After blasting along at an accelerated clip last year, U.S. base oil refiners eased off to a more temperate pace in first-half 2016. They produced a total of 29.1 million barrels from January to June, according to data released Aug. 31 by the federal government. Thats a decline of 2.7 million barrels-or 8.4 percent-from the same period in 2015, when output was a brisk 31.8 million barrels.
The 29.1 million barrels generated in the first half included 24.7 million barrels of paraffinic base oils and 4.4 million of naphthenics, according to the Energy Information Administration. Versus first-half 2015, those numbers represent declines of 9.4 percent and 2.7 percent, respectively.
The cliff-drop from 2016s second half is even more stark: Production reached 33.8 million barrels over the six months from July through December, and pushed the bottom-line total for 2015 to 65.6 million barrels. To match that fulsome figure, producers would have to beget more than 36 million barrels in this years second half-which is simply not in the cards, sources agree.
A variety of forces were blamed for spiriting away the vanished 2.7 million barrels of base oil output. First, by all accounts buying and selling of base oils was only tepid in the years first half. Refiners appear to have taken advantage of that slackness to work off inventories, perform needed maintenance and trim operating rates so that supply could not overshoot demand.
Still, 2.7 million is a staggering number of barrels to shed in just 180 days, said Terrence Hoffman in San Antonio, Texas. Its hard to account for-like having a whole, major lube plant missing for half a year! the base oil marketing consultant exclaimed.
Of course that didnt happen, but capacity totalling nearly 70,000 b/d did get taken down for all or part of February, taking a sizeable bite out of supply. Hoffman also reminded that ExxonMobil began taking steps to permanently close its 10,000 b/d API Group I refinery in Beaumont, Texas, in March. But its final shudders came as a whisper, not a bang. Beaumont had operated far below its nameplate capacity for at least four years, and so that had little impact, he opined.
Meanwhile, we saw a lot of imports coming in, which may have discouraged operators from operating at higher rates and possibly displaced some domestic supply, Hoffman continued. You also saw customers holding back on making purchases well into February, hoping to see prices come down, so there was less need to run hard early in the year.
The U.S. market was remarkably firm in the first half of the year, and the countrys economy has been just chugging along. Its steady-as-she-goes, confirmed Joe Rousmaniere, business development manager at base oil marketer Chemlube International, in Harrison, New York. Only keep in mind that the world has lost a lot of API Group I base oil recently. Kuwait Petroleum closed its Group I plant in Rotterdam, Colas shut its refinery in Dunkerque, France, and Shell shut down in Pernis, Netherlands, while here in the U.S., ExxonMobil closed down Beaumont. So were starting to see a crunch on the Group I side of the business, and an even bigger impact on the wax business.
Another factor was that refiners ended 2015 with their tanks overflowing with unsold product, which may have enabled them to tackle some needed maintenance projects in a more leisurely way. It turned out that February was chock-full of planned and unplanned events that shut down a number of plants for part or all of its 29 short days, remarked Mike Smith, general manager of specialty petroleum marketer UniSource Energy, in Naperville, Illinois. Among the affected plants were:
Motiva, which began a routine maintenance on one of its three base oil trains at Port Arthur, Texas in early January and didnt wrap up the work until the last week of February. Port Arthurs three trains have a combined 40,300 b/d of Group II capacity, although only one was in turnaround.
Calumets Shreveport, Louisiana, base oil plant was partially shut down for a scheduled maintenance for three weeks in February. Calumet said only its heavy grades were affected by the outage, and the company first ensured that it had built inventories ahead of time to keep customers supplied. Shreveport has 4,800 b/d of API Group I capacity and 7,000 b/d of Group II.
Cross Oil experienced a fire in early January at its 5,000 b/d naphthenics plant in Smackover, Arkansas. The fire damaged the refinerys hydrotreater and cooling process equipment, and forced Cross to declare force majeure on all refined products, including base oils, and to allocate supply to existing customers. After a careful restart at the end of February, Cross was able to finally lift the force majeure in early March.
Ergon Inc. performed a turnaround of its Vicksburg, Mississippi, plant in the first quarter, likewise building reserves first to keep customers supplied. Vicksburg has capacity to produce 22,000 b/d of naphthenics, and currently is launching an extra-heavy Group I bright stock into the marketplace.
San Joaquin Refining began a routine turnaround in January on its 8,100 b/d pale oil plant in Bakersfield, California, and completed it during the first half of February. With its inventories nearly depleted, it had expected to need a full month to top up its tanks, but by late March, the company still had not caught up and was selling out all it could make. More significantly, in May the refinery completely replaced its crude vacuum tower, a major, three-week project, said Ryan Eberly, the companys sales and marketing director. During this time, the base oil unit was fed smaller rations of vacuum gas oil and could only run at reduced rates, but the installation was completed by June 1. Since then, the refinery is doing great-running faster, cooler and using less energy than before.
