This week, oil major Chevron began the production of premium base oils from its brand-new $1.4 billion oil facility at its Mississippi oil refinery.
The facility is expected to produce 25,000 bbl/d of premium base oil, boosting Chevron's base oil capacity by around 100%, making Chevron the world's largest producer of premium base oil.
Production from the Pascagoula facility will add to capacity from the company's refinery in Richmond, Calif., and a joint venture facility in Yeosu, Korea. With this addition, Chevron's worldwide base-oil production capacity increases to about 60,000 barrels per day.
Premium base oils?
Now, to some, the fact that Chevron is now a world leader in the production of premium base oils may not mean much. However, leadership in this market is an important part of Chevron's long-term growth plan and the group's plan to stay ahead of the competition.
Base oils are used to make lubricants and greases for machinery and equipment, while premium base oil is the main ingredient in the production of top-tier motor oils. These premium oils can also be used to improve fuel economy, lower emissions, and extend the time between oil changes.
Lubricants are a rapidly growing side of the energy industry, as equipment around the world becomes ever more technologically advanced.
According to Chevron's downstream presentation given earlier this year, the demand for premium base oils is expected to nearly double by 2025. And Chevron is well placed to capture this growth as the world's leading producer.
It's difficult to get exact figures on how profitable premium base oils are for Chevron. Additionally, it's almost impossible to figure out whether or not the start-up of this asset will contribute meaningfully to earnings.
However, the commissioning of the project comes at a great time for the company.
Indeed, within the last month, it has emerged that CPC Corporation in Taiwan has decided to permanently shut down its 250,000 ton per year base oil refinery plant in Taiwan. The plant is operated by CPC-Shell Lubricants Co. a joint venture between CPC (49%) and Royal Dutch Shell (51%). The base oil plant is set to close during November 2014.
The plant is closing partially because of environmental concerns, after complaints from residents. There were discussions about moving the plants, but so far, there have been no such plans made.
Of course, this is great news for Chevron, as the closing of the base oils plant means a reduction in supply. Less supply is likely to boost prices, over both the long and short term. I should say that this is just speculation, although with supply being taken out of the market, it's logical that demand and prices will rise.
The bottom line
Chevron is one of the world's leading oil companies, and now the company is a leading producer of base oil, an integral part of modern society. Indeed, the demand for base oil is set to nearly double over the next decade or so, and Chevron is set to profit from this.
Further, with other producers shutting facilities down, Chevron should see both a rise in demand and a rise in price for its products.
Rupert Hargreaves owns shares of Chevron. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.