BASE STOCKS

Move Towards Lower Viscosity

Base Stock Evolution

Changes in Capacity

Group II Supply

Group III Perspective

Perspectives on Sustainability

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 BASE STOCKS

Global Trends
~45 MT finished lubes demand in 2019

Supply demand imbalance persists

Group II/III/PAO capacity additions

Electrification & drain extensions

dampen demand over time

Latest performance needs demand

higher quality base oils

More competition between

API groups

Challenges persist & complexity increases in global base stock industry

The base stock industry continues to face challenges.

Fairly low growth in the finished lubricant market means new base stock supply is outpacing demand.

With automotive lubes accounting for more than half of the finished lubes demand, the drive for
sustainability is impacting the market, while impacts from vehicle electrification remain off in the future.
Right now, it is legislation that is driving demand for higher performance products and hence higher
quality base stocks.

The market faces more inter-API Group competition as blenders explore options to optimize their costs
and explore new marketing strategies.

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 BASE STOCKS

Specifications Moving to Lower Viscosity

COMMERCIAL VEHICLES

Proposed
API CK-4/FA-4 JASO DH-2F
ACEA
XW-30 5W-30
5W-30
HTHSV >2.9 HTHSV >2.9
HTHSV >2.9

2016 2017 2018 2019 2020

ACEA C5 GM dexos 1 API SN PLUS Proposed ACEA ILSAC GF-6
XW-20 0W-20 0W-20/16 0W-20 0W-16
HTHSV >2.6 HTHSV >2.6 HTHSV >2.6 HTHSV >2.6 HTHSV >2.3
MB 229.71 Toyota/Nissan BMW JASO GLV-1 GM dexos D
XW-20 0W-16 LL17-FE+ 0W-12/8 0W-20
HTHSV >2.6 HTHSV >2.3 0W-20 HTHSV >2.0-1.7 HTHSV >2.3
HTHSV >2.6
Hyundai MB
0W-20/16 0W-20/16
PASSENGER VEHICLES HTHSV >2.6 HTHSV >2.3

Sustainability’s influence can be felt in base stock market as the trend to lower viscosity fluids, to reduce
hydrodynamic friction, is reflected in more industry and OEM specifications.

Providing the optimum balance between hardware protection, extended drain interval and outstanding
oxidative and deposit control performance in thinner SAE 0W-20 viscosity grades, will continue to drive
up demand for higher quality base oils.

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 BASE STOCKS

Moving to Even Lower Viscosities

Passenger car OEMs look for SAE 0W-16 and below
• Volatility & HTHS limiting factors

Base stocks are looked at for: Future PCMO Market

• Lower viscosity cuts SAE 0W-X
• Lower volatility SAE 5W-20 SAE
• High VI 0W-X
SAE 5W-30
• Oxidative resistance
• Lower friction, improved fuel economy SAE 10W-30
• Improved heat removal Other ~30%
• Longer drain intervals
• Meet sustainability desires

Base stocks play a role in every aspect

of the advancement of lubricants
Chart Source: SK Lubricants

Japanese OEMs first started using these lower viscosities and now the trend is creeping towards
European and American OEMs.

Ten years from now, we expect SAE 0W-xx grades to account for some 30% of the passenger car
lubricant market.

Since the limits on lowering the lubricant’s viscosity grade are tied to the properties of the base stock
and as OEMs continue to push viscosities down to SAE 0W-16 and below, Volatility and HTHS viscosity
will be limiting factors.

As the trend to very low viscosity expands beyond Japan, concerns about volatility have been increasing
in both passenger car and commercial vehicle formulations, and may ultimately drive up the demand for
high quality base stocks, such as PAO and Group III.

With so many wants, base stocks are playing a role in every aspect of the advancement of lubricants.

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 BASE STOCKS

Sagawa Takumaru
Deputy General Manager
Nissan Motor Co., Ltd

Further Low Viscosities?

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 BASE STOCKS

Beth Fields
Vice President of Sales
SK Lubricants Americas Inc.

Move to Lower Viscosity

Jeff Brown of Novvi and Beth Fields of SK explains how base stocks are enabling the move to lower
viscosities.

