Miles driven are down as much as 83 percent from last year in urban areas, according to numbers from Streetlight Data, a transportation data analysis company. As drivers do their part to flatten the curve of Covid-19 infections by staying home, both demand for engine oil changes and the volume of used oil those changes generate have plummeted.
For rerefiners, this means less demand for their base oil and finished lubes as well as less feedstock to make those products.
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According to Ellie Bruce, vice president of business management and marketing with Elgin, Illinois-based Heritage-Crystal Clean, while the market varies by state, the overall supply of used oil is down 40 to 50 percent. Used oil generators such as quick lubes are seeing greatly reduced business, she observed, with some down from 30 oil changes per day to just two or three.
Ben Cowart, CEO of Houston, Texas-based Vertex Energy, which operates a rerefinery in Columbus, Ohio, concurred. “We buy a lot of third-party feed for multiple rerefineries, and that’s down by 50 percent,” he said.
Safety-Kleen’s extensive collection network has brought in about 65 percent of its usual volume of feedstock – more than the company had expected when the crisis began, Executive Vice President Craig Linington told Lube Report.
Used oil collection in years past has swung between paying for the oil and charging to collect it. Bruce said she doesn’t believe that offering to pay used oil generators for their waste would help the situation. “This business has been for the last many years a marginally profitable business,” she said. “So long as base oil pricing remains depressed, we have to charge for collection.”
Low crude oil prices also force rerefiners to charge for collection, Linington added, as the material itself is worth less than the cost of obtaining it.
Heritage-Crystal Clean President and CEO Brian Recatto said during a quarterly earnings conference call on April 30 that although there is less used oil generated, the company was able to move from a slight pay-for-oil position during the first quarter to a significant charge-for-oil position during the second quarter, which has helped combat the pandemic-induced downturn in business.
On the other hand, demand for engine oil – and therefore base oil – is also down, so there’s less urgency to obtain feedstock. Cowart reported that demand has dropped about 35 to 50 percent below normal since March, so Vertex’s base oil plant is “in balance right now.”
Linington said demand for Safety-Kleen’s finished products has been in line with what the rest of the industry has seen. Thirst for passenger car motor oil has dropped more than 50 percent, while demand for industrial lubes has been even worse. Commercial transportation “seems to be holding its own, maybe 10 to 20 percent down,” he said, noting sometimes significant regional variations.
In anticipation of the reduction in demand and feedstock availability, the rerefining giant shuttered nearly half of its production last month. The company can churn out 11,450 barrels per day of API Group II base oil. Its 1,200 b/d rerefinery in Newark, California, which had just reopened at the end of 2019 after an approximately two-year hiatus, has again been idled as part of the production cuts.
“Our rerefining spread has contracted with the drop in crude prices,” said Alan McKim, chairman, president and CEO of Safety-Kleen parent Clean Harbors, in the company’s first quarter earnings news release. “Despite our aggressive increase in charge-for-oil pricing, near-term demand for base oil has dropped precipitously, prompting us to shutter some rerefining capacity until the markets improve.”
According to Juan Fritschy, CEO at Avista Oil Refining and Trading USA in Peachtree City, Georgia, his company also saw demand slashed in half last month and has run at about an 80 percent production rate since mid-April.
Recatto said in the earnings conference call that Heritage-Crystal Clean has decreased production at its Indianapolis rerefinery to approximately two-thirds of its normal run rate. To take advantage of the demand weakness, the company plans to move up the timing of an extended maintenance turnaround from autumn into May. According to Bruce, the turnaround should last about three weeks, and the company had been building inventory to cover that downtime.
“After our shutdown maintenance work is completed in May, we will determine if it is prudent to keep the refinery idle until more favorable market conditions exist,” Recatto said in the conference call.
While U.S. Energy Information Administration data show that virgin base oil production dipped 9 percent in 2019 compared to the year before, rerefiners had been running steadily. For Avista and Heritage-Crystal Clean, operating rates actually went up in 2019, and Safety-Kleen saw a record year of production.
“We run at full throttle and are usually able to place our barrels as a rule,” Cowart said. “Our industry does feel that oversupply [in base oil], but our answer is more discounts to move product versus not producing. In this case, there’s no market or very little market that everyone’s trying to sell into.”
Like many in the lubricants industry, rerefiners said in their earnings news releases that they are taking decisive steps to protect their balance sheets. They cut back production to varying extents. Heritage-Crystal Clean is implementing furlough and workshare programs and suspending all non-essential capital expenditures. Clean Harbors has downsized its workforce through furloughs and other actions.
McKim said that Clean Harbors expects its branch business to rebound when shelter-in-place mandates are lifted and low gasoline prices and a reduction in air travel encourage a steady increase in driving.
“It’s a small industry, but if it does go away, it would be a very big problem for the environment as the good options for getting rid of the used oil [are dwindling],” stated Bruce. Asphalt plants that used to burn used engine oil as fuel have nearly all switched over to inexpensive natural gas. Consequently, “there’s no natural outlet for the volume of used oil generated anymore,” she said.
George Gill contributed to this article.