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The hurricanes that recently hit the Gulf Coast were devastating events, and our hearts go out to those affected. These were bad storms that took many hundreds of lives, damaged and destroyed thou-sands of homes and businesses, and reminded us just how vulnerable we are to the power of nature.

In addition, they painfully exposed a number of chinks in our armor and – although it pales in comparison to the suffering felt by others – revealed some unsettling realities about the lubricant supply chain. One of the most concerning is just how fragile our supply chain has become as a result of mergers and acquisitions, consolidation, just-in-time delivery, and other tactics designed to improve efficiencies and profitability.

The first example of this is seen by looking at the lubricant additives business. In just over 10 years, consolidation reduced the number of full-line lubricant additive manufacturers in the global market from eight to four – Lubrizol, Infineum, Chevron Oronite and Afton – and rolled manufacturing up into a handful of world-scale plants. Lubrizol leads in the United States with roughly 30 percent of total dollar value, and Oronite follows with close to 24 percent. Although they are certainly more profitable due to their scale, consolidation has also made these suppliers and the lubricants industry they serve more vulnerable, since manufacturing is concentrated among fewer suppliers with plants clustered in some of the same geographic areas.

This vulnerability became all too real when Katrina made landfall on the Gulf Coast August 29. With global additive supply already compromised by an explosion that for months had restricted operations at Oronites Singapore plant, the industry could ill afford the second hit it took when Katrina closed Oronites Oak Point additive plant in Belle Chasse, La. This outage, along with associated disruptions in the supply lines that run in and out of the Oak Point plant, had added resonance following Oronites August 11 declaration of force majeure.

The implications of this declaration had been immediate. The second-largest supplier of lubricant additives in the United States said it could not meet its contractual commitments to supply additives. Within days, virtually every major lubricant manufacturer was feeling the pinch, and just about three weeks after Katrinas landfall, most were informing their marketers and direct customers that they were now on allocation. Particularly hard hit were additive supplies for Chevrons heavy-duty motor oils, Shells SOPUS Products passenger car motor oils, and a large percentage of blenders serving the marine and natural gas engine oil markets. In fact, beyond allocation, some of these blenders were telling their customers that they were temporarily out of stock on certain lubricants.

To the credit of the majors, they demonstrated incredible resourcefulness in adjusting to the growing shortfall in additive supply. They traded, borrowed, approved substitution, and even petitioned the API for waivers on engine oil testing and approval in an effort to make use of alternative supply. (API responded with an emergency provisional licensing program on Oct. 3.) But at the end of the day, they still may come up short.

Moving to base stock supply, consolidation has created weakness here, too. This critical link in the chain also has gone through significant compression over the past 15 years. Whereas in 1990 there were 37 U.S. and Canadian plants with total capacity for 243,000 barrels per day, today there are only 23 with a nameplate total of 224,900 b/d. This means fewer plants, each averaging significantly greater volumes. Similar to the additives business, these plants are more profitable and efficient due to scale – and also more vulnerable due to concentration. An estimated 68 percent of U.S. base stock supply now resides within 250 miles of where Katrina and Rita hit.

We got a taste of what this could mean when Rita made landfall only 28 days after Katrina. Several of the base stock plants in the Gulf Coast region shut down operations as precautionary measures. During the time required to shut down and restart the facilities (about one week at full capacity), roughly two-thirds of the Group II base stock required for the production of automotive engine oils was unavailable to the market, and much of it still was offline at this writing. In addition, close to 46 percent of Group I production was locked in. This was on top of what Katrina had already done to compromise the supply of millions of gallons of Group III base stock from S-Oil in Korea. S-Oil has primary storage in New Orleans that, while not directly affected, has not been accessible for an extended period of time, leaving its distributor ConocoPhillips also scrambling.

According to a number of majors, the combined impact of Katrina and Rita on lubricant supply could last well into December. Think about it: Two hurricanes randomly and without purpose hit the Gulf Coast, and the entire U.S. lubricant supply chain experiences significant interruptions for three months or more.

Just how vulnerable is our industry? And how much more vulnerable will it become if it continues to consolidate and run lean in an effort to improve efficiencies and profitability?

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