BROWN-BASESTOCKS-7 “High-quality base stocks are going to be mandatory as vis grade specs evolve.
If you look at the requirements to get to fuel economy, you're lowering your vis of your oils. In the base
oil world, this drives towards volatility performance. These high-performance base oils will provide a
volatility that meets these specs, as well as giving your retain performance in use to meet the demands
of the future.”

FIELDS-BASESTOCKS-2 “So, the key benefits of the higher quality base oils are the low temperature
performance and lower volatility. So, as we see our industry evolving towards lighter vis oils, the
balance between CCS and volatility becomes critical, as well as even more stringent requirements
expected from OEMs. So, what we see evolving over time is the Gp 1&2 base oils that previously
satisfied our industry standards are being replaced by the higher quality base oils.” 00:50

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 BASE STOCKS

Meeting Future Market Demands

10W-40 10W-30 5W-40 5W-30 5W-20 0W-30 0W-20 0W-16 0W-8 0W-4

Group I / II

Group III

PAO

Future Base Oils?

Fuel economy drives new viscosity grades & performance

Higher VI base stock options provide additional flexibility
Continuing advancements extend capability to meet future needs

As lubricants move to lower viscosity grades, the formulator needs to decide on the most appropriate
base stock route based on cost and performance to ensure the finished lubricant meets the market
requirements.

Higher VI base stocks offer flexibility to reach the performance requirements of new low viscosity
grades.

And, continuing advancements in base stocks will further extend their capability to meet new viscosity
grades and specifications.

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 BASE STOCKS

Selda
Barnaby
Jeff Brown
Gunsel
Ngai
ChiefPresident,
Vice
Category
Executive
Manager,
Global
Officer
Commercial
Heavy
Novvi Duty Engine
Technology
Oils
Shell
Petro-Canada Lubricants Inc.
Base Stock Evolution

As sustainability and regulations drive higher efficiency, OEMs are requiring more performance from the
lubricant and the base stock mix is evolving.

Here again with their views are Selda, Barnaby and now Jeff Brown of NOVVI.

GUNSEL-BASESTOCKS-7 “The global demand for high quality base stocks has been rising steadily in
recent years, as the lubricant applications focus more and more on energy efficiency and sustainability.
If we look at the PCMO segment in particular, the market share of 0W grades is expected to increase
significantly over the next ten years. This is because of the outstanding fuel economy & carbon footprint
reduction benefits 0W delivers versus heavier grades. In general blending 0W products require the use
of Group III. To meet the even more stringent OEMs requirements for fuel economy and NOACK
volatility, the oils need to be formulated with higher quality Group III stocks, such as Shell’s GTL base
oils. Overall, the market is using more higher quality base stocks. Meanwhile, we’ll continue to see
further performance differentiations among Group III base oils.”

NGAI-BASE STOCKS-5 "So, really the way we look at it is in general, the use of higher-quality base stocks
are going to be driven by the demands that are required of the lubricant. So, if you think about the
specification changes, if you think about the equipment design, they typically demand for a more robust
formulation. And as we know, base oil is a key component as part of that formulation. So, do we see
the base oil slate improving in terms of the use of higher-quality base oils? I mean, absolutely. I think
that that's going to be definitely part of the future.”

BROWN-BASESTOCKS-4 “If you ask yourself what makes the best engine oil bar none, at Novvi this
means your CCS performance, your VI, volatility, durability, and long-term stability of the product.
These aspects cannot be met with conventional technologies today, and will be enabled by tomorrow's
sustainable non-conventional products.”

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 BASE STOCKS

Future is Also Electrified

Hybrid transmission fluids will need high quality base stocks
• Wear protection at low viscosity
• Electrical compatibility
• Thermal conductivity

PAO/Group III can offer

high volume resistivity

Hybrids: careful balance essential

• Electrical properties
• Gear protection
• Materials compatibility

Electrification may impact the base stock market as more of the powertrain is electrified and OEMs look
for longer oil drain intervals.

New hybrid transmission fluids need to ensure wear protection at extremely low viscosities and
electrical compatibility, in a high speed, high temperature, operating environment.

The need for enhanced electrical properties is likely to drive the use of higher quality, less polar base
stocks, such as PAO and Group III, and formulators will need to work hard to strike the right balance
between all the attributes required in transmission fluids for these specific applications.

