Phillips 66 will cut its 2021 capital spending budget to $1.76 billion, around 40% below the $2.9 billion spent in 2020, putting the focus on projects in process including its plan to turn a California refinery into one of the world's largest renewable fuels plant, the company said Dec. 14.
Receive daily email alerts, subscriber notes & personalize your experience.Register Now
"We continue to focus on reducing capital expenditures as market conditions remain challenged," said CEO Greg Garland in a statement.
"We are prioritizing completion of in-process projects, as well as advancing our investments in renewable fuels," he said.
Phillips 66, like other refiners, has struggled with sharp decline in demand this year for refined products brought on by the coronavirus pandemic. Third-quarter global refinery utilization in its system averaged 77%, in line with most of the company's US peers.
"Given a continued tough macro environment heading into 2021, we think that the company is trying to be prudent with its budget, rather than assuming that the market will get better," wrote J.P. Morgan analyst Phil Gresh in a research note Dec. 14.
Spending on Rodeo Renewed project
Phillips 66 has earmarked $776 million of 2020's capital spending for refining, with $521 million of that going to sustainable capital, which includes refinery maintenance and turnarounds. The $776 million does not include the $242 million budgeted for the two WRB Refining joint-venture plants – owned with Cenovus -- which will be used for sustaining projects, crude flexibility and distillate yield enhancement.
"The refining budget will also include $255 million to fund high-return, quick-payout to enhance margins by improving clean product yields and reducing feedstock costs, as well as investments to competitively position the company for a lower carbon future," the statement said.
Included in the 2021 spending is pre-construction and engineering costs relating to Phillips 66's plans to reconfigure its 120,200 b/d Rodeo, California, plant -- a project dubbed Rodeo Renewed -- into one of the world's largest renewable plants, able to produce over 50,000 b/d when completed in 2024.
"The conversion is expected to reduce the facility's greenhouse emissions by 50% and help California meet its low carbon objectives," the statement added.
Credits incentivize renewables
Layering California's Low Carbon Fuel Standard credit with the $1/gal Federal Blenders Tax makes it lucrative for producers of renewable diesel in that state, which otherwise would be a losing proposition.
According to S&P Global Platts assessments, West Coast renewable diesel including credits averaged $3.52/gal in November and is averaging $3.59/gal so far in December. Without the incentive of credits, producers would lose 61 cents/gal in November and 48 cents/gal so far in December.
Phillips 66 is likely to generate higher than average LCFS credits. On its third-quarter call, Phillips 66 said that 80% of the feedstock used would be lower intensity such as Used Cooking Oil (UCO), fats, oils, and tallow, which create the highest credit values.
California's renewable diesel demand was 800 million gallons in 2020, according to S&P Platts Global Analytics, but as other states consider LCFS and transportation cap-and-trade initiatives, demand is expected to rise. Canada's Federal Clean Air Act will begin in 2022 and will increase demand for renewables across the continent.
Prior to the complete conversion of the Rodeo plant, Phillips 66 will use lower Carbon Intensity soybean oil to produce 9,000 b/d from the plant.
Midstream projects include fractionation
Phillips 66 plans to spend $610 million on its midstream sector in 2021, including $300 million on its master limited partnership, Phillips 66 Partners.
"The budget is directed toward completing near-term committed and optimization projects, focusing on pipeline operations and progressing construction of Sweeny Frac 4 and the C2G pipeline," the statement said.
Sweeny Frac 4 is an NGL fractionation unit at the company's Sweeny, Texas refinery. Phillips 66 currently has 400,000 of fractionation capacity at Sweeny.
The C2G ethane pipeline connects the Clemens Storage Caverns to petrochemical facilities in the Corpus Christi area. The project is backed by long-term commitments and is expected to be completed in mid-2021.
At the Buckeye-operated South Texas Gateway Terminal in Corpus Christi, the first dock and 5.1 million barrels of storage capacity have been commissioned. Terminal operations are expected to ramp up through the end of this year as additional phases of construction are finished.
Phillips 66 expects the project to be completed in the first quarter of 2021 with a total storage capacity of 8.6 million barrels and up to 800,000 b/d of crude and condensate export capacity. Phillips 66 partners owns 25% interest in the terminal.