist - Base Oil Technology

Chevron Products Company

and

William M. KleiserSenior Staff Engineer, Automotive Engine Oils

Oronite Global Technology

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Introduction

For the fifty to sixty years prior to the beginning of the 1990’s, paraffinic base oil quality was very slow to change.With a few exceptions, most paraffinic stocks, regardless of location, were made through solvent extraction ofselected crude oil streams. Over the last decade, however, significant changes have occurred within this industry.

In the early 1990s, the changes began when European engine oil volatility specifications drove European suppliersto offer higher VI/lower volatility base oils. Those cost-effective alternatives to the only preexisting solution –using expensive synthetic blend stocks such as polyalphaolefins (PAO) – typically involved solvent dewaxing of afuels hydrocracker (HC) bottoms stream to achieve a high-VI, low volatility product. Although effective as low-volatility base stocks, these generally are limited product offerings intended only to complement existing Group Ibase oil slates. These first-generation Group III base oils were low-capital-cost solutions to the volatility challengethat allowed maximum use of existing Group I base oils to be retained. As a result, European base oil capacity stillis almost entirely solvent refined (Group I) today, and shows few signs of making any major shift in the near future.

In contrast, starting in the mid-1990s the North American base oil industry changed direction, and started to buildnew base oil plants or substantially modify existing plants to manufacture hydroprocessed (Group II/II+/III) baseoils, recognizing their benefits in product quality, low operating costs and flexibility. The result is that in less than adecade, Group II capacity, currently at 40% of the paraffinic market, will have grown to be the dominant paraffinicbase oil type in North America.

While quality and base oil performance were important drivers of base oil changes in Europe and North America, inAsia supply shortfalls precipitated the building of new base oil plants, often by new players in the industry, andmostly utilizing the newer hydroprocessing technology. The result has been the creation of significant availabilityof higher performance base oils in a market which, ironically, generally does not yet need them.

Why did Europe and North America, two interrelated base oil markets with many very similar driving forces at play,diverge in their approach to improving base oil quality and performance? Will this disparity in base oil supplycapability widen or narrow in the future? Will the availability of higher-performing Group II/III base oils in Asiadrive existing Group I producers to upgrade to Group II/III, as it did in North America? What further changes are instore for the base oil industry, in each of these regions, in the future?

This paper will attempt to answer these questions by examining the underlying drivers for change in each of thesethree major regions. Because of similarities in their technical requirements, North American and European lubricantand base oil markets will be discussed first. These two markets will then be compared and contrasted in terms ofhow base oil suppliers have responded to these forces. Next, the Asian base oil market, where drivers are mostlycommercial rather than technical, will be discussed briefly. By examining these many varied driving factors, bothtechnical and commercial, in each of the three markets, the authors hope to shed light on why the base oil industry iswhere it is today, and where it may be going in the future.

North American Base Oil Trends

In the North American market, transportation lubricants is the primary category in which the most significant baseoil changes are occurring. These changes are seen most prominently in motor oils and automatic transmissionfluids, and are being driven in large part by more stringent manufacturer specifications. And while the factorsaffecting each type of product (e.g., passenger car motor oils, heavy duty motor oils) are somewhat different, theyshare the same themes of longer life, cleaner operation and lesser environmental impact.

Performance levels of other lubricants, such as industrial oils and hydraulic fluids, also are moving in the directionof higher quality. This is due in part to the availability of higher quality base oils that are emerging in response totransportation lubricant requirements. Although OEM-driven performance enhancements are less common in thisvery broad category of lubricants, equipment users welcome performance improvements that boost profitability byreducing downtime, extending equipment life, and increasing productivity. This, plus a trend toward more severe

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operating conditions in some types of equipment has spurred a movement toward premium-grade industrial oils thatuse advanced base oils as their foundation.

The major drivers for change in each of these two product categories will be discussed below, with emphasis on thebase oil changes that they have spurred in North America. This is followed by some speculation on what trends maybe seen in the future.

Transportation Lubricants

Passenger Car Motor OilBy far the most prevalent of the transportation lubricants are motor oils, generally split into passenger car motor oils(PCMO) and heavy duty motor oils (HDMO). In each arena, environmental pressure placed on enginemanufacturers, in one form or another, is the key factor forcing these OEMs to create new engine oil categories thatrequire higher performance. Along with this pressure is increasing customer demand for reducing operating costsand/or maintenance time.

In the case of PCMO, the environmental pressure takes two key forms, which also fall in alignment with customer-based drivers. These are:

Improved Fuel Economy : Manufacturers who sell vehicles in the U.S. are required to meet specific CorporateAverage Fuel Economy (CAFE) standards, or face severe fines. With the proliferation of larger vehicles,particularly Sport/Utility Vehicles (SUVs), fleet average fuel economy has actually declined in recent yearssuch that it is now very difficult for some manufacturers to meet CAFE standards [1]. Though most consumersin North America, particularly those who are propagating the trend to larger vehicles, care little about fueleconomy, OEMs are anxious to gain improvements through any available technical means.

Through proper formulation, PCMO can yield a modest benefit in fuel economy relative to today’s typical oils.Moreover, due to the need to demonstrate to regulators that engine oil-derived fuel economy benefits don’tdisappear shortly after the oil goes into the engine, the need has arisen to develop engine oils with fuel economyretention. In addition to improved additive technology, these requirements demand better base oils.Specifically, the base oil must have lower volatility than current oils to help resist evaporative-inducedthickening, and it must be more stable to resist oxidation, which also causes viscosity increase, and additivedepletion, which can reduce the effectiveness of friction modifiers. Moreover, all of these changes must takeplace simultaneously with a shift toward lower viscosity grades; SAE 5W-30 is now the recommended oil formost 2000 model year cars, with 5W-20 proposed for the very near future.

Cleanliness of Engine and Emissions Controls: - With ever more stringent limits on vehicle tailpipe emissions,vehicle manufacturers are requiring increasingly cleaner engines and systems that affect emissions performance.This requires lower oil consumption to protect catalysts and oxygen sensors, as well as to minimize directemissions from combustion of engine oil. Also required are cleaner internal engine components, particularlythe pistons and rings, which have a significant impact on cylinder sealing and thus control of blowby gases andoil consumption. Again, base oil quality plays an important role. Engine oil volatility has been shown to have asignificant impact on oil consumption, and this volatility is determined almost entirely by the base oil. Thus,lower oil consumption demands lower volatility base oils. Lower engine deposits, though most stronglyaffected by additive formulation, also can be reduced by using more stable base stocks, which resist oxidationand therefore the formation of deposit precursors.