The giant Excel Paralubes base oil plant in Westlake, Louisiana, was taken down for maintenance over the last two weeks of February, and came back online in early March. Owned jointly by Phillips 66 and Flint Hills Resources, who share its output 50/50, Excel Paralubes can make 22,200 b/d of Group II.
So February was tough. Yet despite the flurry of downtimes, the market never got as short as youd think, commented UniSources Mike Smith. Yes, Beaumont closed, but there was enough added new capacity elsewhere-like Chevron in Mississippi, Ergon in Vicksburg and ExxonMobil in Baytown [Texas]-which were starting to hit their stride.
In fact, he continued, there are many examples over the last five years of new plants which were built on the belief that they would see export demand from Europe and the Middle East, which hasnt happened. The added Group II and naphthenic production has not as yet found the home they anticipated in the rest of the world.
The supply glut also prompted at least five rerefiners to scratch their plans to erect new capacity. Other base oil projects, including Sasols promised gas-to-liquids plant on the U.S. Gulf Coast, Pemexs long-awaited expansion and upgrade at Salamanca, Mexico, and HollyFrontiers scheme to make Group III base oil in Woods Cross, Utah, were quietly moved to the back burner to await a more welcoming marketplace.
In addition, the agencys data show the U.S. exported 14 million barrels of base oil in this years first half, which is roughly equal to half of the countrys total production for the period. (Exports during the first half of 2015 were 13.5 million barrels.)
Latin American countries, led by Mexico and Brazil, were first in line for these volumes and consumed nearly half of all exports. Europe has been indulging its appetite to a greater extent, and the U.S. delivered 3 million export barrels to the continent in the first half. Were also seeing huge exports of heavy neutrals and bright stock to China; theres a big flow of oil going there, Chemlubes Joe Rousmaniere observed.
The tide of imports was also strong in first-half 2016, swelling to 7.2 million barrels versus 6.6 million in the year-earlier period. So for every barrel of base oil the U.S. imported from abroad, it continued to ship out two.
Canada remained the largest country source of imports, and accounted for 29 percent of what arrived. South Korea was next in the queue, and Qatar, home to Shell and Qatar Petroleums gas-to-liquids Group III plant, also was prominent, with a 20 percent share of the imports.
And lets all remember that this year started off with a bang in Group III, when Adnoc started up its new plant in the U.A.E. in May, said Rousmaniere. Theyre targeting the U.S. for some of that, and already have brought in 20,000 tons to be marketed here by Vertex.
The Energy Information Administration only gathers data on U.S. lubricating base oil production from virgin refiners; rerefiners are exempt from reporting. Rerefined base oil capacity in the U.S. is a bit more than 14,000 b/d, and is almost entirely API Group II quality.
After the furious pace of 2015, the EIA data also confirm that U.S. refiners were holding a lot of inventory when this year began: 13.5 million barrels. Those reserves were drawn down steadily over first half of 2016, sliding to around 11.6 million at the end of February, 11 million two months later, and settling around 10.6 million barrels at the close of June.
Likely, that was the low point for inventories, a source in the U.S. Gulf Coast region said. Everyone builds inventory during the summer because they want to have barrels in the tanks going into the hurricane season. Were still putting barrels into storage now, in a couple locations, as a hedge against any weather events, this base oil executive told LubesnGreases, speaking on condition of anonymity.
This seller went on to note that the market is still tight on heavy grades, and even if the other grades are not as tight, overall demand seems pretty good. Id have to say that demand was not overly robust in the first half, though, except for the heavy grades like 600 vis. We saw prices get knocked down pretty far, and margins were squeezed badly. So it may be that not everyone was totally healthy with their run rates.
Unisources Mike Smith echoed that mood, and foresees it continuing for awhile. My gut feeling is that base oils in general are in oversupply versus demand, and despite all those turnarounds the market appears long on product. Only 600 Group II is tight. It may be that some plants are under-running, just running at the minimum they can to keep their units safe, while not needing to push throughput.
That could change, of course, he added. The capacity is there, and refiners can ramp production back up in a two or three week period without problem. Weve got the bulk of the hurricane season behind us, and there have been no major threats or events so far.
I think refiners now will want to whittle their inventories down in the fourth quarter going into the end of the year, so in my opinion we may see operating rates stay the same or go a little lower.