Citgo Petroleum Corp. in an April 2 letter informed customers that it plans to reduce production at its Lake Charles, La., lubricants and wax refinery – which has 9,500 barrels per day of API Group I base oil capacity – to concentrate on its finished lubricants business.
In its notice to customers, Citgo explained the decision was consistent with a comprehensive evaluation of its lubricants business. As of the date of this letter, any purchase orders for base oil, process oil or wax placed with Citgo Petroleum Corporation will be subject to review by sales management prior to acceptance, the company said in its letter.
Citgo spokesman Fernando Garay told Lube Report it was company policy not to comment on operations.
Stephen Ames, of SBA Consulting in Pepper Pike, Ohio, told Lube Report that economics and supply outstripping demand have led to a number of Group I base oil refiners cutting back this year.
There are a number of U.S. Group I refiners who have cut back, without making it overt, Ames said. In the case of Citgo, it looks like theyre limiting merchant sales with plans to operate the plant to meet their internal demand.
In todays market, it is more profitable to upgrade vacuum gas oil to fuels rather than to base oils, Ames explained, if the refiner has the cracking capacity to do so. It depends on each individual refinery, he said. Whilst Citgo and certain other refiners can buy-in VGO so as to be able to run both the base oil and fuels operations at full capacity, current market conditions are such that light and medium neutrals are not profitable on an absolute basis, let alone on an alternative processing basis. Obviously, Citgo is cutting back Group I sales because theyre not making money on its production and would rather make fuel out of the base oil feedstock.
Citgo subjecting purchase orders to review could refer to certain viscosity grades remaining available, Ames suggested. Theyre probably still making heavy neutral and brightstock as those viscosity grades should have relatively good margins, he added.
Overall, the worlds base oil market was long last year, Ames said, and the surplus will grow and become yet larger in 2008.
This year two million tons of new capacity will stream globally, whilst demand will only increase by perhaps a half-million tons, Ames said. Thats only going to make todays situation worse. Moreover, there will be additional capacity coming onstream in 2009, 2010 and 2011 that will again be in excess of the growth in demand.
According to Citgos Web site, the Lake Charles complex encompasses 2,000 acres and includes both the Citgo refinery and Lake Charles lubricant and waxes plant. Together, the two facilities employ more than 1,200 full-time employees.