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 BASE STOCKS

Global Base Stock Capacity Change

Base Stock Nameplate Capacity 2018
350000
Barrels per day

300000
250000
200000
150000
100000
50000
0
North America South America W&E Europe Middle East + China Asia Pacific Ex
Africa China

43% 41% 16%

Group I Group II Group III

Data Source: Lubes’n’Greases 2018 Global Guide to Base Oil Refining. Reflects disclosed capacities only; additional capacities may exist in the market.

With so many needs, how is the market responding?

Worldwide base stock capacity for Groups 1, 2 and 3 topped 1 million b/d in 2018.

China had new Group 2 & 3 additions, the latest from Hengli Petrochemical Co. adding over 10,000 BPD.

Although Group 3 suppliers are readying for further capacity increases to meet emerging demand,

over the past 5 years the biggest capacity increases worldwide have been in Group 2, which many still
regard as the heart of the market.

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 BASE STOCKS

Expected Capacity Additions

Base Stock Nameplate Capacity Additions to 2021
25000
Barrels per day

20000

15000

10000

5000

0
North America W Europe E Europe China Asia Pacific Ex
China
Group II Group III Group I/II/III

ExxonMobil’s Rotterdam and Hainan Handi’s China

Uncertainty around IMO 2020 implications
plants add almost half of the new capacity

Data Source: Lubes’n’Greases 2018 Global Guide to Base Oil Refining

Even more high-quality base stock capacity is on the way, with over 70,000 b/d expected to be added
before 2021 via new projects, expansions and upgrades.

The demand for lower sulfur fuels to meet IMO 2020 is expected to have an effect on base oil plant
profitability, while the significant addition of Group 2 in Europe will change base oil choices globally.

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 BASE STOCKS

Ted Walko
Basestocks and Specialties
Global Marketing Manager
ExxonMobil Fuels & Lubricants
Perspectives on IMO 2020 Impact

Ted Walko of ExxonMobil offers his perspective on the impact of IMO2020.

WALKO-BASE STOCKS -1 “At ExxonMobil we're paying close attention to the impacts from IMO 2020.
Those changes on the marine industry will introduce multiple fuel options for marine shippers. Those
fuel options will have a significant impact across the lubricants industry, particularly in the area of base
stock manufacturing.”

WALKO-BASE STOCKS -2 “Although we anticipate significant impacts from the IMO 2020, we believe
Group 1 demand will continue to be strong and will have a solid place within the marine shipping
industry. On the supply side, that's where things may change. You see, this production of this lower
sulferized fuel will challenge the economics of many refiners, particularly the low-complexity ones.
They'll have tough decisions to make. Will they invest to de-sulferize and destroy resid? Or, will they
choose to get out of base stock production moving forward? That's where we believe the biggest
impact is going to be.”

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 BASE STOCKS

Sylvie Houry
Global Development Manager
ExxonMobil Fuels & Lubricants
Perspectives on Group II
Base Oil Supply

Next, let’s hear from Sylvie Houry of ExxonMobil which announced the start-up of its Group 2 plant in
Rotterdam this February.

HOURY-BASE STOCKS -1 “On the supply side, today, as you know, in Europe Group 2 base stocks are
primarily coming from North America, imported from North America, imported in a smaller extent from
Asia, as well. Now of course, the fact that new production is starting as we speak in Rotterdam, will
change the supply pattern. Our expectation is that Rotterdam production will, of course, replace most
of the products currently imported from other regions.”

HOURY-BASE STOCKS -2 “We expect the demand for Group 2 base stocks to grow, to continue to grow
worldwide and to significantly grow in Europe in the coming years. This is primarily driven by the
automotive industry. Finished lubricants in automotive applications have different requirements than in
the past.”

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 BASE STOCKS

BethBrown
Jeff Fields
Vice President
Chief ExecutiveofOfficer
Sales
SK Lubricants Americas Inc.
Novvi

Perspectives on Meeting Supply

Beth and Jeff provide a Group III manufacturers view on supplying the global market.

