Road to Recovery: Stocking Up for Future Storms


Editors note: Over the past year, the U.S. lubricant industry was buffeted by an unprecedented series of disruptions to supplies of raw materials. This week Lube Reportconcludes its three-partseries of articles reporting on the strides made toward recovery – and the distance yet to go.

When Hurricane Rita bowled ashore last August, it forced the closure of four base oil plants, causing the biggest disruption in memory to the U.S. lubricant industry. The storm left42 percent of paraffinic capacity in the United States idled for weeks, depleting supply chains and leaving the industry poorly positioned to cope with subsequent incidents.

It would seem a prudent idea, then, for the industry to lay away extra base oils for this years hurricane season. Indeed, suppliers and buyers have decided to do just that. But stocking up is easier said than done these days, and to date it remains mostly just an idea.

Market sources say refiners have been unable to build up extra inventories – mostly because they are still struggling to recover from the hurricanes and a series of other disruptions. Lube blenders say they, too, have yet to replenish drained supply chains and have also been choked by transportation difficulties.

As aresult, the industry has less – not more – inventory than it did a year ago. That predicament has many people nervous as they keep an eye on the Atlantic and an ear to forecasts.

Hurricanes Katrina and Rita impacted all segments of the U.S. oil industry and underscored the vulnerability of having so many drilling rigs, oil refineries and petrochemical plants – not to mention transportation hubs and networks – in and along the Gulf of Mexico. Sources say all of those industries are determined to be better prepared in case hurricanes strike again this year.

Its a top priority within the industry, Valero Vice President of Government Affairs Jim Greenwood told Lube Report yesterday. He was part of a panel that discussed the issue at this years annual meeting of the National Petrochemical and Refiners Association. You cant prevent hurricanes, but companies are doing everything they can to try to avoid the level of disruption we saw last year.

The Gulf Coast is a busy intersection for Atlantic hurricanes, and it is easy to understand the concern that causes for the lubricant industry. Fifty-eight percent of base oil production capacity in the United States is at plants along the coast. Fully 72 percent is in states that border it.

Sources say base oil suppliers undertook earlier this year to increase inventories above levels that they carried prior to last years hurricanes. They also decided to move inventories away from plants and existing terminals – either to other locations along the gulf or out of the region altogether.

The damage that Rita did was really unprecedented, and I think there was a sense that
blenders gave the base oil companies a bit of a pass because no one expected anything like that, one buyer said. But I think buyers also feel like suppliers need to be better prepared for that kind of thing in the future and that there wont be as much tolerance for goingthrough that kind of experience again.

Many sense a heightened need for a supply cushiongiven that the National Hurricane Center forecasts a busier-than-average hurricane season this year. The season runs from June 1 through Nov. 30.

Most base oil producers contacted for this article declined formal comment on inventories. Privately, however, suppliers confirmed that todays levels are actually lower than they were a year ago because they were drained so low by theRita, along with fires and other subsequent disruptions at severalplants.

According to the U.S. Energy Information Administration, base oil stockpiles at refineries and bulk terminals sank to 7.8 million barrels in March. That represented a decline from10.4 million barrels in August and compared to a March average of 10.6 million barrelsfrom 2000 through 2005. The latest data from the EIA showed the beginnings of a rebound in April, as inventories rose to 8.1 million barrels. Sources say thattrend has continued the past two months but that the market has yet to fully recover.

Theres no question [the industry has] far less inventory than we had going into hurricane season a year ago, an official with one refiner said. He explained why progress has been slow.Im sure that other companies are in the same situation we are. Almost every day we face a big decision because one of our customers has called and said, Were in a real bind. Can you send us some more oil or move up our delivery. Literally its a choice between building inventories or keeping a [blend] plant running. Faced with that, we try to help the plant keep running.

Suppliers say they have made more progress moving inventories to different locations, but here, too, they face obstacles. One is simply finding available tanks. EIA statistics indicate that working storage dedicated to base oils has fallen in recent years – from 20 million barrels in January 2000 to 14.1 million barrels at the start of this year. Terminal operators say they have received inquiries from base oil companies looking to lease new tanks, but they have little to offer.

Weve been building tanks steadily for the past six years, but there is so much growth in demand from all kinds of [industrial] segments that we can hardly keep up, said Paul Gray, sales manager for Intercontinental Terminals Co., which operates a chemicals terminal in Houston.

SK E&P Co. was one of the few suppliers willing to discuss the steps it has taken. The Houston company is a U.S. subsidiary of South Korean refiner SK Corp., a major importer of Group III base oils to the United States. Its main terminal is in Houston, but is also sells oils from a terminal in Los Angeles.

We want to try to build our inventories to the point that we have a full month of supply on hand, General Manager Y.M. Park said. He estimated that the company is a few months from reaching that goal, partly because it is still recovering from operational problems earlier this year at its plant in Ulsan, South Korea, but also because it needs more storage space. Park said SK is considering locations on the West Coast and in the Midwest.

Were looking for locations that have enough space and also that will begood locations for our customers, he said. Of course there is a cost to us to carry more inventory. But we had a lot of support from our customers [the past year], and we want to do what we can so they are not inconvenienced again.

Lubricant blenders say they wouldlike to protect themselves bybuilding up their ownbase oil inventories, but they also face obstacles. Like suppliers, many blenders were forced to drain inventories in the wake of disruptions, and they are still trying to restockbothbase oils and finished lubes. Smaller independents generally have little storage space to spare. Larger companies may have tanks but are having difficulty filling them because of transportation issues.

I think some suppliers are running well enough now that they could start selling some extra oil, an official for one blender said. But there is a real shortage of both rail cars and barges, and thats limiting us from getting anything beyond the volumes we need for ongoing operations.

Several sources speculated that the industry may be able to build base oil inventories back up to normal levels by the end of the third quarter. That is little comfort, though, as summer warms the gulf, making conditions more conducive for bigger storms.

The industry is digging itself out of a hole, but its not there yet, a supplier said. People are worried about that, because if we have plant outages from another hurricane – or a fire or strike or any other reason – it will throw the market right back into crisis again.

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