On the consumer side, most drivers are happy to reduce the amount of maintenance that must be performed ontheir cars. With current tune-up and major service intervals now as great as 160,000 km, engine oil is the mostfrequent maintenance item on most modern cars. Also, many people now lease vehicles instead of buying them,and many of these lessees have little interest in opening their hoods between required service points, much lesschecking their oil and topping it off if indicated. In addition the same lubricant must suffice for both summerand winter use. Thus, an engine oil with greater life, lower oil consumption, and stable low and hightemperature viscometrics is desired, again reflecting the need for base oils of lower volatility and betterresistance to oxidation.

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The need to address most of the factors described above has been incorporated into the latest PCMO category. TheInternational Lubricants Standardization and Approval Committee (ILSAC), made up of automotive OEMs, haveworked with the oil and additive industries to arrive at their proposed GF-3 standard, which will be licensed by APIalso as SL, replacing current SJ oils. Nearing completion, this standard will require a significant reduction involatility and improvement in fuel economy, as well as require fuel economy retention and an improvement in high-temperature deposit-forming propensity. Though not explicitly part of the new requirements, these changes mayalso provide some modest additional margin of safety when left in the crankcase for the full recommended oilchange interval, particularly for those who, against good practice, tend not to check their oil level between changes.

Effect on Base OilsFor base oils, all of this favors a shift from conventional solvent refined (API Group I) stocks to hydroprocessedstocks (Group II) The latter stocks have demonstrated superior resistance to oxidation due to the destruction ofunwanted components during processing, yielding a purer base stock that responds better to oxidation-inhibitingadditives. This can be seen particularly in the Sequence IIIF engine test, which uses viscosity increase of the oilduring the test as a measure of oxidation. In Figure 1, for example, it can be seen that Group II oils havesubstantially less viscosity increase than Group I oils despite using the same additive formulation. Group II stocksalso tend to allow for better dispersancy of contaminants, leading to lower sludge and varnish levels in tests such asthe Sequence VG. This difference is exemplified in Figure 2, which shows poorer sludge and varnish for Group Ibase stocks relative to Group II in this engine test. Several researchers have also shown that Group II stocks offerbenefits in fuel economy relative to Group I stocks, and may have an edge in fuel economy retention [2-4]. All ofthese factors indicate that Group II stocks can provide a significant formulating advantage when attempting to meetupcoming requirements such as GF-3, a projection of which is shown in Figure 3.

Furthermore, most Group II stocks tend to have modestly lower volatility relative to Group I stocks of similarviscosity, in part due to the composition of the oil but also due to the relatively modern plants where most of themare manufactured. This should help blenders meet the volatility limit of 15% evaporation in the Noack test, asproposed for GF-3. 5W-30 oils will require base stocks with a VI of between 110 and 120, substantially higher thantoday’s typical paraffinic stocks with VI of 95-105. Because hydroprocessing is the preferred route for increasingVI to the necessary levels, these stocks almost certainly will be Group II. However, due to their atypically-high VI,these stocks have been dubbed “Group II-Plus” in lubricant industry circles [5, 6].

Heavy Duty Motor OilIn the HDMO arena, the environmental pressures are similar to those facing passenger cars, but they derive fromdifferent interests and have a different impact on formulations. As will be discussed, however, the effect on basestocks – forcing a migration toward higher-quality Group II and Group III stocks – is the same.

Emissions Performance: New engine emissions limitations and recent enforcement actions initiated by the U.S.Environmental Protection Agency (EPA) have forced diesel engine manufacturers to find ways to dramaticallyreduce emissions of oxides of nitrogen (NOx), as well as particulates and hydrocarbons, from modern engines.Some of these strategies, particularly those such as retarded injection timing and EGR that are intended toreduce NOx, in most cases lead to significantly higher soot levels in the cylinder, which increases soot loadingin the engine oil. High soot levels cause oil thickening, formation of sludge, and can clog filters, as well asaccelerate wear of engine components through abrasion. Some loss of low-temperature pumpability can be seenalso in oils with high soot loading if this soot is not adequately controlled.

Fuel Economy: Though governmental pressure to produce higher fuel economy in on-highway trucks is far lessthan what is seen in the passenger car business, truck operators are highly motivated to minimize fuelconsumption as this is a significant part of their total operating expense. In heavy duty engines, fuel economycan be improved in many cases by using lower viscosity oils, and by preventing viscosity increase during thelife of the oil. Viscosity increase happens in large part due to the accumulation of soot in the oil, as mentionedabove, but can be exacerbated by oil oxidation.

Consumer Pressure: Another key driver in the push for higher oil quality comes from the desire of truckowners and operators to extend oil drain intervals. The majority of full-size trucks belong to fleets, wheremanagers understand that changing oil means taking a truck out of service, and taking a truck out of servicemeans losing potential revenue. Thus, fleet operators have pressed engine manufacturers to guarantee their

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engines for ever-lengthening drain intervals, and OEMs have responded both by design changes and byrequiring higher-quality oil. And once again, the key effect is the requirement to handle higher levels of soot inthe engine oil, since the oil will spend more time in the engine before being replaced. Naturally, thiscompounds the pressure brought by the need to meet more stringent emissions standards, placing extremepressure on the lubricant.

Effect on Base OilsIn order to handle the ever-increasing levels of combustion-generated soot pushed into HDMO, these oils mustpossess high levels of dispersancy. While this has led to increased levels of dispersant additives in oils meeting thelatest specifications, such as API CH-4, Mack EO-M Plus and Cummins CES 20076, it also has been found thatdispersant effectiveness is enhanced in more highly saturated, low sulphur base stocks [7-10]. This is particularlyevidenced in tests such as the Mack T-8 soot thickening test and the Cummins M-11 High Soot Test, wherehydroprocessed Group II base stocks perform significantly better than solvent refined stocks despite using the samelevel of additives. This is illustrated in Figure 4, where the performance advantage of Group II stocks in soot-induced wear and sludge in the Cummins M-11 test is shown. This presents a considerable advantage to formulatorsstriving to achieve the highest levels of HDMO performance, and is causing a rapid shift from Group I to Group IIstocks in this category of lubricants.

