JERSEY CITY, N.J. – Some U.S. API Group I refineries are here to stay, but when a catastrophe happens – when you face unexpected capital needs – you shut it down, Valeros Terry Hoffman told the ICIS Conference here last week.
Some Group I plants will definitely go away. Its just a question of when will the event occur that will make it happen, Hoffman, director of base oil and process oil sales with Valero Marketing and Supply, told the ICIS Pan-American Base Oils & Lubricants Conference on Dec. 3. But some Group I plants will survive.
Why some Group I plants will go away sometime is clear, said Hoffman, responsible for marketing his companys 11,000 barrels per day of Group I base oils. You cant make a current-technology motor oil or automatic transmission fluid with Group I, at least in the U.S. And 50 percent of U.S. base oil demand is for motor oils. Todays lower sulfur and volatility, low viscosity and high viscosity index requirements all mandate Group II+, III and III+ base oils.
But industrial lubricants are the other 50 percent of the market, and these gear oils, industrial and hydraulic fluids, metalworking fluids, process oils and greases are a solid market for Group I, Hoffman continued.
Group I plants are the primary source of heavy neutrals and bright stock, said Hoffman, another reason for survival. There are only two or three Group II refineries worldwide that make bright stock, he said. PIB or polymers can replace bright stock, but cost more.
Byproducts, including wax and aromatic extracts, can also be significant margin contributors to a Group I plant and help it survive, Hoffman said, although he acknowledged that aromatic extracts are likely finished as rubber process oils, thanks to Europes ban on aromatics in tires.
Group I refiners, said Hoffman, face the low viscosity dilemma. We can only process what Mother Nature gave us in a barrel of crude. Fifty percent or more of the output from a Group I plant is solvent neutral 100 to 150 (3 to 6 centiStoke). With viscosity index of 95 to 100, the base oils can no longer be used in ATFs and motor oils that meet current specifications. Group II will soon face the same challenge, Hoffman noted, but most Group II plants have production flexibility. Adding to the Group I dilemma, bright stock production is limited by propane deasphalting capacity, and no one will build a new PDA unit just to make bright stock.
Despite the weakening demand, the primary reason lube refineries have shut down is unexpected capital needs, said Hoffman. Call it the catastrophe theory of rationalization. Examples include Gulfs Port Arthur, Texas, plant, with a hydrotreater fire, and Conocos Ponca City, Oklahoma, plant, with Duosol problems, both in the 1980s. More recently, Hoffman continued, Citgo had vacuum tower issues and Marathon faced excess turnaround expenses, leading to their 2008 lube plant closures.
All the plants were older. If costs rise too much, you shut it down. When a catastrophe happens, you rationalize, said Hoffman.
New competition is a second reason for shutdowns, he continued. Excel Paralubes opened, Petro-Canada expanded, Motiva expanded, Chevron promises a new plant in Pascagoula, Miss., perhaps as soon as 2013. Lube demand wont grow in the U.S., but new-technology supply is growing, Hoffman noted.
Other factors in shutdowns include real or perceived feedstock shortages, and the misfortune of a good lube plant, like Sunocos Group II facility in Puerto Rico, tied to a poor fuels refinery. Sunoco shuttered the Puerto Rican plant in 2001.
On the other hand, some niche lube plants can look forward to a brighter future. American Refining Group in Bradford, Pa., has high base oil yields from its Penn Grade crude, plus specialty solvents and wax businesses. Imperial Oil in Strathcona, Alberta, and Ergon in Newell, W.Va., both have geographic advantages, Hoffman continued, (The further the competition is away from you, the more likely you are to survive.) plus Ergon enjoys good white oil feedstocks. Holly bought two Oklahoma fuels refineries at low prices from Sunoco and Sinclair – a smart move on fuels that likely saved the former Sunoco Tulsa base oil plant.
What options do Group I plants have? They are selling lower technology in a high-tech world, said Hoffman. That means developing export markets and adding production of more desired products if possible. A Group I plant can convert to higher quality by adding hydroprocessing, Hoffman noted. A gasoil desulfurizer can convert a Group I plant to II or II+ for $150 million, replacing everything but the tanks.
But costs are the challenge. I believe it will be capital events that will drive shut downs, Hoffman concluded.