Demand growth and shifting global dynamics helped US refiners like Phillips 66 to record profits in 2022. Mark Lashier, president and chief executive officer of Phillips 66 talks to Argus about distillate stocks, M&A, the Jones Act and the long term future for refining.
Given a lackluster US gasoline demand recovery, can refiners switch their output to lower gasoline yield and higher distillates?
Without capital investment, there's not going to be a shift from 2022. The market economics drove us all to undertake that shift last year. Everyone was running in max distillates mode. You can get more flexibility with minor capital investments all the way up to making significant capital investments. It is about identifying opportunities, understanding the crude slates at your disposal and positioning yourself to be more flexible.
The US is facing low distillates inventories and high distillates refining margins. How much does the US refining industry actually care about rebuilding distillates inventories?
The challenge with rebuilding inventories is it is market driven, and when the market is signaling that the value of diesel today is likely much greater than it will be in the future, no one's going to build inventory.
We will operate at maximum rates and if the market is signaling that it needs everything that you are producing today, it is called backwardation. And it is not traders trying to play the market. It is the market calling for those molecules today. If we attempted to take those volumes out of the marketplace, the price would only go up further.
Would Jones Act reform help refined product markets, particularly on the US Atlantic coast?
Well, it is a significant political problem and the feedback from congressional representatives and senators that we were meeting with was that it is difficult to do anything legislatively until there is a big crisis. And unfortunately, the markets did respond last year.
Yes, the price of fuel oil in US Atlantic coast got high and was resupplied surprisingly from Europe. The markets worked faster than a legislative solution coming into play.
There is a limited supply of Jones Act vessels. They were all full. The pipelines to the US Atlantic coast were all full. A Jones Act waiver would have allowed foreign ships to carry inventory up to the US Atlantic coast. Well, foreign ships did carry inventory to the US Atlantic coast, they just happened to originate from places other than US ports.
We saw some US refineries change hands last year and capacity expansions this year. Does Phillips 66 have an appetite for acquisitions or expansions?
We are not overtly looking for any opportunities to acquire refineries. We shut down our Belle Chasse, Louisiana, refinery that was under 12 feet of water after a hurricane. We are converting our Rodeo, California, refinery to make 50,000 b/d of renewable diesel. And I think that you're going to continue to see that kind of evolution.
How will the industry deal with aging infrastructure?
If demand is stable, or if gasoline demand is declining, there will be refineries that could get rationalized. But there are some very robust refinery complexes out there that will be able to evolve.
One possibility is that as North American demand for gasoline gets capped, we will be able to export very competitively to the rest of the world before making major investments.
Most new global refining capacity is going to be built outside of the US. Will there be a shift away from the US as a global refining hub?
I think that those additional increments will feed the growing demand. The US will be a refining powerhouse because of the cost position here and the access to advantaged crudes and a strong export capability. We can take advantage of the relative imbalance between gasoline and distillate and see the US becoming more of an exporter of gasoline.