Automatic Transmission FluidAs part of the total vehicle system in modern passenger cars, the performance of the automatic transmission issubject to the same pressures of maximizing fuel economy and minimizing maintenance as were described above forPCMO. In the case of ATF, the key driver is the desire for extended, high-performance service, including “fill forlife” capability. This requires strong resistance to oxidation, viscosity stability, and retention of fluid frictioncharacteristics so as to both minimize wear and prevent unwanted behavior such as “shudder”. And to be certainthat all automatic transmission functions behave as designed even during start-up in cold weather, manufacturers arenow requiring even lower resistance to pumping, measured by Brookfield viscosity, compared with today’s typicalATF. And for next-generation ATF, exemplified by Ford’s Mercon® V and DaimlerChrysler’s ATF+4® fluids,Brookfield viscosity limits are decreasing to about half of current levels, while the shear stability of the fluid mustincrease. All of these factors are causing formulators to look to base oils to help achieve the necessary performance.

Effect on Base OilsIn ATF as in other lubricant applications, hydroprocessed Group II and Group III base stocks provide superioroxidation stability relative to conventional Group I oils. One effect of this is better viscosity control, asdemonstrated in the Mercon® Aluminum Beaker Oxidation Test, where it is seen that Group II stocks resistoxidative thickening commonly exhibited by solvent refined stocks. Another key benefit of hydroprocessed stocks,which is linked with oxidation stability, is that they allow ATF to maintain acceptable levels of friction performancefor longer periods of time, since the friction modifying additives used in ATF remain effective longer.

Another key benefit of Group II base stocks, particularly those made with specialized technology such as Chevron’sIsodewaxing® catalyst, is an improvement in low temperature pumpability relative to solvent refined stocks. Thishas allowed current ATF, such as that meeting General Motors Dexron® III or Ford’s Mercon® standards, toachieve Brookfield viscosity values of less than 20,000 cP @-40°C while maintaining base stock viscosity at around4.0 cSt @100°C. In combination with the superior oxidation stability just described, this capability has put pressureon formulators to move to Group II stocks for current ATF applications [11].

Finally, to achieve the combination of even lower Brookfield viscosity and higher shear stability demanded by thenext-generation ATFs, the right very-high VI base stocks must be used. In addition to PAO, this includes somemodern all-hydroprocessed Group III base stocks like Chevron’s UCBOs. These products have the high VI thatallows higher base stock viscosity to be used to minimize levels of viscosity modifiers and thus improve shearstability, while improving Brookfield viscosity to levels below those achievable with conventional Group II basestocks. Though relatively low now, the volumes of these ATF products are growing rapidly, and could largelydisplace today’s most common ATF types in a few short years, especially in the factory fill and OEM service fillcategories. As a result, Group III penetration into the ATF market should increase rapidly in the near future.

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Gear OilsAs with all of the transportation lubricants discussed so far, gear oils are being driven also to achieve longer life.This means better oxidation stability and good shear stability, and for the lightest grades that meet 70W and 75Wrequirements, low Brookfield viscosity. Gaining OEM approval for extended drain intervals is critical in this field,and the current benchmark is Eaton/Meritor approval for extended warranty.

Effect on Base OilsAgain, extended life requires a significant improvement in oxidation stability, and this in turn favors all-hydroprocessed Group II stocks. In the Eaton-approved category, most current products are PAO-based synthetics,but Group II stocks are beginning to demonstrate the ability to achieve this high level of performance [12]. GroupIII stocks also are good candidates for certain applications, especially the lighter multigrade products, where thecombination of high VI and oxidation stability can be used to achieve superior performance.

Industrial Lubricants

While OEM-driven performance enhancements are less common in the industrial lubricants segment, performancelevels are nonetheless increasing in a number of applications. The obvious driver here is that end users andmaintenance managers of industrial equipment encourage anything that improves profitability, and they recognizethat performance improvements in their lubricants can reduce downtime, extend equipment life, minimizemaintenance costs, save energy, and/or allow greater production rates. In some types of equipment, for exampleturbines, compressors and industrial gear boxes, there is a trend toward more severe operating conditions such ashigher speeds, temperatures and loads, often compounded by reduced oil reservoir volumes. All of these call forlubricants with greater oxidation stability, as this can both improve equipment function (e.g., reduce wear anddeposits) as well as increase the useful life of the lubricant. And since most industrial equipment does notexperience wide swings in operating temperatures very frequently, oxidation stability is by far the most importantaspect of industrial lubricant base stocks.

Effect on Base OilsTo achieve higher levels of oxidation stability, formulators of industrial oils have found that Group II base stockshave a significant advantage over Group I stocks in many different applications. In Figure 5, for example, theoxidation life in the RBOT test (ASTM D 2272) for hydraulic oils formulated with different base stocks but thesame additive package shows a clear advantage for hydroprocessed stocks, in this case both Group II and Group III.This has led many lubricant manufacturers to develop and offer industrial lubricants based on these hydroprocessedstocks, converting products that formerly were blended with solvent refined stocks. Fortunately, this has beenfacilitated to a significant degree by the rapid expansion of Group II base oil capacity that has emerged in responseto transportation lubricant requirements.

Although VI is not nearly as important a base stock property as it is in the engine oil and ATF sectors, there arecases in which industrial lubricants can take advantage of higher VI, including the very high levels offered by GroupIII stocks. These applications typically are those that require performance over a wide temperature range, such asall-weather hydraulic oils. Thus, Group III base stocks are beginning to see application in some areas of theindustrial oil segment, and should continue to grow.