FIELDS-BASESTOCKS-9 “Group 3 base oil will continue to grow in demand in each region of the world.
Certainly within the Americas market we have a significant amount of demand and very little capacity.
So, we're a current net importer and could utilize additional capacity within our region. As it relates to
new capacity and how different companies may invest in that, it's really on a case-by-case basis. SK for
example, has effectively used a joint venture model with three different partners globally. However,
we've also seen in our industry that not all joint ventures are successful. So, it really depends on the
company, their investment strategies, resources, and assets, as to how they achieve that.

BROWN-BASESTOCKS-6 “From Novvi's perspective, there will be ample supply of these sustainable non-
conventional base oils to meet the demand of the industry. What we need to remember about these
new technologies is we have different supply chains. In Novvi's case, our capital expenditure and plant
build-out model is substantially different. We're more efficient and can more organically grow with the
market to ensure that supply and demand always stay in check.”

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 BASE STOCKS

Low Viscosity PAO 250

Global Low Viscosity PAO Capacity 2017

Supply/Demand  EU
 US

Supply is increasing with  Other

demand, usage is balanced on

economics
0
kT ExxonMobil Ineos CPChem Other
Demand likely to increase with
new viscosity and performance
requirements Global Low Viscosity PAO Demand

500
Blenders look for lowest
formulations costs, which drives
250
interplay of HVI
Grp III / PAO demand
0
kT 2017 2018 2019 2020 2021 2022

Charts Data Source: Kline and Company

In low viscosity PAO, the main players are Ineos, ExxonMobil and Chevron Phillips Chemical.

Over 5 years, expansions will add 20% to the production of NAO, which is used as a PAO feed stock.

Supply is increasing with demand, which looks set to grow with the trend of lower viscosities and higher
performance requirements.

However, blenders continue to strive to minimize PAO use, for the lowest formulation cost.

It will be interesting to see the Interplay of High VI Group 3 and PAO demand as it develops.

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 BASE STOCKS

Demand Trend Drivers

Fuel economy legislation
Tighter emissions regulations
Engine oil specifications
Electrification
Longer drain intervals
Need for consideration
of lubricant oils sustainability

Chart Source: Global Lubricants Basestocks: Market Analysis

Bio-base stocks may gain popularity
and Opportunities, Kline & Company. Note: Demand estimates
include only Group I, II/II+, III/III+
and PAO basestocks and exclude Group V basestocks.

Demand trend drivers will continue to shape the market. With a limited increase in demand from the
lubricants market expected, supply levels across all base stock groups will be more than adequate.

We should not lose sight of bio-base stocks, with the added benefits of biodegradability and strong
environmental credentials, they could also see some uptake, especially in Asia Pacific.

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 BASE STOCKS

North America Trends

Grp II and III capacity increases and new entrants
generate activity

Low viscosity demand drives up demand

for synthetics
• Some use split between PAO and HVI Grp III
• Strong financial incentives for HVI Grp III

Some commoditization of Grp III for mainline PCMO

as demand for SAE 0W and 5W grows

Rising cost and complexity of maintaining the

approvals

Let’s look a little closer at the market in North America, where Group 2 & 3 capacity increases and new
entrants have provided increased activity as customers look for the most cost-effective formulations.

The growth of low viscosity grades has driven up overall synthetic demand.

Some use is split between PAO and High VI Group 3 but financial incentives are strong for Group 3s, if oil
approvals allow their use.

We are also seeing some commoditization of Group III base oils as SAE 0W and 5W grades are
increasingly required in passenger car applications.

And as the number of new base oils grows so do the costs and complexity of gaining approvals.

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 BASE STOCKS

Jeff Brown
Chief Executive Officer
Closing Thoughts on Novvi

Sustainability, Public Policy or Corporate

Responsibility

We close the base stocks section with Jeff providing some food for thought on who will lead
sustainability in to the future.

BROWN-BASESTOCKS-5 “Public policy does not play a large role for lubricants, and we're unclear how
this will change in the future. The interesting thing about this question is we've seen corporations and
small governments stepping in and taking the lead. The B2B market values sustainability. Corporations
realize sustainability is important and they play a large role in protecting the environment. There's real
monetary value behind this. The policy void has created a realm where corporations can step in and
make a difference.”

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