Marathon said it had completed a business analysis concerning its lube plant operations. As such, please be advised that prior to year-end, Marathon will discontinue the production of all base oils, slack waxes and extracts, and permanently shut down the Catlettsburg lube plant, Marathon told customers. Until that time, we will work to fill orders for lube plant products.

Linda Casey, communications manager for Marathon Petroleum, told Lube Report that the sales and marketing staff for lubricants, including base oils, are part of the companys marketing group and will not be laid off. Casey added that refinery employees who worked in base oils, waxes and extracts will be reassigned in the facility.

While we certainly were thinking this could happen, its a shock when it does, said Barry Rathkopf, president of Nova Petroleum Specialties Co. LLCin Tarrytown, N.Y. Nova Petroleum buys slack waxes from Marathon Petroleum.

Its certainly going to leave a hole in the Group I and also the waxes, which is what were more involved in these days, Rathkopf told Lube Report. When Citgo went out just a couple of weeks before them, it was a huge hit to the marketplace. How its going to be filled remains to be seen. On April 2, Citgo told customers it was reducing base oil and wax output indefinitely at its 9,500 b/d plant in Lake Charles, La.

Rathkopf said that while there are alternatives in the slack wax market, there only a few suppliers and most are relatively small.

Both Citgo and Marathon were sources of feedstock for the other U.S. refiners to further refine the slack wax, he added. Those refineries will be out in the marketplace looking for alternative feedstocks, as well as the people looking for straight slack wax. The demand for this type of product is going to increase, and I dont know what thats going to do for prices.

Among Group I base oil refiners in the United States, Marathon was the most vulnerable to closure, primarily due to the very limited base oil slate at Catlettsburg, said Stephen Ames, of SBA Consulting in Pepper Pike, Ohio.

They produce only 100 and a 330 neutral, which today are low-value grades, Ames said. These grades are difficult to sell in the North American market as they have historically gone into applications where higher-saturate Group IIs and Group IIIs are now needed – motor oils, to be specific.

Ames said the plant lacked the higher-margin grades, heavy neutral and brightstock, typical of most Group I refineries. Even their byproducts, low-melt slack wax and aromatic extracts, are low value, he added.

Its Kentucky location also meant Marathon was geographically disconnected from the export markets. To get to those alternative markets involved additional costs in barging down river and renting tankage on the Gulf Coast, Ames explained.

He noted that Marathon is a fuel-focused company having little in-house finished lubricants business to support. The base oil plant does not have the material integrated value as it would for a Shell, ExxonMobil or Chevron, Ames said. Everything they produce, they sell to the merchant market. So when the merchant market turns bad – as it has – they have a relatively simple decision. It doesnt really impact their overall downstream business to get out of base oils.

At one time, the refinery had such an internal customer in Valvoline, when both were owned by Ashland Inc. But in 1998, the refinery was folded into a joint venture between Ashland and Marathon.

Then, in June 2005, Marathon Oil completed its buyout of Ashlands stake in the Marathon Ashland Petroleum joint venture. The $3.7 billion deal gave Marathon sole ownership of the Catlettsburg refinery, along with a maleic anhydride business previously owned by Ashland.

Irrespective of the base oil market, for a Marathon it probably makes much better economic sense to produce higher-margin fuels from the VGO feedstock, assuming they have the additional cracking capacity, Ames said. Lacking that, in todays market, cutting a comparable amount of crude may also be preferable.

Ames said Marathons decision was not a surprise but just the tip of the iceberg. There are 2.5 million [metric] tons of new capacity entering the global market this year, including naphthenics, he said. With demand growth likely to be no greater than 0.5 million tons, there is a lot of capacity that will have to operate at reduced levels or close. Marathon happened to be one of the first to blink.

Milind Phadke, energy industry manager for Kline and Co. in Little Falls, N.J., also said Marathons decision to exit the lube base stock business was not a surprising one. In fact, Klines Global Lubricants Basestocks Study identified the Marathon Group I plant as being vulnerable to closure, Phadke told Lube Report.

He said a number of events contributed to it, including the decision for Marathon and Ashland to part ways on their joint venture. This, coupled with the fact that Group I base stocks have almost completely exited passenger car motor oil and heavy duty motor oil formulations, has deprived Marathon of in-house demand, Phadke explained.

Marathon could have continued serving Valvolines industrial lubricants business, he added. However, this business is quite small, Phadke said. Valvolines industrial lubricants account for just 8 percent of the total lubricants sales volume. In comparison, Citgos – who is in a similar predicament – industrial lubricants sales account for 59 percent of its total lubes sales volume.

According to Phadke, Marathon faced the option of either increasing domestic and export merchant sales, or upgrading Catlettsburg to make Group II. Both options are fairly difficult.

Increasing Group I merchant sales is nearly impossible in the current environment of large Group II surplus, limited usage in automotive applications, and flat industrial lubricants demand, Phadke said. On the other hand, upgrading to Group II is a capital-intensive decision with no light at the end of the tunnel, given the large Group II surplus already existing in the market place.

He said what would have finally driven the decision is the fact that lubricant base stocks do not have a strategic future in Marathons business plans. Sales of wax and aromatic extracts have kept the plant going till now, Phadke said. But this cannot continue forever.

Jamie Brunk, of Solomon Associates in Dallas, also said the news of a base oil supplier exiting the market was not unexpected.

I said all along that something had to go, Brunk said. With the Motiva expansion, theres a lot of extra base oil in the U.S., so that was putting price pressure and margin pressure [on base oil refiners]. If you talk to people, everyone has a different thought on whom they think is most vulnerable.