Valero Plans Base Oil Exit at Paulsboro


Valero Energy Corp.s Paulsboro, N.J., base oil plant is in line to join the list of Group I producers that have closed in recent years. Officials say the 11,500-barrels-per-day plant will exit the base oil business, though probably not until 2007 at the earliest.

A company spokeswoman told Lube Report yesterday that the plant will stop making base oils in order to boost the profitability of the overall Paulsboro refinery. The company first stated its intention last month at an energy industry conference in Houston.

Base oil industry observers have predicted additional closures of Group I plants due to the markets continuing shift toward more highly refined stocks. Stephen Ames, of SBA Consulting in Pepper Pike, Ohio, said it is an obvious choice for Group I producers that do not make finished lubricants – especially in light of the high margins that fuels have yielded the past two years.

Im not at all surprised, said Stephen Ames, principal of SBA Consulting of Pepper Pike, Ohio. If you look at Valero [or other refiners that produce Group I base oils but not finished lubricants], they are facing less demand for those products and, at the same time, very strong returns on fuels.

Base oil demand has steadily shifted from Group I to more highly refined stocks during the past decade, driven mainly by growing demand for oils with greater oxidative stability, higher purity and higher viscosity indices. Including a large expansion that Motiva plans to open next month at its Port Arthur, Texas, plant, Group II and Group III base oils account for 57 percent of paraffinic capacity in the United States. Just seven years ago, Group I stocks accounted for two-thirds of capacity.

Numerous Group I plants in the United States, Europe and Australia have closed in recent years, but observers said the U.S. remained over-supplied in the category. Many agree that Group I demand will fall further this year with the commercial introduction of the next diesel engine oil upgrade, PC-10.

Valero Senior Vice President of Refinery Operations Rich Marcogliese announced the plan to stop making base oils at Paulsboro during a Dec. 15 presentation at the Questions in Energy Conference hosted by Morgan Stanley. Senior Vice President for Corporate Communications Mary Rose Brown elaborated on the decision yesterday, explaining that the base oil plant limitsthe refinerys ability to use different types of crude oils. Sweet crudes have higher base oil yields, but sour crudes have become increasingly economical the past couple years.

The [lubricating base oil] operation is profitable today, butthe crude limitationsimposed by the production oflubes impede the refinerysprofitability, Brown said. Also, future changes in the marketwill impact the profitability of the lubes business. For example,higher technology motor oils requirethat we either change to a fuels operation or invest significant capital.

She added that Valero has not yet decided when to stop making base oil at Paulsboro but said it does not anticipate doing so before 2007. The company plans to continue making naphthenic base oils at its refinery in Three Rivers, Texas.

An official at Kline and Co. consultants, of Little Falls, N.J., said yesterday that the Paulsboro plant has advantages and disadvantages but that the technology it uses would make it relatively expensive to upgrade.

We have always considered Valeros Paulsboro lube basestock plant to be at some risk for closure, said Geeta Agashe, director of the firms Petroleum and Energy Practice. This risk, however,was reduced by the fact that it had a long-term contract to supply basestocks to ExxonMobil.

Hence, it will be critical to understand if there is an issue with this contract. For if there is thenValero will have to find new buyers in the marketplace for its Group I base oils, and you know that this can be tough.

Brown declined to discuss the contract with ExxonMobil, citing a confidentiality agreement.

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