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The Oncoming Train


PORT ARTHUR, Texas – Early next month, Motiva Enterprises LLC is scheduled to open an expansion of approximately 15,000 barrels per day at its base oil plant here. Thats an eye-grabbing number certainly, but the project has another that is even more amazing: 40,300 b/d, which will be the new capacity of the facility. At that size this will be not just the biggest base oil plant in the world, but by far bigger than any other plant — today, in the past or in the foreseeable future.

The numbers are much more than novelties, carrying significance both for Motiva and the rest of the base oil market. The company claims the plants scale gives it advantages in terms of operations and marketing. For the market, the expansion brings a huge infusion of Group II barrels at a time when consumption of highly refined oils is rising. It remains to be seen just how demand and supply will balance, but some industry observers say there is bound to be downward pressure on prices.

Tale of the Tape

Even before the expansion the Port Arthur plant was the worlds biggest base oil facility, but just barely. A catalyst change in 2004 increased its capacity to 25,000 b/d, slightly ahead of S-Oil Corp.s plant in Onsan, South Korea, which lists at 24,500 b/d. With its expansion, however, Motivas plant will be a whopping 64 percent larger than its nearest rival.

It will also far surpass the former size of Azerneftyags plant in Baku, Azerbaijan, which reportedly had capacity in the neighborhood of 29,000 b/d before downsizing after the breakup of the Soviet Union. It also out-weighs one-time size champ, ExxonMobils Baytown, Texas, facility (which hit 32,000 b/d in the 80s, before slimming down to its present 21,000). And though numerous new plants are scheduled to be constructed in the next five years, none approach the size of Port Arthur. The closest is a gas-to-liquids plant that

ExxonMobil and Qatar Petroleum plan to open in Ras Laffan, Qatar, in 2011, pegged for 30,800 b/d.

One might expect a plant that is so much larger to enjoy economies of scale that give it cost advantages over competitors. Industry analysts say Motiva will derive only marginal savings because the expansion is actually a separate new production train – the third within the Port Arthur refining complex. That contrasts, for example, with several large ExxonMobil plants that consist of single trains.

If [Port Arthur] was a single-train operation, the size would be very significant because the additional capacity would not require additional people, said Stephen B. Ames, principal of SBA Consulting in Pepperpike, Ohio. Then there would be tremendous cost savings.

Motiva, a 50/50 joint venture between Shell Oil Co. and Saudi Refining Inc., generally agreed with that assessment but contended that the expansion will allow it to reap a different type of efficiency. The plant will make six grades of oil after the expansion: Group IIs of 2, 3, 4, 6 and 12 centiStokes, and a 5 cSt Group II+. Under normal operating conditions, one of the three trains will be devoted to a single product, while a second will make two products, one essentially a side-cut. That means those trains will be able to run continuously without block switches, avoiding production time lost when changing from one product to another. Those trains will still resort to batch production periodically – for example, when one train shuts down for maintenance – but officials said production rates will benefit significantly.

With this project, we are taking the process to what we believe is its most efficient operating strategy, Major Projects Manager B.G. Gil Davidson said. The stream-lining has the capability of increasing the plants overall capacity by 3 percent to 5 percent at a later date, he said, on top of 40,300 b/d.

On the sales end, officials said the expansion gives Motiva an edge with big multinational accounts.

Many individuals talk about base oil and lubricants being a global market, Base Oils General Manager Gerry Jackson said. With the large size of the plant and a location that provides easy accessibility to many modes of transportation, we now can supply oil to large customers on a global basis.

Bracing for Impact

The market cannot help but feel a project that increases Group II/III capacity in North America by 14 percent. The actual effects, though, depend on a few other variables: How much will demand increase? When?

And where?

Taking location first, many in the industry say that Europe and Asia, like North America, have a growing need for Group II oils, and that the size of the expansion will force Motiva to seek customers in those overseas markets. Motiva, however, suggests that most of its barrels will remain in the Western Hemisphere. The company has sold mostly to U.S. blenders in the past, and although it speaks of the expansion suiting it to become more of a global supplier, Jackson explained that this will probably mean occasional shipments to Europe or Asia to meet specific needs, rather than steady flows.

