Increasing Profitability in the Refining Business Segment at Phillips 66

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Logo of Phillips 66. “We are standing on the shoulders of giants,” said Phillips 66 CEO Greg Garland. “People like E. W. Marland, who started Marland Oil in 1911, and Frank and L. E. Phillips that started Phillips Petroleum in 1917. I could go on and on and list the giants that have come before us that have so well positioned this company for the success that we enjoy today.”[1] Photo: ConocoPhillips

Increasing Profitability in the Refining and Marketing Business Segment

Greg Garland told security analysts at the Credit Suisse Global Energy Summit on February 12, 2014 that there are five things Phillips is doing to in refining and marketing in to enhance returns and capital efficiency. "We think we have 400 basis points of improvement in ROCE in this business and there's five things that we're doing to drive that." Photo courtesy of Phillips 66
Steps Phillips will take to improve returns by 400 basis points. Graphic from Phillips 3rd Quarter Presentation to Analysts on December 12, 2013.
Greg Garland told security analysts at the Credit Suisse Global Energy Summit on February 12, 2014 that Phillips will get more advantaged crude in front of refineries. "We're well on our way. Last year, we're 74%, up 10%. As you move to into the fourth quarter, we pushed that up to 90%. So our real opportunities are the East Coast and the West Coast today. I think we've got good advantaged crude in the midcon and in the Gulf Coast, where 51% of our or 55% of our capacity resides today."[2] Graphic from Phillips Presentation to USB Global Oil and Gas Conference May 21, 2013.

Greg Garland told security analysts at the Credit Suisse Global Energy Summit on February 12, 2014 that there are five things Phillips is doing to in refining and marketing in to enhance returns and capital efficiency."We think we have 400 basis points of improvement in ROCE in this business and there's five things that we're doing to drive that."[3]

Increase Profitability by Getting More Advantaged Crude in Front of Refineries

March 12, 2014: Brent-WTI Spread Narrows While Heavy and Sour Canadian Crude Oil Maintain High Margins

Isac Simon writes at "The Motley Fool" that with the Cushing Marketlink pipeline coming online in late January, inventories at the Cushing storage hub of the West Texas Intermediate have eased causing the Brent-WTI spread to shrink to less than $7 a barrel. "Since the two most widely traded crude oil benchmarks diverged in late 2010, a narrowing spread between Brent and WTI has never been a good sign for refiners," writes Simon. "Throughout 2012 and during the fourth quarter of 2013, U.S. refiners enjoyed a solid run -- thanks to the availability of the deeply discounted West Texas Intermediate crude oil when compared against the internationally traded Brent. As a result, refiners such as HollyFrontier, Marathon Petroleum, Valero Energy Corporation, and Phillips 66 could buy cheaper feedstock, while maintaining global prices for refined products."[4]

However sour and heavy variants of crude oil are much cheaper than their light and sweet counterparts and higher volumes of heavy crude -- or bituminous crude -- from Canada's tar sands are slowly making way by rail to the Gulf Coast where most refineries are located according to Simon. "Phillips 66 is expecting 2,000 railcars to be delivered in 2013-2014. These high-capacity railcars will be used primarily to deliver Bakken crude oil to its Bayway and Ferndale refineries. Out of its 11 refineries in the United States, eight are capable of refining heavy sour crude," writes Simon. "Both Canadian crude and the price-advantaged Bakken sweet crude are trading at a discount to the West Texas Intermediate. So while the Brent-WTI spread may be narrowing, there's a different market force at work -- that of directly transporting cheap crude by rail. The better prepared refiner is well on its way to take advantage."[5]

February 12, 2014: Garland Says Phillips Will Get More Advantaged Crude in Front of Refineries

Greg Garland told security analysts at the Credit Suisse Global Energy Summit on February 12, 2014 that Phillips will get more advantaged crude in front of refineries. "We're well on our way. Last year, we're 74%, up 10%. As you move to into the fourth quarter, we pushed that up to 90%. So our real opportunities are the East Coast and the West Coast today. I think we've got good advantaged crude in the midcon and in the Gulf Coast, where 51% of our or 55% of our capacity resides today. We're working on our clean product yields. There's $60 million to $100 million of value creation there by pushing our yields. We're working on decreasing operating costs and then we're working on portfolio management in terms of rightsizing the portfolio."[6]

""We have an extensive system of railcars, pipelines, barges, access to ocean-going ships. We're using that in the value capture for advantaged crude to the front end of our refineries," said Garland. "You'll see us expand this system over time. You'll see us add more railcars, more unloading capability and we're working the East and West Coast right now. Bayway we have the rail rack at Bayway. 75,000 barrels a day will come on later this year. On the West Coast, we have the rail rack at Ferndale that'll come on later this year, 35,000 a day. We're in the middle of a comment period on permitting for our Santa Maria rail rack. We're actively working other third-party rail unloading facilities in southern California.[7]

January 30, 2014: in the Fourth Quarter, 94% of Phillips Crude Slate Was Advantaged

Greg Garland told analysts at the 4th quarter earnings conference on January 30, 2013 that 94% of Phillips' US crude slate was advantaged. "Our realized margin was $10.75 per barrel, with a market capture rate of 112%. The global crude utilization rate was 92%, and our clean product yield was 84%. During the quarter, 94% of the Company's US crude slate was advantaged, and this compares with 66% last quarter. The increase was largely driven by additional domestic crude's consistently trading at a discount to Brent. We will cover this in more detail on slide 13. The 2013 adjusted return on capital employed for refining was 13%, and the average capital employed for this segment was $14.3 billion," said Garland. "On an annual basis, our advantaged crude slate has increased from 62% in 2012, to 74% in 2013. And this is due to processing an additional 118,000 barrels per day of tight oil, additional domestic crude's that consistently trade at a discount to Brent, as well as higher volumes of heavy Canadian crudes."[8]

