Welcome to the Q3 2020 Phillips 66 Earnings Conference Call. My name is David, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded.
I will now turn the call over to Jeff Duder, Vice President, Investor Relations. Jeff, you may begin.
Good morning, and welcome to the Phillips 66 Third Quarter Earnings Conference Call. Participants on today's call will include Greg Garland, Chairman and CEO Kevin Mitchell, EVP and CFO Bob Herman, EVP, Refining Brian Mandel, EVP, Marketing and Commercial and Tim Roberts, EVP of Midstream. Today's presentation material can be found on the Investor Relations section of the Phillips 66 website, along with supplemental financial and operating information. Slide 2 contains our Safe Harbor statement. We will be making forward looking statements during the presentation and our Q and A session.
Actual results may differ materially from today's comments. Factors that could cause actual results to differ are included here as well as in our SEC filings. With that, I'll turn the call over to Greg Garland for opening remarks.
Okay. Thanks, Jeff, and good morning, everyone, and thank you for joining us today. Our diversified integrated portfolio, strong balance sheet and disciplined capital allocation enable us to navigate through this challenging market environment. In the 3rd quarter, we delivered improved results in our midstream, chemicals and marketing businesses. We had an adjusted loss of $1,000,000 or $0.01 per share and generated $795,000,000 of operating cash flow excluding working capital.
We're proud of our employees and how they continue to step up to the challenges of 2020, including the pandemic, the West Coast fires, Gulf Coast hurricanes. Most recently, our people responded to the storms by helping their families, their neighbors and safeguarding our assets. Through our employees commitment to operating excellence, our facilities were secured and sustained minimal damage. Our counties provided $7,000,000 in assistance to our employees and contributions to communities across the Gulf Coast to help those affected by the storms. Our employees continue to execute our strategy with an unwavering focus on operating excellence in what has been a very uncertain and challenging environment.
Our year to date safety results are exceeding last year's industry leading performance despite the current challenges. Every day, we strive toward a 0 incident, 0 accident workplace and to keep our people healthy and safe. In the Q3, we returned $393,000,000 to our shareholders through dividends. We remain committed to a secure, competitive and growing dividend. Since we formed the company, we returned over $27,000,000,000 to shareholders through dividends, share repurchases and exchanges.
In the near term, our focus is on ensuring the financial and operational strength of our company and overcoming this period of market weakness. We expect to exceed the $500,000,000 in cost reductions and the $700,000,000 in consolidated capital spending reductions announced earlier this year. We will continue to maintain disciplined capital allocation with a focus on long term value creation for our shareholders. We're executing our growth strategy and achieved a major milestone with completion of the Sweeny Hub Phase 2 expansion. We completed the 2 new 150,000 barrel a day fractionators at the Sweeny Hub, bringing the site's total fractionation capacity to 400,000 barrels per day.
Frac 2 reached full rates in September and Frac 3 started operations in October. Both fractionators have operated at rates exceeding design capacity. The fractionators are supported by long term customer commitments. Phillips 66 Partners continued construction the C2G pipeline, connecting its Clement storage caverns to petrochemical facilities in the Corpus Christi area. The project is backed by long term commitments and is expected to be completed in mid-twenty 21.
At the South Texas Gateway Terminal, the first stock and 5,100,000 barrels of storage capacity have been commissioned. Terminal operations are expected to ramp up through the end of this year as additional phases of construction are finished. We expect the project to be completed in the Q1 of 2021 with a total storage capacity of 8,600,000 barrels and up to 800,000 barrels per day of export capacity. Field 66 Partners owns 25% interest in the terminal. As we wrap up our major projects and execution this year, we expect that total capital spending for 2021 will be $2,000,000,000 or less.
We look forward to sharing the details of our 2021 capital program with you in December, following the approval of our Board. Phillips 66 recognizes the climate challenge and is making investments to competitively position the company for a lower carbon future. Recently, we announced plans to reconfigure our San Francisco refinery in Rodeo, California into the world's largest renewable fuels facility to meet the growing demand for renewable energy. The plant will no longer produce fuels from crude oil, but instead will have the flexibility to run used cooking oil, fats, greases and other feedstocks. Upon completion in early 2024, the facility will have over 50,000 barrels per day or 800,000,000 gallons per year of renewable fuel production capacity.
This capital efficient investment is expected to deliver strong returns. The conversion is expected to reduce the plant's greenhouse gas emissions by 50% and help California meet its low carbon objectives. Earlier this month, CVChem announced its first commercial scale production of polyethylene from recycled mixed waste plastics. This development is an important milestone, further demonstrating CPChem's commitment to proactively help the world find sustainable solutions, including elimination of plastics, waste and environment. We have a dual challenge providing affordable, abundant, reliable energy to the world and also addressing the global climate challenge.