We dont see a need to export a lot of excess barrels, he said. If the right [export] opportunity presents itself, well be able to consider it. But we will still be focused on the Americas.

Motiva officials contend there is already unmet demand for Group II in North America, represented by the use of Group I-Group III blends in some passenger car motor oils. In addition, the company and outside observers expect demand to make another big jump this year with the commercial introduction of the next heavy-duty engine oil upgrade, PC-10. According to some, the specifications performance demands will prohibit use of Group I oils, which account for most of the segments base oil content. HDEO demand in the United States is 385 million gallons per year, according to the National Petrochemical and Refiners Associations annual Report on U.S. Lubricating Oil and Wax Sales, and the market has been quick to embrace new specifications the past two years.

I think Motivas expansion is wisely timed because of PC-10 and also because of new diesel specifications that are coming in over in Europe, Ames said. Whatever market they look at, it should be able to sop up those new barrels in a few years.

Other observers say PC-10s impact has been overstated. Some note that similar predictions were made about PCMO specification GF-4 before it came to market in 2004, with many saying it would preclude use of Group I oils. As it turned out, some marketers depended entirely on Group IIs, but others used blends of Group I and Group III.

Out of the Tunnel

Whenever a large dose of additional supply hits a market, it carries the potential to depress prices. Not in this case, according to Motiva. In November, Jackson said the company had already placed most of the new barrels and, while declining to discuss pricing, said they appeared not to have had a dramatic impact on the market.

Observers, however, expressed skepticism that so much volume could be added to the market without roiling it. Motiva is making an addition of about 60 percent to its current capacity, said Milind Phadke, project manager with Kline and Co., a consulting firm based in Little Falls, N.J. Consequently, there is tremendous pressure to ramp up sales volume. As a result we predict that Motiva will be aggressive on pricing to build up its customer base.

He and others said the industry can take a lesson from 2004, when the price premium for Group IIs disappeared. Over the preceding three years, Group II suppliers had gradually raised posted prices in relation to Group I oils until the spread reached 9 cents per gallon. In mid-2004, Motiva chipped away at the spread until the posted price for one of its heavy grades was equal to the lowest-priced Group I of the corresponding grade. The price for a light grade actually fell a nickel below the Group I price.

Those actions pressured other Group II suppliers to lower their own prices in relation to Group I, though not as much as Motiva. Motiva now acknowledges its actions were caused in part by the 2,500-b/d increase in capacity gained from its catalyst conversion.

Group II suppliers subsequently restored the Group II premium, which ranged from 4 cents to 14 cents as this article went to press, but industry observers say it could disappear again as Port Arthurs new volume hit the market.

Fifteen thousand additional barrels of [daily] supply will flood the Group II market in the U.S., driving prices down, said Jamie Brunk, senior consultant with Dallas-based Solomon Associates. It has to happen – laws of supply and demand apply. He said that to place that additional volume would require taking business from another supplier or exporting the excess. In the first case, he said, other suppliers end up with excess capacity that pushes prices downward.

Base oil marketers have historically tried to export excess barrels and not crater the U.S. market. Im not so sure that this works anymore as the market is much more of a worldwide one rather than regional.

Kline officials suspect Motiva may have placed a large chunk of its output with one of its parent companies.

Shells stake in Motiva implies that it evaluated and approved the expansion, said Geeta Agashe, director of the firms Petroleum and Energy Practice. Shell has also been closing down base stock refineries. And it is putting a global blend book in place, which will standardize lube products and blend components across the world. All of this suggests that a significant portion of the expansion may be absorbed in the Shell system. (Shells portfolio of lubricant brands includes Pennzoil, Quaker State, Shell, Rotella and others.)

It may take a while before the expansions impact can be clearly assessed. The market is still recovering from Hurricane Rita, which forced four plants, including Port Arthur, to shut down temporarily last fall. Supply remains unusually tight, and sources say it still could be weeks before demand and supply return to balance. In addition, Motiva plans a maintenance shutdown of one of its existing trains in April and will be working until then to build inventories.

Still, the expansion has already grabbed the industrys attention. Given its size, how could it not?

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