Calumet and Lyondell? Not So Fast


LyondellBasells planned switch of its naphthenic base oil and white oil marketing contracts to Calumet wont come without a courtroom battle, as Nynas Naphthenics and Schumann Steier each filed objections in U.S. Bankruptcy Court in New York Friday, to be heard Nov. 4.

As part of its ongoing Chapter 11 bankruptcy reorganization, LyondellBasell solicited bids to replace a contract to supply white mineral oil to Coral Gables, Fla.-based Schumann Steier (SSI) and another contract covering naphthenic base oils sold to Sweden-based Nynas, replacing both with Calumet.

Jennifer Straumins, senior vice president for Calumet Specialty Products Partners LP, said the company declined to comment at this time because it is an ongoing legal matter.

While Calumets Oct. 2 announcement said it would assume the contracts Nov. 1, LyondellBasell public affairs director David Harpole said that has been changed to coincide with the hearing date for the two objections. Our expectation at this time is that the transition will occur Nov. 4, he told Lube Report.

The bankruptcy process permits us to reject contracts that are burdensome and unnecessary to our ongoing business operations, Harpole said. We solicited bids for replacement production, and both of those firms with contracts had an opportunity to participate. Another bidder offered a more attractive opportunity for us, and we chose that other party over previous contracts, which we have the opportunity to reject.

In its Oct. 16 filing, Nynas asked the court to either turn down LyondellBasells effort to end its current marketing contract with Nynas, or adjourn for 90 days so Nynas can investigate further and prepare its case for why the contract should not go to Calumet.

Nynas and LyondellBasells Houston Refining subsidiary have had a naphthenic lubricants sales agreement since August 2007. Nynas agreed to take all of Houston Refinings output of naphthenic base oils. In addition, Nynas said it provided Houston Refining with technical advice and proprietary business information about the products being sold. Nynas said its confidential advice and technical assistance enabled Houston Refining to create and improve Tufflo 60T, which Nynas then purchased and used in its transformer oils.

The filing alleges that Calumet intends to bring to market, starting in January 2010, a product designed to compete directly with a key Nynas product that uses 60T.

Nynas also charged that LyondellBasells decision to reject its sales agreement was not made in good faith.

On the contrary, it appears that the underlying purpose of the rejection may be to enable a non-debtor third party – i.e., Calumet – to unfairly compete with Nynas by obtaining access to Nynass confidential and proprietary information about 60T so that it can use that information to make a competing product, Nynas continued. Throughout the term of the sales agreement, Nynas provided Houston Refining with substantial proprietary data and information that made it possible for Houston Refining to make 60T in the first place. By rejecting the sales agreement and turning that know-how over to Calumet [LyondellBasell is] both violating Section 20 of the agreement and giving an unfair leg-up to one of Nynass competitors.

According to Nynas, the sales agreement contained strict confidentiality provisions prohibiting Houston Refining from unlawfully disclosing the confidential information to third parties or otherwise misusing it. The objection filing notes that the confidentiality provisions survive for five years following termination of the sales agreement.

Nynas said it also learned that Calumet recently approached one of its employees about coming to work for Calumet. This person is familiar with the sales agreement, the products and the relationship between Nynas and Houston refining, and has access to Nynass critical and confidential business information, the companys objection states.

Jay Flint, president/GM of Nynas USA, pointed out that while the bankruptcy court judge will ultimately decide what happens on the motion, the judge doesnt have to negate the entire contents of any existing agreement.

Thats going to be one of the things were going to be pressuring on – if indeed he rules in favor of LyondellBasells motion for creditors, thats one thing, but there are certain elements of the existing agreement that can sustain and should, he explained. And so were going to be arguing on that basis. The proprietary portion is quite a concern. And it is a concern of ours as well that its going to a direct competitor.

Flint emphasized Nynas was committed to the U.S. market regardless of what happens with the LyondellBasell contract. We view the U.S. as not only an important market segment, but strategically, an important supply point for us globally, he continued. That doesnt change as a result of this, we just have to get a little more creative about how were going to solve some things on an interim basis.

On the white oils side, LyondellBasell agreed in February 2008 to sell all of its Duoprime, Duopac, Crystex, Aquamarine and Ideal brand white oil specialties to petroleum products marketer Schumann Steier, which in turn markets and sells them throughout the United States. The agreements initial term was set to expire Jan. 31, 2011. SSI noted it had the option to unilaterally renew the agreement for an additional two-year period.

SSI has asked the court either to deny LyondellBasells motion to reject its existing contract, or to at least provide SSI an opportunity to look further into the new agreement with Calumet.

SSI President Arthur Steier told Lube Report that a key allegation in its filing is the anti-competitive nature of the proposed agreement with Calumet, in terms of the effect it would have on the white oils market.

In its objection, SSI alleges that a LyondellBasell and Calumet alliance would likely give Calumet control over more than 50 percent of the U.S. white oils market. Such a result would threaten to give Calumet a substantial ability to control prices in the market for white oil, the company stated.

Steier said he understands that the matter has been referred to the Federal Trade Commission and the U.S. Department of Justice. “It’s their job to protect the American consumer and we remain confident that they take their mandate seriously,” he said.

SSI said it has purchased about 8 million gallons of white oils from LyondellBasell over the last calendar year (although in a normal economy it would have needed at least 10 million to 12 million gallons of product). Schumann Steier is able to calculate that its damages over the remaining two years of the initial term of the agreement … would be no less than $2.4 million, it told the court.

Although white oils are used by many companies to produce hundreds of products, SSIs filing said the U.S. white oil market is effectively controlled by three domestic producers – LyondellBasell, Calumet and Sonneborn. Domestic producers account for roughly 90 percent of the white oils available in the United States, the document noted, while the rest is imported.

SSI disagreed with LyondellBasells contention that it had thoroughly reviewed available alternatives to rejecting the existing white oil contract, including possible contract amendments with SSI. In its objection, SSI claimed it had agreed to virtually all of LyondellBasells requests during discussions to renegotiate the agreement, but now believed that the company was engaged all along in negotiations to sell all of their white oils to Calumet at what is widely believed to be prices that greatly exceed market averages.

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