CITGO announced on Friday (June 13th) that it
will eliminate base stock production at its
Lake Charles, Louisiana Lubricants and Wax
refinery during the 3rd quarter of 2008.
According to Petroleum Trends International
(PTI),
"this
is a significant development since it will
reduce the overall base stock supply pool in
the US by close to 4%. And in a market where
base stock price increases are occurring at
an unprecedented rate due to the skyrocketing
price of crude, this is certainly an
unwelcome development for many downstream of
base stock production since it will tighten
base stock supply and likely drive prices
even higher."
If there is any good news (and it's not much)
for base stock buyers in this announced
closure, PTI says "the Lake Charles plant will
only take API Group I out of the supply
pool. In fact, for many this closure comes as
no surprise since the specifications in the
US market continue to favor the use of API
Group II base stocks over Group I. As such,
it was clear CITGO was under increasing
pressure to either invest heavily to upgrade
the Lake Charles facility to produce Group II
to meet
captive demand, or cease production and
purchase base stocks on the merchant market."
Understanding CITGO recently announced it was
reducing production at the Lake Charles
plant, it appeared only a matter of time
before the other hammer would drop. It did,
just a little faster than many thought. And
maybe the reason it did is tied to the
alternative value of base stock feed (Vacuum
gas oil - VGO) as cat cracker feed to make fuel.
Because as those who took the time to read
Time to Get Cracking in the
full print edition of JobbersWorld this
month, petroleum refineries
do not have to produce lubricant base
stocks. Instead, it can use those
hydrocarbons as catalytic- or hydro-cracker
feed. Crackers are an integral part of the
refinery and they convert feed to fuel by
breaking long chain (heavy) hydrocarbons into
smaller chain (light) hydrocarbons. Although
the decision to direct the base stock feed to
a cracker is multidimensional, in a large
part it's driven by alternative value
economics. In the case of base stocks, the
alternative value is the difference in margin
between hydrocarbons used to produce base
stocks as compared to cracking it to fuel. In
other words, what makes more for the major -
turning the feed to fuel or to base stocks?
And with the price for a gallon of diesel
fuel currently higher than the price for a
gallon of base stock, that may have helped
accelerate CITGO's decision to cease base
stock production at Lake Charles.
As background, the Lake Charles Louisiana
refinery is an API Group I facility with a
reported capacity of 9,500 B/D. The plant
operates at near capacity and the base stock
slate produced is primarily solvent refined
150N. Virtually all of the 150N is consumed
captively to make CITGO lubricants. Such
other grades as 600N and bright stock are
consumed captively and sold on the merchant
market for use in industrial and other heavy
viscosity products.
The CITGO base stocks are considered to be on
the higher end of the Group I category based
on its high saturates and low sulfur content.
These are important factors with today's
automotive oils and one of the reasons why
CITGO base stocks continued to be used in
these products, as compared to other Group I
base stocks that have limited or no
capability due to their lower saturates and
higher sulfur levels. But once again,
directionally the automotive market continues
to move away from Group I and even the higher
end Group I will increasingly struggle to
find a home in this segment.
