Asia Perspective Tri Zen Bulow

The 9th ICIS-LOR World Base Oils Conference
London 17-18 February 2005
LUBE BASESTOCKS – A PERSPECTIVE FROM ASIA
Harland Bulow
TRI-ZEN International
CHARACTERISTICS OF ASIA’s LUBE BUSINESS
6 Disparate economic development and quality requirements

6 Economic growth above global averages
6 Rapid demand growth in certain countries
6 Mostly mid/low tier but with growing premium market
6 Transportation & manufacturing driving demand
6 Growing focus on the environmental/ legislative/performance/product
life
6 Impact of brand awareness & OEM’s
6 Base oil demand still technically Group I, but beginning to change
6 Strong and growing exports of Gp III
6 Substantial GpII/GpIII capacity additions planned
6 Characteristics changing with increasing pace
The 9th ICIS-LOR World Base Oils Conference London 17-18 February 2005 2
ECONOMIC GROWTH (GDP % p.a. - Source: EIU)
GDP growth rates (%) 2002 2003 2004 2005
World 1.9 2.7 4.1 3.4
US 2.2 3.1 4.3 3.5
EU 1.2 1.1 2.3 2.4
Asia & Australasia 2.6 4.2 5.7 4.2
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
China, 8.0%
India, 6.9%
Vietnam, 6.9%
Pakistan, 5.8%
Malaysia, 5.4%
Singapore, 5.2%
Taiwan, 4.9%
Thailand, 4.9%
The 9th ICIS-LOR World Base Oils Conference

Indonesia , 4.6%
FORECAST GDP GROWTH 2004-2008 (% p.a.)
S. Korea, 4.5%
Philippines, 4.4%
Australia, 3.4%
N.Zealand, 3.1%
London 17-18 February 2005
Japan, 1.5%
4
ASIA GDP per capita 2004 at PPP (US$)

Singapore 30,460
Australia 29,859
Japan 29,698
Above
US$20,000 Taiwan 26,263
N.Zealand 23,599
S. Korea 21,770
Thailand 7,910
Above Malaysia 7,015
US$5,000
China 5,759
Philippines 4,406
Indonesia 3,730
Below
US$5,000 India 3,040
Vietnam 2,680
Pakistan 2,260
US$ 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000
ASIA’s OIL CONSUMPTION - 2004 (‘000 bbls/day)
China 6508 Over 5,000 mbcd

Japan 5524
India 2389
Over 2,000 mbcd
S.Korea 2351
Indonesia 1127
Over 1,000 mbcd
Taiwan 1094
Australia 968
Thailand 852
Singapore 754
Malaysia 526 Less than 1,000 mbcd
Pakistan 440
Philippines 337
Vietnam 200
New Zealand 150
0 1000 2000 3000 4000 5000 6000 7000

mbcd
ASIA’s LUBE DEMAND – 2005 (‘000 tonnes p.a.)
5,000
4,500
China
4,000
3,500
3,000
Japan
2,500
South Korea
2,000
India
Indonesia
1,500
Philippines
Australia
Thailand
Others
Malaysia
Pakistan
Taiwan
1,000
500
ASIA’s LUBE DEMAND – 2000/2005/2010 (‘000 tonnes p.a.)
6,000 2010
2005
5,000
4,000
3,000
2000
2010
2005
2010
2005
2,000
2000
2010
2005
2010
2005
1,000
2000
2000
2000
0
China Japan India S.Korea Indonesia
ASIAN LUBE SEGMENTATION – 2004
Marine 7%
Grease 1%
Automotive
51%
Industrial 41%
Main Product Demand
Asian region is the largest lube market with 30% of global demand
and Automotive grades have the largest segment
ASIAN AUTOMOTIVE LUBE SEGMENTATION - 2004

Auto Gearbox
6.6%
Others 6.9%
Motorcycle
10.6%
Diesel 45%
Gasoline 30.8%
Automotive Demand
Demand is dominated by Automotive grades, diesel has the largest

share
ASIAN INDUSTRIAL LUBE SEGMENTATION - 2004
Industrial engine
Others 20%
oils 35%
Gear oils 4%
Compress oils
11%
Hydraulic fluids
Metal working
25%
5%
Industrial Demand
The Industrial sector is diverse, where OEM’s influence initial

fills and then subsequent fills are sold on technical performance
ASIA’s BASE OIL PRODUCTION (tonnes p.a.)
14,000,000
Total
12,000,000
Total Total
10,000,000 Group I
Group I Group I
8,000,000
6,000,000
Group II/III
4,000,000
Group II/III
2,000,000 Group II/III
0
2000 2005 2010
ASIA’s BASE OIL CAPACITY (tonnes p.a.)

