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Looking Before They Leap?


Hardly a month seems to go by without someone vowing to build or expand a used oil rerefinery in the United States, usually to produce high-value API Group II base oil. If all these proposals make the leap from blueprint to commercial operation, rerefineries will dot the landscape like freckles on a redhead and the country will gain more than 15,000 barrels a day of base oil capacity in a few short years.

Not every project may see completion, of course. Some are but a gleam in their eager owners eye, with pivotal details promised for some unspecified date. But others are moving swiftly to market.

Heritage-Crystal Cleans 2,000 b/d rerefinery in Indianapolis just accelerated its construction plans. It will stream vacuum gas oil this fall, and produce Group II base oil before year end, per an update issued in August.

Universal Lubricants, with one rerefinery in Wichita, Kan., is trying to secure permits to build at least one other and possibly more, in as-yet undisclosed locations. Moreover, a turnaround next month will debottleneck the Wichita plant to reach 780 b/d of Group II.

Used oil collector Universal Environmental Services has lined up $52 million in financing, and with European partner Avista Oil will erect a rerefinery in Peachtree City, Ga., beginning in November. To stream by first-quarter 2013, it will handle 30 million gallons of used oil annually.

Green View Technologies expects to open its rerefinery this fall in Rollinsford, N.H., with yearly capacity to process 5 million gallons of used oil into products to include Group II base oil.

NexLube Tampa has secured permits for its 1,100 b/d Group II rerefinery in Florida, and will launch into construction next year. Plans call for a 2013 opening as well as a lubricants blending plant at the site.

Safety-Kleen, already the worlds largest rerefiner, will expand its Breslau, Ontario, plant next year by 500 b/d, and then build a completely new facility in the U.S. Southeast or Gulf Coast region, adding 45 million gallons of used oil processing capacity.

These dreamers are drawn by the high price of base oil – virgin Group II today costs almost $5 a gallon for the mid-vis grade – and the energetic roll-out of Valvolines NextGen recycled motor oil. Some independent marketers, including Safety-Kleen and Universal Lubricants, already were profitably selling recycled motor oil, but Valvoline brought instant bulk and national recognition to the product category, and also locked up a sizeable amount of the available rerefined base oil. Now capacity must expand to allow future growth.

We are seeing growing interest in both used oil collection and rerefining, and are receiving a number of inquiries from industry operators and private investors looking at ways to enter this sector, Effram Kaplan, a principal with the middle market investment bank Brown Gibbons Lang & Co. (BGL) in Cleveland, told LubesnGreases. Many of the inquiries center on raising capital to establish rerefineries.

There are three important aspects to consider when looking at expanding into rerefining, Kaplan said. You need a proven rerefining process, which may be viewed as the least difficult barrier because there is access to a number of technologies today. The other two barriers can be more challenging. You need access to capital, and a consistent supply of feedstock.

There are businesses that were able to secure debt capital, some in more challenging financing markets, because they had a captive collection network or access to third-party feedstock through contractual supply agreements, Kaplan said. While raising capital for a rerefinery is still challenging today, the difference is the capital markets are very healthy, and there is more of an appetite for putting capital to work.

Theres also heightened interest from the private-equity community. Sponsors are reaching out to us to better understand the opportunities within the industry, Kaplan said.

Others that have looked at the sector in the past are taking a harder look again, citing growing consumer acceptance of Valvolines launch and recent strategic investments as positive developments, added Rebecca Dickenscheidt, director of research at BGL. They have capital to spend and are actively looking for growth platforms in waste-to-value themes.

Scott Parker, executive director of NORA, the Association of Responsible Recyclers in Haymarket, Va., agreed that rerefining is exciting. But dreams must be tempered with pragmatism, he cautioned. One hard fact is that rerefiners cant go collect more used oil than whats generated. If your feedstock is crude, yes, you can dig deeper wells or use new recovery technologies to extract more – but with used oil theres a finite capacity. Every year, its just going to be a set amount based on whats available from quick lubes and garages and maybe some manufacturing locations.

Only improved oil collection can enlarge the supply, he said. We as a nation still are not collecting hundreds of millions of gallons of used oil every year. Twenty to 30 percent is not collected, so the number one priority at NORA is collection.

NORAs members fall into three main groups: used oil generators, collectors and processors, and end-users such as oil burners. These last, especially the asphalt industry, are rerefiners biggest competitors for used oil feedstock, and consume over 80 percent of the used oil collected in the United States. There always has been competition between the burners and rerefiners, Parker commented. These are two separate markets, and they certainly compete for the gallons, but from the wider used oil market perspective, having diverse users is a benefit as a whole.