October 30, 2013: Phillips May Buy More Railcars to Move Advantaged Crude to US Refineries

Reuters reported on October 30, 2013 that Garland told analysts during the third quarter earnings conference call that Phillips may buy more railcars to move advantaged crude from North Dakota and Canada to its refineries. This would be on top of the 2,000 railcars already expected for delivery this year of which the company has to date received 1,270.[9]

Phillips Bayway refinery had been running about 100,000 barrels per day of U.S. crudes in place of imports - from Texas via tanker and North Dakota's Bakken via rail and barge but the company cut rail shipments to 30,000 bpd day when the discount of U.S. crude benchmark West Texas Intermediate to London's Brent all but dried up during the quarter. The discount of North Dakota Bakken crude to WTI also narrowed. However, Phillips 66 is ramping rail shipments back up and running less imported crude now that the spread has widened to more than $10 a barrel. "The spreads now incent us to run Bakken at Bayway today," said Tim Taylor, executive vice president for commercial, marketing, transportation and business development, in a post-call interview.[10]

Phillips 66 is building a new rail offloading facility at Bayway to further increase shipments by 75,000 bpd by the second half of 2014. The company also received all necessary permits to build a similar facility at its 100,000 bpd refinery in Ferndale, Washington, to handle 30,000 bpd also by the second half of next year.[11]

July 31, 2013: Narrowing of WTI-Brent Gap Contributes to Disappointing Earnings for Phillips' 2nd Quarter

FuelFix reported on July 131, 2013 that Phillips underperformed in the second quarter as its earnings dropped 19 percent because of higher costs for oil and outages that shut down key facilities. “We should have run better and our earnings results reflect this,” said Garland. Phillips 66′s adjusted earnings per share of about $1.50 was well below analyst expectations of about $1. 81 for that figure.[12]

Higher domestic oil prices pushed down profits as the gap between the price of West Texas Intermediate, a benchmark for domestic crude, and Brent, a measure of international oil prices, narrowed substantially during the second quarter. That trend is expected to continue through the remainder of the year, with Brent currently around $107 and WTI at about $105. U.S. refiners had previously enjoyed a huge advantage over their foreign competitors because WTI prices were as much as $20 lower than Brent prices , with some U.S. crudes priced far lower because there was limited access to foreign markets.[13]

July 31, 2013: Phillips Has Taken Delivery of 650 Rail Cars Out of 2,000

FuelFix reported on July 31, 2013 that Phillips has already taken delivery of 650 rail cars of the 2,000 that they ordered in 2012. “These cars will be used to transport advantaged crude to Phillips 66 refineries on the east and west coasts," said Garland. “Phillips 66 has been an early mover on adding logistical infrastructure to improve its flexibility of taking lower cost domestic crudes to refineries across its portfolio and this flexibility we believe will lower their feedstock costs over the long run,” said Jeff Dietert, and analyst for Simmons & Co. International.[14]

July 21, 2013: Brent-WTI Spread Disappears For Now

James Hamilton reports on Econobrowwer that on July 19, 2013 West Texas Intermediate sold for the same price as Brent for the first time in almost three years. "Since 2010, infrastructure for transport and delivery of crude to U.S. refiners by rail and barge has grown tremendously," writes Hamilton. "This has narrowed the Brent-WTI spread, but is not enough to eliminate it, since pipelines are an economically more efficient (and environmentally more friendly) way to transport oil." However Hamilton adds that other projects will also likely soon be bringing even more oil from Canada and the U.S. into Cushing including the 600,000 b/d from the South Flanagan project and another 800,000 b/d that could be delivered through the proposed Canada-to- Nebraska leg of the Keystone project. "All of this means that the elimination of the Brent-WTI spread may prove to be a short-lived phenomenon."[15]

May 21, 2013: Phillips Plans to Increase Advantaged Crude Processing to 100% Within the Next Few Years

Greg Maxwell, Executive Vice-President for Finance and Phillips CFO, told analysts at the UBS Global Oil and Gas Conference on May 21, 2013 that the first and largest lever in improving earnings is increasing advantaged crude processing. "We are well-positioned to utilize the emerging advantaged crudes in our domestic refineries. For example, from a sensitivity perspective, $1 per barrel change in our crude cost, if we can capture $1 a barrel change, that improves our net income by $440 million per year. And already, we're running shale crudes at eight of our domestic refineries. We increased our advantaged crude runs from 52% in 2011 to 62% in 2012, and 68% in the first quarter of this year. These crudes are being delivered via truck, and being delivered by rail, barge, ocean-going vessel, and also by pipelines. And our plan is to be able to run 100% advantaged crudes within the next few years."[16]

May 1, 2013: Phillips Increases Share of Advantaged Crude to 68%

Fox News reported on May 1, 2013 that Phillips has been working to increase its use of relatively cheap crude by building rail capacity at its plants and buying rail cars to help bring crude from shale formations not yet reached by pipelines and the company has been inching toward the goal of processing only discounted crudes extracted in North America, a target they expect the company to hit within the next few years. "Certainly its an aspiration, but it is concrete and achievable," said Tim Taylor, executive vice president for commercial, transportation, business development and marketing. Phillips 66 said it boosted the share of discounted crude produced in the U.S. and Canada that its refineries process to 68% of its feedstock, up from 60% last year and during the quarter, it processed 221,000 barrels per day of crude from the Eagle Ford, Bakken and Mississippi Lime formations, up 120,000 barrels per day over last year's first quarter.[17]

March 20, 2013: Phillips Signs Deals to Boost Deliveries of Cheap Crude by Pipeline and Rail