16,000,000
Total
14,000,000 Total
Total
12,000,000
10,000,000 Group I
Group I Group I
8,000,000
6,000,000
Group II
4,000,000
Group II
Group II
Group III Group III
2,000,000
Group III
0
2000 2005 2010
NEW AND PROPOSED GROUP II/III CAPACITY (tonnes p.a.)
6 Recent addition:
Sinopec Gaoqiao 2004 300,000
6 Under construction
BPCL Mumbai 2006 180,000
6 Proposed:
Sinopec Maoming 2007 200,000
Petronas Melaka 2007 330,000
Formosa Petchem 2007 540,000
CPC Kaohsiung 2008 270,000
SK expansion Under review
BASE OIL TRADE FLOWS - 1995
BASE OIL TRADE FLOWS – 1995
6 Europe the “swing supplier”

6 Substantial flows from Europe to North East Asia
6 Limited exports from USA to Asia and S.America
6 South East Asia broadly balanced
6 Local balancing activity – S.E. Asia & N.E. Asia
6 New Asian capacity in 1997 took region from balanced to long
6 1998 financial recession resulted in Asia exports
BASE OIL TRADE FLOWS - 2005
Group I
Group II/III
BASE OIL TRADE FLOWS – 2005
6 Europe still the “swing supplier”

6 India remains the major importer
6 Regular Group I supplies from US into Asia. US now the price setter
6 Substantial exports of Gp II/III from Korea and Singapore to US
6 Korea GP II/III also moving to Europe, India and South East Asia.
6 US Group II moving to Asia
6 China exporting Gp II
6 Lower Gp I exports from China, some imports
6 Russia & Iran become substantial suppliers into India and S.E. Asia
6 Sizeable trade flows balancing N.E. Asia and S.E. Asia
6 Asia becoming a supply/trading centre with some two-way movements
SINGAPORE BASE OILS - FOB QUOTATIONS 2004 (US$/tonne)
US$/MT
700
650
600
550
500
450
400
350
4
04
04
3
04
4
4
3
4
04
4
/0
/0
/0
/0
/0
/0
/0
l/0
/0
/0
n/
b/
n/
p/
ug
ay
pr
ar
ec
ec
ov
ov
ct
Ju
Ju
Fe
Se
Ja
O
M
M
D
D
N
N
SN 150 SN 500 BSTK
HISTORIC BASEOIL PRICES FOB SINGAPORE 1997-2004 (US$/tonne)
600
US$/MT
550
500
450
400
350
300
250
200
97
98
99
00
01
02
03
04
19
19
19
20
20
20
20
20
SN150 SN500 Bstk
GLOBAL SN150 - FOB QUOTATIONS 2004 (US$/tonne)
US$/MT
490
470
450
430
410
390
370
350
4
04
04
3
04
4
4
3
4
04
4
/0
/0
/0
/0
/0
/0
/0
l/0
/0
/0
n/
b/
n/
p/
ug
ay
pr
ar
ec
ec
ov
ov
ct
Ju
Ju
Fe
Se
Ja
O
M
M
D
D
N
N
FOB Sing EU Export FOB FOB USGC
FREIGHT RATES TO ASIA – 5,000 MT VESSEL - 2003-2004 (US$/tonne)

100
US$/MT
90
80
70
60
50
40
30
3
4
3
4
03
04
03
04
3
4
-0
-0
-0
-0
-0
l-0
l-0
n-
n-
p-
p-
ay
ay
ar
ar
ov
Ju
Ju
Ja
Ja
Se
Se
M
M
M
M
N
USGC-FE USGC-India Rott-FE Rott-India
PRICING - USGC SN100 versus WTI CRUDE – 2004 (US$/tonne)
US$/MT
600
500
400
300
200
4
04
04
3
04
4
4
3
4
04
05
4
/0
/0
/0
/0
/0
/0
/0
l/0
/0
/0
n/
b/
n/
n/
p/
ug
ay
pr
ar
ec
ec
ov
ov
ct
Ju
Ju
Fe
Se
Ja
Ja
O
M
M
D
D
N
N
SN100 WTI
LUBE GROWTH PROJECTIONS 2005-2010 (% p.a.)
China 4.8
India 4.6
Indonesia 4.5
Vietnan 4.4
Pakistan 4.3
Thailand 4.2
Malaysia 3.3
South Korea 2.7
Philippines 2.6
New Zealand 1.2
Singapore 1
Japan 0.5
Australia 0.5
Taiwan -0.5
% p.a.
-1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5
MARKET – CHINA
6 ‘Workshop of the world’