John Wesley, president of Universal Lubricants in Wichita, Kans., keeps a watchful eye on used oil supply, but with a collection network spread across 14 states, hes not worried. Only about one-third of what Universal collects now goes into its rerefinery so we have the supply network needed to feed additional plants. Still, the field could get crowded, he conceded. In the past 24 months, weve seen Safety-Kleen expand its plant, Avista and UES are building in Georgia, theres Green View in New Hampshire and Heritage-Crystal Clean about to open in Indianapolis. But of every five new ones announced now, Id be surprised to see one get built.

Fortunately, the supply-demand picture this summer allowed rerefined base oils to do extremely well compared to virgin base oils. And it should do very well, Wesley went on. You absolutely cannot tell the difference in color or odor, and in how well it meets the specification. In many cases, the rerefined product is better because youre starting with a much cleaner product than crude. And the process is less energy-intensive as well.

Much of Universals rerefined Group II base stock goes into its Eco Ultra recycled motor oil, shipments of which have already passed 5 million gallons this year. Universal next will seek permits to build several additional plants, envisioning micro-rerefineries which each could handle around 25 million gallons per year of used oil. (For comparison, category heavyweight Safety-Kleen handles about 150 million gallons of used oil yearly at its two existing plants.)

Wed want these new facilities to be close to the same population thats generating the used oil and is consuming the finished lubricants, Wesley explained. Finding big pockets of population allows you to build a series of rerefineries, satisfy the need for green technologies, and spread your risk out.

But neophytes really need to look hard at the feedstock market before jumping in, he added. In this country, our feedstock generation peaked in 2006, when the U.S. motor oil market reached 1.3 billion gallons. Now with the economy down, it was closer to just 1.1 billion gallons of motor oil sold in 2010. So the pool started shrinking just as new-comers were coming to drink from it.

Gary Maxwell is one of those newcomers. He left the asphalt oil business to form Rock Canyon Oil in February. Its plant in American Fork, Utah, can process about 300 gallons of purchased used oil monthly into a VGO thats sold as a fuel lubricity enhancer, but at year end he hopes to triple that and install a clay filtration system to the sites vacuum distillation unit.

This additional finishing step will upgrade the VGO to a marketable Group I base oil, Maxwell said. Even with all the hype over Group II and Group III, 50 percent of the base oil market is Group I, and the demand is still strong. We expect to be able to make a 120 vis, which is the most popular cut, and also a heavier 240-250 vis. Clay filtration is a lot cheaper way to get into the market, but there are limits on where you can sell the base oil, such as straight-grade and 10W-30 motor oils and some industrial oils, and this also is a slowly decreasing market.

Rock Canyon is pondering other options, too, such as building vacuum distillation units at other locations to produce more VGO from used motor oil. Eventually, this VGO could be fed to a hydrotreater and upgraded to Group II base oil – but the investment would have to be much greater than the clay treatment system now planned.

If you want to make Group II base oil, the finishing piece of the process has to be a hydrotreater or hydrofinisher, Maxwell acknowledged. Thats what does the magic and lets you meet the requirements for saturates and sulfur that a Group II has. With clay treatment, you can enhance the smell and color, so its an amber color. But the hydrofinisher will get you that product that everyone calls water-white.

Scott Parker at NORA suggested that those mulling the rerefining business should gauge their regional markets needs and try to right-size the process units to fit. Theres definitely a sweet spot on how big to build a facility. You want it to be as big as possible to maximize overhead and operating costs, but the bigger you make it, the further you may need to go for feedstock. There will be some who want to make it a national business, but there are strong drivers that will require it to be a regionalized business. Once the oil is rerefined, you have to get it to the market and much of the blender market is in the Northeast and Central U.S.

Used oil collection also is ripe for investment, feels BGLs Effram Kaplan. The industry is highly fragmented, so there is real opportunity on a regional basis to consolidate the used oil collection network. With increased scale, collectors could realize improved logistics, route density, and long-term supply agreements and customer contracts, he pointed out.

The timing is very favorable for used oil collectors to consider options, Kaplan added. There is an appetite from the larger strategics to consolidate the industry because rerefineries are being constructed and new products are coming online that will need the used oil.

Rerefining is more capital intensive, and there are higher barriers to entry. Those companies that have rerefineries and captive collection networks are in an incredibly favorable position going forward, he stressed.

All others, urged Parker, should take a hard look at what value-added can be found in this product. NORA has many companies that are not going into rerefining themselves, but I tell our members, every one of them, that they all should at least have a rerefining strategy. You need to work with one or more rerefiners in your region, to diversify your customer base.

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