Recycled vs. Rerefined

In the lubricants business, recycled or reconditioned oil refers to used oil run through commercial filtration systems that remove insoluble impurities. The process does not remove any soluble contaminants; nor is the additive package replenished. Recycled oil has limited use and cannot be used in automotive applications.

Over the years, the Middle East has become a major re-export hub, supplying markets in Africa not only with recycled oil but also, in some cases, with counterfeit oils. The U.A.E. is particularly well-known as a source of recycled base oils, and there is growing concern in Saudi Arabia over the proliferation of recycling plants and their role in a burgeoning counterfeiting market.

Rerefined oil has been common in the United States for some years, and the process for producing it is well established and regulated. The process removes all soluble and insoluble impurities as well as spent additive, returning the oil to a condition that can be used in automotive lubricants. Approximately 75 percent of the original base stock is reclaimed, and in many instances the rerefined oil is equal to or better than virgin base oils.

When run through the hydrotreating process, used oil can be rerefined to comply with API Group II specifications. At a time when environmental considerations have risen to the top of the agenda, rerefined oil has come into its own. The rerefining process is less severe than the refining of crude oil and uses less energy. In addition, automotive oils can be rerefined several times.

Historically, the Middle East has lagged U.S. and Europe in handling waste oil, but experience shows that rerefining reduces environmental impact particularly groundwater contamination and soil quality. That is one of the reasons countries like Saudi Arabia are seeing rapid growth in the rerefining market, where previously used oil was burned, releasing extremely harmful emissions into the atmosphere. With summer temperatures in the Gulf often approaching 50 degrees C, the combination is highly toxic.

According to the American Petroleum Institute, 42 gallons (one barrel) of used oil will produce 34 gallons of rerefined lubricant, compared with just 0.5 gallons with conventional crude refining. So how much of a threat does rerefining pose to the traditional base oils sector?

T R Kumar, managing director of Tesla Lubricants in the U.A.E., said the fact that rerefined oils match the quality of virgin base oils is relevant to the Middle East. Rerefined base oils are at par or superior to virgin base oils; therefore, scientifically, rerefined base oils can be beneficial and reduce pollution and land seepage.

Europes experience in driving the use of rerefined oils could act as a template for greater use in the Middle East, Kumar claimed. As part of environmental protection plans, some governments provide tax relief and subsidies for using rerefined base oil in finished formulations.

However, he said lingering concerns over the quality of the rerefining process could put a brake on widespread use. The drawback comes when used oils are not properly rerefined in an effort to save processing costs. Improper processing will not yield quality base oils that can be used in formulations.

Middle East Potential

Accurate data on the Middle East market is hard to come by in the best of times, and the rerefined base oils sector is no exception. What is known is that Saudi Arabia is a major market with around five rerefining plants, producing approximately 100,000 metric tons of rerefined base oils, said Kumar. The status of the U.A.E. as a re-export hub indicates that it could be a sizeable market that, unlike Saudi Arabia, imposes no ban on the import of used oils The total rerefining oil market [in the U.A.E.] is 150,000 to 250,000 metric tons per year. Other GCC countries either have no rerefining sector, or their volume is insignificant, he added.

Still, questions over the quality of rerefined oils continue to undermine the market. Unilube, based in Jubail, Saudi Arabia, claims to be a prominent rerefiner with ISO 14001:2004 certification, but the company declined to provide information about its operation in Saudi Arabia. Nevertheless, Kumar said, the company has invested in proven technology. Unilubes website claims that the company offers an integrated operation for used oil collection, processing and export of base oils and byproducts.

According to Kumar, the difference in cost between rerefined and virgin base oils will drive the market, but the cost advantage could be short-lived. There is a gap of U.S. $100 to $200 per metric ton between virgin and rerefined oils, and if this gap is not maintained, demand will [dry up] for rerefined base oils.

It is a point echoed by Ben Nathan, technical manager of Caspian Chemical, who envisions a big market for the production of finished lubricants for developing markets. The key criteria for selection of rerefined base oils in these markets have always been price, followed by color, while viscometric properties take a back seat. He said the financial crisis in 2008 significantly changed the regional market landscape. The financial crisis devastated the rerefining base oils market, especially in the U.A.E. Facing low utilization rates, a number [of companies] have been forced to shut down, and recent drops in crude prices have not helped either.

Improvements in the rerefining process will also be needed, and that is going to require new investment. Extra investment will increase break-even costs and reduce the cost differential between rerefined and virgin base oils. With the rapidly increasing commoditization of virgin base oils, the opportunity for a significant increase in market share for rerefined oils looks limited.

On the other hand, the possibility of increased regulation could support the rerefined market. In Saudi Arabia, companies like Petromin are worried about the proliferation of recycled and counterfeit oils that threatens to dent consumer confidence in finished lubricants. Samir Nawar, president and CEO of Petromin, recently called for better collection and monitoring of used oil as well as a more stringent regulatory environment to counter the threat.

Irans Return

Blenders and refiners are watching events unfold as the prospect of new investment in Iran could radically alter supply dynamics in the region. There is an abundance of API Group I base oils in Iran, due largely to the aged state of the countrys refining infrastructure. Yet, Irans return to oil markets may also exert further downward pressure on base oil prices, something that would be bearish for the economics of the rerefined market.

Even so, Iran lacks the modern technology that the rerefining market demands. The question is how big the window is before a post-sanctions Iran gains technology.

According to Capsians Nathan, Irans presence is likely to be quickly felt, but the impact may be limited. The return of Iranian crude to the market will definitely suppress the rerefined base oils business, however, not to the extent imagined by most. Iranian base stock is present in the market regardless of current sanctions, and is the base oil of choice among many price-sensitive blenders.

There is no doubt the sanctions have kept a lid on prices and distorted the market, but that may be about to change, said Nathan. Should sanctions be lifted, these base oils will be able to command a higher price, perhaps pushing some manufacturers toward other cost-effective alternatives, such as rerefined base stocks. But all things being said, spot crude oil prices are probably the best indicator of the viability of the rerefined oils business.

As things stand, there is a major desire for the deal to be approved from some of the biggest companies in the automotive and refining sector. Indeed, Irans automotive fleet is ripe for an upgrade, and with a population of approximately 80 million and a GDP of U.S. $500 billion, it is clearly a major opportunity that is increasingly rare in emerging markets. There is a lot of spare capacity in the countrys refining sector, but Capital Economics in London estimates the economy could grow between 6 to 8 percent in a post-sanctions environment.

The rerefining market looks like it is here to stay in the Middle East. What is yet to be determined is whether there will be a shift in ownership in the sector. It is clearly a Gulf-centric business at the moment, but that could possibly be challenged or subverted by Irans substantial experience and historic presence in the refining sector.