By Tim Sullivan
 
The Royal Dutch/Shell Group’s announcement that it has agreed to buy Pennzoil-Quaker State Co. raises prospects that the multinational energy giant will bolster its number two position in the U.S. paraffinic base oil market.
 
Opinions vary, however, about the market implications of the deal. Some sources speculated yesterday that Shell could assume a lead role in Group II base stocks, with ExxonMobil continuing to determine Group I prices. Others contended that the acquisition will have little impact because Shell will consume most of its own supply.
 
Shell has already increased its base oil holdings with Texaco’s recent exit from the Equilon and Motiva joint ventures. Shell acquired sole ownership of Equilon, which has base oil refineries in Deer Park, Texas, and Martinez, Calif., and is now a 50-50 partner with Saudi Refining Inc. in Motiva, which owns a refinery in Port Arthur, Texas. The deal announced this week would add Pennzoil-Quaker State’s 50 percent stake in the Excel Paralubes joint venture, which owns a refinery in Westlake, La. Conoco holds the other 50 percent interest in Excel Paralubes.
 
Most observers believe that Shell will be the managing partner in Motiva and therefore control the Port Arthur supply. If so, Pennzoil-Quaker State’s share of the 22,000-barrel-per-day Paralubes facility would give Shell control of 46,500 b/d; 36,800 of those barrels would be paraffinic. ExxonMobil has U.S. capacity of 48,500 b/d, all of it paraffinic.
 
Shell’s capacity is heavy in Group II. With Motiva and a stake in Excel Paralubes, it would control 33,300 b/d of Group II, nearly half of the 71,800 b/d total U.S. Group II capacity. In contrast, all but 8,600 b/d of ExxonMobil’s capacity is Group I. Because it controls an estimated 40 percent of the base oil sold on the open market in the U.S., ExxonMobil takes a lead role in determining prices in the United States.
 
“This changes everything,” one base oil marketer said of Shell’s plan to buy Pennzoil-Quaker State. “Potentially, this could create a situation where Exxon dominates Group I and Shell dominates the Group II side.” The marketer speculated that such a prospect could lead Group II purchasers to complain to regulators about the concentration of base oil capacity. When Exxon and Mobil merged in 2000, the U.S. Federal Trade Commission required the combined company to enter long-term contracts for the sale of 12,000 b/d from its Beaumont, Texas refinery.
 
While Shell could end up well-stocked with capacity, some sources predicted that it won’t gain much power in the open market.
 
“Whereas Exxon is putting a lot of supply onto the market, Shell is going to consume most of its supply,” a large base oil procurer said. “Pennzoil-Quaker State only gets about half of its supply from Excel Paralubes, so a lot of barrels have to come from somewhere else. I’m not sure that Shell would be much of a force on the market.”
 
Another marketer suggested that the flexibility of Shell’s base oil operations could be limited by the fact that two of its plants are joint ventures.
 
“The Saudis may not be managing Motiva but they’re going to take an interest,” the marketer said. “And the problem with 50-50 partners is that they don’t always let you do what you want to do. One partner might want to gear production toward a particular formulation while the other wants to go in another direction.”

 Paraffinic Base Oil Posted Prices (US$ per gallon)