January 30, 2013 / 5:35 PM / 6 years ago

UPDATE 2-Phillips 66 mulling options for California refineries

* Sale of California plants not ruled out

* Company aims to boost profit near-term, access cheaper oil

* No longer taking light, sweet crude imports on Gulf Coast

By Kristen Hays

HOUSTON, Jan 30 (Reuters) - Phillips 66 is studying “any and all options” for its California refineries given challenges with state regulatory requirements and high costs, Chief Executive Greg Garland told analysts on Wednesday.

Analysts have repeatedly asked whether the second-largest independent U.S. refiner would try to sell its two California refineries and exit the state because of higher operating costs.

Phillips 66 is working to improve profits at the California plants by tapping into cheaper crudes already run by refineries elsewhere in the country and reducing costs, Garland said on the company’s fourth-quarter 2012 earnings conference call.

He did not rule out a sale.

“We’re studying any and all options for California in terms of where do we go long-term in the business,” he said. “We are doing everything we can to improve it. I don’t feel it’s a distressed asset. We want to take our time and be thoughtful.”

Garland said the company had increased its runs of so-called advantaged crudes - such as cheap inland U.S. crude and Canadian heavy oil - to 67 percent of the overall U.S. crude slate, up from 57 percent a year ago.

With that increase, the company had stopped receiving light, sweet imports into the U.S. Gulf Coast, Garland said. Valero Energy Corp, the largest independent U.S. refiner, on Tuesday also said it had replaced light crude imports with cheaper domestic crude.

Marathon Petroleum Corp on Wednesday said it aims to replace foreign sweets with U.S. oil at its Gulf Coast refineries.

Phillips 66 is the only refiner with plants in all five U.S.-defined petroleum supply zones. Most of its refineries run at least some of those crudes that trade at discounts to other global crudes because U.S. production has far outpaced infrastructure to move it to markets.

But refiners with plants in California face regulatory challenges as well as isolation from other markets when it comes to tapping that supply.

Garland told analysts that Phillips 66 was looking at getting railcars capable of hauling even cheaper Canadian heavy crude to the company’s refineries in California.

However, he said resistance to such a move was likely. A 2006 California law requiring sharp cuts in emissions has a component that would require refineries to run crudes produced in environmentally friendly ways. Canadian crude production comes with high emissions.

Regulations for that component have yet to be finalized and are tangled in the courts, leaving refiners unsure of what limits they may have to certain cheaper crudes.

Plus, California has the huge Monterey shale, estimated by the U.S. government to have more reserves than the prolific Eagle Ford in Texas or Bakken in North Dakota. But output has been spotty with geology that differs from those other plays.

Given those uncertainties, Garland told Reuters in an interview that for the time being, Phillips 66 will focus on improving the California refineries’ single-digit returns while studying a possible sale, joint venture or spinoff.

“The option value to hold California is zero. It really costs us nothing,” he said.


Phillips 66 said its refineries ran an average of 112,000 barrels per day of shale crude in 2012, and aims to increase that to 200,000 bpd this year with logistics improvements.

The company will begin receiving 2,000 railcars next month to move more crude to refineries, and is eyeing investments at its plants to increase sweet-crude processing capability.

Garland said the company is looking at running all sweet crude at its 247,000-bpd refinery in Sweeny, Texas, which is near the endpoint of the newly expanded Seaway pipeline that moves crude from the U.S. crude futures hub in Cushing, Oklahoma, to the Texas Gulf Coast.

Garland said Sweeny, primarily a heavy crude refinery, can run about 60,000 bpd of sweet crude. A $50 million or less investment could help increase that capability - just one example of “quick-hit” investments to capture more cheaper crude, he said.

“We will look at that and watch that,” Garland said. “We think we have quite a bit of room left to run in terms of accelerating advantaged crude capture around our refineries.”

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