Synthetic Lubricants

Until recently, synthetic lubricants have been blended predominantly with polyalphaolefins or PAO/ester blends.Although widely available, these stocks are made in relatively small volumes. However, with the latestdevelopments in hydroprocessing technology, some all-hydroprocessed Group III stocks fairly can be consideredsynthetic, since their composition clearly shows them to be man-made [13-14]. Just as important, these stockspossess properties and exhibit performance comparable to PAO in key areas such as oxidation stability, VI, andvolatility. As a result, they are viable alternatives to PAO for formulating synthetic lubricants in both transportationand industrial applications. Moreover, the potential capacity for manufacturing such stocks is quite large, as muchof the technology now deployed in making Group II stocks can be applied to manufacturing Group III. Therefore,substantial growth in the Group III market is expected as formulators take advantage of this new opportunity,leading to a significant acceleration in the growth of the synthetic market.

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Base Oil Trends for European Motor Lubricants

Significant changes are occurring in transportation lubricants in Western Europe. As in North America, one of theareas of most significant and rapid change is in lubricants for trucks and passenger cars. The changes to therequirements being placed on the finished lubricant are having an impact on the desired properties of the base oilused in these fluids. New sources of Group III stocks have entered the marketplace in the last several years. At thepresent time, Group III stocks have become a cost effective way to meet the physical and performance requirementsof European engine lubricants while still allowing usage of the major quantity of Group I stocks manufactured in theregion. This trend is continuing as new demands on the finished lubricant continue to highlight the advantagesprovided by higher VI, highly saturated base stocks. These trends impact both the light duty (passenger car) andheavy duty (trucks) lubricant formulations, although some differences exist in the driving forces.

Heavy Duty Motor Oil

There are a variety of driving factors that are impacting the base oil needs for heavy duty motor oils in WesternEurope. These include:

• Emission Regulations,• Environmental concerns,• Vehicle operating costs,• Lubricant formulation cost and supply.

Increasingly stringent exhaust emission regulations are being placed on heavy duty engines within the EuropeanUnion. The “Euro-3” regulations went into effect this year and the next stage, Euro-4, is planned for 2005. Theseregulations are having significant impacts on engine design and consequently lubricant performance requirements.In addition there are indirect environmental concerns beyond the emission regulations cited above. One of these isthe reduction of CO2 emissions. The most direct way to reduce CO2 emissions is to reduce fuel consumption.Disposal of used engine oil is another environmental issue. Reducing drain frequency reduces the amount of wasteoil generated. Some of the concerns highlighted by European truck manufacturers for lubricants include:

• Soot related wear and viscosity increase,• Oxidation resistance,• High temperature deposit control,• Fuel Economy.

Operating costs in commercial truck fleets is an ongoing issue. Truck manufacturers are striving to reduce fuelconsumption because this is critical to their competitive position. In addition, they are increasing the vehicle serviceintervals. Drain intervals have increased from the range of 30,000km several years ago to as much as 100,000kmtoday. These increases have been linked to new generations of engine hardware and are allowed by increasedperformance and durability from the lubricant. Further extensions of drain interval are anticipated in the near future,again coupled with higher performance lubricants.

Unlike the American HDMO market, the European market has a degree of segmentation. This segmentation hasparalleled the different levels of ACEA and OEM approval performance levels. At the lower end of the market aremixed fleet oils designed to meet the needs of both passenger cars and heavy duty trucks. A typical profile is ACEAA2/B2/E2 API CG-4, Mercedes Benz 228.1, Volvo VDS, and MAN 271. At higher performance levels thelubricants are typically products dedicated to HDMO application without gasoline engine performance claims,although some retain some level of claims for gasoline engines. These are typically mineral based 15W-40 or semi-synthetic 10W-40 grades and would claim ACEA B3/E3 API CG-4, Mercedes Benz 228.3, MAN 3275, and VolvoVDS 2. At the top of the market are the top-tier diesel-only products claiming the highest levels of OEM approvals.These products are either semi-synthetic 10W-40 or synthetic 5W-30s claiming ACEA E4, Mercedes Benz 228.5,and Volvo VDS 2. Recently the US API CH-4 and ACEA E5 specifications have entered the market. Theseproducts represent a further improvement in soot handling requirements.

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At least as important as the technical drivers related to lubricant performance demands, supply and cost issues aremajor drivers on current and future base oil needs. As usage of high performance base stocks increases, an assuredsupply of cost effective, high performance, base stocks is essential. The impact of an interruption of supply of highperformance base stocks was observed recently when one of Europe’s major Group III base stock suppliers wasunable to supply product. This situation fueled the realization that additional supplies of such base stocks wererequired.

Effect on Base OilsPerformance factors identified above are increasing demands on lubricant formulations. Many of the currentadvances in overall engine oil performance are as much related to improvements in base stock properties as toimprovements in additive chemistry. Issues specific to HDMO include:

• Soot related viscosity increase control• Soot related wear control• High temperature oxidation stability• Reduced volatility• Higher viscosity Index

Desirable base stock properties to address these needs include:

• High level of saturation• Very low sulphur• Improved oxidative stability and response to oxidation inhibitors• Increased viscosity index• Reduced volatility• Large volume availability• Reasonable cost-performance

Significant advantages can be shown for lubricant formulations based on Group II or Group III base oils comparedto Group 1. In particular:

• Soot related wear and viscosity increase. As shown in North America, the additive requirements to meetspecifications such as ACEA E5-99 and API CH-4 are significantly lower for highly saturated, low sulphurbase stocks, such as Group II and III stocks.

• Improved oxidation stability is observed in finished lubricants using Group II or III base stocks. Advantagecan be taken of this by either the use of a more cost optimized inhibition system or by improved overalllubricant stability.

• Higher viscosity index base oils such as Group II+ or Group III (or Group IV) allow the blending of lowerviscosity oils whilst continuing to meet viscometric and volatility requirements. While the majority ofHDMO in Europe are presently SAE 15W-40, we anticipate a move towards SAE 10W-30 in order to offerimproved fuel economy.

Unlike North America, there is only limited capacity for Group II base stocks in Europe. Due to the excess capacityof solvent refined Group I stocks, there has not yet been a large-scale shift in base oil processing technology towardshydroprocessing for 100VI base stocks. However, this situation could potentially change in the near future, with anew refiner having recently announced plans to build an all-hydroprocessing lube plant. Petrola Hellas S.A., aGreek refiner, has licensed Chevron’s hydrocracking and Isodewaxing® technology to make Group II, Group II+and Group III base oils in Greece by 2003, and market them in Europe and elsewhere exclusively through Chevron.The pressure to utilize Group II base stocks in conventional viscosity grades such as 15W-40 may increase sharply ifother base oil suppliers follow this lead and invest in hydroprocessing technology.

