From the day it’s refined until it’s blended into a finished lubricant, base oil exists in an unhappy limbo state, parked in the refinery’s bulk liquid tanks and on its books. In recent years however, base oil storage capacity at U.S. refineries has shrunk by more than 20 percent. That helped to trim inventory and capital costs — and also left the industry more sensitive to supply disruptions, some refining officials suggest.
According to data compiled by the U.S. Energy Information Administration and reported by the National Petrochemical and Refiners Association, working storage capacity for base stocks at U.S. refineries stood at around 20.2 million barrels in 2000. Over the next few years, this volume contracted steadily, especially as the industry consolidated and some refineries stopped making base stocks. By 2004, refiners’ working storage for base stocks had dipped to just 13.9 million barrels, before easing a bit to 15.7 million barrels this year. The net result: a loss of nearly 4.5 million barrels of cushion space in five years’ time.
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Over those same years, base oil manufacturing capacity also was shifting. While total U.S. base oil manufacturing capacity stood at 218,000 barrels per day in January 2000, numerous closures marked the following years. Fortunately, “capacity creep” in the form of debottleneckings, catalyst changes and process improvements helped to nudge the manufacturing capacity back up, and by this January the total again was at 217,000 b/d, about even with 2000’s level.
Terry Hoffman, director of base and process oil sales at Valero Marketing in San Antonio, observed the shift taking place. First, as older plants exited the base oil business — the Golden Bear facility in Oildale, Calif., Sunoco’s plant in Yabuccoa, Puerto Rico, Shell refineries in Martinez, Calif., and Deer Park, Texas — storage tanks at those defunct facilities also were taken out of service. “Second, refiners such as Motiva, Excel Paralubes and Chevron had capacity creep — but none were building new tanks. Tank capacity doesn’t creep,” he said.
“Refiners hate to build tanks,” Hoffman continued. “It’s a basic philosophy of senior management that if you build it, the refinery’s people will find a way to fill it. So while we’ll work to increase the size of our operating units, to make more product, we don’t want to build tanks to put it in. We want our marketing people to sell it.”
President and Chief Operating Officer Harvey Golubock of American Refining Group in Bradford, Pa., agreed. “There’s not a very good payoff on tanks,” he said. “It just ties up capital.” Instead, the goal is to be more efficient, to squeeze waste out of the supply chain, he said.
Return on capital employed is the crucial measure, indicated David Hieronymus of Motiva, and storage capacity just drags it down. “Everyone is moving to having as low levels of inventory as we can hold and still adequately serve our customers,” the Houston-based manager of international base oil sales said. “It means that planning intently becomes ever more important. We watch our inventories daily, even several times a day, looking at where shipments are, how the units are operating, what’s happening with inventories.
“I don’t want to hold inventory, I want to move it and sell it,” Hieronymus stressed.
The base oil sector is not alone in its dislike of plump storage capacity. “Inventory carrying costs play a big role in determining what the refinery is willing to carry in terms of finished goods,” explained one member of the NPRA Lubes & Waxes Statistical Committee, who did not want to be identified. “Clearly the emphasis is being placed on running at capacity (or near to) while at the same time focusing on every opportunity to be just in time with product shipments. That is the fine line between refinery operating economics and inventory carrying costs. Days of supply on hand is a significant key performance indicator.”
Days of supply on hand was a factor cited by Global Basestocks Strategic Planner X B Cox of ExxonMobil, Fairfax, Va., in an analysis of why certain base stocks were in short supply in the 2003/04 time period. In a presentation to the ICIS-LOR World Base Oils Conference in February, Cox cited the downward trend in refinery storage capacity as one link in a chain of events that narrowed supply and led to painful shortages when demand surged unexpectedly in 2003.
For now, the ratio of manufacturing capacity to storage capacity remains snug. Five years ago, U.S. refineries together held enough storage capacity to store more than 90 days worth of production. Currently, they’re down to about 72 day’s worth of storage capacity — nearly three weeks less. And with today’s strong demand, warned one Gulf Coast base oil salesman, it’s unwise to believe that these tanks are full.
Golubock is among those who expect the overall storage capacity will stay battened down. “Some companies once were notorious for periodic ‘inventory sales,’ to just clear out product when they found their tanks were overflowing,” he recalls. “Not anymore. Now they’re more sophisticated, they make a point of knowing what exactly they have in inventory, and they have storage and manufacturing planning tools, like enterprise management software.”
However, he concedes, there is risk now that once-flabby tankage has been trimmed. “There is much less cushion, and it’s a trade-off, trying to balance how much you need to keep on hand to satisfy your customers, versus how much you can stand to hold in storage. If you get into a stock-out situation on the supply side, or have unexpected demand on the finished product side, you can get in trouble.”
That’s where planning can help. “More companies are putting money into planning tools, and into sales forecasts that are really accurate,” Golubock said. “I watch our inventory like a hawk, and have ingrained that into our people.”
“There’s not the same mount of ‘safety’ stock, that’s true,” Valero’s Hoffman conceded, but he also thinks storage capacity needed to be clipped. “In the early 1980s,” he said, “it was not out of the ordinary to have 45 to 60 days of base oil inventory on hand, including all that was warehoused and packaged. But over time, companies don’t want a lot of money tied up in inventory.”
With electronic tank sensors and computerized inventory reporting, Hoffman thinks a 30-day inventory — enough to cover a block production sequence with a little room to spare — is adequate. “Other than to build up supply to cover a planned outage for maintenance, the ideal is to hold yourself to 30 days of inventory.”
Rarely, an independent terminal may perform as a relief valve if there’s a pressing need — such as when a refinery wants to shift products quickly because a hurricane is headed its way — but that’s costly, said Motiva’s Hieronymus. “There’s the cost of transporting the material there, getting it offloaded, then the storage fee, and then you pay again to get it out of storage.”
Instead, Motiva tries to move product from the refinery to company-owned terminals near its customers, or even to the customer’s own storage tanks, where it remains the refiner’s property as “vendor-managed inventory.”
Above all, the tighter rein on storage capacity “requires closer scheduling within refining operations, as well as among customers and suppliers,” Hieronymus said. “Both sides must watch inventories closely.”
Not every lubricant blender is on top of this issue, he added. “Some are skilled, very sophisticated and astute about planning and managing their needs. And some need to make an effort. They’re just not there yet.”