Just a few years ago, used-oil rerefiners were jumping at the opportunity to expand their horizons. Base oil prices were steady, proposals for new capacity were on every drawing board, and investors were knocking on the doors of used oil collectors.

Today the momentum seems to have stalled, and companies are figuring out the best way to get through this downturn. The first months of 2016 have already brought changes for some well-known players.

Hydrodec Group, which specializes in reclaiming transformer oils, in early March sold its United Kingdom operations – including a waste oil collection business and an unbuilt API Group II rerefinery – for 1 pound cash ($1.43) plus 1.2 million pounds of assumed debt. Hydrodec sank roughly $6.3 million into the venture in 2013 and later leased a site for the rerefinery, but then global oil prices fell and market conditions changed. After significant losses in 2015, the U.K. business had to be unloaded. The buyer, shareholder Andrew Black, will attempt to get the rerefinery built, while Hydrodec focuses on its two other rerefineries in Canton, Ohio, and Young, Australia.

Also in March, Puralube revealed plans to partner with NexLube Tampa to complete its Florida rerefinery and enable it to produce API Group III base oils by 2018. NexLube already had spent $100 million to build offices, blending facilities and above-ground storage tanks at the site, but suspended construction in November 2013 before the rerefinery was erected. It was expected to process 24 million gallons of used oil annually. In January, Puralube, which is headquartered in Wayne, Pennsylvania, also revealed plans to upgrade one of its rerefineries in Troeglitz, Germany, to enable production of Group III base oils in 2017.

In February, Clean Harbors, parent company of Safety-Kleen and Kleen Performance Products, acquired Vertex Energys Group II rerefinery in Fallon, Nevada, for $35 million. Houston-based Vertex had been renting the rerefinery from Bango Oil only since last May, under a lease that allowed it to purchase the 1,400 barrel per day facility at any time. In 2014, Vertex also acquired Heartland Group Holdings – owner of a used oil collection network and a 1,500 b/d Group II rerefinery in Columbus, Ohio.

What are the main factors behind this general retreat? Sources point to the steady drop in oil prices, as well as a decrease in demand for used oil. There has been a vast contraction with margins and its been a tough market for all the players within the used oil rerefining marketplace, Effram Kaplan, managing director of investment bankers Brown Gibbons Lang & Co. in Cleveland, Ohio, told LubesnGreases.

There was a point in time where there was the potential to build a rerefinery, but many of those projects did not get off the ground, Kaplan added. I dont really chalk this issue up to rerefining capacity; I really chalk this issue up to markets, whats happening on a global scale, which is oil pricing.

Change of Hands

These market conditions were precisely what caused Hydrodec to sell its U.K. venture. Despite implementing extensive restructuring and cost-saving measures during 2015, including a 36 percent reduction in its workforce, the company said it remained exposed to lower prices for petroleum products, and its U.K. operations were unprofitable. The scrapped rerefinery had been slated to operate by the end of 2017.

Scott Parker, executive director of NORA, An Association of Responsible Recyclers, sees rerefiners experiencing a change of ownership of assets, not a reduction in the capacity to rerefine. Based in Gainesville, Virginia, NORA is a trade association representing 375 companies worldwide that collect, process and market used oil and its derivatives, including rerefined base oils.

When we look at rerefining, the demand for base lubricants is down, and what youre seeing across the industry is companies trying to control things they can control. Our industry is unable to control what they sell their products for, Parker told LubesnGreases. What they [rerefiners] are looking at is internal efficiencies and making sure the companies are structured in the most profitable way possible.

Such is the case with Clean Harbors acquisition of Vertexs Nevada plant, since its proximity to California and other West Coast lubricants markets was appealing. Thats a market where Clean Harbors and Safety-Kleen do a lot of business, and is obviously very receptive to green or recycled products, Jim Buckley, senior vice president for investor relations and corporate communications at Clean Harbors, said in a February interview with Lube Report.

Shifts in the Market

Most used oil that is collected will end up in either of two applications: rerefining or the burner market. The latter consists of oil consumed as a fuel product at asphalt and related plants, and is rerefinings biggest competitor for used oil feedstock.

A few years ago, demand for base oil was high while natural gas prices were down. That encouraged industrial buyers to switch their burners over to natural gas, and left more of the used oil pool available for rerefiners, recalled Parker. As there was demand on the base lubricants side and there was a decrease in demand on the burner side, you saw a natural investment and focus on rerefining, adding more value to the finished products, he explained.

The outlook has now shifted, and some rerefiners have transitioned away from paying generators for their used oil towards a zero-pay or charge-for-service model for collecting it. This has gone from a market where collectors would be paying 80 cents to $1.15 for a gallon of used oil and selling it for $2, to right now, where theyre taking the lead of larger players including Safety-Kleen, and trying to get paid to pick up the oil, pointed out BLGs Kaplan.

What the rerefining industry needs to do now is brace itself for where base oil demand is likely going over the next 10 years, said Parker. The market conditions can shift dramatically in this sector. If you look back two or three years ago, it has been a massive shift, and in another two or three years there could be another shift.

He views Puralubes deal to revive the NexLube Tampa project as an example of looking ahead to strategically increase rerefining capacity. Theyre looking beyond 2016, Parker said. Where [right now] the market is not favorable for base lubricants, theyre looking at 2017 and beyond.

Surviving the Downturn

The question now: In an era of low crude and energy prices, what is the outlook for rerefining in the next few years? Parker reminded that not all rerefiners are being impacted the same way, because pricing for oil products – particularly base oils – has not gone down equally across the different range of cuts.

Its not as simple as saying all base lubricants are down or all base lubricants are up. And then you have to look at each individual rerefinery. Often times what limits their ability to produce a product is not just technology, its also [securing] feedstock, said Parker.

Survival may come down to an individual companys ability to source feedstock, or the ability to have the investment to upgrade their technology in order to compete, he added. One of the challenges for rerefineries, compared to a refinery, is that they have a limitation on the number of different products they can produce. With the refineries, they can produce many products, thereby spreading their costs and risk across a wider range of products.

Kaplan believes that rerefiners who want to get through this down period will need to be integrated into the logistics side of the business, to assure they have ample supply of used oil at their disposal. Whether you are a small or big rerefiner, owning your feedstock is important, he stressed.

An example of this is Avista Oil, the Uetze, Germany-based company that owns Universal Environmental Services in the United States. In addition to running a 1,250 b/d Group II rerefinery in Peachtree City, Georgia, UES has bought numerous used oil collectors in the Southeastern U.S. The latest, Metro Environmental Services in Alabama, was acquired late last year and brought UESs total to 21 terminals.

Expansion is another key to survival in a tough market, especially in providing services to customers. When youre a rerefiner, youre making a decision to get into a certain product, be it a VGO [vacuum gas oil] or a Group II or synthetic, and its hard to somewhat diversify when youve got such a heavy amount of capital invested into a certain type of facility, explained Kaplan. The [used oil] collector, on the other hand, has the ability to diversify and not be as reliant upon import and export markets or [energy] pricing.

Despite the current situation, Parker showed optimism in the rerefining industrys ability to bounce back. In the United States, which generates an estimated 1 billion gallons of used oil annually, regulations on collection and disposal will continue to encourage the gathering and recycling of that material.

Regardless of the demand for the rerefined base oil lubricant or any of the other products that are derived from used oil, we as an industry need to continue to collect that oil, emphasized Parker.

George Gill contributed to this article.