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Phillips 66 cuts refinery rates, capital spending and defers pipeline projects to manage coronavirus demand destruction

Highlights

Phillips 66 sees 20% US petroleum demand destruction from coronavirus

Company refineries running at minimum levels

Puts Liberty and Red Oak pipeline projects on hold

New York — Phillips 66 has cut its capital spending for 2020 across all its businesses by $700 million, to $3.1 billion, as it looks to get ahead of demand destruction for petroleum and chemicals resulting from mandated stay-at-home measures impacting refining and midstream operations, the company said Tuesday.

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In refining, the company has cut back to minimum rates at its 13 refineries in the US and abroad, and is now expecting first-quarter refinery utilization rates to be in the low to mid-80% range compared to the 90% originally forecast.

"We're seeing around the U.S. about 20% demand destruction; and in some markets, particularly the West Coast, where they've been isolating longer, about 30%. So a lot of demand destruction," Brian Mandell, Phillip 66's head of commercial operations, sai on a special conference call with analysts and investors.

Phillips 66's West Coast refinery position represents about 13% of the overall regional gasoline demand and 16% of its total U.S. production. Phillips 66 has two California refineries: the 120,200 b/d Rodeo plant and the 139,000 b/d Wilmington facility. The company also has a 105,000 b/d Ferndale, Washington, refinery.

"We're seeing gasoline cracks negative margins," Mandell said. "We're seeing jet cracks even worse. Distillate cracks are still holding up around the US, but we're seeing even our Latin American customers asking us if they can back out of cargoes now. So we see that demand destruction starting to move toward Latin America. So it's a tough market out there, and we're seeing refiners start to have run cuts, including Phillips 66, and that's kind of the way to help clean up this demand in the short term."

Phillips 66 currently makes about 225,000 b/d of distillate, with about half of that jet fuel. In the fourth quarter, total refined product exports were 157,000 b/d per day compared with 220,000 b/d in the third quarter.

The company is working with airlines and others to "take the jet we have," said Mandell, adding "it's a small amount versus the whole roughly 1.8 million b/d of production currently."

DELAYING TURNAROUNDS ON CONTAGION FEARS

Phillips 66 is looking to defer some planned turnaround at its refineries to limit the risk of contagion from bringing in outside contractors and other turnaround staff as well as to cut back on turnaround expenses. Much of the year's planned work has been accomplished in the first quarter, but those further out in the year are likely to be deferred.

"We've really sharpened our pencil around our turnarounds this year, and we've got about three sizable turnarounds that we're able to shift into next year," said Bob Herman, Phillips 66's head of refining. He did not provide details on what they were.

"Some of that just comes from some of the units are driven by catalyst changes. And as we run lower rates, we're not burning up to catalyst as fast..... and specifically, we have pushed turnarounds because of worries about getting the workforce in. So if you think about that, that actually helps us on the capital side, too, because we have a lot of sustaining capital associated with our bigger turnarounds," he added.

CRUDE PIPELINE PROJECTS DELAYED

Phillips 66 has also opted out – for now -- several key crude pipeline takeaway projects as US crude production dries up on unsustainably low crude prices.

This includes the Red Oak Pipeline and the Liberty Pipeline, which falls under the aegis of its midstream master limited partnership, Phillips 66 Partners. The projects were to provide access for growing production of North American crude to US Gulf Coast plants as well as the export market.

The growth of Permian production – the engine of US crude production increases – is falling as producers cut their spending and production guidance. Large Permian player, Chevron, on Tuesday cut output guidance by 125,000 boe/d from its previous guidance of 514,000 boe/d.

Phillips 66 formed a joint venture with Bridger to build the Liberty Pipeline which would carry about 350,000 b/d of Bakken and Rockies crude to the oil hub of Cushing, Oklahoma. It was due online in the first quarter of 2021.

The Red Oak pipeline was to carry Permian oil to Cushing, Oklahoma. The Phillips 66/Plains All American joint venture was to carry 400,000 b/d of Permian crude to Cushing, and then onto Texas, to Corpus Christi, Ingleside, Houston and Beaumont, for refining or export. It was also due online in the first quarter of 2021.

"We thought at this point with regard to these two projects that they're early enough in the project cycle, and we like the projects," said Tim Roberts, head of Phillips 66's midstream segment.

"But with the current uncertainty in the marketplace and what's happened quite a shock to the system, we thought it was a good time to go ahead and pull up, pause and then we can reevaluate," he added.

Roberts said that Phillips 66 and Phillips 66 Partners has been in discussion with their partners and shippers.

"And we just think it's the prudent thing to do with the amount of uncertainty going on in the market right now," he added.

Phillips 66 Partners' Gray Oak pipeline started up in November, and full service was expected in the first quarter of 2020. Gray Oak carries Eagle Ford and Permian crude to US Gulf Coast for refining or exports.

The pipeline will connect with the Buckeye's South Texas Gateway terminal, which is due to start up mid-2020.

Phillips 66 Partners is also putting on hold the final investment decision on ACE pipeline. The ACE Pipeline System project, which would supply southeastern Louisiana refineries, including Phillips 66's 249,700 b/d Alliance refinery in Belle Chasse, with crude from the St. James oil hub.