6 Some cooling to growth (8% p.a. 2005)
6 Economy in transition as growth,
industrialisation and urbanisation continues unabated
6 Large and growing lube market at 4 million tonnes p.a.
6 Dominated by domestic companies Sinopec, PetroChina and independents
6 Internationals have secured 20-25% of the market in premium lube
grades with healthy gross margins of US$70-100 per barrel
6 The growth in the Auto market has been spectacular and general
manufacturing growth is also strong ~10%
6 New auto manufacturing capacity growing even faster than vehicle
sales Some production may be exported with additional OEM initial
fill opportunities
6 International premium brands commanding good margins
MARKET – INDIA
6 With recent economic growth at over 6% there are expectations

that India might finally emerge as an industrial force
6 Low base with GDP per cap at US$650 (US$3000 at PPP)
6 Loosening constraints on consumer finance is driving domestic
demand as car ownership, for example, surges
6 Although ‘liberalized’ in 1999, the 1.3 million tonne market remains
dominated by 3 players: Hindustan, IOC and BPCL
6 Castrol is the dominant international player and base oil imports are
significant
6 Lube market growing with industries such as mining, power,
construction, manufacturing and infrastructure significant sectors
6 Opportunities for tie-ups with local player and distributors, but new
industry entrants can now go it alone. Low entry barriers
MARKET – JAPAN
6 A large and mature economy, that has resumed some

growth, but remains largely flat
6 Domestic industrial demand growth remains weak and
the market is highly competitive, dominated by the
producers, which include ExxonMobil & Shell
6 The total lube demand is about 2 million tonnes p.a.
with
only modest growth potential in second half of the
decade
6 Latest generation lubricants being introduced,
driven by environmental initiatives
6 High costs and difficult marketing and distribution
limit the opportunity for imports
MARKET – INDONESIA
6 Slow economic recovery now gaining

momentum with growth at 4.5%
6 GDP per capita is US$1,200 (US$3,700 at PPP)
6 A transitioning market
6 Total market is about 540 k.tonnes per year with 230 kt auto
and 140 kt industrial
6 Lube market deregulated in 2001 with foreign imports of
mineral oil now permitted and meeting the demand for premium
quality
6 BP-Castrol blends in country. Opportunities for high quality
lubes imports in niche segments
6 Earthquake re-building work will have a short term and small
impact on lube demand and the country has potential for
faster growth, with govt support for mining and
infrastructure
The 9th ICIS-LORprojects
World Base Oils Conference London 17-18 February 2005 28
MARKET – THAILAND
6 Growing industrial economy and a strong agricultural base.

GDP per cap is US$2,460 (US$7,900 at PPP) and growth in 2004
was 6%
6 Thailand’s base oil manufacturing has underperformed, but
its two plants are now meeting demand with an occasional
small surplus
6 Lube market is about 430 k.tonnes, of which ~ 70% is
automotive, with a high penetration of synthetics and semi-
synthetics
6 Industrial lube demand at about 100 kt goes to a niche
cross-section of applications, though a portion is base
oil/process oil
6 The majors are the dominant players with ExxonMobil, Shell
and BP Castrol all having about 20-22% each
6 Emerging manufacturer/assembler of autos and parts
The 9th
6 Steady ICIS-LOR
growth of World Base annum
3-4% per Oils Conference
is expectedLondon 17-18 highly
in this February 2005 29
competitive market, especially in premium grades
MARKET – MALAYSIA
6 Economic development continues with GDP per capita

at US$4,375 (US$7,000 at PPP) and growth about 7%
6 Steady lube growth, a large vehicle population and no basestock
production
6 Malaysia imports significant volumes of basestocks and finished
lubes and has sales of about 235 k.tonnes per year
6 Auto lubes make up about 57% with industrial at 34%.
6 The lube market is dominated by the majors, with BP-Castrol
dominant with about one-third of the market and Shell not far
behind
6 A fully liberalised market with low barriers to entry result in a
highly competitive market
TWO MORE MARKETS

