Phillips 66 is steadily making a number of commitments to transportation infrastructure to deliver advantaged, or lower cost, crude oil to its U.S. refineries, resulting in significant cost savings and increased profitability for the company.
The company’s biggest operating cost by far is the purchase of approximately 2 million barrels of crude oil per day (BPD), or 730 million barrels per year -- enough oil to fill Reliant Stadium in Houston 29 times. With crude oil prices fluctuating between $90 and $120 per barrel, that equates to more than $80 billion a year for crude oil purchases.
“Crude oil and energy consumption account for approximately 70 percent of our refining business’ cost structure,” said Chairman and Chief Executive Officer Greg Garland. “The single biggest lever we have to improve value in our refining business is through lowering our feedstock costs. A savings of $1 per barrel across our refining system is worth about $450 million of net income to us.”
“The single biggest lever we have to improve value in our refining business is through lowering our feedstock costs. A savings of $1 per barrel across our refining system is worth about $450 million of net income to us.”
Advantaged crude oil sells at a discount relative to crude oils tied to the global benchmark, North Sea Brent crude. For Phillips 66, advantaged crude oil includes heavy crude oil from Canada and Latin America, lighter Canadian grades, and West Texas Intermediate (WTI). Increasingly, it also includes shale crude oil from places like the Bakken in North Dakota and the Eagle Ford in Texas. The price for U.S. shale crude is typically tied to the WTI domestic benchmark which has recently been trading $20 less per barrel than Brent crude.
“Running more advantaged crude oil in our refineries allows us to run less of the more expensive globally priced crude oils,” said Garland. “This is a key element of the company’s strategy for enhancing returns on capital and we think we can drive 2 to 3 percent improvement on our return on capital employed for our Refining business by incorporating more advantaged crude oil into our supply.”
In the fourth quarter of 2012, 67 percent, or about 1 million BPD, of Phillips 66’s U.S. refining crude slate was considered advantaged crude oil – most of it WTI and heavy crude from Canada and Latin America, along with about 135,000 BPD of shale oil. By 2017, the company expects to be processing 500,000 BPD of new or increasingly advantaged crude oils.
The challenge for refiners like Phillips 66 is getting the advantaged crude oil to the refineries that are equipped to process it. While vast resources of advantaged crude oil are being produced in Canada and in the United States, there is not enough pipeline capacity in the right locations to carry the oil to where it’s needed.
A number of pipeline projects that are planned or already under way could significantly increase the volumes of advantaged crude oil available to refineries in the Midcontinent and Gulf Coast regions, such as the proposed Keystone XL pipeline, the Seaway pipeline reversal and expansion, the Ho-Ho pipeline reversal and others. In the meantime, Phillips 66 is seeking alternative means to transport advantaged crude oil to its refineries.
“We are looking at pipe, rail, truck, barge and ship -- just about any way we can get advantaged crude to the front end of the refineries,” said Garland.
Phillips 66 has established a cross-functional team from its Business Development, Commercial, Refining and
Transportation businesses to develop strategies for accessing and moving advantaged crude oil into its refineries. This team has moved quickly to complete a number of logistics and supply agreements with third parties over the past 12 months as well as identified opportunities to grow existing wholly owned transportation assets that supply the refineries.
“Until new pipeline projects come online, rail is in many cases the easiest and most cost efficient way to get advantaged crude to some of our refineries”
“Until new pipeline projects come online, rail is in many cases the easiest and most cost efficient way to get advantaged crude to some of our refineries,” said Jay Clements, manager, Business Development, and leader of the advantaged crude strategy team. “New rail projects can be built much faster than pipelines, allowing quicker access to the new and growing shale plays. However, our refineries are not currently set up to take delivery of large volumes of crude oil from trains, so we’re looking at building rail offloading facilities at several refineries including the Bayway Refinery in Linden, N.J., and the Ferndale, Wash., refinery.”
Phillips 66 has secured access to a third-party rail loading facility in North Dakota and the company has received the first batch of railcars from the 2,000 ordered in 2012. These railcars initially will be used to deliver Bakken crude oil west to the Ferndale Refinery and east to the Bayway Refinery.