Eliot Caroom reported on Bloomberg on March 20, 2013 that Phillips will increase deliveries of cheaper crudes to its refineries nationwide by as much as 130,000 barrels a day under three transportation deals and a new investment.[18]

First is a three-year deal with Enbridge Energy Partners LP for loading rail cars with up to 35,000 to 45,000 barrels a day of Bakkan crude from Enbridge’s terminal in Berthold, North Dakota. The crude will be delivered to Bayway Refinery on the east coast and Ferndale Refinery on the West Coast. Some crude could also be sent to Gulf Coast refineries at Lake Charles, Alliance, and Sweeney.[19]

Second is a pact with Targa Resources Partners LP (NGLS) for five years to provide rail-unloading and barge-loading services in Tacoma, Washington for about 30,000 barrels a day of U.S. and Canadian crudes that will go to the Ferndale Refinery. Phillips’s Rodeo refinery near San Francisco could also receive crude deliveries, displacing imports from outside North America.[20]

Finally Phillips has signed a pipeline deal with Magellan Midstream Partners LP (MMP) to move 20,000 barrels a day of crude to near the Marland Refinery in Ponca City, replacing West Texas Intermediate from Cushing with oil from the Mississippian Lime play. Magellan service will begin in late 2013, reaching full volume by January 2014. Phillips will also invest in its own Oklahoma assets to transport an additional 40,000 barrels a day of Mississippian Lime to Ponca City. Mississippian Lime crude comes from the Anadarko Basin, which spans Oklahoma and neighboring states. Two new pipelines carrying the grade are planned to start service this year, according to a February EIA report. “We are aggressively pursuing increased access to advantaged crudes in North America by partnering with leading third-party transportation providers and better leveraging our own system capabilities,” Greg Garland, Phillips 66 chairman and chief executive officer, said in the statement. “Increasing our utilization of those advantaged crudes should allow us to capture significant value in our refining and marketing businesses.”[21]

January 30, 2013: Garland Says Phillips is Running More Advantaged Crude

Greg Garland told analysts at the 4th quarter earnings conference on January 30, 2013 that Phillips is running more advantaged crudes with 67% of Phillips U.S. crude in advantaged crude compared to 57% in the fourth quarter of last year.[22]

January 30, 2013: Garland Says Feedstock Advantage Increased Earnings for $300 Million for 2012

Greg Garland told analysts at the 4th quarter earnings conference on January 30, 2013 that improvements in feedstock advantage increased earnings in the Gulf Coast by over $200 million and by over $100 million in the Central Corridor. "The positive $3.69 per barrel adjustment per feedstocks stems from running certain crudes and other feedstocks that are priced lower than our benchmark crudes," said Garland. "For example, our feedstock advantage this quarter was primarily related to running for an heavy-sour crudes at our Gulf Coast refineries and Canadian crudes in our refineries in the Central Corridor. In addition, our crude slate is increased to include more shale crudes, primarily Bakken and Eagle. Finally, the other category primarily reflects the impacts of volume gain and product differentials."[23]

January 8, 2013: Global Partners to Deliver 50,000 bpd of Bakken Crude to Bayway Refinery

The Boston Globe reported on January 8, 2013 that Global Partners LP has signed a five-year contract with Phillips 66 to deliver crude oil from North Dakota to Bayway Refinery using its rail transloading, logistics, and transportation system to deliver about 91 million barrels of crude oil to the Phillips refinery over the life of the contract. That equates to approximately 50,000 barrels per day.[24] “Global has established a ‘virtual pipeline’ for the reliable transportation of Bakken crude,” said Tim Taylor, Executive Vice President, Commercial, Marketing, Transportation & Business Development of Phillips 66. “Our five-year agreement with Global assures us long-term access to advantaged crude for our Bayway refinery through what we believe is a cost competitive origin-to-destination supply system to the East Coast.” The Bakken crude oil is expected to be transloaded at Basin Transload LLC’s North Dakota rail facilities.[25]

December 13, 2012: Phillips Announces Marine Charter Agreements to Supply Alliance and Bayway Refineries

Phillips 66 reported at their inaugural Analyst Meeting on December 13, 2013 that they had recently signed time charter agreements for two medium-range Jones Act marine vessels that will supply the Alliance and Bayway refineries, and potentially the company’s other Gulf Coast refineries, with Eagle Ford crude beginning in early 2013.[26]

September 19, 2012: Greg Garland Says Structural Change in Crude Prices Provide an Opportunity for US Refiners

Fuelfix reported on September 19, 2012 that with new shale crudes coming on there has been a structural change in crude prices that presents a real opportunity for the U.S. refining businesses. "You still have 2 to 3 million barrels a day of new light sweet crude coming on out of these new shale plays," said Garland. "And I think ultimately there’s 2 to 3 million barrels a day of Canadian heavy that comes south. I think the U.S. is going to find itself, particularly the mid-continent areas and the Gulf Coast areas — where 51 percent of our capacity is — with an advantaged crude price versus the rest of the world. That’s a structural change."[27]

September 5, 2012: All Three Business Segments Are Well Positioned to Take Advantage of the Prolific Shale Plays and the Canadian Heavy

Greg Garland told investors and securities analysts at the 2012 Barclays CEO Energy-Power Conference in New York on September 5, 2012 that all three business segments, the R&M business, the Midstream business, and the Chemicals business, are well positioned to take advantage of the prolific shale plays and the Canadian heavy. "A big source of competitive advantage we think we can have in our business is the access to advantaged crudes. It's 75% of our cost structure, a lot of work going across the Company in accessing these advantaged crudes."[28]

