Observers said the loss of naphthenic capacity would be mitigated by expansions announced this week by Ergon Inc.and Calumet Lubricants but that the West Coast will probably experience a regional shortage. They also noted that, with the Martinez closure, North America will lose its major source of sodium sulfonates.

Shell said it will continue making asphalt at Martinez but that it decided to stop naphthenic base oil production because of declining profitability. Margins have been poor in recent years and sales flat or falling, and officials expected those trends to continue. The company added that the shutdown of Deer Park, announced in mid-December and scheduled for March 31, contributed to the decision to close the Martinez operation.

The Martinez refinery has capacity to produce 4,500 barrels per day of naphthenics, which are used for electrical transformer oils, process oils, industrial lubricants and metalworking fluids, adhesives, lubricant additives and greases.

Even before last weeks announcement, naphthenic marketers had warned that the closure of Deer Park would pinch U.S. supply. Purchasers of transformer oils – a major use of naphthenics – were reportedly scrambling to line up supply, and naphthenics had already undergone two rounds of price hikessince Jan. 1. Deer Park has capacity for 5,000 b/d of naphthenics, as well as 4,600 b/d of paraffinic base oils. The United States had approximately 45,000 b/d of naphthenic capacity at the start of the year.

Ergon and Calumet announced their expansions Monday. Ergon said it has already increased capacity at its Vicksburg, Miss., refinery to 11,000 b/d, up from 8,000 b/d at the beginning of the year. The company said it gained the additional capacity through a combination of hydrotreater efficiency improvements and changes in crude supply.

Ergon said it plans to add another 2,500 b/d of capacity by the fourth quarter of 2003 by installing processing equipment that is already on-site, including a very-high-pressure hydrotreating unit that will produce highly saturated naphthenic technical white oils.

Calumet said it plans to install a primary crude tower at its Princeton, La., refinery in April, although it did not specify how much capacity the new unit would add. The company said it is also considering transporting excess distillates from Princeton to resume naphthenic production at its refinery in Shreveport, La. The Shreveport facility produced 3,500 b/d of naphthenics until last year, when, because of weak demand, Calumet reconfigured it to run 100 percent paraffinics.

If the naphthenic market truly runs short of product, we will do what we can to bolster supply, Vice President of Sales and Marketing Bill Anderson said.

The expansions weve heard about this week will really help ease the impact of Shells closings, one observer said. Otherwise it would have been huge. When you look at those two [Shell] plants together, thats an enormous chunk of the market to eliminate all at once. Others added that any potential shortage in naphthenics could be eased by blenders shifting some of their base oil consumption to Group I paraffinics, where supply is relatively long.

Sources said they do expect West Coast blenders to feel the pinch of the Martinez shutdown, which leaves San Joaquin Refining Co., of Bakersfield, Calif., as the only naphthenic refiner in the region.

Im sure that some customers are going to have to get their base oil from other parts of the country, one naphthenic marketer said. And the transportation costs of doing that can be pretty significant.

Some predicted that the biggest impact of the Martinez closing will be felt by the sulfonates market. Martinez is the major North American supplier of sodium sulfonates, which are used primarily as chemical intermediates and as emulsifiers and rust preventives in soluble oil metalworking fluids.

Penreco is the only other U.S. manufacturer of natural sodium sulfonates. Sources said some users will have to import or reformulate to use alternative chemistries.

I think there may be less of an impact on chemical intermediates because companies have a number of options to turn to, a knowledgeable market source said. Companies making soluble oils will also have options, but their options are less numerous and may come at a higher cost.

Shells Martinez base oil plant employs 96 people. The company said it will try to offer all of them jobs in other Shell operations.