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Refinings Bumpy Banner Year


A slow start, liberally strewn outages and a fourth-quarter slump didnt deter U.S. refiners from turning out almost 62 million barrels of base oil last year. Thats a 3 percent gain over 2010, shows data released last month by the federal Energy Information Administration.

Total output may have lagged the 2006 peak of 67 million barrels, but sources said strong margins and buoyant demand kept refiners flush with success – as long as they could keep their units running.

Paraffinic base oil accounted for 50.6 million barrels of the 2011 total output, an increase of 2 percent over 2010 production. Naphthenics put on an even bigger burst of speed, and reached 11.3 million barrels, 7.6 percent higher than 2010.

For both product streams, it was a far cry from the dark days of 2009, when paraffinic refiners could muster only 45.9 million barrels and naphthenics sank to a 20-year low of 9.1 million.

2011 was a stellar year for base oil – at least for the first nine months, said Yvonne Schappell, director of lubes marketing at Paulsboro Refining Co., which has 11,000 barrels per day of API Group I capacity in Paulsboro, N.J. We saw historical margins, we ran smoothly all year, we had no production issues, and in fact were able to help out those who did. At times we couldnt make base oil fast enough.

Chevrons Brent Lok, manager of base oil marketing and production technology in San Ramon, Calif., tended to agree. Despite some issues at the companys 20,000 b/d Group II facility in Richmond, Calif., it was a good year in general. We did not see any major upsets and we didnt see severe shortages; things were just tight, he said. Most blenders could get their product out. Also, we saw China and India growing again, taking more supply. Then Shells GTL was expected to come onstream and maybe loosen up Group III availability, but that never happened – it just got soaked up immediately.

In recent months now were seeing more Group IIIs available in the marketplace, Lok added. Were even being asked to take more. The markets certainly not sloppy though.

Dogged by Outages

Buyers and sellers recall a parade of outages, allocations and sales controls during the year. U.S. refiners American Refining Group, Calumet, Chevron, Exxon -Mobil, HollyFrontier, Motiva and San Joaquin were among those who had operating issues in the first half, as did northern neighbor Petro-Canada. Supply logistics also were hindered by history-making floods along the Mississippi River in May.

Stuff was tight, and it seemed there were a bunch of refinery turnarounds. Motiva had a base oil unit that was causing problems and that put a real crimp in the Group II market for a while, said the president of one large lubricant blender in the Midwest, speaking anonymously for competitive reasons. It took substantially longer to get deliveries, we were on allocation repeatedly, and it was hand-to-mouth at times. Things were cramped and you saw long lead times out there.

Brent Lok conceded that there was rough sledding. 2011 was characterized by lots of planned and unplanned downtime at Group II and Group III refineries. This created real tightness at times, he said. As buyers – Chevron makes Group II, but were a significant net buyer globally – we found ourselves challenged to keep our blending plants supplied.

We also saw allocations and sales volume controls, he went on. Sometimes we werent officially on allocation, but suppliers just wouldnt let us lift more than we took the year before. Or wed have given annual target volumes to the suppliers, and they prorated that to each month, so we couldnt get any variance in those months when more was needed.

Things got better, but not quickly. Motivas scheduled summer turnaround at Port Arthur, Texas, took weeks longer than expected, and when Chevron went offline for a planned six-week maintenance in October, it experienced a fire which kept it sidelined for weeks more. Both companies held customers to Group II sales allocations for much of the year, but each got up and running and was able to remove sales controls in December – just after demand went into the winter doldrums.

At the year end, there was some turndown in production, but thats pretty common and U.S. demand typically drops then every year, said Mike Burnett, managing director, international sales, for base oil marketer Renkert Oil. Heading into spring, some recovery in demand does seem to be occurring, but its very slow; Id say its cautious. Were not experiencing a drop-off, maybe more a leveling off. We havent seen any gain yet in the housing market, for example, which would create demand for electrical insulating oils.

The Group III Blues

Pressure did ease off as the year wound down, Paulsboro Refinings Schappell noted. In the first six months of 2011, we saw a lot of outages during peak demand, but in the last three months excess base oil started to build as supply improved and demand dropped. The fact that Group I postings went down three times in the fourth quarter certainly shows that demand was weaker. But Group III seemed to be tight all along.

Group III, which accounted last year for only about 6 percent of base oil supply worldwide, is a nagging concern, said the Midwest lubricant blender. More products are requiring you to use Group III now. Were also seeing less demand from our customers and retailers for what youd call fighting grade products that can use Group I, like API SH motor oils. More and more, the markets want the current and high-end stuff, where in order to get to the specified Noack volatility, youve got to blend in Group III. Most automatic transmission fluids require you to use Group III too.

As product slates change to where youre required to use more hydrocracked base oils, theres just a huge sucking sound where Group III is supposed to be, this executive added. In another three to six months, things are supposed to be better, with new capacity thats coming on. But most of the need is concentrated into a few viscosity grades, and these were tough to come by.

Inbound, Outbound

EIA also released figures on U.S. imports and exports.

Except for a dip in 2009, lubricant base oil exports have surged since 2001, and reached 24.9 million barrels in 2011, the agency reported. This means a solid 40 percent of U.S. base oil production was shipped out in 2011.

On a net basis, exports took all the gain in U.S. base oil production, and then some. Total domestic output rose by 1.8 million barrels in 2011 over the year before, and exports ate 2.3 million barrels more.

Over a third (9.5 million barrels) of the exports flowed to just three trading partners in the hemisphere: Mexico, Canada and Brazil.

Imports of base oil rose, with 10 million barrels landing on U.S. shores in 2011 versus 9.6 million the year before. South Korea, with 3.9 million barrels, and Canada (3.5 million) are the two largest sources of imports.

What goes out differs from what comes in, reminded Renkerts Mike Burnett, who is based in Brandon, Miss. Exports have been rising due to the fact that were producing a lot of Group II and a lot of naphthenics, more than the rest of the world, and both are experiencing a lot of foreign demand. We see U.S. naphthenics going to Asia and Europe, and our Group II going mostly to Europe, he said.

Most growth in U.S. naphthenics production, he added, can be laid to Ergons expansion of its Vicksburg, Miss., plant, now at 22,000 b/d. Some of this volume definitely is going for export, as it was planned and created for. He also sees good demand in Europe for heavy Group II, as a replacement for bright stock in color-sensitive process oil applications.

The export market is always a possible outlet, said Schappell. It just comes down to whether economics support making the export barrel. We often see most export sales coming at year end, in winter, when domestic markets slow. We exported some product this winter, but timing can be difficult to work out due to pricing and vessel availability. European base oil prices really cratered in December, making this an unattractive outlet for light neutrals in particular.

Heads Up

Last year was a year that made a lot of people recognize, given the shortages, that security of supply is paramount. If you didnt recognize this before, you do now, said Chevrons Lok. Refineries are much bigger than historically, so if one closes – and especially closes unexpectedly – so much volume goes out of the market that its very disruptive.

That means buyers need to make sure they have backup plans for their blending plants, backup formulations, and backup suppliers, he advised. It also seems to me that hydropro-cessing plants, when they go down, they seem to go down for longer periods than our older solvent refining units did. That may be in the nature of big, modern Group II and III plants, so buyers have to be very sure of their supply plans. Thats what our more sophisticated customers are telling us.

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