In the mean time, there has been considerable expansion in the supply of Group III stocks in the region. Theincreasing availability of these stocks make lower viscosity HDMO a more attractive possibility, since mixingGroup I and III stocks provides the required viscometric properties as well as some level of performance benefit.

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However, the wholesale shift to take advantage of the benefits of fully-hydroprocessed stocks must await theemergence of a critical mass of such stocks in Europe, an event that seems on the verge of occurring.

Passenger Car Motor Oil

Key driving factors that are impacting base oil trends in Europe include:

• Emission and environmental regulations• Trend toward reduced service intervals• Market segmentation• OEM-specific oils

Emission and environmental regulations are putting even greater pressure on passenger car fuel consumption. Thisis driven both by the regulatory drive for lower exhaust emissions, including CO2 , as well as consumer pressure dueto increasing fuel taxes. In addition to this there is a strong move by a number of European passenger carmanufacturers to extend service intervals to as much as 30,000 km.

Unlike North America, the passenger car engine oils market in Europe has several distinct tiers of performance. Theperformance claims, viscosity grade, and type of base stock used differentiate these. A major part of the market isdriven primarily by ACEA performance requirements. A large portion of this market is driven by SAE 10W-40products claiming ACEA A3/B3 along with some OEM requirements, such as VW 500 (though now obsolete) and505, which are similar to this performance level. A higher tier of products are typically considered to be ‘semi-synthetic’ and normally are 5W-40 or 5W-30 products. These products claim ACEA performance but also add anumber of upper tier OEM approvals such as BMW, Porsche, and DaimlerChrylser. Finally, at the top of the marketare fully synthetic products that are now moving to grades such as 0W-40. A distinguishing feature of almost all ofthese products is the maintenance of a high temperature high shear rate (HTHS) viscosity of 3.5 cP in order to meetthe majority of European OEM requirements.

In addition to consumer products, a recent phenomenon is the development of OEM-specific factory fill lubricantsmeeting the unique requirements of the OEM. What distinguishes these new generation factory fill oils is that theyare focusing on providing top level performance designed specifically for the OEM’s engine. The first generationsof these oils have been low viscosity products with reduced HTHS viscosity in order to improve fuel economy. Thecurrent Volkswagen factory fill specification 521.73 is an example of such oil. This OEM requirement specifies ahigh performance 0W-30 for factory fill purposes. Both Mercedes Benz and Opel are also targeting similar specifichigh performance fluids for factory fill application, although the specific requirements of each are designed to meetthe needs of the specific OEM. To date, the market impact of these products is unclear.

Effect on Base OilsMainline PCMO products claiming ACEA performance are typically SAE 10W-40, 15W-40, or 15W-50. The 10W-40 grade in Europe is typically comprised of a mixture of Group I with 10-20% Group III or Group IV in order tomeet volatility requirements. Group III is favored over Group IV for this purpose because it is a more cost-effectiveproduct for volatility control. The alternative to mixtures of conventional Group I and Group III stocks is theproduction of specific, low volatility solvent extracted neutrals. However, by nature, these base stocks areexpensive to manufacture via solvent extraction. In North America we have observed the introduction of Group II+stocks to address a similar issue. However, the trend in Europe, for the time, is to combine the existing Group Istocks with the increasingly-available Group III base oils. This trend could begin to change, though, when Petrolacomes into the market in the near future with hydroprocessed Group II+, as well as Group II and Group III basestocks.

In the past few years we have seen the 5W-30 and 5W-40 products evolving from Group IV/V blends to mixtureswhich comprise high levels of Group III stocks. As with the 10W-40 products, the motivation is reduced cost whilstmaintaining most rheological properties. The 0W-30/40 products remain blended with Group IV and V stocks atthis time.

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Overall there is a trend to lower viscosity products. This is seen both in the factory fill and service requirements.These requirements can vary from manufacturer to manufacturer, but it is becoming clear that reduced viscosity inorder to improve fuel efficiency is a common one. This is coupled with the maintenance of current volatility limitsas well as increased performance standards. For example, the TU5JP test being developed as a replacement for theTU3MH is expected to put further pressure on oxidation and volatility performance requirements. In addition, asplit on HTHS viscosity requirements among OEMs in Europe has developed. Some OEMs are promoting lowHTHS viscosity products (2.9 cP) while others still require 3.5 cP minimum. As viscosity grades are reduced andperformance requirements increase, it is becoming necessary to use increasing amounts of high VI base stock incombination with less Group 1 in order to meet the expanding, and often conflicting combinations of requirements.

Tests that are developed to demonstrate long drain capabilities are stressing the volatility and oxidative stability ofbase oils. In these tests, such as the VW PV1449 and VW TDi, the performance benefits of Group III base stocksversus Group I become evident. Some of these test requirements stress volatility to the point where the Group 1stocks comprise a minority of the base stock blend. While Group IV performs well, in many cases Group III canoffer a cost-effective alternative.

SummarySeveral performance and environmental issues are impacting the future of base oils in Europe. The significant treatcost benefits for top tier HDMO products related to Group II or III base stocks is well known to oil marketers. Inaddition, increasing pressure on oil durability and reduced viscosity demands use of higher quality base stocks.Group III stocks have been used in Europe for a number of years but have recently increased in importance ascommercial supply and performance demands have increased. These Group III stocks have been used in lieu of theintroduction of widespread use of Group II or Group II+ stocks because they allow the continued utilization of theexisting Group I manufacturing infrastructure. However, we see pressures on both the HDMO and PCMO sideswhich could in the longer term put such combinations at a disadvantage versus base stock mixes comprised entirelyof highly saturated, low sulphur base stocks such as those resulting from hydroprocessing technology. Several ofthese factors are discussed above, including improved soot handling which allows lower additive treatment costs,improved deposit formation tendency, greater oxidation stability, and better ability to tailor volatility. In addition, inthe future we recognize the increasing concern about the contribution of lubricant sulphur to after-treatmentdurability. Since a Group I stock is a significant source of the lubricant-based sulphur, it may become necessary toreduce these levels as the next generation of emission control systems begin to enter the market place in the last halfof this decade. At least one refiner, Petrola Hellas, has seen the writing on the wall and has made plans tointroduced all-hydroprocessed Group II/II+/III base stocks in Europe beginning in 2003. This signals that thebeginning of a widespread change in the European base oil industry may be just around the corner.

