* Will run imports rather than U.S. crude as costs dictate
* Narrowed U.S. crude discounts to Brent cut 2Q profits
* May increase biofuel blending to cut ethanol credit costs
By Kristen Hays
HOUSTON, July 31 U.S. independent refiner and
chemical company Phillips 66 has increased runs of light
crude imports at its New Jersey refinery as costs of North
Dakota Bakken crude have risen in the last five months,
executives told analysts on Wednesday.
"We have reduced our take on the (North Dakota) Bakken
to the East Coast as we've adjusted our crude slates and (are)
replacing that with more competitive barrels from imports," said
Tim Taylor, executive vice president for commercial, marketing,
transportation and business development, during the company's
second-quarter earnings call.
Executives said the company still sees U.S. and Canadian
heavy crude as cost-advantaged over imports that are priced off
London's benchmark Brent crude, but they can adjust crude slates
to optimize those costs as differentials move.
The discount of U.S. crude to London's Brent has
narrowed sharply to less than $3 a barrel from more than $23 in
February as pipeline projects came online to help alleviate a
glut at the U.S. crude futures hub in Cushing, Oklahoma.
The narrowed discount squeezes profits from running U.S.
crudes delivered by rail or other expensive transport means,
which can add double-digit per-barrel costs. Phillips 66 has run
as much as 90,000 barrels per day of Bakken brought in by rail
at its 238,000 bpd Bayway refinery in Linden, New Jersey.
Chief Executive Greg Garland said the company's strategy of
replacing all imports with cheaper U.S. and Canadian heavy
crudes remains unchanged, as executives expect the spread to
widen as U.S. crude production increases.
Taylor added that refineries can pull back on U.S. crudes to
run imports when needed.
"We have to maintain the option to do an import just because
it makes the best value," Taylor told Reuters. "Fundamentally,
we still believe these U.S.-produced crudes are going to be a
Phillips 66 reported a quarterly profit below analysts'
expectations on those higher crude costs, sending shares down by
3 percent before the bell.
By mid-afternoon, shares rose by nearly 6 percent to $61.81
on the New York Stock Exchange.
The narrowed crude spreads between the two benchmarks helped
slice Phillips 66's refining segment profits to $481 million,
down $404 million from the second quarter last year.
Increased costs for ethanol credits further cut refining
margins, the company said.
A 2007 law that mandates growing use of biofuel in gasoline
requires refiners to collect enough Renewable Identification
Numbers, or RINs, to prove they meet the mandate. If they blend
ethanol into gasoline, they get a RIN - and if they sell
unblended gasoline, they must buy a RIN for each gallon. RIN
prices have spiked as some refiners scramble to get enough.
Phillips 66, unlike some other refiners, does not disclose
its specific RINs expenses. But the company operates on both
ends, getting RINs from blending through its terminal systems
and buying RINs when it sells unblended gasoline.
Taylor said the company may increase blending to reduce its
"That takes time," he said. "You have that opportunity to
grow the volume that we blend and sell directly."
Refiners also can escape RIN costs by exporting more refined
products, as those sent to other countries do not have to be
blended with biofuels.
Phillips 66, which already had aimed to increase gasoline
and diesel exports, said the company exported 181,000 bpd of
refined products in the second quarter, up by 75,000 bpd from a