Our company is committed to both, while continuing to deliver shareholder returns. So with that, I'll turn the call over to Kevin to review the financials.
Thank you, Greg. Hello, everyone. Starting with an overview on Slide 4, we summarize our financial results. We reported a 3rd quarter loss of $799,000,000 We had special items amounting to an after tax loss of $798,000,000 including impairments related to the planned conversion of the San Francisco refinery to a renewable fuels facility as well as the cancellation of the Red Oak pipeline project. Excluding special items, we had an adjusted loss of $1,000,000 or 0 point 0 $1 per share.
Operating cash flow was 795 excluding working capital. Adjusted capital spending for the quarter was $549,000,000 including $347,000,000 for growth projects. We returned $393,000,000 to shareholders through dividends. Moving to Slide 5. This slide shows the change in adjusted results from the Q2 to the Q3, an improvement of $323,000,000 Adjusted pre tax results across all segments were improved except refining.
The income tax benefit was mainly driven by bonus depreciation on assets recently completed and the ability under the CARES Act to carry back net operating losses to previous periods. Slide 6 shows our midstream results. 3rd quarter adjusted pretax income was $354,000,000 an increase of $109,000,000 from the previous quarter. Transportation adjusted pretax income was $202,000,000 up $72,000,000 from the previous quarter. The increase was due to higher pipeline and terminal volumes supported by recovering demand.
3rd quarter results reflect a ramp up of volumes on the Gray Oak pipeline and the start up of South Texas Gateway Terminal. NGL and other delivered adjusted pretax income of $102,000,000 The $19,000,000 increase from the prior quarter was due to higher Sweeny Hub volumes and inventory impacts. At the Sweeny Hub, the Freeport LPG export facility averaged 12 cargoes per month and Frac 1 averaged 120,000 barrels per day. DCP Midstream adjusted pretax income of $50,000,000 was up $18,000,000 from the previous quarter, reflecting hedging impacts. Turning to Chemicals on Slide 7.
3rd quarter adjusted pretax income was $132,000,000 up $43,000,000 from the 2nd quarter. Ophins and polyolefins adjusted pretax income was $148,000,000 The $42,000,000 increase from the previous quarter is due to higher polyethylene margins driven by improved sales prices, partially offset by lower polyethylene volumes and higher operating costs. Global O and P utilization was 94%, reflecting downtime at U. S. Gulf Coast facilities.
CPChem proactively shut down facilities in preparation for the storms that made landfall in the Q3. The facility sustained minimal damage and have returned to normal operations. Adjusted pretax income for SA and S decreased $6,000,000 primarily due to lower margins, partially offset by higher volumes. During the Q3, we received $112,000,000 in cash distributions from CPChem. Turning to Refining on Slide 8.
Refining 3rd quarter adjusted pretax loss was $970,000,000 down from an adjusted pretax loss of 8 $67,000,000 last quarter. The decrease was due to lower realized margins, partially offset by higher volumes. Realized margins for the quarter decreased by 32% to $1.78 per barrel. The decrease reflects tightening crude spreads and the absence of the steep contango market structure experienced in the 2nd quarter. In addition, secondary product margins were lower due to rising crude prices.
Crude utilization was 77% compared with 75% last quarter. Improved utilization reflects increased refining runs in the Central Corridor and West Coast regions, partially offset by downtime at Gulf Coast refineries. We shut the Lake Charles refinery in late August and the Alliance refinery in mid September in preparation for hurricanes Laura and Sally. Lake Charles downtime was extended due to 3rd party power supply issues following Hurricane Laura and restart was further delayed by Hurricane Delta. The Lake Charles Refinery has safely resumed operations and Alliance remains down for planned turnaround activity.
Pretax turnaround costs were $41,000,000 in line with the prior quarter. The 3rd quarter clean product yield was 85%. Slide 9 covers market capture. The 321 market crack for the 3rd quarter was $8.17 per barrel compared to $7.47 per barrel in the 2nd quarter. Realized margin was $1.78 per barrel and resulted in an overall market capture of 22%.
Market capture in the previous quarter was 35%. Market capture is impacted by refinery configuration. We make less gasoline and more distillate than premised in the 321 market crack. During the quarter, the distillate crack decreased $2.46 per barrel and the gasoline crack improved $2.27 per barrel. Losses from secondary products of $1.80 per barrel increased $0.85 per barrel from the previous quarter due to rising crude prices.