Comparison and Contrast: The North American and European Markets

The base oil market, especially in North America, is going through unprecedented change today. This switch tofast-changing base oil product specifications, which started in the early 1990s, was initially met with modestchanges in existing hardware and introduction of specialty supplemental products, especially in Europe.

But as the specifications transitioned from upgrades in physical properties, such as volatility, to chemicalperformance upgrades, such as oxidation stability, fundamental changes in the way producers met the challengewere seen. Recognizing the inherent inflexibility of solvent technology, and the substantial investment in thattechnology needed just to make the next hurdle vis-a-vis the better cost position of the newer technologies,producers started building Group II/II+/III plants - but mostly in North America.

Why, given the similarity in direction and underlying driving factors did this same shift in manufacturing not takeplace in Europe? The answer lies largely in timing. As has been discussed, Europe introduced stringent volatilityrequirements in the early 1990s that could be met cost-effectively by bringing fuels hydrocracker bottoms streamsinto an existing solvent plant for processing to what we now call Group III base oil. With some notable exceptions,these oils were designed mostly to address volatility.

In North America, the drive to improved volatility was slower in coming and coincided with development of enginetests, such as the Mack T8, that preferred highly-saturated base oils, typically Group II or greater. The higher

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saturates content also brings better oxidative and thermal stability that brings many other desired benefits describedearlier. Simultaneously, in the mid 1990s base oil processing technology advancements, mostly led by Chevron,offered a solution to these and other problems by offering:

• Better volatility through higher VI,• Better oxidative/thermal stability through higher saturates,• Better low temperature performance through catalytic dewaxing, e.g. Chevron’s ISODEWAXING®

technology,• More flexibility to meet the changing needs of the base oil market through modern plant design and the

capability to move from Group II to III or anywhere in between,• Greater crude source flexibility,• Much lower operating cost to run a Group II plant – critical in a mature market with flat growth.

Thus, the concomitant availability of technology for licensing, the need for flexibility to manufacture Group II andGroup III base oils, and the development of specifications that demanded such oils drove North American suppliersto build new Group II/III plants rather than follow the European solution of just a few years earlier.

In addition to these events, three other factors made this move to Group II/III plants gain momentum in NorthAmerica:

• The prior existence of Chevron’s, Petro Canada’s, and Sun’s Group II plants in North America meant that manyformulators were already familiar with how to work with these types of base stocks.

• Conoco and Pennzoil’s new joint venture plant, Excel Paralubes, meant that the largest PCMO supplier in NorthAmerica was going to Group II.

• Group II technology licensing became practical and competitive, with more than one supplier.

As a result, Group II/III capacity expanded so rapidly that now, after only a few short years, these base stocks areapproaching half of the paraffinic base oil capacity in North America. With such a critical mass of these stocks nowhere, movement of specifications to take advantage of these higher quality base stocks has accelerated, as evidencedby both GF-3 and PC-9. It would have been inconceivable just a few years earlier that a 15% Noack volatilityspecification would have survived the various industry committees that develop and approve these specifications.Industry’s rapid and cost-effective commercialization of Group II+ base stocks made this possible.

While the extensive availability of Group II stocks facilitates rapid change in lubricant specifications, there are alsosupply chain drivers that slow them down in North America:

• Incumbent Group I suppliers find themselves falling farther and farther behind, with little opportunity toupgrade due to low industry margins and high capital costs, and the promise of very high remediation costspreventing them from exiting the business.

• Independent lubricant manufacturers, who are dependent on purchased base oils, see specifications that wouldrequire higher-priced Group III base oils as an unfair advantage to the majors who are basic in those stocks.Evidence of this position can be seen in their apparent acceptance of GF-3 volatility specifications requiringlower-priced Group II+ base oils, but their recent opposition to inclusion of Group III base oils in the upcomingPC-9 precision testing matrix.

Short product life cycles demonstrate how quickly drivers of base oil quality are changing, and serve notice of thingsto come. For example, Chevron introduced Neutral Oil 100RLV for use as a low volatility engine oil componentcoincident with ILSAC GF-2 in 1996. In preparation for GF-3, that product was discontinued in 1999, just threeshort years after it’s inception - even less than the life cycle of the specification for which it was designed. In thefuture, such short lifetimes will become more common, with our industry behaving much more like the additivesindustry by quickly responding to changing customer needs with new product offerings tailored to address thoseneeds.

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Fortunately, North America is capable of creating new base oil products to meet the changing needs of formulatorslargely because of the inherent flexibility of the new generation of hydroprocessing-based plants. The creation ofGroup II+ base oils in North America is a good illustration of this adaptability. None of these products existed priorto the first GF-3 specification proposal. Yet, once the goal was defined, the new breed of base oil suppliersindependently worked with additive suppliers and lubricant customers to develop products to address the volatilitychallenge of GF-3. The results were in every case a 110-119 VI Group II base oil, now commonly called Group II+.These products are the most cost-effective solution for the industry, bringing maximum value to the consumer. Withfuture specifications we will continue to see the base oil industry in North America respond to technical challengesby offering custom designed base oils to meet an industry need, and do so quickly. The North American base oilindustry has woken up and became dynamic in responding to ever-tightening specifications.

That is not to say that the European base oil market is not also dynamic and responsive to specification challenges,because it is. However, due to the relative inflexibility of the dominant Group I facilities and even much of the first-generation Group III facilities, the options available to European producers are more limited at the moment. Thefact that most of the Group III facilities have limited capacities and cannot make Group II or Group II+ stocks limitsthe rapid upgrading of mainstream motor oils. Whatever can be achieved with additives in combination withexisting Group I stocks, supplemented with modest Group III volumes, determines mainstream performance. Whilecurrent mainstream specifications can be met through this combination, the question is can future specifications?

