Base oil refiners in the U.S. energetically cranked out their highest first-half volumes since the 2009 recession, recent government data show. From January to June this year, refinery net production of lubricant base oils totaled 31.8 million barrels, versus 28.9 million barrels for January-June 2014.
The first-half output matches the level reported for the second half of 2014 too, which was also 31.8 million barrels, according to the U.S. Energy Information Administration.
Paraffinic base oils accounted for 86 percent of the first-half volume (27.3 million barrels), while the remaining 4.5 million barrels were naphthenic base stocks. The data were extracted from EIAs Petroleum Supply Monthly published on Aug. 31.
The reason for the yearlong spike in supply is obvious, pointed out Steve Ames of SBA Consulting in Pepper Pike, Ohio. It was the big gush of capacity that arrived last summer with the startup of Chevrons base oil plant in Pascagoula, Miss. That added 25,000 b/d of API Group II capacity to the scene, and bulked up the nations base oil processing muscle by 10 percent.
How much of Pascagoulas capacity is actually operating right now, though, is a mystery. Since mid-summer, a number of sources – ranging from oil traders to large buyers to rival producers – have whispered that the base oil operation appears to be limping, and was heading into an unplanned maintenance turnaround.
Chevron has been mum regarding the root of the rumored trouble, and has not responded to requests for an update on the plants operating status and what (if any) maintenance work it may need. In early August, a Chevron spokesman simply said the company did not discuss its day-to-day operations. Chevron also makes Group II base oil in Richmond, Calif., and at its joint-venture GS-Caltex plant in Yeosu, South Korea, and supplies customers from stockpiles around the world.
The full repercussion of another new slug of capacity, ExxonMobils expansion at its refinery in Baytown, Texas, cannot be discerned yet from the EIA data, either. Baytowns expansion officially came onstream in May, when the company announced it was fully operational, but the new unit was commissioned some months earlier. LubesnGreases estimated the expansion to be 7,000 b/d of Group II base oil, while others suggest the expansion was in fact much larger – possibly more than 10,000 b/d. A clearer picture of Baytowns impact on U.S. base oil volumes may emerge in early 2016, when government data for all of 2015 is made available.
Looking more closely at the current first-half data, paraffinic volumes rose 12.7 percent, versus the output reported in the first half of 2014. Paraffinic production was 27.3 million barrels in the first half of 2015 and 24.2 million barrels in first-half 2014; and 22.8 million in 2013s first six months
Pale Oil Drivers
Naphthenic refiners did not enjoy the same growth spurt though, and continued to see volume shrinkage. Pale oil output was slightly under 4.5 million barrels in 2015s first six months, versus 4.6 million barrels in 2014s first half and 5.0 million in first-half 2013.
Terry Hoffman, a San Antonio-based consultant with long experience in base oil refining and marketing, believes that naphthenics face steep hurdles, including a general slump in demand and a head-on challenge from lightweight 2 centiStoke Group II oils, which have made inroads into the transformer oil market (a traditional naphthenic stronghold).
Pale oils could get a lift from another trend though: rising tire production in the United States. Continental Tire has announced that theyre going to double the capacity of their South Carolina plant next year, and a couple of Chinese and Korean tire makers are also opening new plants in the Southeast United States. So there will be more demand for heavy naphthenics, Hoffman states. The U.S. has always favored heavy-vis naphthenics for tire-making and rubber process oils.
Others link the declining pale oil supply to the depletion of naphthenic crude fields. Not so, counters Ryan Eberly, sales and marketing director at San Joaquin Refining in Bakersfield, Calif. San Joaquin operates the only naphthenic base oil refinery on the West Coast, with 8,100 b/d capacity.
Weve got all the crude we need, were sitting right on top of it, Eberly told LubesnGreases. And we buy only from major crude suppliers. San Joaquins units are designed to run crudes within a certain API gravity range though, he conceded, which narrows its feedstock options.
Naphthenic producers do face strong challenges from the current glut of low-cost Group II base oils, he continued, especially in applications where customers can toggle between the two types. Grease manufacturers have shown strong preference for pale oil, Eberly continued, but overall demand has been pretty soft. Right now, it looks like buyers are working hand-to-mouth because of the sudden downturn in prices. People are afraid to buy in big volumes – afraid that if they buy today, the same barrels will be cheaper tomorrow.
Exports and Imports
Global trade in base oil continues apace, and the United States is a major player in this arena. EIA data show that that U.S. exported 13.5 million barrels of lubricant base oil in this years first half – 42 percent of the countrys entire production.