Korea Philippines
6 Previously one of the faster 6 Yet to achieve the growth
growing markets, now moving potential seen in the
towards maturity early 1990s
6 Expected to grow by about 3.3% 6 Growth is a respectable
per annum during the second 4% per annum but GDP per
half of this decade cap is only US$975
6 Little opportunity,
however, should it
attract mining investment
and become the main food
supplier to Asia, then
the new industries could
anchor a lube entry
EMISSION STANDARDS FOR NEW VEHICLES

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
EU Euro 3 Euro 4 Euro 5
Bangladesh Euro 2
China (BJ & SH) Euro 1 Euro 2 Euro 3 Euro 4
China (Others) Euro 1 Euro 2 Euro 3

Hong Kong Euro 3 Euro 4
India (main cities) Euro 1 Euro 2 Euro 3 Euro 4
India (others) Euro 1 Euro 2 Euro 3
Indonesia Euro 1 Euro 2

Malaysia Euro 2
Philippines Euro 1
Singapore Euro 1 Euro 2 Euro 4
Thailand Euro 1 Euro 2 Euro 3 Euro 4
Vietnam (mogas) Euro 1 Euro 4
Vietnam (diesel) Euro 1 Euro 2 E3 E4
ISSUES IMPACTING LUBE FORMULATION
Legislation Requirement Solution

Particulate traps,
Lower ash, sulphur,
Emission oxidation catalysts,
phosphorous
NOX reduction.
Fuel economy Visometric restrictions Lower viscosity lubes
Reformulate lube to use

Longer drain intervals Better soot handling
Group II/III
HDDO & PCMO will require Group II/III basestocks. Group I will continue to be
attractive for marine, locomotive, process and some industrial applications
LUBE QUALITY TRENDS

6 Rapid upgrading of fuels and lubes required to achieve benefits sought
from legislation and new engine technology
6 Countries have advocated different time lines for change to fuel
specifications but some convergence can now be seen
6 Auto manufacturing dominated by global players and therefore a rapid
evolution to higher quality lubricants likely particularly in China
6 Premium PCMO lubes will be API SL/SM and mid-tier market upgrading
dependant on varying vehicle replacement rates
6 Heavy vehicle manufacturing dominated by local players therefore initial
change will be slow before legislation demands more advanced hardware
6 Global operations of the major lube marketers resulting in early
reformulation of premium lubes through a “supply push” rather than
“demand pull”
6 Competitive priced Group II/III base oil could facilitate early
reformulation and give independents the opportunity to blend leading edge
quality
The 9thproducts
ICIS-LOR World Base Oils Conference London 17-18 February 2005 34
ASIA LUBES – A CHANGING MARKET

6 The pace of change is accelerating
Asia adopting EURO standards. Japanese standards converging

Timetable not final but converging interests have created
momentum to suggest an early move to EURO 4 with most major
markets at that level by 2010
China/India planning to move first in major cities, but EURO 4
will require new lube formulations and advanced engines – thus
will be difficult to limit change to cities – country wide role
out could be fast
New legislation does not only effect cars & trucks. EURO 3
limits will apply to 2 and 3-wheelers in India from 2008
Introduction of GF-4 in US led to a sharp increase in demand for
Gp II and it becoming the dominant base oil. Could the same
happen in Asia?
6 Maybe atICIS-LOR
The 9th a faster paceBase
World than some
Oils expect
Conference London 17-18 February 2005 35
SUMMARY PERSPECTIVE
6 Pace of change is accelerating

6 Global sourcing necessary to remain competitive
6 Commercially led introduction of Group II base oils already seen, while
technical needs will shortly create new Group II demand
6 Change, when it occurs, could be faster than expected
6 Substantial availability of Group II/III base oils is building
6 A third of Asia’s base oil capacity could be Gp II/III by 2010
6 Asia moving to (Gp II/II+) but could use Gp III in NE. Asia for its cold
properties
6 GTL base oils available by the end of the decade
6 Asia is diverse and complex, but has the fastest developing markets
6 Barriers to entry lower as markets liberalise – well researched and
carefully considered entries to selective markets could provide rewards
OPPORTUNITY - ASIA’S GROWING MIDDLE INCOME EARNERS
Millions 2002 2010 Forecast 380 million Asians

