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Base Oil Output Dips, Again

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Base oil production at U.S. refineries reached 27.8 million barrels in the first six months of this year, slumping 5 percent from the 29.3 million barrels manufactured in first-half 2012.

This marked the second year in a row of reduced output from the countrys domestic refiners, whose yields fell disappointingly short of the figures chalked up for January-to-June 2011 (when they cranked out 31.1 million barrels) and 2010 (29.3 million barrels).

Despite this drooping performance, optimists at least can take comfort that U.S. base oil production is well ahead of the recession year of 2009, when first-half output sank to an abysmal 25 million barrels.

This years January-to-June tally included 5 million barrels of naphthenic base oils and 22.8 million barrels of paraffinic stocks, according to data released at the end of August by the U.S. Energy Information Administration.

For those same six months in 2012, U.S. pale oil manufacturers reported producing 5.1 million barrels. Paraffinic base oil output totaled 24.2 million.

Eyeing the naphthenic side of the slate, Ryan Eberly, director of sales and marketing at San Joaquin Refining, said the market all year has been quite healthy. Generally, weve been running fast and at full capacity for some time now. And thats despite having a couple small hiccups, in addition to being down for a planned two-week maintenance in March.

San Joaquin has 8,100 barrels a day of pale oil capacity in Bakersfield, Calif., and production-wise, things have gone very well, Eberly added. During the summer, the refinery did see some power supply issues when electricity demand peaked. The summer heat really affects the grid, and even if we lose power for only an hour, it can be a day or two more before we are up again. Still, we probably have spent fewer than 20 days down so far this year.

Demand has been strong, Im certainly not complaining, Eberly continued. However, we are seeing some length now on the heavies – the grades that go into tires, ink, greases. Its good, but it could be better. On the side of the low-vis products, like transformer oils and pale 60s, thats where more demand is seen, and its been very steady.

Paraffinic base oils contracted more in the first half than did naphthenics, and nowhere was the pinch as severe as at Chevrons Richmond, Calif., refinery, the EIA data shows. Richmond experienced a fire in its crude unit on Aug. 6, 2012, that left downstream units – including its 20,700 barrel a day API Group II base oil plant – starved for feedstock.

From that day until late spring, Richmonds base oil unit rarely was able to muster more than one-third of its usual production volumes, which prior to the fire had averaged a half-million barrels per month. Chevron restored the plant to full operation during May, but had it been humming at its usual rate, it likely would have contributed an additional million barrels to the total U.S. base oil supply in the first six months of this year alone.

Helping to fill that void, U.S. imports of base oils ticked up in the first six months of 2013; 6.3 million barrels of base oil came ashore in the United States, versus 5.9 million in first-half 2012. South Korea, with 2.2 million barrels, led all others in landing base oil in the United States, followed by Qatar (1.4 million) and Canada (just under 1.4 million barrels).

On the export side of the balance sheet, U.S. refiners shipped out 12.5 million barrels, or 45 percent of all first-half production. Thats down somewhat from 14.2 million barrels in the first six months of 2012.

Turning to the present-day scene and the months ahead, sources in mid-September described the paraffinic market as struggling or balanced to long. Speculation also is rising around the likely impact of Chevrons new base oil unit in Pascagoula, Miss. The 25,000 b/d API Group II plant is due to stream in this quarter, and to ship its first commercial volumes in early March, pointed out Stephen B. Ames, principal of SBA Consulting in Pepper Pike, Ohio.

While several new plants have opened in recent years, including in Qatar, Bahrain and South Korea, this one will be very different, Ames declared. All its output is going to be exported – one-and-a-quarter tons a year of Group II. Theyll be shipping 500,000 barrels just to Europe alone, for the merchant market. And Pascagoula will be one of the lowest-cost base oil plants in the world. Others who export Group II to Europe, such as Motiva and Phillips 66, can expect to see some serious jostling, he noted.

Additional markets for the Pascagoula base oil likely will be South America, South Africa and Australia, said San Antonio-based industry consultant Terrence Hoffmann. These new volumes will enable Chevron to be self-sufficient in making finished lubricants worldwide, he said, and will plump up the already-glutted market for Group II and III. And because the Mississippi base oil plant is so large and economically advantaged, he believes it will pressure older, high-cost refiners either to invest in upgrades or live with narrowed margins.

Is Pascagoula a big deal? Absolutely, Hoffmann stated. Who is it a big deal for? For anyone who has to spend money to keep up.

Hoffmann added that he isnt surprised that first-half U.S. production was so low. A lot of people look at things like the total U.S. capacity, and think thats whats produced. In fact, if you estimate an 80 percent operating rate for many base oil refineries, thats probably being generous.

Of the barrels that were produced, he added, a goodly percentage went abroad. If you look at a globe these days, you can see how our market is divided. Asia makes the Group III – or it did until we started getting Group IIIs made in the Middle East – North America has the naphthenics and the Group II, and Europe supplies the world with Group I.

Regarding whats ahead for naphthenics, Eberly of San Joaquin surmised, Well start to see things wind down, maybe sooner than is usual for this time of the year. Some of that may be due to the price increases, which we had to announce in August, along with other refiners. The increase was justified and needed, with crude costs being so high, but refiners here may have lost some export business because of it. And our domestic customers loaded up on purchases to beat the increase, so September seems to be quickly turning more sluggish.

His conclusion: I expect that business will be maintained at a steady level and be OK through October, and then probably fall off a bit in the last two months of the year.

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