August 15, 2012: Crack Spread is $29.05 a barrel for Texas and Midwest Refiners

Paragon reported on August 15, 2012 that new crude production from Texas and the Midwest has resulted in profits reaching their highest levels since 2007 with the difference between the cost of crude and the price companies could sell fuel 9crack spread) in the April-June quarter at $29.05 a barrel according to data collected from Bloomberg. "The prospects for U.S. refiners have turned around dramatically," said John Auers, senior vice president of Turner Mason & Co., a petroleum and refinery consulting company. "Cheap crude has given an advantage to the U.S. refining system, already the most advanced, most complex and most efficient in the world." U.S. refiners have outperformed all other energy sectors in the S&P 500 Index with an average gain of 42 percent. In comparison the S&P 500 Integrated Oil & Gas Index has gained just 2.85 percent year-to-date.[29]

August 1, 2012: The Spread between Brent and Bakken Crude is still around $19/barrel

Michael Fitzsimmons wrote on Seeking Alpha on August 1, 2012 that in February2, 102 Fitzsimmons wrote that the price differential between WTI and Brent (then $19/barrel) would tighten up once the Seaway pipeline was reversed. "I was wrong in my prediction. What I missed was the huge increase in oil production coming out of the Bakken (now over 600,000 bpd) and Eagle Ford shales," writes Fitzsimmons. "While I was expecting production to increase, I had no idea it would increase at such a rate as to pretty much fill up Seaway and still be left with the same problem as before it was reversed."[30]

August 1, 2012: Phillips to Buy 2,000 Rail Cars to Move Bakken Crude to Bayway and Ferndale Refineries

Reuters reported on Phillips second-quarters earnings report on August 2, 2012 that Phillips 66 plans to buy 2,000 railcars to move cheap crude from North Dakota's Bakken shale play to the Bayway plant and its 100,000 bpd plant in Ferndale, Washington. Bayway already runs 10,000 to 20,000 bpd of Bakken crude.[31]

June 5, 2012: Phillips May Add Several Thousand Railroad Cars in an Effort to Expand Capacity

Streetinsider reported on Jun 5, 2012 that Phillips may purchase a "couple thousand" additional rail cars to provide transportation from US shale formations to refineries.[32] The railroad cars would cost $200 million and enable Phillips to carry 120,000 barrels of oil a day from mid-continent, where oil is cheaper, to Phillips coastal refineries.[33] "We're going to add rail capacity," said Garland. "We're considering buying a couple thousand more railcars so we can get Bakken crude either east and west." The initial goal is to increase delivery of shale crudes to Phillips refineries by 100,000 to 150,000 bpd within two years using railroad unit trains. "That's a pipeline on wheels. So, that could go to the Bakken. It could go to the Niobrara. It can shift as the opportunity shifts around the country." Many analysts say rail will be a bigger part of the oil delivery picture for years because shale wells - often scattered, small and of uncertain lifespan - won't justify pipeline construction.[34]

June 5, 2012: Garland Wants to Get More Advantaged Crude to the Front End of Refineries

On June 5, 2012 Phillips CEO Greg Garland presented to the Citi Global Energy Conference and said Phillips has a clear strategy for growth and improving returns.[35]

Garland said Phillips is kind of an average performer in terms of returns on Refining and Marketing with a 12% ROCE in this business, but the expectation is thatthis can be improved to a 15% ROCE business over the cycle. "The R&M business for us is a run well, optimized business. You won’t see us adding capacity. You will see us investing around the infrastructure to put more advantaged crude to the front end of the refineries and to be able to export."[36]

There is another way Phillips would like to improve returns in the refining business and that is by getting advantaged crude to the front end of the refineries. "Today we can process about 500,000 barrels a day of TI-related and about 100,000 barrels a day of shalerelated crudes. If you think about the mid-con, we think there’s about 2 million barrels a day of new light sweet crude coming on in the central part of the US. Then you’ve got another couple million barrels a day of the Canadian heavy that’s ultimately going to make its way down through the midcontinent and ultimately, we believe to the Gulf Coast. And so every dollar that we can capture across our system is worth about $500 million of net income to us." So Phillips is going to go around pipelines and is considering buying a couple thousand more rail cars to get Bakken crude either east and west. "We’re running about 100,000 barrels a day of these shales today and we think we can easily in the next year or two move another 120-150,000 barrels a day of incremental crude through rail. Plus as these pipeline solutions become more available and ready, we’ll capture those opportunities. But ultimately, we can process about 500,000 barrels a day of these shale-type crudes."[37]

June 5, 2012: Greg Garland Wants a Pipeline on Wheels to Get the Barrels in Front of the Facilities

Streetinsider reported on Jun 5, 2012 that Phillips may purchase a "couple thousand" additional rail cars to provide transportation from US shale formations to refineries.[38] The railroad cars would cost $200 million and enable Phillips to carry 120,000 barrels of oil a day from mid-continent, where oil is cheaper, to Phillips coastal refineries.[39] "We're going to add rail capacity," said Garland. "We're considering buying a couple thousand more railcars so we can get Bakken crude either east and west." The initial goal is to increase delivery of shale crudes to Phillips refineries by 100,000 to 150,000 bpd within two years using railroad unit trains. "That's a pipeline on wheels. So, that could go to the Bakken. It could go to the Niobrara. It can shift as the opportunity shifts around the country." Many analysts say rail will be a bigger part of the oil delivery picture for years because shale wells - often scattered, small and of uncertain lifespan - won't justify pipeline construction.[40]