China 64 237 will join the “middle income”
Hong Kong 6 7 group between 2002-10. More
than the entire US population
India 11 55
Indonesia 11 24 China – 173 million join the
consumer classes!
South Korea 43 47
Malaysia 7 20
Philippines 4 21
Forecasts show over 120
million vehicles will be sold
Singapore 4 4
over the next five years in Asia
Taiwan 20 23 versus 104 million in the US
Thailand 10 42
Source: MasterCard International – defined as income of US$5,000 +
Harland Bulow
TRI-ZEN International
Singapore
Bangkok
Hanoi
Hong Kong
Jakarta
Perth
Shanghai
www.tri-zen.com

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The 9th ICIS-LOR World Base Oils Conference

London 17-18 February 2005

LUBE BASESTOCKS – A PERSPECTIVE FROM ASIA

CHARACTERISTICS OF ASIA’s LUBE BUSINESS

6 Disparate economic development and quality requirements

ECONOMIC GROWTH (GDP % p.a. - Source: EIU)

GDP growth rates (%) 2002 2003 2004 2005

World 1.9 2.7 4.1 3.4

US 2.2 3.1 4.3 3.5

EU 1.2 1.1 2.3 2.4

Asia & Australasia 2.6 4.2 5.7 4.2

The 9th ICIS-LOR World Base Oils Conference

ASIA GDP per capita 2004 at PPP (US$)

US$ 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000

ASIA’s OIL CONSUMPTION - 2004 (‘000 bbls/day)

China 6508 Over 5,000 mbcd

0 1000 2000 3000 4000 5000 6000 7000

ASIA’s LUBE DEMAND – 2005 (‘000 tonnes p.a.)

ASIA’s LUBE DEMAND – 2000/2005/2010 (‘000 tonnes p.a.)

ASIAN LUBE SEGMENTATION – 2004

Main Product Demand

ASIAN AUTOMOTIVE LUBE SEGMENTATION - 2004

Demand is dominated by Automotive grades, diesel has the largest

ASIAN INDUSTRIAL LUBE SEGMENTATION - 2004

The Industrial sector is diverse, where OEM’s influence initial

ASIA’s BASE OIL PRODUCTION (tonnes p.a.)

2,000,000 Group II/III

ASIA’s BASE OIL CAPACITY (tonnes p.a.)

NEW AND PROPOSED GROUP II/III CAPACITY (tonnes p.a.)

BASE OIL TRADE FLOWS - 1995

BASE OIL TRADE FLOWS – 1995

6 Europe the “swing supplier”

BASE OIL TRADE FLOWS - 2005

BASE OIL TRADE FLOWS – 2005

6 Europe still the “swing supplier”

SINGAPORE BASE OILS - FOB QUOTATIONS 2004 (US$/tonne)

HISTORIC BASEOIL PRICES FOB SINGAPORE 1997-2004 (US$/tonne)

GLOBAL SN150 - FOB QUOTATIONS 2004 (US$/tonne)

FREIGHT RATES TO ASIA – 5,000 MT VESSEL - 2003-2004 (US$/tonne)

USGC-FE USGC-India Rott-FE Rott-India

PRICING - USGC SN100 versus WTI CRUDE – 2004 (US$/tonne)

LUBE GROWTH PROJECTIONS 2005-2010 (% p.a.)

6 ‘Workshop of the world’

6 With recent economic growth at over 6% there are expectations

6 A large and mature economy, that has resumed some

6 Slow economic recovery now gaining

6 Growing industrial economy and a strong agricultural base.

6 Economic development continues with GDP per capita

TWO MORE MARKETS

EMISSION STANDARDS FOR NEW VEHICLES

China (BJ & SH) Euro 1 Euro 2 Euro 3 Euro 4

China (Others) Euro 1 Euro 2 Euro 3

India (main cities) Euro 1 Euro 2 Euro 3 Euro 4

India (others) Euro 1 Euro 2 Euro 3

Indonesia Euro 1 Euro 2

ISSUES IMPACTING LUBE FORMULATION

Legislation Requirement Solution

Fuel economy Visometric restrictions Lower viscosity lubes

Reformulate lube to use

LUBE QUALITY TRENDS

ASIA LUBES – A CHANGING MARKET

 Asia adopting EURO standards. Japanese standards converging

6 Pace of change is accelerating

OPPORTUNITY - ASIA’S GROWING MIDDLE INCOME EARNERS

Asia adopting EURO standards. Japanese standards converging