The top five country destinations for U.S. base oil exports in the first half of 2015 were Mexico, which took 2 million barrels; Brazil, with 1.4 million barrels; Canada (1.3 million); Belgium (1.2 million) and India (783,000 barrels).
A lot of base oil flows into the country, too, and that tide continues to rise. More than 6.6 million barrels landed on U.S. shores in the first half, compared to 5.4 million barrels in first-half 2014. Most of this inflow is Group III base oils, which are not made in the United States but are in strong demand for blending SAE 0W-XX multigrade engine oils and automatic transmission fluids.
The largest source of base oil imports was South Korea, with 35 percent of the total (2.3 million barrels). That was a 49 percent gain over last years first half, when imports from South Korea dipped to 1.6 million barrels.
The next-largest source of U.S. base oil imports is Canada, which delivered nearly 2 million barrels in the years first half, a 15 percent gain versus 1H 2014.
Two newer sources, Bahrain and Qatar, together accounted for 25 percent of the imports in the first half, with Qatars volume amounting to 1.2 million barrels and Bahrains being 486,000 barrels. Bahrain is the home of Bapco Lube Oil, a joint venture between Finlands Neste and Bahrains national oil company, which has 8,200 b/d of Group III capacity.
Qatars base oil is entirely sourced from Pearl, a gas-to-liquid facility making Group II and III base oils that are unavailable as yet to anyone but Shell Lubricants. Shell is a co-owner of the joint venture plant, along with Qatars national oil company; Pearls capacity totals 28,000 b/d.
Wax Output Slides
The EIA data also confirm the continuing slide in U.S. wax production, which sank to 896,000 barrels for the first half of 2015 – down 25 percent from the 1.2 million barrels reported in first-half 2014.
Eighty-six percent of this (771,000 barrels) was exported to foreign wax processors and users, especially Canada, which alone absorbed 566,000 barrels. Toronto-based International Group Inc. is North Americas largest wax processor, and much of its output reenters the U.S. as finished products, sources reminded.
Another 101,000 barrels of U.S. wax landed in Mexico, which has a thriving candle-making industry; many of these also return to the United States. Smaller amounts of U.S. wax went to India, China, France, Belgium, elsewhere in Europe and Latin America.
On a global scale, base oil is about than 1 percent of the crude oil barrel, and wax is barely 0.1 percent of the crude barrel. Wax production has been snuffed out by processing changes at refineries, such as at ExxonMobil Baytown, one of the latest to quit making wax.
Its a minor molecule, and its highly dependent on a certain type of crude, remarked a marketer of specialty waxes. Its not in aromatic or in asphaltic crude, and its not economically extractable from naphthenic crudes. You need a waxy paraffinic crude. One great source used to be the Daqing crudes in China, but that field is dwindling now. And nobody is building new [solvent dewaxing] units to extract wax any more. Im just waiting to see who falls over next.
Outlook: Wintry
The EIA collects data on refinery net production of petroleum products, and aggregates it in the Petroleum Supply Monthly after a lag of two months, so full-year 2015 data wont be available until March 2016. The agency also does not collect production data from rerefineries, so the figures above do not include volumes from seven modern rerefineries which hold roughly 5 percent of U.S. base oil capacity.
Heading into the final quarter of the year, San Joaquins Ryan Eberly anticipates somewhat slow activity on the naphthenics side. For one thing, we manufacture asphalt, and thats 40 percent of our residuum. But asphalt demand all goes away in the cold, rainy months and thats when we slow our runs. By late October-early November, things will really slow down.
On the paraffinics side, the oft-heard concern is how to balance slates to create enough heavy and light base oil cuts. A number of U.S. refineries are now running low-cost crudes from the Bakken and Eagle Ford fields. These are lighter than conventional crudes, and with fewer heavy molecules going into the refinery, the heavy-viscosity base oil yield suffers.
That has left the market very long on light-viscosity base oil and gasping for heavier cuts such as 600 vis grade, SBAs Steve Ames says. Everyone is having trouble getting rid of light neutrals, and their tanks are pretty much chock-a-block full. Were seeing big exports of light neutrals to places like India, via traders.
Ugh, exclaimed an executive in the Houston office of a base oil supplier, speaking off the record. You do not want to go to India unless you have to, and have no alternatives. The economics are really ugly, not attractive at all.
This too will pass, the oil executive said pragmatically. Even the current snugness in the supply of heavier viscosity grades could flip around like a weathervane. Everyone wants the 600 cuts, the heavy molecules. But even there, the market could go long instantly if the people having problems can solve them. By the first quarter of next year, who knows? We could be long on 600.