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U.S. Base Oils Race Over Harveys Hurdles


U.S. Base Oils Race Over Harveys Hurdles

Despite a grim outlook in the immediate aftermath of Hurricane Harvey, which hit the United States Gulf Coast in late August and forced operations to cease at several refineries, producers pumped out 64.9 million barrels of base oils in 2017-making it the second-best year in the past decade.

This represents 4.3 million more barrels than the 2016 total of 60.6 million barrels, according to U.S. Energy Information Administration data released at the end of February. Paraffinic base oil production racked up 54.7 million barrels in 2017 compared to 51.7 million the year before, an increase of 6 percent. On the naphthenic side, producers churned out 10.2 million barrels, a 15 percent jump compared to the prior years 8.9 million barrels.

Its an unexpected peak in a period marked by ups and downs since the 2009 recession. Though 2015 is still the decades reigning production year with 65.4 million barrels of base oil, last year became the runner-up, knocking 2008 down to third place.

With two periods where production surged over 6 million barrels each month, first July-August and later November-December, and an almost insatiable export market, its easy to see why the base oil market is whistling a more optimistic tune this year.

Production Losses

Market players can now breathe a sigh of relief, but the story was much different just a few months ago. One of the many massive storms of the extremely active 2017 Atlantic hurricane season, Harvey brought torrential rains that flooded the major enclaves of base oil production in Houston, east Texas and parts of Louisiana.

Total domestic production in September amounted to 4.3 million barrels, a 29 percent decline from the 6 million barrels made in August. Refiners in Petroleum Administration for Defense District 3-which houses 70 percent of U.S. base oil manufacturing capacity in the above-mentioned states as well as Mississippi-produced just under 2.9 million barrels, a 38 percent drop compared to the month before. Overall, LubesnGreases estimated that more than $200 million in revenue was lost from the reduced output.

Numerous refiners either trimmed operational capacity or were forced to shut down in September and beyond as they assessed damages caused by the hurricane. Motivas 40,300-barrel-per-day plant in Port Arthur, Texas, by far the largest source of domestic base oil production, halted operations in early September and declared force majeure on all of its API Group II grades, placing all customers on allocation until mid-November.

Similarly, ExxonMobils operations at its Group I and Group II base oil plant in Baytown, Texas, were interrupted due to the hurricane. The facility has capacity to produce 28,000 b/d of base oils, including 9,800 b/d of Group I and 18,200 b/d of Group II, according to LubesnGreases 2017 Global Guide to Base Oil Refining. The oil major declared force majeure in mid-September and implemented an allocation program for its base oils, which it lifted at some point in the fourth quarter.

Other plants that dealt with interruptions in Harveys wake include LyondellBasells 4,600 b/d naphthenic facility in Houston; Valeros Three Rivers, Texas, refinery, which has capacity of 2,400 b/d of naphthenics; and Chevrons 25,000 b/d Group II refinery in Pascagoula, Mississippi. All three restarted operations at reduced rates between mid-September and early October.

Even with the disruption, the Texas Gulf Coasts net production of paraffinic base oils in 2017 totaled 19.1 million barrels, which was actually higher compared to 2016 by more than 100,000 barrels, according to the EIA data. Exports from the PADD3 area did falter in September by some 900,000 barrels compared to shipments in August, while imports from outside the U.S. flowed in at a steady pace of 1.1 million barrels per month.

Harvey wasnt the only event that battered base oil production in 2017. Because of several large plant outages and turnarounds in the first half of the year-some planned but others unforeseen-base oil resellers had difficulty securing product for local customers, especially Group II base stocks, said Jeremy Kriska, director, sales and marketing at Tulsa, Oklahoma-based Tulstar.

Group IIs availability was sporadic throughout the year, and it seemed to change by viscosity grade, which was a bit bizarre. Historically, it seemed like light neutral Group I or Group II have all been readily available, but last year there was a period of time when that got very tight, Kriska conveyed to LubesnGreases, adding that by contrast, heavy neutral grades had more availability and were easier to source throughout the year.

Exports Surge, Imports Shift

Exports have been outweighing domestic consumption of base oils for some time now, and the EIA data reflect this. Sixty-two percent of base oil production in the U.S., or about 40.5 million barrels, was exported. Thats a 42 percent increase over 2016. The main recipients of U.S. base oils in 2017 were Mexico with close to 7.8 million barrels; Northern Europe with almost 7.1 million barrels; Canada with 3.4 million barrels, as well as Brazil and Argentina with a little over 2.8 million barrels each.

