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Vol. 17, No. 25 Week of June 17, 2012
Providing coverage of Bakken oil and gas

Phillips 66 might buy 2,000 rail cars to haul mid-con shale oil; sees lower NGL prices thru’ 2017

Phillips 66 is looking at buying as many as 2,000 railroad tank cars to ship sweet, light crude produced from U.S. midcontinent shale oil fields to refineries, company Chairman and CEO Greg Garland told attendees of the Citi Global Energy Conference June 5.

“We’re doing things around pipelines, we’re doing things around trucks, we’re doing things around rail,” Garland said. “We’re considering buying a couple thousand more railcars so we can get Bakken crude either east and west.”

Phillips 66, the newly spun-off downstream arm of ConocoPhillips, has 11 refineries on the east, west and gulf coasts of the United States. Garland said those refineries currently handle about 100,000 barrels a day of shale oil, which “can easily, in the next year or two” be increased by another 120,000-150,000 bpd of incremental crude transported by rail.

“Ultimately, we can process about 500,000 barrels a day of these shale-type crudes,” he said, noting it would take about three years to get to that number and that the company would also take advantage of pipeline transport as it becomes available.

“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 U.S. … Every dollar that we can capture across our system is worth about $500 million of net income to us,” Garland said. “There’s significant incentives for us to find ways to put these advantaged crude to the front end of our refineries.”

Phillips 66 is “not looking to expand capacity” at its refineries, he said, but instead it’s “looking to put more advantaged crude at the front end of our refineries.”

The goal is to optimize the profitability of the company’s existing refining assets, he said.

“The other thing we can do is we can drive margin capture in the refineries by increasing our yields. Every 1 percent clean product yield is worth … $100 to $150 million of net income. For every 1 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 percent diesel, which is really the highest of the peer group. … 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.”

The additional shale oil, shipped mainly by rail, will not necessarily be solely Bakken crude, Garland said in a Q&A following his presentation.

“It takes a — these unit trains, 32,000 gallons in a railcar, 100 cars on the train, so 2,000 cars gets you roughly 100,000 barrels a day of capacity. 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.”

“We think that the E&P side will develop faster than infrastructure to take it away over the next 5 to 10 years, and so we think that that will be a good investment. It’s a really quick payback on that. Then the pipes are coming into play and that will take up the bulk. So I think within the next three years or so, we should get to that 500,000 barrels a day of processing shales into our refineries.”

Downward pressure on NGL prices through 2016, 2017

When asked for his view on recently falling prices for oil and natural gas liquids, or NGLs, Garland said the drop in oil prices was good for the economy.

“It puts more dollars in people’s pocketbooks. We think it will have a positive impact on driving and ultimately demand for our products. So we’re not as concerned about that.”

What he is concerned about is “what’s going on in Europe” and the “apparent slowdown … in Asia, particularly in China. On the chem side we’ve seen a little bit of slowdown there. And so from a macro standpoint, the world is in flux and as bad as it feels in the U.S., we’re actually doing pretty good, relative to the rest of the world,” Garland said.

“We’re certainly seeing pressure on NGL prices. You’ve seen ethane prices really, wouldn’t use the word collapse, but they significantly have fallen over the course of the last six to eight weeks. And haven’t seemed to found a bottom yet,” he said, noting that “part of it’s been some turnarounds in the chemical industry, but it’s also — there’s a lot of ethane that’s coming on, as these shale plays are starting to develop.”

The propane inventory is starting to build, he said. “Within the last week, propane has switched to the preferred crack for the petchem industry. And so that will put more pressure on ethane prices.”

Garland predicted the midstream industry would “come under pressure between now and 2016, 2017 when these new crackers come up. If you think about the petchem business, historically, cracked about 800,000 barrels a day of ethane. It’s moved it up to 1.1 million barrels a day.”

Incrementally, he said “the engineers are really good. They’ll find a way to get a few more barrels through” existing facilities, “but they’re not going to find a way to get another 300-500,000, 800,000 barrels a day through the system. … It’s going to take the new grassroots facilities coming on to really soak up that demand. So I think you’ll see some pressure on NGLs in this interim space.”

—Kay Cashman

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