In North America, key majors stepped out and made the plunge to manufacture Group II stocks. Now, this seems tobe on the verge of happening in Europe, with Petrola planning to offer Group II, II+ and III base stocks in the nearfuture. Until now, the dominant producers have appeared to be content with their current Group I plants, despite themovement of their North American counterparts to Group II production. With the expected introduction ofhydroprocessed Group II by a new supplier in Europe, the pressure to move to modern Group II/III capability maysoon begin.

The globalization of motor oil specifications in recent years, though slow and far from complete, has brought NorthAmerican bench and engine tests to Europe and vice versa. With substantial Group II/III capacity to address thesenew tests that often prefer Group II/III base oils, many North American suppliers are well positioned to takeadvantage of these stocks, resulting in lower additive treat rates for those who have access to these components. InEurope, since there is minimal Group II capacity, the playing field is even, with all blenders using higher additivetreats and/or Group III or IV base stocks to meet the most stringent specifications. Two situations promise to disruptthis equilibrium: 1) a new Group II supplier offers these products at competitive prices to the European market, and2) top tier or OEM specifications become so demanding that Group I base stocks are effectively excluded from thatsegment of the market.

It is no surprise, then, that the transition to hydroprocessing in Europe is starting. Fortum (formerly Neste) hassuccessfully built a Chevron–licensed Group III plant in Finland, and are marketing their stocks effectively. PetrolaHellas, as mentioned before, has recently announced plans to build a Chevron-licensed Group II/III base oil plant inGreece by 2003. Although their product slate could change, plans are to offer a 5cSt Group III product, and twogrades of Group II, likely 150N and 500N, all of which will be marketed by Chevron. Thus, the tide in Europeseems poised to shift toward Group II/III stocks – with the question now more a matter of speed, not whether.

Asian Base Oil Product Trends

Product trends in the Asian base oil market are substantially different than those in Europe and NorthAmerica. While the two mature economies discussed above are driven to upgrade based to a significant extent,though not entirely, on ever increasing product performance hurdles, the Asian base oil product trends are minimallydriven by performance needs. In Asia the current mainstream motor oils are API SE, SF, SG and/or CC, CD qualitywhere almost any Group I base oil meets the need, and where Group II/III are completely unnecessary.Transportation lubricants dominate the total lubricant market, though industrial oils and marine oils are growing. Inaddition, approximately 75% of the motor oil market is reported to be single grade motor oils, which is aboutopposite of the multigrade/monograde ratio found in North America and Europe. This bias towards single grades,inspired by warmer climates and widespread perceptions that “thicker is better”, results in base oil products heavily

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emphasizing heavy neutral grades, mostly 500N. Bright stocks and 150N typically fill out the product slate but aresmaller percentages.

There is a trend to higher performance multigrades driven by OEM warranty requirements and by the multinationaloil companies’ desire to grow their top tier product offerings for better margins. These products do find a need forGroup II/III, but their market share is still small and they are not a major driver for base oil product upgrades.

Despite minimal need for higher performance base oils, Asia has seen a number of new base oil plants come onstream in recent years (2 in Thailand, one each in Singapore, Korea and China), and more are slated to start up in thenext few years. While the region had a base oil deficit, the new supply has more than made up for this, to the extentthat Asia now has excess base oil capacity.

These new plants have been a mixture of Group I and Group II/III, with the latter plants all using the newerhydroprocessing technologies. The robust Asian economies of the mid-1990s and the base oil deficit made it easy tojustify construction of these plants, and the more common choice of adopting Group II/III capability was drivenmostly by the lower cost of operating such plants. However, the recent Asian economic slowdown coupled withweak base oil prices due to excess capacity should temporarily slow or stop construction of additional new orupgraded base oil plants in the region.

But we do not anticipate that this expansion will stop entirely. There are a number of reasons why there will still beupgrades and new plants in the near future:

• The lowering of trade barriers has intensified competition, and forced many national oil companies to competeon a global scale through improved operations - some through upgrading the quality of their products.

• Large automotive and heavy-duty OEMs, particularly common now due to consolidation, mergers and jointventures, are pushing for uniform, high-quality lubricants that meet the same specifications throughout theworld.

These drivers will spur investment despite the reality that low base oil prices and a slow economic recovery wouldsuggest that these plants often should be marginal investments. When a new plant is being contemplated, lowoperational cost and crude flexibility are the biggest drivers; which in turn favors Group II/III facilities. Theflexibility to upgrade from Group II to Group III, important in the future, is also a consideration, though not the mostimportant factor.

Projections Regarding Future Asian Base Oil Product Trends

The Asian base oil market will continue to be dominated by Group I facilities, though Group II/III plants will play asignificant role in the market. Many of the older inefficient and poorer quality Group I plants will continue tooperate into the future, often driven by local governmental pressure to maintain operations for full employment. Asa result we see the possibility of continuing base oil capacity overhang for some time for this region, though theextent and length depend on the rate of economic recovery. In fact, if the economy accelerates significantly, thecurrent regional supply excess could diminish fairly rapidly. Nevertheless, any new start-ups in the region will nothave the luxury of backing out imports as did some recent plants, and therefore will have to battle it out with localproducers for market share.

The continued availability of the lower tier base oils will also sustain the strong position of the corresponding lowertier lubricants that now dominate large parts of Asia. Group II/III plants still will be built, though at a slower pacethan in the 1990s. There may even be some upgrades of existing Group I plants to Group II/III. These volumes willbe more than sufficient to meet the performance needs of lubricants well into the future. In fact, the more immediateproduct need for the near future in Asia is flexibility to shift to lighter viscosity grades as the market moves fromsingle grade to multi-grade motor oils. Again, modern Group II/III plants have greater flexibility in this dimensionthan older Group I plants. Only in the medium term will the need for flexibility to transition from Group II to GroupIII be needed as Asia moves to low volatility, fuel conserving and high performance motor oils as currently beingasked for in the mature economies of Western Europe, North America and Japan.

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Summary

Though relatively complacent for decades, the base oil industry has seen remarkable change in the last ten years, aprocess likely to continue into the future. In the more developed regions of the world, particularly North Americaand Western Europe, changes have been spurred in large part by increasingly more stringent performancerequirements for passenger car and heavy duty motor oils. In the past, advances in chemical additive technologyhave provided the majority of performance improvements in such lubricants. However, the combination ofadvances in base oil manufacturing technology, particularly hydroprocessing technology such as offered byChevron’s hydrocracking and Isodewaxing® catalysts, and the advent of performance requirements which respondstrongly to base oil quality has changed this paradigm.