The company is already processing 75,000 BPD of Bakken crude oil at Bayway and is processing smaller volumes of Bakken crude at Ferndale, with plans to significantly grow those volumes as the new rail car fleet is delivered. The oil is being delivered through third-party rail facilities and then by barge to the refineries. A proposed new rail offloading facility planned for Bayway would enable the delivery of 70,000 barrels per day of Bakken crude directly into the refinery. Smaller volumes of Bakken crude also are being delivered to the company’s Midcontinent refineries via existing pipeline systems and to its Gulf Coast refineries through a combination of rail, pipelines and barges.
“Our U.S. refining network occupies the broadest geographic footprint within our peer group which we think gives us a competitive advantage. It's a great platform for capturing advantaged feedstock”
The Ponca City Refinery in Oklahoma is situated on top of the Mississippian Lime formation and the company has signed an agreement with a third-party pipeline operator to supply the refinery with approximately 20,000 BPD of crude oil from this local source. In addition, the company is enhancing its own transportation facilities that will enable delivery of another 40,000 BPD of Mississippian Lime crude oil to Ponca City by mid-2014.
The Sweeny Refinery in Texas is in close proximity to the Eagle Ford shale and another recent pipeline agreement will supply up to 30,000 BPD of Eagle Ford crude oil to that refinery beginning in 2014. Eagle Ford crude oil also is being delivered to Phillips 66’s Gulf Coast refineries and to the Bayway Refinery via barges and tankers. The company recently signed time charter agreements for two medium-range U.S.-flagged tankers that supply Eagle Ford crude oil to the Bayway Refinery, the Alliance Refinery in Louisiana and potentially the company’s other Gulf Coast refineries.
While many of Phillips 66’s U.S. refineries are already processing some advantaged crudes, the company is making small modifications to several refineries, including the Lake Charles Refinery in Louisiana and the Ponca City, Sweeny, Alliance and Wood River refineries that will enable those facilities to process even more advantaged crude oil. The next challenge for the company is identifying strategies to get more advantaged crude oil to its California refineries.
“The California refineries are capable of running a wide range of crude oils which creates opportunities throughout North America to supply California if we can find a cost effective mode of transportation,” says Clements.
Garland believes the geographic diversity of the company’s U.S. refining network, especially the company’s significant presence in the Midcontinent and Gulf Coast regions, is a major strength and positions the company to be able to benefit from advantaged crude sources for years to come.
“Our U.S. refining network occupies the broadest geographic footprint within our peer group which we think gives us a competitive advantage. It's a great platform for capturing advantaged feedstock,” said Garland. “Over the next several years, we are expecting 2 to 3 million barrels a day of light, sweet crude coming out of new U.S. shale plays and ultimately there will be 2 to 3 million barrels a day of Canadian heavy crude oil that comes south. We’re going to make investments in infrastructure and aggressively pursue every angle we can to ensure we can bring as much advantaged crude as possible to our refineries.”
CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This story contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. Words and phrases such as “is anticipated,” “is estimated,” “is expected,” “is planned,” “is scheduled,” “is targeted,” “believes,” “intends,” “objectives,” “projects,” “strategies” and similar expressions are used to identify such forward-looking statements. However, the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements relating to Phillips 66’s operations (including joint venture operations) are based on management’s expectations, estimates and projections about the company, its interests and the energy industry in general on the date this story was prepared. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements. Factors that could cause actual results or events to differ materially from those described in the forward-looking statements include fluctuations in crude oil, NGL, and natural gas prices, refining and marketing margins and margins for our chemicals business; unexpected changes in costs for constructing, modifying or operating our facilities; unexpected difficulties in manufacturing, refining or transporting our products; lack of, or disruptions in, adequate and reliable transportation for our crude oil, natural gas, NGL, and refined products; potential liability for remedial actions, including removal and reclamation obligations, under environmental regulations; potential liability resulting from litigation; limited access to capital or significantly higher cost of capital related to illiquidity or uncertainty in the domestic or international financial markets; and other economic, business, competitive and/or regulatory factors affecting Phillips 66’s businesses generally as set forth in our filings with the Securities and Exchange Commission, including our filings with the Securities and Exchange Commission. Phillips 66 is under no obligation (and expressly disclaims any such obligation) to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise.