INTERVIEW: Phillips 66 aims to become leading downstream energy provider through increased synergies: CEO

Phillips 66 CEO Mark Lashier's plan to cut costs while creating synergies among the company's core businesses is reaping rewards as well as positioning the company for any lower demand scenarios which may lie ahead.

In a Sept. 6 interview with S&P Global Commodity Insights, Lashier said amid the evolution of energy sources, the company's "overarching strategy" remains that of an energy provider geared to improving lives, as it has over the last 100 years.

"To do that, we intend to be the leading downstream integrated energy provider", he said.

Houston-based Phillips 66 has a more unique and diverse company profile than that of its US refining peers, with strong joint-venture chemical operations and NGL businesses complementing refining operations.

While Phillips 66's corporate diversification let it spread business risk among separate sectors, the siloing of business units did not always work in its favor.

However, under Lashier and his team, as lines among business segments have blurred, the company has been able to prioritize cost-cutting by improving corporate synergies, increasing efficiencies, and focusing on increasing value from the wellhead to the market.

And through the end of Q2, the company had already amassed a run rate synergy capture of over $300 million, as well as $1 billion of run rate cost savings, moving closer to the $1.4 billion target.

Varied hydrocarbon chains

A lot of the value is due to increased interaction between different hydrocarbon chains.

"We compete in a number of different chains. If you think about us, we've got two primary value chains," Lashier explained.

"We've got the crude value chain where we either import or gather crude at the oil fields, bring it to our refineries, run these refineries extraordinarily well, make refined products to go on to our marketing network or [for] export," he said.

"But we've also established a value chain in NGLs...but that is really a critical value chain for us," he said.

After "we acquired the majority of DCP, we've done some other things to creating wellhead to market value chain and NGLs, and that's going to be a growth driver for us," Lashier said.

In June 2023 Phillips 66 increased its stake in DCP to 86.8% from 28.26%, and will oversee and manage the joint venture. It further bolstered its Permian Midland Basin natural gas gathering and processing footprint with the recent acquisition of Pinnacle Midstream.

"We bring the raw NGLs to our fractionators. We upgrade that to purity ethane, propane, butane, which feeds the petrochemical industry, and we can feed at exports into the international petrochemical industry, so you can start to see how all these elements integrate together," said Lashier, explaining the process.

Phillips 66 has four fractionators at its Sweeny, Texas, hub with 550,000 b/d of capacity, out of Phillips 66's total system capacity of 719,000 b/d which is supported by 11 NGL fractionation plants, natural gas and NGL storage facilities and pipelines.

And Phillips 66's 265,000 b/d refinery at Sweeny reaps the benefit of the nearby hub. The refinery runs on natural gas supplied by the midstream, sends refining light ends to the fractionators, increasing access to valuable isobutane and boosting refinery profit margins and capture rate – an example of Phillips 66's integrated value chain in action.

Refinery self-help game plan

Refining is a cyclical business. And over the past few years, strong demand has outpaced supply, raising mid-cycle refining margins a notch.

However, 2024 global refinery margins are softer amid expectations of a weaker global economic picture impacting demand outlooks.

"We've seen softer demand for the last several months," Lashier said.

"In fact, in the spring time, diesel demand was softer than expected rolling into gasoline season travel season....We saw things pick up a little bit in July, but it was a little delayed. And our view was we were just seeing some really general early signs of softening in the economy," he said.

"And that's why the Fed raised interest rates, because the economy was too hot," he added.

Phillips 66 is the fourth largest refiner in the US, with 1.387 million b/d of refining capacity spread across every region. It also operates the Humber refinery in the UK and has a stake in a German refiner.

In the past, Phillips 66's margin capture has been behind that of some peers. In Q2, the company's reported margin capture was 64% compared with Marathon Petroleum's 94%.

But that is changing. Phillips 66 is seeing positive results from self-help initiatives as Lashier took the helm in 2022 from its joint-venture CP Chem.

Through the implementation of small low capital, high-margin, high-return projects, the company is closing in on its goal of reducing refinery operating costs by $1/b -- reporting an 83 cents/b reduction in Q2 -- enhancing refinery economics and positioning it for a lower demand environment.

While Phillips 66 cut Q3 refinery utilization guidance to low 90% rate from Q2's record 98%, Lashier, despite some demand weakness, said lower rates were not economic run cuts, noting that refined product exports are up.

"We're able to compete out in the globe for market share, and you're seeing refineries cut back in Europe. Refineries cut back in Asia, and we can profitably export into that market and run at high rates and continue those high utilizations," he said.

Lashier sees 2025 global refinery rationalization ranging between 600,000 b/d and 700,000 b/d, which will work to balance impending additional supply from the ramp up of Nigeria's massive 650,000 b/d Dangote refinery and Mexico's 340,000 b/d Dos Bocas refinery, now expected in early 2025 and end 2026, respectively.

"They're coming on slower and later than everyone anticipated, but you are seeing some volumes out there, primarily intermediates, and that's going to continue to enter in the marketplace," he said.

"Meanwhile, global demand continues to grow. And, so, the longer those things take to hit their stride, the more demand will be out there and the less impactful those volumes will be on margins," he added.

"So, I think that there's good favorable supply and demand balance in the medium to longer term," he said.

Low carbon value chain management pays off

One of Phillip 66's crowning achievements has been the speed with which it transformed its traditional Rodeo, California, refinery into a renewables fuel plant.

Crude processing ceased in January. And by the end of Q2, the facility was producing 50,000 b/d of renewable diesel, with plans to make 10,000 b/d of renewable jet to be blended to produce sustainable aviation fuel.

"We are producing and building some inventory of renewable jet, and then we'll take that and we'll blend it up with traditional jet to [achieve] a 50-50 blend for retail sales to airlines and commercial transporters," Lashier said.

In renewables, Phillips 66 is benefiting from segment synergies. The relationship between its production and commercial segments gives it control over renewable fuel value chain, increasing margins and creating a stable revenue stream which allows it to keep barrels off the spot market.

"We don't have to go through wholesalers. We don't have to go through distributors. We're selling it right into the tanks of end-use customers. And so they'll never see that," Lashier said.

"One of the nice things about our position on the West Coast is we have retail outlets, our 76 branded stations, and we've converted them all to be able to sell renewable diesel directly to consumers," he added.

"So we can control the molecules all the way out to the end user. So if you were in California driving a diesel truck or diesel car, you can fill up at a 76 station and make use of that renewable diesel," he said.