Base stock suppliers, seeing this demand, are responding by moving more and more to offer these newerhydroprocessed base oils. In North America, where the timing of new requirements and the availability ofcompetitive processing technology coincided, a large-scale shift from Group I to Group II, II+ and III base stockshas occurred, so that these stocks now represent approximately 40% of the total paraffinic base oil market in theregion. In Europe, where higher performance (and somewhat different) requirements slightly preceded those on theother side of the Atlantic, specialty Group III products sprang up instead, postponing somewhat a more widespreadconversion to hydroprocessed Group II/II+/III capacity. However, with one such new plant already offering GroupIII and another planning to come on line with Group II, II+ and III in the near future, migration away from Group Istocks may begin to occur in Western Europe, also. As a result, motor oil products which benefit from higherquality base stocks are becoming widespread in these two regions. By using Group II, Group II+ or Group IIIstocks, many more alternatives exist for meeting the latest and highest quality specifications, and/or achieving highquality at lower additive treat rates.

In Asia, the base oil landscape is changing rapidly also, although for much less performance-driven reasons. There,the combination of a former regional supply shortfall, plus the desire of manufacturers to run plants that offer thelowest possible operating cost along with feed source flexibility have driven the construction of new plants, morecommonly of the hydroprocessing variety. Although this recent capacity, in combination with the current economicdownturn in the region have led to a supply surplus, economic recovery will erode this overhang and return theregion closer to balance. Further, with much of the new capacity in the Group II/II+/III category, the ability of thisregion to jump to higher performance levels is significant, and with equipment OEM’s desires to employ the samehigh-quality lubricants in all regions of the world, taking advantage of these better base stocks is just a matter oftime.

With all of this change in base oils throughout the world, particularly the addition of new hydroprocessing plants,the downside has been an increase in supply that has outstripped growth and demand in this industry. However,with clear advantages for the newer hydroprocessed stocks, the consolidation that has taken place in the base oilindustry has been in the Group I category, a trend which is expected to continue. Although worldwide excess baseoil supply is likely to continue for some time, stocks in the Group II, Group II+ and Group III category shouldnevertheless be preferred for their advantages in engine oils, the biggest of all lubricant segments. This, plus theoperating cost benefits of hydroprocessing plants should position these stocks relatively well in an industry whereworldwide future growth is expected to be modest.

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References

[1] U.S. Department of Transportation, National Highway Transportation Safety Administration, AutomotiveFuel Economy Program, Twenty-third Annual Report to Congress, Calendar Year 1998.

[2] Crosthwait, K., May, C., and Deane, B.C., “The Effect of High Quality Basestocks on PCMO FuelEconomy”, NPRA Paper No. LW-99-126, 1999.

[3] Kiovsky, T.E., Yates, N.C., and Bales, J.R., “Use of Lo w-Viscosity, Low-Volatility Basestocks inFormulation of High Performance Motor Oils”, SAE Paper 922348, 1992.

[4] Igarishi, J., Kagaya, M., Satoh, T., and Nagashima, T., “High Viscosity Index Petroleum Base Stocks – TheHigh Potential Base Stocks for Fuel Economy Automotive Lubricants”, SAE Paper No. 920659, 1992.

[5] McFall, D., “Base Stock Struggle”, Lubes ’n’ Greases , Vol. 5., No. 3, pp. 26-9, March 1999.

[6] DeMarco, N., “Selling Group II-Plus”, Lubes ’n’ Greases, Vol. 5., No. 3, pp. 32-3, March 1999.

[7] McGeehan, J.A., et. al., “The World’s First Diesel Engine Oil Category for Use With Low-Sulfur Fuel: APICG-4”, SAE Paper No. 941939, 1994.

[8] McGeehan, J.A., et. al., “New Diesel Engine Oil Category for 1998: API CH-4”, SAE Paper No. 981371,1998.

[9] McGeehan, J.A., Alexander III, W., Ziemer, J.N., Roby, S.H., and Graham, J.P., “The Pivotal Role ofCrankcase Oil in Preventing Soot Wear and Extending Filter Life in Low Emission Diesel Engines”, SAEPaper No. 1999-01-1525, 1999.

[10] Scott, G., “Cleaner Air, Tougher Oil”, Lubricants World, Vol. 9, No. 7, pp. 16-9, July 1999.

[11] Ward, W.C., “Global Appeal”, Lubricants World, Vol. 9, No. 12, pp. 16-8, December 1999.

[12] Bui, K., “Extended Honors”, Lubricants World, Vol. 9, No. 12, pp. 31-4, December 1999.

[13] Adam, P.S., “Showdown for Synthetics”, Lubes ’n’ Greases, Vol. 5., No. 12, pp. 18-22, November 1999.

[14] Bui, K. “A Defining Moment for Synthetics, Part 1 of 2”, Lubricants World, Vol. 9, No. 10, pp. 30-40,October 1999.

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Figure 1. Effect of base stock on viscosity increase in the Sequence IIIF engine test.‘AO’ refers to antioxidant.

Figure 2. Effect of base stock on average sludge and varnish ratings in the SequenceVG engine test. Higher ratings are better.

Effect of Base Stock Group on Sequence IIIF Viscosity Increase

050

100150200250300350400

Group II/II+ Group I Group I plus AO

Effect of Base Stock Type on Sequence VG

7.607.808.008.208.408.608.809.009.209.40

Group II/II+ Group I

Average Engine Sludge Average Engine Varnish

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Figure 3. Potential formulating advantage of Group II relative to Group I in GF-3PCMO.

Figure 4. Effect of base stock on sludge and valvetrain crosshead wear in the CumminsM11 engine test. Higher deposit ratings and lower wear are better.

GF3 Estimated Base Stock Impact Group I versus Group II(Group I = 70% saturates/0.4% S)

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Figure 5. Effect of base stock on oxidation stability for a hydraulic oil formulation, inthe RBOT test (ASTM D 2272).

Hydraulic Oil Oxidation Stability

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