U.S. Base Oil Output Climbs 6%

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Encouraged by robust demand and fat margins, U.S. refiners wrenched open the spigots and streamed 31 million barrels of base oil in this year’s first half. Despite outages and setbacks that dented operating rates at a number of plants, total base oil production in the first six months of 2011 was almost 6 percent higher than the same period last year, according to data released Aug. 31 by the U.S. Energy Information Administration.

The improvement was seen most emphatically on the naphthenics side of the business as suppliers produced 5.6 million barrels of pale oil, 8 percent above last year’s first-half total of 5.2 million barrels and their strongest showing since 2002. Industry sources credited Ergon’s expanded naphthenics capacity in Vicksburg, Miss., as the biggest factor on the supply side of this equation, and pointed to brisk orders from the tire, transformer and metalworking industries on the demand side.

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In the far larger paraffinics segment of the business, base oil producers attained 25.4 million barrels in the January-to-June time frame, a gain of 5 percent over first-half 2010’s 24.1 million barrels, but still somewhat shy of the 28-million-barrel peak they hit in the first six months of 2008.

Output also was shy of market demand. Many suppliers said they struggled to fulfill all customer orders throughout the late winter and spring, especially for API Group II and III base oils. The market early was flooded with sales allocation programs by numerous base oil producers who experienced disruptions, including Motiva, Chevron, Petro-Canada, American Refining Group and Calumet. Then in May the flood became literal, as the Mississippi River threatened to swamp some refiners and further suppress supply.

Despite these trials, “this has been a good year, with demand steady on both the naphthenic and paraffinic sides,” said John Banach, lube sales manager at Calumet Specialty Products Partners, which is headquartered in Indianapolis. Calumet makes both paraffinic and naphthenic base oils at two Louisiana refineries, and markets the pale oil from Houston Refining as well.

Another industry player, who asked to not be identified, quipped, “With margins like these today, of course refiners are making as much base oil as they can. When the heck would they make it, if not now?”

But healthy margins are a relatively recent development, some would argue. Looking back at this year’s first half, Banach said the gains were especially welcome after 2009’s recession. “In October 2008 when we sat down with our customers, they were all begging us for base oil,” he recalled. “Everyone was asking, ‘where can I get more base oil?’ Then in November, it was like a light switch being turned off — everyone stopped buying at once. By December, you couldn’t give base oil away, and when the 2009 recession hit we were holding large inventories. We slowed down and ran at reduced rates in 2009, just to keep the refineries running.” Margins also nosedived at this time, Banach pointed out.

After the first quarter of 2010, operations were able gradually to ramp up again but margins were slow to follow, he continued. “As demand rose, even into early 2010 paraffinic margins were kept low; all the refiners were scared to raise margins. But right now, margins are astronomical — they’ve reached record highs, particularly with crude having come down by $20 or $30 a barrel. So the refiners have plenty of incentive to make as much base oil as possible.”

Jeremy Kriska, director of sales and marketing for Tulsa, Okla.-based oil marketer Tulstar, echoed those comments. “This year has been a good year. We’re seeing some slowdown now in demand across all segments, but until now it’s been very good. Demand in the first half was strong enough to even outpace the rising prices due to crude cost increases.

“We’ve also seen good demand for exports, but availability of supply has been tight there too, although we sold some heavy grades into North Africa and South America,” Kriska added.

Exports were indeed a bright spot for U.S. refiners, who averaged 72,000 daily barrels of shipments to foreign ports from January through June, totalling 13 million barrels, according to the EIA data. That’s more than 40 percent of all the base oil produced in the first half. By contrast, exports during 2010 averaged 58,000 barrels a day.

“Exports account for a good part of this year’s high demand,” said Calumet’s Banach, “and the prices they are willing to pay overseas are higher than domestic because often they couldn’t get oil at all. We’ve seen good demand especially from China and India.”

“We export certain vis grades, and were seeing very high demand for those outside the United States,” remarked Craig Busbea, marketing vice president, Americas, at Ergon in Jackson, Miss. “Overall our volume expansion was directed at increasing our export sales, and we’re now seeing a lot of our 100-Second oil go to transformer markets in China, India, Brazil and Europe. Even the U.S. has some strong segments where infrastructure is being rebuilt, like large high-voltage substations that buy transformer oil. These are still a strong market for us.”

Substitution of cleaner naphthenic oils for aromatic solvents in Europe’s tire manufacturing industry also boosted his company’s exports, Busbea added. “Our goal was to be a larger exporter of product since U.S. need was stagnant, and the transition to clean oils has fulfilled that.”

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