Base oil plants are complex facilities whose performance can be measured in numerous ways. One stands far above others, however, in consistently predicting plant profitability, an official from Solomon Associates said recently. That indicator is the degree to which the plant’s output is weighted toward heavy base stocks and high-value byproducts such as waxes and specialty petroleum products.
Speaking at the ICIS World Base Oils & Lubricants Conference in Windsor, United Kingdom, last month, Solomon’s Attilio Donarelli added that operators of the most profitable plants are less concerned about minimizing spending on feedstock, personnel or energy bills.
“Top net cash margin plants do not cut down on operating costs,” Donarelli said.
Solomon is a research firm providing data about global oil refining operations so that operators may benchmarking their own performance. The company is based in Dallas, Texas, United States and is part of HSB.
Donarelli’s presentation was based on Solomon’s bi-annual Lube Study, which he manages, and analyzed the eight base oil plants that had the highest net cash margins – a measure of profitability – across the 2016, 2018 and 2020 editions, based on Solomon’s estimates of prices at refinery gates.
Donarelli noted that there was significant variation between the eight plants. Three were located in North America, an equal amount in Europe and the Middle East, and two were located elsewhere in Asia. Four use mostly solvent refining to make API Group I base stocks, while the others use mostly hydroprocessing technology to make Group II and III oils. He added that their capacities also varied significantly, though he did not provide details.
The average net cash margins of the eight unidentified plants was solidly in the first quartile of all plants for each of the past three studies. To show the keys to achieving that level of profitability, Donarelli analyzed their average performance for six parameters: non-energy costs, maintenance costs, energy efficiency, personnel efficiency, utilization and gross margins.
The plants in question scored high for only one parameter – gross margins, where they averaged a top quartile ranking for each of the three studies that were analyzed. Donarelli said they did this by managing processes and operations so as to maximize output of high-margin products while minimizing low-margin by-products.
The lowest priced products during the study periods were light neutral Group I and II base stocks and foots oil, which were all comparable, followed by treated distillate and residual aromatic extracts and cylinder oils. At the other end of the spectrum were waxes, which brought prices more than twice as high as Group I light solvent neutrals, and petrolatum, which was more than 1.5 times light Group I oils. Light Group III oils and bright stock were just under 1.5 times the prices of light Group Is, while heavy Group II oils were around 1.2 times that price.
On average, 23% of the output from the most profitable Group I plants was bright stock, and 12% was wax or specialties. By comparison, those products accounted for only an average of 17% and 3% respectively, at other Group I plants.
Output from most profitable Group II and III plants was on average 27% light Group III or heavy Group II and 9% heavier Group III or specialties. Output from other Group II and III plants was only 10% and 0.3% of those categories.
“The top net cash margin [plants] generate superior gross margins, meaning they produce the highest value product,” Donarelli said.
The most profitable plants did not stand out in terms of other parameters. They averaged a third quartile ranking for all three studies for operating costs not related to energy consumption.
“We found out that operating expenditures were not a consideration for those plants,” Donarelli said. “Why is that? Because other costs are much more important – for example raw material costs.” For maintenance costs their performance was worse – averaging in the fourth quartile for all three studies. Donarelli said they invest in maintenance in order to optimize output. For energy efficiency and plant utilization they were consistently middle of the pack. In terms of personnel efficiency they were solidly third quartile.