Imports, by comparison, grew modestly against 2016, with 15 million barrels brought into the market, almost a 6 percent increase. What was notable, however, is where the material came from. Canadas share, for instance, was reduced to 3.7 million barrels in 2017, compared to 4 million barrels the year before. Canada houses Petro-Canada Lubricants 15,600 b/d plant in Mississauga, Ontario (now owned by HollyFrontier).

Thats just a blip compared to Qatar, which saw its deliveries of imports tumble from 3.3 million barrels in 2016 to just under 2.3 million barrels last year. The reason: Production at Shell and Qatar Petroleums jointly owned Pearl gas-to-liquids refinery in Ras Laffan, Qatar, which has capacity to make 6,000 b/d of Group II and 22,000 b/d of Group III, slumped in 2015, forcing the companies to shut down production in February 2017 to conduct major repairs on the gasifier units.

By contrast, South Korea-already a major source of Group II and Group III imports-landed 4.3 million barrels, 16 percent more than the year before, according to EIAs data. South Korea is home to four large base oil refineries: GS Caltexs 26,000 b/d plant in Yeosu, Hyundai OilBank-Shells 13,000 b/d facility in Daesan, S-Oils Onsan refinery with capacity to make 41,800 b/d and SK Lubricants 40,000 b/d plant in Ulsan.

There was also a three-way tie for imports among Bahrain, Indonesia and U.A.E. The latter represents Adnocs Group III base oils, which entered the U.S. market in late 2016. Adnoc contracted Netherlands-based Penthol C.V. to distribute those oils in the U.S., and Penthol selected Vertex Energy to serve as its agent and help to market them.

Its been very well accepted. In the beginning the ramp-up was slower than we had hoped only because it came in as an unapproved product, said Erica Snedegar of Vertex. The AdBase-branded base stocks now have approvals for API SN, ILSAC GF-5 and General Motors’ Dexos 1 passenger car engine oil specifications.

She noted that there has not been a slowdown in demand for Adnocs product despite small additions of domestic Group III production in 2017, notably from Motiva in Port Arthur, Calumet in Shreveport, Louisiana, and rerefiner Avista Oil in Peachtree City, Georgia. Snedegar attributed this to the high viscosity index of the Adnoc material, which allows it to be marketed as a Group III+.

I think the reason we havent seen a whole lot of decline in demand, even though theres more volume coming [on stream], is just that its two different types of buyers buying two different products, she elaborated.

A Look Ahead

Changes in the base oil market can come swiftly, even though their effects may take time to register both in EIAs data and at the manufacturing, trading and buying levels. Just this year, two major changes have taken place that could signal shifts ahead in how base oils are marketed and sold to buyers.

Flint Hills Resources announced in October that it would discontinue marketing of base oils produced at Excel Paralubes, its Westlake, Louisiana, joint venture refinery with Phillips 66. Excel Paralubes has capacity to produce 22,200 b/d of Group II base oils and is the fifth-largest base oil plant in the U.S. The agreement states that Phillips 66 would be in charge of marketing all of the output from the facility. At the time of the announcement, some base oil buyers expressed concern that this limited the number of suppliers in the market.

Another change starting this year is Bahrain Petroleum Co.s launch of its own brand of base stocks from the joint venture refinery in Sitra, Bahrain, it owns with Finnish producer Neste Oil. Bapco will take over marketing its share of the barrels-55 percent against Nestes 45 percent-streamed at the plant, which has capacity to make 8,200 b/d of Group III oils. Neste will continue to market its share of the output.

Between 60 and 70 percent of Bapcos Group III Bapbase-branded oils are being supplied to Harrison, New York-based Chemlube for resale, said Joe Rousmaniere, director, business development. The reseller was awarded the contract to sell the oils for one year, with the first cargo of 5,000 metric tons due to have arrived last month.

Bapco has always hoped that the majority of their oil would be sold in the United States, said Rousmaniere. For the next year, we intend to maintain a regular inventory to sell in the United States as well as possibly moving into other markets.

Things are looking up, and there has been more buying activity in the first three months of the year to sustain that feeling, said Tulstars Kriska. 2010 to 2016 was just always a negative tone when we asked how business was. Everyone always said It could be better, he commented. The sentiment is a lot better now than it used to be.

Snedegar of Vertex echoed the feeling. Demand has been really, really strong. We have been in a sold-out position of roughly 110 percent of nameplate capacity since January 1. We are effectively in a sold-out position until mid-April. Its a nice change.

But it doesnt mean that players are resting on their laurels. With Group III reigning supreme in more markets, competition is only bound to get fiercer. We feel that Group III as a whole is going to increase at least 8 percent year over year in the next five years, Snedegar added.

Rousmaniere concurred. The one thing that we all in the industry agree on is that the only real growth in the base oil business is in the Group III sector. There is a constant demand for Group III in the United States, and we expect it to grow.

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