July 31, 2013 / 8:17 PM / in 4 years

UPDATE 1-Phillips 66 adjusts NJ crude slate due to Bakken cost rise

* Will run imports rather than U.S. crude as costs dictate

* Narrowed U.S. crude discounts to Brent cut 2Q profits

* May increase biofuel blending to cut ethanol credit costs

By Kristen Hays

HOUSTON, July 31 (Reuters) - U.S. independent refiner and chemical company Phillips 66 has increased runs of light crude imports at its New Jersey refinery as costs of North Dakota Bakken crude have risen in the last five months, executives told analysts on Wednesday.

“We have reduced our take on the (North Dakota) Bakken to the East Coast as we’ve adjusted our crude slates and (are) replacing that with more competitive barrels from imports,” said Tim Taylor, executive vice president for commercial, marketing, transportation and business development, during the company’s second-quarter earnings call.

Executives said the company still sees U.S. and Canadian heavy crude as cost-advantaged over imports that are priced off London’s benchmark Brent crude, but they can adjust crude slates to optimize those costs as differentials move.

The discount of U.S. crude to London’s Brent has narrowed sharply to less than $3 a barrel from more than $23 in February as pipeline projects came online to help alleviate a glut at the U.S. crude futures hub in Cushing, Oklahoma.

The narrowed discount squeezes profits from running U.S. crudes delivered by rail or other expensive transport means, which can add double-digit per-barrel costs. Phillips 66 has run as much as 90,000 barrels per day of Bakken brought in by rail at its 238,000 bpd Bayway refinery in Linden, New Jersey.

Chief Executive Greg Garland said the company’s strategy of replacing all imports with cheaper U.S. and Canadian heavy crudes remains unchanged, as executives expect the spread to widen as U.S. crude production increases.

Taylor added that refineries can pull back on U.S. crudes to run imports when needed.

“We have to maintain the option to do an import just because it makes the best value,” Taylor told Reuters. “Fundamentally, we still believe these U.S.-produced crudes are going to be a better value.”

ETHANOL CREDITS

Phillips 66 reported a quarterly profit below analysts’ expectations on those higher crude costs, sending shares down by 3 percent before the bell.

By mid-afternoon, shares rose by nearly 6 percent to $61.81 on the New York Stock Exchange.

The narrowed crude spreads between the two benchmarks helped slice Phillips 66’s refining segment profits to $481 million, down $404 million from the second quarter last year.

Increased costs for ethanol credits further cut refining margins, the company said.

A 2007 law that mandates growing use of biofuel in gasoline requires refiners to collect enough Renewable Identification Numbers, or RINs, to prove they meet the mandate. If they blend ethanol into gasoline, they get a RIN - and if they sell unblended gasoline, they must buy a RIN for each gallon. RIN prices have spiked as some refiners scramble to get enough.

Phillips 66, unlike some other refiners, does not disclose its specific RINs expenses. But the company operates on both ends, getting RINs from blending through its terminal systems and buying RINs when it sells unblended gasoline.

Taylor said the company may increase blending to reduce its RIN exposure.

“That takes time,” he said. “You have that opportunity to grow the volume that we blend and sell directly.”

Refiners also can escape RIN costs by exporting more refined products, as those sent to other countries do not have to be blended with biofuels.

Phillips 66, which already had aimed to increase gasoline and diesel exports, said the company exported 181,000 bpd of refined products in the second quarter, up by 75,000 bpd from a year ago.

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