Flint Hills Resources LLC closed Thursday on its purchase of Shell Oil Co.s 50-percent stake in the Excel Paralubes base oil refinery. The transaction introduces a new supplier to the U.S. base oil industry, but observers said it may be awhile before Flint Hills becomes an active player in the market.
Excel Paralubes,a 21,300-barrel-per-day Group II plant in Westlake, La., was a joint venture between ConocoPhillips and Pennzoil-Quaker State. Shell acquired its stake when it purchased Pennzoil-Quaker State last year, but wasordered to divest it by the U.S. Federal Trade Commission, which said that Shell stood to control too much of the Group II supply in North America.
Shell agreed in April to sell its stake to Flint Hills Resources, a subsidiary of Wichita, Kansas-based Koch Industries, but had to await FTC approval. The commission gave its blessing July 25.
As co-owner, Flint Hills Resources now controls half of Excel Paralubes output. President and Chief Executive Officer Dave Robertson said in a news release that the company viewed the purchase as anavenue to expand into a new market, as Koch has never been in the base oil business. Entering into this product line gives us the opportunity to serve a new customer base, he said.
Flint Hills Resources declined this week to answer questions about its new business, but observers said they expect the vast majority of its share of the output to be sold to Shell, at least for several months. As part of its order to divest the Pennzoil-Quaker State stake, the FTC said Shell could enter an agreement to purchase the new owner’s barrels for up to one year. This would represent a continuation of the status quo since Pennzoil-Quaker State, before being acquired, used most of its share to blend its own motor oils.
I think theyre still trying to figure out what theyre going to do, saidone market observer, who echoed the comments of several others. I assume theyre going to be selling most of their supply to Shell for awhile, just because thats what theyve been doing.
Some observers speculated that Flint Hills Resources and Shell may have entered a supply agreement ofsix to 12 months, to give Flint Hills time to develop a strategy for taking its base oil to market. The company has retained former Pennzoil-Quaker State officials, including Daniel J. Bradley, who was director of base oil sales and marketing for Pennzoil-Quaker State. Bradleymanaged the business for the trustee in charge of the stake while Shell was trying to sell it.
Some sources noted that Pennzoil-Quaker State exported cuts not used by its motor oil business to markets such as India. They speculated that the practice may resume under Flint Hills Resources.
Whatever becomes of Flint Hills Resources barrels is sure to attract attention in the lubricant industry, especially with the looming adoption of GF-4, the next passenger car motor oil upgrade, which is expected to spur increased demand for Group II base oils. One independent lube blender expressed optimism yesterday that the new base oil supplier wont leave small companies out of its plans.
I heard that Flint Hills bought the last sponsorship for the [Independent Lubricant Manufacturers Association’s annual meeting in October], the source said. Maybe thats a good sign.
Posted prices for paraffinic base oils in the United States were unchanged again this week. The price of crude oil on the New York Mercantile Exchange closed at $32.25 per barrel yesterday, up $2.06 from a week earlier.
Historic U.S. posted base oil prices and WTI and Brent crude spot prices are available for purchase in Excel format.