Phillips 66 CEO says exports will ease U.S. refining challenges

Since splitting from ConocoPhillips last spring, Phillips 66  has touted itself as a diversified refining, chemicals and midstream company. The refining side of the business had a stellar breakout quarter. Still, CEO Greg Garland says the company’s growth will come from its smaller divisions — joint ventures in chemical company Chevron Phillips and in natural gas processing and transport business DCP Midstream.

Garland spoke to FuelFix recently about his vision for Phillips 66’s future. Edited excerpts follow.

Q: In its first quarter after the spin-off, your refining business performed very well. Is that a sign that refining can play a bigger role in Phillips 66’s growth than planned?

A: The refining business is still a very challenged business. There’s no question demand is declining. Part of it is economic driven — the economy has suffered and people have driven less. The second thing is you have the increased CAFE standards. That’s less demand for gasoline. And then you have the increasing biofuels that are coming into the mix. That’s a pretty strong headwind.

Q: What’s been driving the better financial results we’ve seen for the refining business in 2012?

A: What people are talking about today, and what I think is a real opportunity for the U.S. refining business, is the structural change in crude prices. We’ve seen advantaged crude in the U.S. versus the rest of the world, with the new shale crudes coming on. You still have 2 to 3 million barrels a day of new light sweet crude coming on out of these new shale plays. 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.

Q: Given the cost advantage, how are U.S. exports playing in the global market?

A: Think about a U.S. refiner that’s buying his energy at $3 per million Btu for natural gas. Europeans are paying $12 for their natural gas. So we have a significant advantage in energy cost and crude cost. That’s 70 percent of your cost structure. That’s a huge leverage that you have.

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.

Q: Are exports becoming a bigger part of Phillips 66’s business?

We’ve been investing in increasing our capability to export. We did about 100,000 barrels a day last year. Ultimately, we are going to take that to 220,000 barrels a day across the U.S. By the end of 2013 we’ll be there. Certainly by 2014.

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.

We’re going to chase the highest value opportunity. 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.

Q: Could these lead to refinery expansions in the United States?

A: There’s no need to expand capacity. This market is well supplied. I think we have the opportunity to improve margins and improve returns because of these structural changes in crude and the opportunity to uplift export. But even for us, while looking at exports, the refineries tend to have very localized markets. So you think globally, but act locally in this business for the most part.

Q: Is this putting the United States on the road to energy independence?

I think we are going to move that way directionally. But I don’t think you are going to see us exporting the majority of what we make. We have a huge demand here in the country. And the exports are that marginal piece on the top of meeting the demand here.

Q: What about Phillips 66’s other businesses? What role will the chemicals and midstream divisions playing in the company’s growth?

It’s a core part of our business. Ten years from today we are still going to be refining a lot of products. If you think about the last three years, we’ve had 12 percent returns in the refining business. We’ve had 28 to 30 percent returns in midstream and chemicals. So our shareholders want us to chase the highest returns. And those are businesses that are growing, versus refining that’s kind of declining.

They’re applying these new technologies of hydraulic fracturing and horizontal drilling in the oil fields like the Permian. And there’s the Utica and the Marcellus, you can go through all the names. So that creates a huge opportunity. The midstream infrastructure will follow. The takeaway capacity is completely loaded and full. So there’s a need for new investment to do that, to take that away.

Q: With the challenges refineries are having in some regions, could there be more sales?

We have $50 billion in assets and in the last six years we’ve sold $10 billion. You would expect that some assets are really good and some aren’t quite as good. Over time you want to move the under-performing assets and take that money and invest it in higher performing assets. That’s business.

I don’t have any refineries today that have a huge capital requirement. It’s not that we’re in dire straights and we have to do something with any asset we have. It becomes a question of what assets do we think long-term will provide the highest returns in the portfolio. And the ones that don’t meet that criteria, what can we do to fix them? I would prefer to fix them first. And we’re going to give people time to do that. But ultimately, if we can’t get a way to fix them, we’ll see if someone will pay something for them, more than they’re worth.