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2018 Base Oils Flowed Unimpeded

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Without major turnarounds, plant outages or unforeseen disruptions plaguing the market, base oil production in the United States cruised to a 20-year high of 67.2 million barrels in 2018, data from the U.S. Energy Information Administration released in early March show.

Though this represents just 2.2 million barrels more than the 65 million barrels churned out two years ago, 2018 proved to be the biggest production year in two decades. As usual, paraffinic base oil producers spearheaded the effort, with total production of 57.3 million barrels versus 54.7 million barrels in 2017, while naphthenic manufacturers put out 9.8 million barrels of base oil, a drop of about half a million barrels compared to the year before.

Most base oil production came from the powerhouse that is the U.S. Gulf Coast in Petroleum Administration for Defense District 3, where 52.5 million barrels were filled in 2018. Of these, 43.7 million barrels were of the paraffinic variety, with the remaining 8.8 million consisting of naphthenic base oils.

The U.S. Gulf Coast, particularly Texas, is home to facilities from ExxonMobil in Baytown, with capacity of 28,000 barrels per day of API Group I and Group II; Motiva in Port Arthur (40,300 b/d of Group II); LyondellBasell in Houston (4,600 b/d of Group II and naphthenic); and Valero in Three Rivers (2,400 b/d of naphthenic oils), according to LubesnGreases 2018 Guide to Global Base Oil Refining.

Other base oil producers in this district include Calumet, with facilities in Princeton and Shreveport, Louisiana (18,800 b/d of combined Group I, II and III and naphthenic capacity), Ergon in Vicksburg, Mississippi (25,000 b/d of Group I and naphthenic), Excel Paralubes in Westlake, Louisiana (22,200 b/d of Group II), and Chevron in Pascagoula, Mississippi (25,000 b/d of Group II).

There were also 7.5 million barrels produced by refiners in California, including 6.4 million barrels of paraffinic base oil churned out by Chevrons plant in Richmond, with capacity of 20,700 b/d of Group II, and 1.1 million naphthenic barrels produced by San Joaquin Refining at its 8,100 b/d facility in Bakersfield.

Rounding up the totals, producers on the U.S. East Coast (PADD 2) tacked on 4.8 million barrels of paraffinic base oil from facilities that include American Refining Groups Bradford, Pennsylvania 2,400 b/d Group I and Group II refinery, PBF Energys 11,000 b/d Group I plant in Paulsboro, New Jersey, and Ergons Newell, West Virginia, plant with capacity of 4,800 b/d of paraffinic Groups I and II. HollyFrontier produced 2.4 million barrels of paraffinic base oils at its 9,500 b/d refinery in Tulsa, Oklahoma.

A Relatively Quiet Year

Overall, base oil producers, suppliers and industry experts familiar with the U.S base oil market remarked on how quiet 2018 was, allowing production to hum along without interruption, especially compared to the year before, several sources told LubesnGreases.

2017 was notorious for supply disruptions from plant turnarounds and major outages at several facilities, including Chevrons plants in California and Mississippi, Excel Paralubes in Louisiana, Motiva in Texas and Shell and Qatar Petroleums joint venture Pearl gas-to-liquids refinery in Ras Laffan, Qatar, with 28,000 b/d capacity of Group II and Group III base oils.

This scenario was exacerbated when Hurricane Harvey struck the U.S. Gulf Coast in August of that year, bringing base oil shortages that led paraffinic base oil producers to lift prices on certain grades at the beginning of 2018.

Even without conditions like those that lead to base oil supply disruptions in 2017, producers had to contend with rising crude oil feedstock costs throughout 2018, as well as increases in transportation fees and labor costs.

Juan Fritschy, CEO at Peachtree City, Georgia-based rerefiner Avista Oil, acknowledged that rising transportation costs affected the company in 2018. Rail rates went up higher than inflation, and truck drivers are in high demand, pushing prices up, he said. The shortage of truck drivers is an issue everywhere. He did note, however, that demand for Avistas Group II and Group III base oils was higher in 2018 compared to the year before.

Lance Puckett, president of Ergon Refining and Ergon-West Virginia, said the company managed to evade the rise in costs thanks to optimization of their refineries to handle a range of feedstocks. The company also has its own transportation network for hauling product in trucks and through inland waterways.

Puckett pointed out that demand for the refiners naphthenic base oil increased slightly in 2018 compared to 2017 from industries that required products with higher solvency and viscosity. On the paraffinic side, demand was stable through 2018, with some compressed margins for lighter-viscosity products as higher levels of supply were available worldwide, he added.

Base oil resellers also appreciated the ability to keep product moving. Jeremy Kriska, director of sales and marketing at Tulsa, Oklahoma-based Tulstar, observed that base oil buyers were mostly optimistic throughout the year.

