Ergon Inc. disclosed yesterday that it plans to expand its naphthenic base oil plant in Vicksburg, Miss., by 7,600 barrels per day in 2008. But the company warned that availability of heavy pale oils will tighten significantly toward the end of this decade, due to looming demand from the tire industry.
Other suppliers agreed with Ergons assessment that demand for naphthenics will increase dramatically as tire manufacturers phase out their use of aromatic extracts. The effects have already begun to manifest themselves, they say, in the form of recent price hikes.
The new demand from the tire industry stems from legislation passed for Western Europe. As part of an effort to protect workers from carcinogens, the European Commission has set a 2010 deadline for tire manufacturers to stop using rubber that contains aromatic extracts.
Observers say this will end the tire industrys use of aromatic extracts around the world because most suppliers are global and dont want to complicate their businesses by using the materials in some areas but not others. The solution may vary from region to region, though; sources say tire manufacturers have decided to use severely refined aromatics in Europe but to substitute with heavy grades of naphthenic base oils in North America.
Ergon officials say the course chosen for North America will cause a sharp increase in demand for naphthenic base oils.
There are not enough [heavy] naphthenics being produced globally to replace all of the aromatic extracts, Ergon Vice President James Mike Burnett Jr. said. This is going to represent a very large amount of new demand competing for supply, so large that we believe the only people who will continue to use heavy naphthenics will be those who have a chemical need for the molecule. Those who dont will switch to alternatives, such as paraffinic base oils for the lubricant industry.
Burnett said Ergon planned its expansion with tire industry demand in mind. The project will increase capacity at Vicksburg from 11,400 b/d to 19,000 b/d, and is scheduled to be completed in the last quarter of 2008, in time, Ergon expects, for the bigger part of the phase-out of aromatic extracts. Officials said the expansion will increase capacity for heavy, medium and light grades of pale oil at ratios consistent with the plants current capacity. The additional capacity will include 2,500 b/d of bright stock produced from naphthenic crude.
Other naphthenic suppliers agreed in general with Ergons forecast, saying the additional demand will drive up prices to the point that pale oils stop being an economic option for some applications and are chosen only based on their chemical properties.
Suppliers say some tire makers have already taken small steps in switching to naphthenics and that prices have already been affected.
In recent months weve been raising our prices faster than crude oil prices have been rising, and thats been driven mostly by increased demand, said Jack Eberly, director of sales and marketing of special products for San Joaquin Refining, in Bakersfield, Calif. But the biggest part of the increase [in demand] is still coming, and its going to drive up the market value for naphthenics.
Ergon has reduced competitive allowance discounts for customers, at least in part because of demand from the tire industry, and plans to continue doing so the rest of this year.