Kalpesh Ramwani, senior consultant at Contax Partners, discusses how feedstock shortages may encourage waste oil refining in the UAE
Used oil or waste oil is any oil, whether refined from crude or synthetic, that has been contaminated by physical or chemical impurities as a result of use.
Waste oil is typically derived from automotive and industrial lubricants, including spent motor oil, hydraulic fluids, refrigeration coolants, metalworking and cutting oils, and electrical insulating oil. Among the facilities generating used oil are vehicle repair shops, fleet maintenance facilities and industries
It was not longer than twenty years ago that people began to see oil as a limited resource. Most waste oil (if it was collected at all) was disposed of by burning for heat or blending with other fuels.
Nowadays, through improved technology and varying levels of regulations and incentives, of the total used oil generated globally, about 75% is collected. The remaining 25% is combusted, re-used without appropriate treatment or discarded.
Of the total waste oil collected, developed countries in Europe and Americas send 50% for refinement while in developing countries; the percentage refined is far less. The overall global trend however is moving towards a greater drive for refining.
Globally, four major reasons are driving this momentum of refining used oil. Firstly, the quality of re-refined base oils is improving dramatically.
The overall improvements in the refining process and improvement in the quality of used oils collected due to better collection practices and the use of high quality base stocks in virgin lubricants.
Second, rising crude oil prices have driven up base oil prices, making re-refining economically attractive. Third, recent studies by the US Environmental Protection Agency (EPA) have also revealed that there are significant economic benefits of waste oil refining. Tests conducted have shown that reprocessing used oil consumes far less energy and resources than refining crude oil from the earth.
(For example, it takes only 4 litres of used oil to produce 2.5 litres of new engine oil. But when starting from scratch, that same 2.5 quarts would require 160 litres of unrefined crude oil to manufacture.) Fourth, environmental standards across all countries, developed and developing, are becoming stringent. Tests have shown the 4 litres of oil dumped into a river can contaminate 4 million litres of water and have disastrous effects on our planet’s ecosystem.
Within the GCC, waste oil refining is a relatively new phenomenon, led by UAE and Saudi Arabia. Being at the epicentre of oil production, historically, the region never saw the reason for refining waste oil.
In-fact many local governments discouraged it as it was perceived as competition to the state owned grease and lube manufacturers.
The perception changed slowly as gas stations, garages and waste oil producers saw refiners as an economical way of disposal of the used oil, which would have alternatively caused them time and money for disposal. It was not until the mid ‘90s that governments and companies realized the economic benefits realized by waste oil refiners that they started charging for waste oil supply.
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Within the UAE, it was not until the early 2000’s that waste oil refining started reaching new heights. Tremendous economic growth driven by the rising oil prices and the booming construction sector saw strong population growth rates and a subsequent increase in spends on automobiles and real estate.
As a result of this increase in economic activity, the waste oil collection and refining sector saw itself evolve from a handful of waste oil collectors and 2-3 refiners in the late ‘90s to over 30 collectors and 12 refiners by the end of the decade.
A majority of these refiners were converting waste oil into lower end base oils and furnace fuels. With a strong growth in players within the sector, regulations (at the federal level and city level) became stringent.
Refiners however enjoyed strong demand (both local and export) and lucrative margins (in excess of 40%). The resultant capacity shortages due to growing demand saw new entrants and large investments in capacity expansion. However, by the turn of the decade, the story was far different.
The crash of the real estate bubble, subsequent oil prices, and the mass exodus of people saw several refineries shut down; margins plummet to single digits and companies struggling with maintaining sound operating cash flow levels.
The current market conditions are better than the times of the financial crisis, however, far from the hay days of the late 2000’s. Presently, there are approximately eight active waste oil refiners and twenty waste oil collectors within the UAE.
Market estimated reveal that between 200,000-250,000 tons of waste oil is collected annually within the UAE. Of this, the market of Abu Dhabi is controlled by a single refiner that collects and refines most of the waste oil collected within the emirate. The remaining refiners compete for waste oil collected within Dubai and the Northern Emirates.
While the current refiners have the capacity and demand to refine the waste oil to largely make base oils and furnace oil, they are now competing with the growing number of brokers that export the waste oil to countries such as China and Vietnam which use it within their large industrial furnaces for burning purposes.
As a result, current refiners are struggling to meet the necessary utilization rates necessary to ensure better margins.
In addition, UAE Federal Law has put a ban on the imports of waste oil, thus adding to the challenges of the existing refiners.
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As a result of these new market conditions, the industry in a state of stagnation, with existing players focused on maintaining their market share and improving their margins by moving to more lucrative export markets of Africa and investing in downstream activities offsetting up blending facilities to make lubricants and greases from the refined base oil produced in the refinery.
The dilemma for refiners however is whether they should make further investments in technology to produce more value added products and higher category of base oils given the challenges related to feedstock shortages or maintain the status quo and gradually try and grow their business inorganically through acquisitions of smaller players.
This could be through the acquisition of other refiners or integrating vertically by acquiring waste oil collectors or blenders.
Deeper analysis suggests that what the industry needs is support from local and federal authorities in the form of incentives, which would help refiners be more competitive against exporters of waste oil and more competitive against virgin base oil and lubricant manufacturers.
In addition, relaxation on feedstock import restriction would also help companies use some of their excess capacities. The recycling and re-refining model has been a great success in the West primarily due to government initiates and support.
While UAE has taken the lead in promoting the theme of environmental sustainability and reduction of carbon footprint, the re-refining sector has not seen such initiatives.
Given the country’s reliance on Abu Dhabi for all its energy requirements, Dubai and the Northern Emirates should lead the way in promotion of these environmentally sustainable initiatives. Policies defined in the coming few years will define the overall future of this industry that is dangling in a “state of flux.”