Losses from feedstock were $0.35 per barrel compared with $0.67 per barrel last quarter. The other category reduced realized margins by $2.77 per barrel. This category includes RINs, freight costs, clean product realizations and inventory impacts. Moving to Marketing and Specialties on Slide 10. Adjusted Q3 pretax income was $417,000,000 $124,000,000 higher than the 2nd quarter.
Marketing and other increased $107,000,000 due to higher margins and volumes. The marketing business captured strong margins during the quarter and benefited from recovering demand. Specialties increased $17,000,000 due to higher finished lubricants volumes. We re imaged 284 domestic branded sites during the Q3, bringing the total to approximately 5,000 since the start of the program. In our international marketing business, we re imaged 31 European sites, bringing the total to 143 since the program's inception.
Refined product exports in the 3rd quarter were 139,000 barrels per day, a decrease from the prior quarter. On Slide 11, the Corporate and Other segment had adjusted pretax costs of $213,000,000 a decrease of $11,000,000 from the prior quarter. The improvement is primarily due to lower employee related expenses, partially offset by higher net interest expense. Slide 12 shows the change in cash for the quarter. We started the quarter with $1,900,000,000 in cash on our balance sheet.
Cash from operations was $795,000,000 excluding working capital. There was a working capital use of $304,000,000 driven by an increase in tax receivables. Our net debt issuances were Adjusted capital spending was $549,000,000 We expect full year 2020 adjusted capital to be approximately $2,900,000,000 We returned $393,000,000 to shareholders through dividends. Our ending cash balance was $1,500,000,000 We remain focused on conserving cash and maintaining strong liquidity in the current environment. At September 30, we had $7,000,000,000 of committed liquidity, reflecting $1,500,000,000 of cash plus available capacity on our credit facilities of $5,000,000,000 at Phillips 66 and $500,000,000 at Phillips 66 Partners.
This concludes my review of the financial and operating results. Next, I'll cover a few outlook items. In Chemicals, we expect the Q4 global O and P utilization rate to be in the mid-90s. In Refining, crude utilization will be adjusted according to market conditions. In October, utilization has been in the mid-sixty percent range, impacted by downtime at the Lake Charles and the Lyons refineries.
We expect Q4 pretax turnaround expenses to be between $80,000,000 $100,000,000 We anticipate Q4 corporate and other costs coming between $220,000,000 $230,000,000 pretax. With that, we'll now open the line for questions.
Thank you. We will now begin the question and answer session. As we open the call for questions, as a courtesy to all participants, please limit yourself to one question and a follow-up. The first question comes from Neil Mehta from Goldman Sachs.
My opening question is around balance sheet and the dividend outlook from here. I think the message today is that you guys view the dividend as sustainable, but can you just talk to that? And then can you also just give us some flavor, maybe this is for Kevin, about conversations with the ratings agencies about the credit and how do you feel about where your balance sheet position is right now?
Let me take the first part and Kevin take the second. I think I mean, Neil, first of all, one of the things I've learned is you never say never, right, in this business, but all the actions that we've taken to date, cutting our costs, cutting our CapEx, increasing our liquidity have been around defending the dividend. And as you look at Q3, essentially we covered our CapEx and our dividend through cash. Certainly, we feel comfortable as we if things don't get any better and we stay kind of where we're at, then we feel really comfortable that our first dollar is going to go sustaining capital at $1,000,000,000 our second dollar is going to go to the dividend $1,600,000,000 that we can cover sustaining CapEx and our dividend from our cash. I think that's one of the great strengths of the PXX portfolio and the diversified nature of our portfolio.
So I'll let Kevin talk a little bit about the balance sheet and expectations there. Yes. So we've consistently expressed
our objective to maintain a strong balance sheet, keep that financial flexibility. And that's reflected in our credit ratings A3 at Moody's and BBB Plus at S and P. As you would expect, this year with a couple of debt issuances that we've done, we've had plenty of opportunity to have conversations with the rating agencies. Those have gone well. Our ratings have stayed where they are.
We've had no actions and we still have a stable outlook on the current rating. So we feel good about that. In the event that we need to to the balance sheet, we feel pretty comfortable that we still have decent capacity without having a detrimental impact on the overall health of the balance sheet. So you think from a long term standpoint, our objective is to have a solid investment grade credit rating, and we're clearly there at this point. We've added some debt.
We've also talked about a 30% debt to capital ratio. We're above that right now. I think as we come through this current situation and we were able to get debt back down, we'd anticipate that over time, we'd like to see ourselves back in around about that range. But we've always said that's not an absolute target. The real objective is to maintain the solid investment grade credit ratings and we're comfortably there and we feel good that we can stay there.
Great.
And the follow-up is just around marketing. It was a strong quarter there. Just any flavor in terms of what drove the outperformance? And real time, what are you seeing for demand in the markets that you serve?