We saw a fairly level or slightly higher buying pattern in 2018 versus 2017. Keep in mind that we sell products into a lot of different markets, so one base oil may be used in a lubricant application or a process oil application, he clarified. When you look across all the market segments, lubricants was fairly flat, maybe a little higher, but other markets increased steadily.

Kriska said that demand for all base stocks, including naphthenics, Group III and synthetics such as polyalphaolefins, was healthy across the board. The demand for higher-end Group III and PAO products continued to grow [in 2018]. Thats a market that we tend to focus on because we understand those products and we see the growth rate that is occurring, he noted.

Exports Stay Strong

Base oils originating from the U.S. are not abating their stream over the northern and southern borders and across the Atlantic Ocean. Exports of base oils reached 39.8 million barrels in 2018 compared to 36.2 million barrels for 2017. It should be noted that total exports in 2017 were revised downward by the EIA from the 40.5 million reported at the end of February 2018.

Mexico took the largest share of exports from its neighbor to the north, with a whopping 10.2 million barrels of base oil. Mexico has significantly increased the level of exports from the U.S., reflecting the poor performance of the Pemex Group I refinery [in Salamanca] and the continued demand for Group II and Group III, said Ernie Henderson, president of K&E Petroleum Consulting. There is also a segment of very-low-viscosity Group II exports from the U.S. that is directed for non-lubricant applications.

Countries in Central and South America (excluding Brazil) also took a significant amount of base oils from the U.S., with totals clocking in at 7 million barrels in 2018. Across the pond, northern European countries took in 6.8 million barrels. Brazil and Canada were the two other significant buyers of U.S. base oil, with 3.5 million and 3.2 million barrels pouring over their borders in 2018, respectively.

Henderson told LubesnGreases that Belgium is also a key market for U.S. base oil exports, representing the continuing growth of Group II in Europe. The EIA data show that the country took in 4.9 million barrels in 2018. It will be interesting to see if this continues with the recent successful start-up of the ExxonMobil Group II refinery in Rotterdam, the Netherlands, which opened in late February, he continued.

Imports of base oil to the U.S. also rose slightly last year, totaling 15.6 million barrels compared to 15 million barrels the year before. Most barrels-4.5 million-came from South Korea, which has a collection of primarily Group II and Group III facilities operated by SK Lubricants, S-Oil, GS Caltex and Hyundai Shell Base Oil. Qatar and Canada took second and third place, supplying 3.4 million and 2.8 million barrels to the U.S. in 2018, respectively.

Henderson highlighted that the thirst for Group III and Group III+ base oils reflects the continuing growth of lower-viscosity and high-performance passenger car engine oils in the U.S. finished lubricants market.

As the automotive market continues to push for fuel economy via lower SAE grades, the import of Group III and Group III+ base stocks continues to grow. This creates the opportunity for domestic production that has been pursued by Calumet and Motiva, said Henderson. Motiva Group III now appears in the [Saudi] Aramco base oil marketing brochure, suggesting that some production will occur at Port Arthur for the North American market.

Trends on the Horizon

Finished lubricant trends in the U.S. continue leading lube manufacturers to seek out base oils that offer higher performance, such as Group II over Group I.

I would see a continuation of the splits between Group I and Group II demand, as these are now more focused on technical demands versus market dynamics. This would also suggest a stable and continued demand for bright stock, a specialty originating from Group I, Henderson noted.

That said, the relative pricing of Group I and Group II could impact those customers who have a choice of both slates for their finished products, he continued. Favorable Group II pricing could encourage customers to convert from Group I to Group II at a cost savings and a possible quality upgrade, as Group II will typically deliver improved performance when properly formulated.

But he also pointed out that original equipment manufacturer requirements such as General Motors Dexos 1 Gen 2 specification could spur greater demand for Group III and Group III+ base oils. Market general API SN Plus and ILSAC GF-5 can still be formulated with Group II and Group II+ base stocks, whereas the more stringent OEM requirements effectively eliminate these base stock options for the primary SAE 0W-20 and SAE 5W-30 grades, said Henderson.

Kriska of Tulstar said that Group III base oils have now become more accessible in terms of base oil producers making them part of their product slate and pushing them into the U.S. market, causing prices to fall.

Another development generating discussion among base oil producers is the International Maritime Organizations 2020 cap on marine fuel sulfur levels, which some industry observers have said will impact base oil refining capacity and accelerate the move to higher-quality Group II and Group III base oils.

The anticipated increase in demand for low-sulfur fuel oil is expected to impact base oils with distillate equivalency, such as transformer oil. We also anticipate increased transportation costs across the base oil supply chain with this upcoming regulation, said Puckett.

Kriska named electrification of vehicles as another forward-looking concern for base oil refiners in the U.S. and around the world. Potentially long-term, were going to be looking at what we do with moving some of these base oils, because some of the big demands like lubricants may not be there, but yet these products are needed for a lot of other markets. [Rationalization is] far off, but its something thats going to be in our lifetime, he concluded.

Gabriela Wheeler contributed to this story.

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