Simone Sebastian reported in the Houston Chronicle on July 2, 2012 that the nation's energy transportation network is undergoing a multibillion-dollar overhaul, as oil and natural gas production surges in new regions of the country and energy producers charge into new areas with technology that can reach oil and natural gas trapped in shale and other tight rock formations leaving pools of crude and gas stranded far from the Gulf Coast refineries and petrochemical plants that need them. "Where it used to be isn't where it is now. Where it needs to go isn't where it used to go," says Terrance McGill, president of fuel carrier Enbridge Energy. "You're seeing this fundamental shift of crude oil across the country." Phillips 66 CEO Greg Garland says his company is considering buying 2,000 more rail cars that could carry an additional 150,000 barrels a day from shale regions (PDF) to its refineries across the country because the glut of crude oil pouring out of the newly tapped shale oil plays like North Dakota’s Bakken has kept the price of Mid-Continent crude at a record-wide discount of up to $27 per barrel relative to its rival European benchmark Brent crude because there is not enough pipeline capacity to get Bakken crude to Gulf coast refineries. "That's a pipeline on wheels," says Garland. "You'll see us stepping out and doing some more things around infrastructure. Like everyone else, we're doing everything we can to get more barrels in front of those facilities."[41][42]

May 24, 2012: Clayton Reasor Says Price Spread between West Texas Intermediate Crude and Brent Crude futures Likely to Narrow Sharply in 2013

NASDAQ reported on May 24, 2012 that according to Clayton Reasor, Phillips 66's senior vice president of strategy and corporate affairs, the price spread between West Texas Intermediate crude and Brent crude futures is likely to narrow sharply in 2013 as increased domestic pipeline capacity relieves the glut created by new shale-oil supplies. "The WTI-Brent differential will narrow as the onshore pipeline capacity is built up and removes some of the bottlenecks that exist between Cushing and the Gulf Coast," said Reasor.[43]

May 22, 2012: New Pipelines to Bring Bakken Crude to Ponca City Refinery and Cushing

Janet McGurty wrote in the Calgary Herald on May 22, 2012 that Kinder Morgan’s Pony Express Pipeline and Belle Fourche Pipeline are looking for shippers to use their newly planned pipeline to send their light, sweet crude from outside Baker, Montana, just over the state line from North Dakota’s booming Bakken oil shale play, about 1,000 miles southeast to Ponca City, home of Phillips 66 refinery before continuing on to the oil storage hub of Cushing, Oklahoma. Once the Pony Express reaches Cushing it will be near the Seaway pipeline, now able to carry 150,000 bpd of oil to the Gulf Coast with expansion plans to over 400,000 in the works. Although plans are on the book to move Bakken crude north and east, production in the region topped 510,000 bpd in March and is expected to continue to expand.[44]

May 15, 2012: Gregory J. Millman Says Mid-Continent Refineries Have Access to Cheap, High Quality Crudes

Gregory J. Millman wrote in the Wall Street Journal on May 15, 2012 that mid-continent refineries have access to high quality crudes that are cheap because there are no pipelines to carry them to world markets, and therefore they are in superabundant supply. Since the product price is a world market price, and refineries have access to export markets, those that can use cheaper crudes enjoy fatter margins and are more profitable than those who cannot.[45]

May 10, 2012: Simon Moore Says New Pipelines Will Bring Bakken Oil to Mid-Continent Refineries

Simon Moore writes on Seeking Alpha on May 10, 2012 that with all the new piplines getting ready to come online to move Bakken Oil to Cushing, starting material for refineries in the Mid-Continent Segment will soon become relatively cheaper which will benefit Phillips 66 with three Gulf coast refineries with a total capacity of 733 MMbpd for the next several years. Moore notes that the Seaqay Pipline reversal will go online on May 17, 2012 brining 150,000 barrels/day of light sweet crude from Cushing, Oklahoma to the Gulf Coast and there are currently plans to expand the pipeline to approximately 400,000 barrels/day and then to 850,000 barrels/day. In addition the new Flanagan South Pipeline will move another 585,000 barrels/day from Illinois to Cushing. Finally the Bakken Express Pipeline from Oneok (OKE) will move 200,000 barrels/day from the Bakken to Cushing. "PSX stands to benefit from the extra crude that will be piped from Cushing to the Gulf Coast increasingly over time."[46]

May 1, 2012: Phillips 66 Plans to Run More Shale Oil

Phillips may purchase 2,000 additional rail cars to provide transportation from US shale formations to refineries.[47] The railroad cars would cost $200 million and enable Phillips to carry 150,000 barrels of oil a day from mid-continent, where oil is cheaper, to Phillips coastal refineries.[48] "We're going to add rail capacity," said Garland. "We're considering buying a couple thousand more railcars so we can get Bakken crude either east and west." The initial goal is to increase delivery of shale crudes to Phillips refineries by 100,000 to 150,000 bpd within two years using railroad unit trains. "That's a pipeline on wheels. So, that could go to the Bakken. It could go to the Niobrara. It can shift as the opportunity shifts around the country." Many analysts say rail will be a bigger part of the oil delivery picture for years because shale wells - often scattered, small and of uncertain lifespan - won't justify pipeline construction.[49] Photo: Railroad Tank Cars by San Diego Model Railroad Museum Flickr Creative Commons Attribution-NonCommercial-NoDerivs 2.0 Generic (CC BY-NC-ND 2.0)

Kristen Hays wrote on Reuters on May 1, 2012 that Greg Garland says the Phillips 66 aims to process more shale oil "everywhere we can get it." Garland added that several refineries are already well positioned to receive shale oil, such as its 247,000 barrels-per-day (bpd) refinery in Sweeny, Texas, in proximity to the state's prolific Eagle Ford shale play, or Midwest plants. The company last fall also ran unit trains from the Bakken shale oil play in North Dakota to its 238,000 bpd Bayway refinery in Linden, New Jersey, and has taken trains to West Coast refineries. "You'll see us stepping out and doing some more things around infrastructure," he said. "Like everyone else, we're doing everything we can to get more barrels in front of those facilities."[50]

