Shale Daily / NGI All News Access

Phillips 66 Moves to Leverage North American Shale Oil

Midstream and downstream energy giant Phillips 66 is positioning itself to take full advantage of the ongoing North American shale oil boom by inking a number of deals to increase supplies of cost-advantaged North American crude oil to its U.S. refineries.

Houston-based Phillips 66 on Wednesday said it had reached three separate agreements, financial terms undisclosed, with several logistics providers for rail loading, terminaling services and a pipeline project, all of which the company said would support a rapidly changing domestic energy landscape and energy security. The deals are to tap unconventional crude production from the Bakken Shale of North Dakota and the Mississippian Lime of Oklahoma and Kansas, among other plays.

Phillips 66 CEO Greg Garland said the company can increase its margins by replacing overseas crude with a domestic supply stream. "We are aggressively pursuing increased access to advantaged crudes in North America by partnering with leading third-party transportation providers and better leveraging our own system capabilities. Increasing our utilization of those advantaged crudes should allow us to capture significant value in our refining and marketing businesses."

Under the first deal, Phillips 66 and Enbridge Energy Partners LP subsidiary Enbridge Rail (North Dakota) LLC agreed to a three-year deal for rail car loading of Bakken crude at Enbridge's Berthold, ND, terminal beginning in May, with volumes ramping up to 35,000-40,000 b/d by November. The crude oil would be delivered to Phillips 66 refineries on the West and East coasts, and the company said it may also pursue opportunities to send it to its Gulf Coast refineries.

In the second agreement, Targa Resources Partners LP has agreed to provide rail unloading and barge loading services in Tacoma, WA. The five-year agreement, which began in late 2012, allows advantaged U.S. or Canadian crude oil to be unloaded from rail cars at Targa's Tacoma terminal and transloaded onto barges for delivery to the Phillips 66 Ferndale, WA, refinery. The facility also allows for delivery into the San Francisco refinery, where crude imported from outside of North America could be replaced. Phillips 66 said the terminal is currently capable of receiving individual cars, but as volumes ramp up it would transition to unit train capability this summer. At full volume, the delivery capability is estimated to be about 30,000 b/d.

The third deal is with Magellan Midstream Partners LP to transport advantaged crude on Magellan's pipelines near Phillips 66's refinery in Ponca City, OK. Phillips 66 said the project would replace West Texas Intermediate crude from Cushing, OK, with virgin crude from the nearby Mississippian Lime play. Small volumes are expected to be delivered to the refinery by late 2013, with about 20,000 b/d anticipated by the project's completion date in January. Phillips 66 said it is also investing in transportation assets in Oklahoma to carry an additional 40,000 b/d of Mississippian Lime crude to the Ponca City Refinery, and at the refinery to accept crude from the Magellan project.

"These business partners give us another important link to increasing access to advantaged crudes, which continues to be a top priority for the Phillips 66 team for the foreseeable future," said Phillips 66's Glenn Simpson, general manager of crude and international supply.

Phillips 66's refining and marketing operations include 15 refineries with a net crude oil capacity of 2.2 million b/d, 10,000 owned or supplied branded marketing outlets, and 15,000 miles of pipeline systems. The midstream segment includes a 50% interest in DCP Midstream LLC, one of the largest natural gas gatherers and processors in the United States with 7.2 Bcf/d gross of natural gas processing capacity.

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