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2016: Some Gains, Some Pains


Clocking a measured pace for most of the year, U.S. base oil refiners delivered a respectable 60.6 million barrels of paraffinic and naphthenic stocks in 2016, according to data released Feb. 28 by the federal Energy Information Administration.

That nice, round number is a near-echo of the 60.7 million barrels that domestic producers supplied two years ago in 2014, and is one of the best full-year totals since the recession slashed output to just 55 million barrels in 2009. Still, it suffers in comparison to its immediate predecessor, 2015, when supply reached a 10-year peak of 65.4 million barrels. Versus that ebullience, 2016 retreated 7.4 percent.

The brakes were applied with equal pressure on both sides of the market, paraffinic and naphthenic alike, EIAs data show. The 2016 tally included 51.7 million barrels of paraffinic base stocks, a decline of 7.3 percent from the 55.8 million barrels manufactured in 2015.

Naphthenic refiners, who represent about 18 percent of the countrys nameplate capacity for virgin base oil manufacturing, generated 8.9 million barrels in 2016, versus their 2015 total of 9.6 million barrels-a decline of 7.5 percent. This was the sixth straight year of waning pale oil output, and the first year in EIAs records, which extend back to 1993, that naphthenic producers failed to punch through the 9 million barrel mark.

Outages-expected and not-were one big reason for the slowdown, especially in the first and last quarters of the year. Early in January naphthenic base oil refiner Cross Oil, whose capacity in Smackover, Arkansas, is 5,000 barrels a day, suffered a fire in its hydrotreater and cooling equipment. The base oil unit was undamaged but off-line until Cross was able to make repairs and restart safely in late February. Within a few weeks, the company said it achieved a normal flow of product.

Fellow pale oil refiners San Joaquin Refining, with 8,100 b/d of capacity in Bakersfield, California, and Ergon, 22,000 b/d in Vicksburg, Mississippi, also came down for weeks of planned maintenance in February, although each had bolstered its inventories going into the work periods so customers could be served without interruption.

On the paraffinic side, Motiva shut down one of its three lube trains in Port Arthur, Texas, for a turnaround that lasted from early January to mid-February; Calumet did a partial turnaround on its Shreveport, Louisiana, units; and Excel Paralubes took the last two weeks of February to do routine maintenance on its Westlake, Louisiana, facility. Port Arthur boasts a total of 40,300 b/d of API Group II; Shreveport can make 11,800 b/d of Group I and Group II; and Westlake has 22,200 b/d of Group II capacity.

All together, those early months of lost productivity may have cost the country more than a million barrels. But an even greater setback lay ahead: Chevrons 20,700 b/d Group II refinery in Richmond, California, was down for nearly the entire fourth quarter of 2016, choking back some 2 million barrels of potential supply. After building stockpiles, the plant shut down from late September to early December as part of a $1 billion upgrade of the entire Richmond complex that will take until 2019 to complete.

The U.S. market continued to chug along nicely though, with little fretting over these routine work periods, points out Jamie Brunk, manager of lube studies at Solomon Associates. Producers typically fill their tanks and supply chains ahead of a scheduled maintenance, and contract customers may not even register the dip in productivity, although spot markets can tighten.

Also, he continued, on the paraffinic side, its no secret that theres lots of oversupply. One reason is that refiners in the U.S. and elsewhere built all these huge base oil plants on the expectation that there was going to be 15 percent growth a year in demand from Asia. But then Chinas rate of growth dropped to just 6 percent a year, so demand is down, and we see Group II base oils pushing into the market space that was held by Group I.

Meanwhile, Brunk added, a lot of U.S. Group I found a beautiful market last year in South America.

EIA data support this surmise. The U.S. exported 28.5 million barrels of lube oils in 2016, some 2 million barrels more than was exported in 2015. Not only was it a record high, it was equal to 47 percent of the countrys total production.

Mexico was first in line for that supply, taking 18 percent, and roughly the same amount went to the South American quartet of Brazil, Colombia, Chile and Peru. European countries like Belgium, Germany, France and the Netherlands took 19 percent of the exports, and Canada absorbed 11 percent.

The incoming tide was also strong. U.S. base oil imports totaled 14.2 million barrels in 2016, a new peak. Canada was the top purveyor of those volumes, as it was in 2015, while South Korea, which delivered 30 percent of U.S. imports in 2015, only managed a 26 percent share in 2016. Both of these countries are feeling the heat from rivals in the Middle East like Qatar, Bahrain and now the United Arab Emirates.

Last year, Abu Dhabis state-owned oil company Adnoc opened its Takreer base oil refinery in Ruwais, UAE, with capacity to make 2,000 b/d of Group II and 10,300 of Group III. Targeting blenders in the U.S. and Europe, it landed two fresh parcels of base oils in the U.S. last year.