May 1, 2012: Investments in refining will enhance its export abilities and connections to lower-cost crude

Garland told the Houston Chronicle on May 1, 2012 that investments in refining will enhance its export abilities and connections to lower-cost crude. "But you won't see us investing to increase refining capacity," Garland says. Garland says that Phillips 66 will execute a number of strategies to revitalize the refining business. Phillips 66 will target lower-cost oil and focus more of its refining capacity on producing diesel and other high-yield fuels. The company also will ramp up exports to foreign markets that offer higher prices for their fuel.[51]

April 30, 2012: Phillips 66′s most profitable refineries of the past couple years are in what’s called the Mid-Continent

According to Christopher Helman writing in Forbes magazine, Phillips 66′s most profitable refineries of the past couple years are in what’s called the Mid-Continent — from Texas north to Montana including the Sweeny refinery [sic], Ponca City, Wood River and Billings. The reason for their high profitability has been the glut of crude oil pouring into the region from newly tapped shale oil plays like North Dakota’s Bakken. "Because there was a lot of new oil and not enough pipeline capacity to get it down to the Gulf Coast mega-refineries, the crude got bottled up in the storage tanks at Cushing," writes Helman. "The bottleneck that kept oil from getting out of Cushing also kept its price at a record-wide discount relative to its rival European benchmark Brent crude. At one point last year you could buy a barrel of WTI for $27 less than a barrel of Brent. Historically WTI has been slightly more expensive." In an April conference call with analysts, Garland said the company had been generating $90 million in annual net income for every dollar of WTI-Brent price differential that it could capture for its refineries. However, this opportunity is not going to last long term because there will soon be plenty of new options for getting crude out of Cushing and Garland agrees that the price differential will collapse. “Over three to five years those wide differentials that we’re seeing in the Midcon will collapse to the transportation differential,” he told me. “So more like $3 to $5 a barrel. It’s not going to be $20 forever.”[52]

Increase Profitability by Increasing Exports

Greg Garland disclosed during the 4th quarter earnings conference call on January 29, 2014 that Phillips exported nearly 200,000 barrels a day. "Our total export capacity is just over 400,000 barrels per day, up from 285,000 barrels at the end of 2012." Garland added that the increase in export capacity is primarily Gulf Coast. "I think we will continue to push the limits. We are looking for cheap ways that we can just get more barrels across there. Certainly, we have stated our ultimate target is about 500 a day, but almost all that increase is going to be on the Gulf Coast. Minor debottlenecks on the West Coast, and then we have underutilized capacity today on the East Coast."[53] Graphic from Phillips Presentation to USB Global Oil and Gas Conference May 21, 2013.

April 11, 2014: Phillips Exports Oil to Canada

Reuters reported on April 11, 2014 that after securing an export license in 2013, Phillips is now exporting oil to Canada. A Phillipsspokesman declined to say where in Canada its exports are headed and in what volume and did not disclose if the oil will reach its destination via rail or barges. "As a matter of practice, Phillips 66 does not comment on commercial activity," said spokesman Dennis Nuss. The United States does not allow exports of its own oil, but makes exceptions such as barrels going to Canada and re-exports of foreign oil.[54]

April 11, 2014: Phillips to Build Splitter at Sweeny Refinery to Process Condensates into Fuel Components that Can Be Exported

Reuters reported on April 11, 2014 that Phillips plans to build a condensate splitter at Sweeny refinery which will allow it to process condensates into fuel components that can be exported.[55]

March 5, 2014: BP Skirts US Crude Export Ban with Mini-Refineries: Phillips May Follow Suit

Bloomberg reports that the oil industry is pressuring President Barack Obama to end the 41-year-old ban on most crude exports but British Petroleum (BP) isn’t waiting for a decision. The British oil giant has signed on to take at least 80 percent of the capacity of a new $360 million mini-refinery in Houston that will process crude just enough to escape restrictions on sales outside the country. “It’s a relatively inexpensive way around the export prohibition,” says Judith Dwarkin “You can lightly ruffle the hydrocarbons and they are considered processed and then they aren’t subject to the ban.” Amid a flood of new US oil], the demand for simple, one-step plants capable of transforming raw crude into exportable products such as propane is feeding a construction boom along the Gulf Coast. The first such mini-refinery, built for 1/10 the cost of a complex, full-scale refinery, is scheduled to open the first phase of its 100,000 barrel-a-day crude processing plant in July, The mini-refineries take advantage of the law that allows products refined from oil to be sold overseas, though not the raw crude itself. "The international buyers of these products will likely need to refine them further, so this is basically a veiled form of condensate exports,” says Leo Mariani.[56][57][58]

According to Bloomberg, three additional plants have been proposed by other pipeline or trading companies, and refiners including Valero and Phillips said they may follow suit.[59]

February 19, 2014: Christopher Helman Says the US Oil Boom is Not So Bad for Refinery Owners

Christopher Helman wrote at Forbes Magazine on February 19, 2014 that increasingly, the oil giants seem to have realized that there’s better returns to be made, with fewer headaches, by turning their focus back to the USA and that it’s the smaller operators that have been able to capitalize best on the unconventional oil and gas revolution. "Thanks to the U.S. oil boom, refineries in this country are chronically oversupplied with cheap oil (as witnessed by the discount of WTI to Brent) and will continue to be as long as oil exports remain prohibited. This frustrates the small independent drillers who would like to sidestep the refiners and export their crude to the world market (if it weren’t prohibited). But it’s not so bad if you happen to own a refinery; then you can capture much of that differential by exporting finished gasoline and diesel to the world market," writes Helman. "That’s why Exxon, Chevron and Shell are unlikely to jettison any U.S. refineries as long as this dynamic remains. On the contrary, notes Deutsche Bank’s oil analyst Paul Sankey, we may soon see the day when a big independent oil producer buys a small refining company — “relative multiples would make this a highly accretive move,” Sankey wrote."

