Apparently Valvoline has been purchasing all of its Group I base oils from MAP, said Geeta S. Agashe, director of petroleum and energy for Kline and Co. consultants. But the level of those purchases will probably at least be reduced going forward. It is Kline’s assessment that this plant is at some risk for closure.

The Catlettsburg base oil plant is part of a refinery complex that Ashland contributed to MAP when the joint venture was formed in 1997. MAP owns a total of seven refineries, giving it 6 percent of total refining capacity in the United States.

The partnership has been a significant source of cash for Ashland, but the Covington, Ky., company said it hopes to make its performance more consistent by cutting ties to the cyclical refining industry. In any case, the agreement that formed the joint venture gave Finlay, Ohio-based Marathon a window to buy Ashlands stake on Jan. 1, 2005 for 115 percent of its market value.

The deal announced last week calls for Marathon to pay $3 billion in cash, stock and assumed debt for the joint venture stake, along with 61 Valvoline Instant Oil Change quick lube centers in the Midwest and Ashlands maleic anhydride business. The companies emphasized that the transaction is contingent on the Internal Revenue Service classifying it tax free to shareholders. They said they do not expect a decision from the agency until the fourth quarter of this year.

The Catlettsburg base oil plant has capacity to produce 8,800 barrels per day of Group I base oils, approximately one-tenth of Group I capacity in the United States. Officials with the joint venture declined to say how much of the plants output is purchased by Valvoline, but industry sources said they believed the automotive consumer products marketer bought most of the plants barrels and used them at all eight of its blending plants. Sources said MAP is not at all active in the base oil spot market.

MAP spokesman Chuck Rice said the company expects its supply relationship with Valvoline to remain in place.

Market observers have speculated for some time that Valvoline would at least cut back on its use of Catlettsburg base oil due to the implementation of the next passenger car motor oil upgrade, GF-4. The specification, issued in January by the International Lubricant Standardization and Approval Committee, is scheduled to be commercially licensed beginning this summer. Because of its more stringent requirements, the new standard is expected to reduce or even preclude use of some Group I base oils.

Observers said GF-4 will affect Valvolines ability to use MAP base oilwhether or not Ashland maintains its stake in the joint venture. Divestiture, however, would remove any financial incentive for Ashland to support the refiner by purchasing from it.

According to Kline, which is based in Little Falls, N.J., MAPs plant produces two cuts of base oil, a 100 neutral and a 300 neutral, both of which have been finding reduced use in automotive lubricants.

The 100 neutral in particular, which is the product produced in the greatest volume at this plant, is not expected to meet future PCMO requirements, Agashe said.

Sources speculated that Marathon would have several options if Valvoline significantly curtails its purchases. The least disruptive would be to find other customers. However, most observers agree that U.S. demand for Group I oils will fall following the onset of GF-4, and many have predicted that at least one Group I supplier will exit the market.

Marathon could upgrade the plant, but some say the price tag to improve the quality of its base stocks would be too high. The refinery is undergoing a $300 million project to lower the sulfur content of the fuel it produces and to increase fuel and asphalt output, but officials have announced no plans to improve the base oil plant.

Agashe noted that Marathon has shownan interest in gas-to-liquids technology, which can be used to produce very high quality base oils. But it is hard to imagine how a GTL project could preserve the Catlettsburg base oil plant, since GTL plants are usually built near large natural gas reserves.

Its hard to say what Marathon would do with that plant, said one observer, who spoke on conditionof anonymity. Sometimes companies have their own particular reasons for continuing to operate a plant like that. But if Ashland gets out, that would seem to create a situation where Marathon had some decisions to make regarding that base oil plant. And closing would certainly be one option.

U.S. posted prices for paraffinic base oils were unchanged this week. The price of crude oil on the New York Mercantile Exchange closed at $37.50 per barrel yesterday, 5 cents higher than a week earlier.

Historic U.S. posted base oil prices and WTI and Brent crude spot prices are available for purchase in Excel format.