Base Stocks

In Search of Base Oils’ Shangri-La


Every base oil producer dreams of being able to sell as much oil as they can make at impressive margins. Either part of that dream seems particularly difficult to attain in the current industry environment, where global supply surpasses demand and geopolitical and economic factors have triggered a general slowdown in activity.

Furthermore, technological developments and improved product quality have suppressed demand volume as drain intervals are extended.

Global base oil nameplate capacity is outpacing demand, and as a result, most refiners are not running their base oil plants at full utilization rates. As an industry, we approach 75 percent utilization on average, Jamie Brunk, manager of lube studies with Solomon Associates, noted during a presentation at the ICIS Pan American Base Oils & Lubricants Conference in Jersey City, New Jersey.

One could argue that a key element to a profitable base oil operation would be access to the right crude oil slate. Low-cost production and margin remain the keys to refinery survivability, and this can only be achieved through the optimum mix of feedstocks and products along with low operating expense, Brunk confirmed.

The types of crude run at base oil plants have changed over the years, not only because of pricing but also due to availability. In 2008, for example, Arab Light made up 29 percent of all crudes used to produce base oils, with other Middle East crudes and Arab Medium representing 35 percent of the mix and North Sea crudes accounting for 6 percent.

By comparison, in 2018, Arab crudes were scaled back to 50 percent, while Russian crudes have jumped up substantially. Many European refiners have been running it because it is cheap. It is not the best crude for lubes because it kills yields, but its cheap, Brunk noted.

North Sea crude runs, on the other hand, have seen a reduction to 2 percent in 2018. North Sea is dying; there is not much crude available anymore, so basically production is coming down, he explained.

Similarly, Mexican crude, which made up 6 percent of all crude oil run to produce base oils in 2008, dropped to 3 percent in 2018 due to production issues and reduced export volumes.

Permian Basin crude, a tight oil that comes largely from shale or sandstone formations and is easily accessible to U.S. producers, does not have a very good lube yield, according to Brunk, and most lube plants are not running it.

Some crude slates dictate it, but if you didnt have to buy that crude for your plant, you would not buy it, he said.

A base oil distributor and industry veteran present at the December conference agreed with Brunks assessment, adding that Permian Basin crudes are light and therefore good for producing fuels. They are poor for making heavy base oil, but serviceable for light and mid-range viscosities. Refinery economics win out, so refineries love Permian Basin crudes.

At the end of the day, though, most big U.S. Gulf Coast refineries and base oil plants use Arab Mid, which is great for fuels and for base oils, the expert concluded.

Aside from the type of crude run at a refinery, producers pay attention to the main source of feed to lube plants: vacuum gas oil. VGO prices typically follow crude oil, and they dropped sharply in late 2018, then recovered somewhat in the first half of 2019.

Managing Margins There is basically no margin to be made on the Group I 100 viscosity, said Brunk. The [solvent neutral] 500 [margin] gets a little bit higher, and then bright stock substantially improves.

Brunk observed that Group II producers were struggling. Even their heavy neutral is not as attractive in margin as the Group I bright stock and the Group I 500 vis. Group II 100 N and 220 N oils reached zero margins late in 2018.

Different companies focus on different things in their quest for profitability, Brunk commented. While U.S. producers tend to value profits, some refineries do things because they employ a village and they make money for the government; their economics may not be on the same par, he explained.

Another measure that differentiates producers is their cost of production. This includes net raw material cost (what they pay for their VGO and other feedstocks), less whatever by-products they can sell, and adding their operating expense.

Each refiner may be dealing with its cost of production in different ways. One plant may have very steep raw material costs but very low operating expenses, while another pays less for its raw materials but gets hit with high operating costs. Brunk emphasized that these two elements are not independent variables. If a producer buys low quality materials just because they are more economical, it will have to spend more money to produce high quality base oils.

Geography plays an important role in determining operating expenses, which include energy, maintenance, non-maintenance personnel, taxes, insurance and other fixed costs, plus volume-related expenditures.

In Asia and Europe, the cost of energy floats on crude oil prices, and this means it can be quite volatile. Operating expenses go up as crude prices go up, and they come down as crude prices come down, and in 2018, it was kind of break-even, said Brunk. By comparison, in the U.S., there is a large dependence on natural gas, which is relatively low-cost. The Middle East enjoys similar advantages.

Southeast Asia benefits from the low cost of labor, although refiners there have to deal with high energy prices. Western Europe gets hit on both counts-refiners there face steep labor and energy expenses.

In 2018, about 40 percent of the worldwide industrys operating expense was devoted to energy. About a quarter was maintenance cost-which includes personnel involved in equipment maintenance-but there was also another 22 percent that covered non-maintenance personnel, such as operators, engineers, accountants and all the rest of the functions in a company. Finally, about 6 to 7 percent of the operating expense was taken up by taxes, insurance, catalyst chemicals, etc. Approximately 7 to 8 percent covered other volume-related disbursements.

In North and South America, the picture is slightly different. Approximately 20 percent of the operating expense in 2018 was devoted to energy-much less than the global average because refiners in that region had extremely low energy costs due to the availability of inexpensive natural gas. However, maintenance costs were high, accounting for over 36 percent of the total.

Latin American refineries, in particular, are weighed down by very high maintenance costs, mostly linked to the condition of their equipment. Stephen B. Ames, managing director of SBA Consulting LLC, explained: Latin America base oil operations, save Lwarts Group II rerefining and Petrobras small naphthenic operations in Brazil, are all old Group I plants at least 50 years old.Some of them, including Pemexs Salamanca and PdVSAs three operations at Amuay, Cardon and Curacao, have not seen maintenance capital in more than a decade.

They are-to say the least-in very poor repair and struggle to operate even at very low rates of utilization. Consequently, their costs of production on a dollar per ton basis are very high compared to more well-maintained plants running at higher rates of throughput, he said.

Dale Fatland, who handles sales and procurement for an international organization, agreed, adding that the lack of investment in newer processes and instead buying Group II base oils turns out to be very costly.

Brunk noted that having to ship base oil makes little difference in a products competitiveness. Transportation adds about $5 per barrel no matter where it goes, which is only a 5 percent markup on a $100 barrel.

Thats why we see Korean base oils and Middle Eastern product in the U.S. Its a global marketplace, and its important to be able to compete from the refining standpoint. If you are in the U.S., you compete with Korea, whether you like it or not, Ames emphasized.

Culture Makes the Cut So what does it take to be one of the worlds most competitive base oil refineries? A worlds best refinery has a relentless focus on margin and continuous improvement, Brunk stated.

He added that top-notch refineries invest in energy efficiency and other areas of production cost that are within the sites control. They also nurture a reliability culture that results in improved gross margin, increased energy efficiency and reduced maintenance cost.

Henry Pienik, base oil sales manager at HollyFrontier, underscored the importance of running a safe operation. Safety is the number one concern with refiners, and fines are very high if you dont comply.

Brunk concluded that perhaps one of the main differentiators is, in fact, a company culture that constantly strives toward the highest level of operational excellence. The worlds best refineries have a process excellence culture that drives outstanding performance in margin generation, he concluded.

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