February 14, 2014: Garland Says Phillips is Well Placed to Compete in the Export Market to South America

Greg Garland told security analysts at the Credit Suisse Global Energy Summit on February 12, 2014 that Phillips is well placed to compete in the export market. "We have 7 coastal refineries, so roughly 75% of our domestic capacity is on the coast. These are going to be the best position refineries to participate in the export opportunities that we see," said Garland. "We believe that you're going to have to access the export markets to be able to continue to run high utilization rates and hence our focus on growing our export capability to 500,000 barrels a day." Garland said that in December we sold 250,000 barrels a day to Latin America and South America. "We do believe that the U.S. refining business is really well positioned to compete in those export markets. You have an energy price advantage over European and Asian refiners. You have -- you're in the right zip code so you have a transportation cost advantage. Then you factor in an advantaged crude position. So these refineries and when you look at the complexity, size and the scale of the U.S. refining business, well positioned to compete in the export markets. That's true of Phillips 66 also."[60]

January 29, 2014: Garland Reiterates Support of Crude Exports

In response to a question from Doug Leggate of Merrill Lynch, Greg Garland reiterated his support for crudge exports during the 4th quarter earnings conference call on January 29, 2014. "I think I came out in May of 2012, and said we wouldn't be opposed to lifting the ban on crude exports. We do encourage a thoughtful and broad conversation around energy policy in our country, and I think you have got to look at that holistically. It is not just crude exports, but it is also infrastructure. And that could be pipelines, that could be marine, and I think you just can't take one of them and pull it out separately. So we don't oppose lifting the crude ban. But I think you have got to look at RFS. You have got to look at infrastructure pipeline. Can we approve a pipeline or not in this country? All the way to marine infrastructure limitations that we have in this country. So and generally we are free-traders, but we would like to see a free market also."[61]

January 29, 2014: Phillips Hits New Record Exporting 200,000 BPD, Ultimate Target is 500,000 BPD

Greg Garland disclosed during the 4th quarter earnings conference call on January 29, 2014 that Phillips exported nearly 200,000 barrels a day. "Our total export capacity is just over 400,000 barrels per day, up from 285,000 barrels at the end of 2012." Garland added that the increase in export capacity is primarily Gulf Coast. "I think we will continue to push the limits. We are looking for cheap ways that we can just get more barrels across there. Certainly, we have stated our ultimate target is about 500 a day, but almost all that increase is going to be on the Gulf Coast. Minor debottlenecks on the West Coast, and then we have underutilized capacity today on the East Coast."[62]

May 21, 2013: Phillips is Increasing Export Capabilities

Greg Maxwell, Executive Vice-President for Finance and Phillips CFO, told analysts at the UBS Global Oil and Gas Conference on May 21, 2013 that Phillips is increasing export capabilities. "We have projects in progress to increase export capability from our Gulf Coast and our West Coast refineries by 115,000 barrels per day over the next few years. And during the first quarter, we moved 150,000 barrels per day into the export market. And these projects position us with the capability to export up to 30% of our total clean product production from our coastal refineries."[63]

January 10, 2013: Michael Fitzsimmons Writes that Garland's Support of Crude Exports is Grounded in Confidence in the Future and in Relations with ConocoPhillips

Michael Fitzsimmons wrote in Seeking Alpha on January 10, 2013 that Fitzsimmons has a theory as to why Phillips CEO Garland has unpredictably come public in December in support of is supporting crude oil exports: Could it be that Phillips 66's position on the crude oil export question goes back to its relationship to - ConocoPhillips? After all, Fitzsimmons says, since the spin-off many COP executives and employees likely hold stock in PSX, and vice-versa. Fitzsimmons says that COP produces over 130,000 boe/day of high quality light-sweet crude in the Eagle Ford - very close to PSX's Texas refineries. "Even though the companies are now separate publicly traded entities, you know that COP and PSX management talk turkey quite often. So I wonder what PSX might get from COP in return for publicly supporting crude exports? First dibs on Eagle Ford production at a favorable rate? Discounts on natural gas feedstock for its refinery and chemical operations? Discounts on WCS from COP's top-tier position in the Canadian oil sands? The point is this - by working in tandem, there is certainly room for COP and PSX to optimize the overall returns for both companies."[64]

"While an easing of the crude oil export ban will likely reduce the Brent/WTI spread and thus crimp profits in the company's refining sector, I take it as a very bullish and almost cocky indicator of the confidence PSX management has in its future - exports or no exports. I also believe COP and PSX will work closely together to maximize the benefits to both companies should the ban on crude oil exports be lifted or substantially eased - something I see as very likely."[65]

December 13, 2012: Garland Supports Exports of Crude Oil

Reuters reported on December 13, 2013 that Phillips 66 CEO Greg Garland told reporters at a lunch in New York that Phillips would support exports of crude oil from the United States, arguing the boost they would give the country's economy would trump the higher costs for the company and for American consumers. "When you think about what is good for U.S. economy, what drives job growth... all of these are reasons why we support crude oil exports," said Garland. "If we're allowed to export refined products I think others should be allowed to export the crude they produce." Garland is the first head of a major refiner to speak openly in favor of exporting crude.[66]