One shipment of 75,000 barrels of Group III from Ruwais arrived during July and another of just under 70,000 barrels landed in December, Erica Snedegar, manager of base oils for Vertex Energy, Adnocs U.S. marketing partner, told LubesnGreases. She added that both consignments were snatched up quickly by U.S. buyers. However, these volumes are not included yet in the EIA data for 2016.

We have another shipment landing in five or 10 days, Snedegar advised in late February. Originally it was due on February 1 but there were weather delays. And another shipment is en route now that will be arriving in mid-March or early April. The plan looking forward is for monthly arrivals, she continued, with product being delivered directly to customers or stored in bulk tanks at Stolt Terminals in New Orleans.

EIA also tracks refinery production of paraffin waxes, a co-product of base oil manufacturing. These volumes also are withering because wax is extracted from base oil by solvent refining processes, which only a handful of U.S. refiners continue to use. Wax output, which regularly topped 5 million barrels just 10 years ago, in 2016 came to just 1.7 million barrels.

The EIA data signal another shift taking place in the market: U.S. base oil suppliers are sitting on much more inventory now. Stocks at the end of each month in 2010, for example, ranged from just 6.8 million to 8.5 million barrels. Last year, most months closed with nearly 12 million barrels in tanks at U.S. refineries and terminals.

Consultant and marketing specialist Terrence Hoffman is not surprised by these swelling volumes, which he says are not bloat. For one thing, you want to have volumes ready for export. The data show that we are continuing to export a lot, especially Group II, so to load ships you have to build inventories at or outside the refinery.

Second, theres more tankage needed for imports. Companies like Valvoline and BP Castrol dont make any base oil themselves, and neither do many others, so theyre bringing in a lot of Group III to make finished products. Even ExxonMobil has to bring in and store Group III to make their 0W engine oils, and Shell has to stock its GTL base oil from Qatar for the same reason.

Third, a refinery needs to have tanks to store at least 21 days of production at a bare-bones minimum, and more like 30 days realistically speaking. When you add in the capacity weve gained with the opening of Chevron Pascagoula [Mississippi] and ExxonMobils Baytown [Texas] expansion, its obvious that youll have more storage at refineries. Add it all up-what refiners make plus all the Group I and II exports, plus imports of Group III for everyone-and 12 million barrels in ending stocks each month makes sense.

According to the 2016 Guide to Global Base Oil Refining, published by LubesnGreases, the countrys pool of base oil refiners includes 10 facilities that make only paraffinic base oils, five that are devoted to naphthenics, and two that have some capacity for both.

The country also has eight significant rerefineries that recycle used oil into lubricant-quality base oil. The EIA does not collect data from these facilities, which have a combined capacity of around 15,000 daily barrels of base oil.

The base oil market was long on product last year, Vertexs Snedegar said. Now its tightening a little, but its not tight by any means. Weve had no difficulties placing barrels from Takreer or from our Heartland rerefinery in Columbus, Ohio. At the end of the fourth quarter, we saw blenders running just-in-time and holding off on ordering base oils because they dont want to have inventory in their tanks at year end. But once the new year started we saw an uptick.

Buyers now see that two of the countrys largest Group II refineries will be down for turnarounds in March and April, so theyre trying to get ahead of the curve and get orders in before those turnarounds, Snedegar added.

By the time readers see this, significant turnarounds should be underway at Excel Paralubes in Westlake and at Chevron Pascagoula. Westlakes 22,200 b/d of Group II capacity came offline for maintenance on March 1, and will be down for around eight weeks. Pascagoula, with 25,000 b/d of Group II, is expected to be down for three weeks in April.

Those two sites hold about 30 percent of the U.S. Group II capacity, so some snugness may be unavoidable, remarked the base oil sales manager at a large U.S. Gulf Coast producer, speaking on condition of anonymity. We sold tons of product in February, he said, and we did a lot of export barrels, too. My intuition tells me that its all about those turnarounds at Chevron and Excel Paralubes. They may not have done many extra deals ahead of their maintenance, so that could be a reason for supply seeming tighter.

Another looming question for the market, said Gerry Jackson of base oil marketer Renkert Oil, is the status of Pearl, the gas-to-liquids plant built in Qatar by Shell, the worlds largest supplier of finished lubricants. With 22,000 b/d of Group III capacity, Pearl made Shell virtually self-sufficient in Group III. However, the base oil plant has been operating at greatly reduced rates since mid-December because of problems with upstream gasifier units. Its unknown how long the plant will be limping (some suggest six months or longer) but Jackson expects to see Shell soaking up Group III barrels from elsewhere, snugging up that segment, too.

When might supply loosen up again? Probably in the third quarter of this year, Jackson said. By August or September the turnarounds will be over, and well be past the summer driving season that always drives up demand. We should also see Luberefs Yanbual Bahr plant finally begin operating in Saudi Arabia. So weve never seen a base oil tsunami yet, despite all the new plants and overbuilding, but in the third quarter we may be in a position to see it finally arrive.

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