UPDATE 2-Marathon runs US Midwest refineries at full throttle
* Marathon's Midwest refineries running "full out"
* Marathon says diesel demand up 2-3 pct year-on-year
* Gasoline demand to rebound if crude falls to $80 to $90
* Company will not sell E15 blend gasoline
NEW YORK, July 26 (Reuters) - The head of Marathon Petroleum Corp (MPC.N) is worried about U.S. fuel demand, but that is not stopping him from running the company's Midwest refineries at full tilt and seeking creative ways to access cheaper crude.
Higher crude prices are hurting demand and especially weighing on gasoline consumption, Gary Heminger, chief executive of the new company, told Reuters on Tuesday.
"But we're running our plants in PADD II (Midwest) full out," Heminger said in an interview.
Marathon -- the largest refiner in the Midwest with a combined capacity of 602,000 barrels per day there -- is well-positioned to take advantage of cheaper crude in the region priced against U.S. benchmark West Texas Intermediate (WTI).
Increasing production in the Bakken shale prospect in North Dakota and higher imports of heavy Canadian crude into the Midwest have created a supply glut at Cushing, Oklahoma, which led to a wider discount for WTI crude against world benchmark Brent.
Aside from the wide spread, which hit a record high above $23 in mid-July, Marathon says demand for distillates is robust in the Midwest, helping to push refinery rates higher.
"We're balanced on diesel," Heminger said, adding products from Marathon's Midwest refineries stay in the region and the company is importing 800,000 to 900,000 bpd of products from the Gulf Coast to cover excess demand.
Heminger also has a bullish outlook on distillate demand, which he says is up 2 to 3 percent compared with a year ago. A rebound in gasoline demand, however, is not possible until crude falls to a range of $80 to $90 a barrel, he said.
Aside from its considerable refining assets in the Midwest, Marathon Petroleum, just three-and-a-half weeks old, is also the largest ethanol blender in the region.
Nonetheless, the company has no plan to go beyond 10 percent of ethanol in its gasoline mix, known as E10, fearing liability for potential engine failure.
"I think we're going to hit the blending wall this next year with E10," Heminger said, adding that only 4 percent of engines in the United States can easily run higher blends such as the 15 percent ethanol mix known as E15.
"We are not going to go out and sell E15 the way it is set up today because the majority of cars' warranties are only good for a 10 percent blend," he said.
Marathon says it is uniquely positioned to take advantage of increasing North American crude production because of its refineries' configuration, which allows for flexible feeds, and its transport network, which includes some 150 barges that carry up to 100,000 bpd of crude and other feedstock.
"We haven't had any problems sourcing crude," Heminger said.
His company is undertaking a $2.2 billion expansion at its 106,000-bpd Detroit, Michigan, refinery, which will add 15,000 bpd of capacity complete with a new coking facility by the second half of 2012.
This will ramp up heavy Canadian crude intake at Marathon's Midwest refineries. The company's expanded 464,000-bpd Garyville refinery in Louisiana will also process heavy Canadian crude carried to the Louisiana port by barge.
The Garyville refinery is aptly located to ship crude to destinations in Latin America and now exports up to 65,000 barrels of oil products a day, according to company spokeswoman Pamela Beall.
To take further advantage of U.S. production, which rose to an eight-year high of 5.4 million bpd in March, Marathon will ship Bakken crude on railcars from the plains of North Dakota to its Midwest refineries, Heminger said.
Heminger said Marathon does not see the move as a long-term supply solution and expects speedy construction of pipelines in the region. [ID:nN1E76P1C1]
(Reporting by Selam Gebrekidan, Matthew Robinson, Janet McGurty, David Sheppard and Robert Campbell; Editing by Dale Hudson and Lisa Shumaker)
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