The United States in the past three years has become a major exporter of gasoline, jet fuel, and diesel as domestic demand has fallen in reaction to higher prices and a slow economic recovery. Some say the decades old ban on crude oil exports is outdated should North America become energy independent in the coming years, though it is likely to be a fiercely fought political issue. Garland said that U.S. sea-borne crude oil imports could be as low as 2 million barrels per day (bpd) within five years. The drop in sea-borne imports, from a peak above 8 million bpd in the middle of the last decade, has led many to speculate the U.S. could eventually become a net exporter of crude.[67]

Garland praised the cheap energy-led "renaissance" in American manufacturing. "We consider ourselves a manufacturing company... Last year the biggest export from the United States was not planes or automobiles but refined products - and that's the first time since the 1940s."[68]

September 19, 2012: Phillips Plans to Increase Exports to 220,000 bbl by End of 2013

FuelFix reported on September 19, 2012 that Phillips 66 exported about 100,000 barrels a day and plans to increase daily exports to 220,000 by the end of 2013. "If we can export to make more money, we’ll do that. If we can sell in the U.S. and optimize earnings, we’ll do that too. But to date, exporting has actually gotten us a higher price than selling in the U.S." Garland added that it doesn't take a huge investment to increase exports. "These aren’t huge investments. It’s access to tanks and pipes and dock space. It’s less than $100 million of investment for us to do this." Garland says that demand is down in the United States, so increasing exports is beneficial for the country. "Last year, the U.S. industry’s No. 1 export oil products, gasoline and diesel essentially. When we think about exports, we think it’s great for the country. It makes jobs for us. Ultimately, I think it results in better prices for American consumers. We are running our refineries harder, we are spreading those fixed costs over more barrels. So what you are seeing is relatively high utilization rates in the U.S. refining industry today even though demand has been down."[69]

Increase Profitability by Increasing Clean Product Yields

Greg Garland told security analysts at the Credit Suisse Global Energy Summit on February 12, 2014 that there's $60 million to $100 million of value creation by pushing our clean yields.[70] Graphic from Phillips Presentation to USB Global Oil and Gas Conferecne May 21, 2013.

February 12, 2014: Garland Says Phillips is Pushing Our Clean Yields

Greg Garland told security analysts at the Credit Suisse Global Energy Summit on February 12, 2014 that there's $60 million to $100 million of value creation by pushing our clean yields.[71]

January 29, 2014: Phillips Benefited from Clean Product Differentials

Greg Garland told analysts at the fourth quarter earnings conference on January 29, 2014 that Phillips benefited from clean product differentials. "During the quarter, we realized better prices on average for clean products, compared with the benchmark prices. In addition, as RIN prices moderated, the benefit of resulting lower expenses is reflected in this bar."[72]

May 21, 2013: Phillips Plans to Increase Product Yields

Greg Maxwell, Executive Vice-President for Finance and Phillips CFO, told analysts at the UBS Global Oil and Gas Conference on May 21, 2013 that Phillips plans to increase product yields. "Over the last few years, we've increased our total clean product yields by 2% percent with an emphasis on maximizing our diesel yield. As you know, global demand for diesel is strong and growing. Our distillate yield is 3% higher than the United States industry average. And we believe we have a peer leading distillate yield. This is worth approximately $150 million in net income per year based on today's market prices. And 11 of our refineries have small projects to increase both clean product and diesel yields."[73]

April 9, 2012: Garland Wants to Increase Clean Product Yields

"As we look at our refining business, we pulled capital down over the past couple years. Our sustaining level of capital in the R&M segment is about $1 billion a year. We will focus some incremental spend in R&M on margin improvement projects. We think that there's opportunities to capture more feed stock advantaged crudes. We can drive our clean product yields, increase our export capability. 1% improvement in clean product yield gives us about $100 million to $150 million of net income improvement. If we can capture $1 a barrel of WTI/Brent differential, it's worth about $90 million of net income. There is powerful economic incentives to capture these margin improvements."[74][75][76]

June 5, 2012: Garland Wants to Increase Clean Product Yields

On June 5, 2012 Phillips CEO Greg Garland presented to the Citi Global Energy Conference and said Phillips has a clear strategy for growth and improving returns. Garland said Phillips is kind of an average performer in terms of returns on Refining and Marketing with a 12% ROCE in this business, but the expectation is thatthis can be improved to a 15% ROCE business over the cycle. "The R&M business for us is a run well, optimized business. You won’t see us adding capacity." Phillips wants to increase yields in the refineries. "Every one percent clean product yield is worth somewhere between $100 to $150 million of net income. For every one percent diesel yield, we can increase, in today’s market is the capture of about $60 million in net income. In the first quarter we ran about 41% diesel, which is really the highest of the peer group if you look out there. And so we’re pretty comfortable that we can continue to tweak the operations in refineries and to eke out a couple more percentage points in clean product yields and continue to push our diesel yields up without significant investment at this point in time.[77]

Increase Profitability by Decreasing Costs

See * Operational Excellence

Increase Profitability by Optimizing Portfolio

See * Phillips' Divestiture of Non-Core Assets Through Sale, Exchange, or Closure

Master Index for Phillips 66 Articles

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About the Author

Hugh Pickens

Hugh Pickens (Po-Hi '67) is a physicist who has explored for oil in the Amazon jungle, crossed the empty quarter of Saudi Arabia, and built satellite control stations for Goddard Space Flight Center all over the world. Retired in 1999, Pickens and his wife moved from Baltimore back to his hometown of Ponca City, Oklahoma in 2005 where he cultivates his square foot garden, mows nine acres of lawn, writes about local history and photographs events at the Poncan Theatre and Ponca Playhouse.

Since 2001 Pickens has edited and published “Peace Corps Online,” serving over one million monthly pageviews. His other writing includes contributing over 1,500 stories to “Slashdot: News for Nerds,” and articles for Wikipedia, “Ponca City, We Love You”, and Peace Corps Worldwide.

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