Thanks, Neil. Yes, we're very happy with the marketing earnings in Q3 versus Q2. We were up 40% on margins in the U. S. And 16% on volume.
Overseas, we were up 23% on margins and volumes as well. I think a number of things. If you look at Q2, underlying commodity flat price came off hard in April and was up May June. And as you know, flat price is inversely correlated to marketing margins. So that helped our margins a good bit.
Also the volumes, of course, were up in Q3 versus Q2 when COVID was more fierce during Q2 time period. Currently, we're seeing gasoline off about 10% in the U. S. When we talk to our large truck stop customers, they say that until recently, diesel demand was back up to pre COVID levels, but they've started to see it come off a bit 3% and 4% type levels. Overseas, we were back up to 100% of demand pre COVID levels.
Currently, with lockdowns tightening just a bit, we're seeing those levels come off just a percentage points, but kind of happy where we've gotten to from the lows in early Q2.
One thing I might add, we've seen strength on the West Coast, the Port of LA port is up 13% year on year and we're actually seeing PADD 5 diesel demand up year on year. So some strength especially on the West Coast.
Bill Gresh from JPMorgan. Please go ahead. Your line is open.
Yes, hi. Good afternoon. Just want to start with a question on refining here. Some of your peers are acknowledging that the U. S.
Industry needs to close 1,000,000 barrels a day of capacity in order to balance the market. You guys have obviously taken some action here with Rodeo. I'm curious how you think about the U. S. Refining industry, the amount of capacity that needs to close and with respect to the existing system as it stands and where utilization is, how do you think about your individual refineries and whether it makes sense to have a temporary idling or permanent idling at some point for another refinery?
Thank you.
Yes, Neal, it's Bob. I think we would agree there needs to continue to be some rationalization between the U. S. And the European refining system. But specifically in the U.
S, right, the refineries kind of run the gamut between really strong and there's some maybe some weaker assets out there. But fundamentally, the U. S. Refining system is the most complex, lowest cost refining system with the exception of maybe a couple of big assets in the Middle East. So I think as demand rationalizes over time, the U.
S. Is really positioned to be a strong player. You'll see some export activity that will rise over time into Latin America and South America into West Africa. But the US really does stand to take up that mantle as we go forward. Having said that, there will be assets that will continue to rationalize out of this and you've seen it on both the East Coast and the West Coast and no doubt some of the maybe landlocked fires as time goes on here will have difficulties as crude dips remain squeezed in the U.
S. And Jeff, you've got some numbers on closures so far.
Yes, we've been tracking announced refinery closures and in fact, we've had to revise it There's another 700,000 barrels a day of announced closures globally. There's another 700,000 barrels a day of temporary closures and then another 700,000 barrels a day of refineries that have talked about potential of converting into terminals or other activity. So 3,000,000 to 3,500,000 barrels a day globally. It's kind of split regionally with equal parts of U. S, Europe and Asia.
We've even seen an Australia refinery that's been announced closure earlier today. And as you listen to many of the integrated oil companies, they've made comments on planning to further reduce their exposure in the downstream. So we're moving rapidly through rationalization.
I think as we watch diesel inventories come off really hard over the last few weeks here, I think that's a little bit of light at the end of this tunnel for margins to improve and with margins improving utilization will come back as the market dictates. But until that kind of happens, I don't think we'll see it. The growth in GDP numbers this last week, I think are really good bellwether that says diesel demand should continue to strengthen into the winter and the normal cold season and the burning of heating oil in the north is going to be a help. So I think we might be in a position to tread a little water here for a couple of months, but I think it's setting ourselves up that as we get to spring and look forward into next year's gasoline season, that we do have a real chance of returning to a lot more normalcy in the margin structure and then utilization.
Okay, great. Thank you for all of that. Just to follow-up on your own refining performance here in the quarter and the pace of margin normalization, How do you think about, I guess the capture rates that you've been seeing this quarter and last quarter? There's obviously hurricane effects. Kevin, you called out a number of factors in the other bucket that were headwinds here in the quarter.
So how do you think about the sensitivity of capture rates to the overall margin profile? And as we move forward, if margins get better, captures get better and things like that versus maybe some one off items that may have happened
in the quarter? Yes.
Neil, I think the way I look at the capture rate is when you've got cracks that are down in the $6 to $8 range, right. Those are that part is kind of covering your costs. And then crude dips are really as a refining system where we make our money and when we haven't we've seen very tight crude dips on just about every flavor of crude across our system. So it's hard to get much crack expansion there. The other thing that plays into it too, when you're at low utilization and low cracks, kind of the fixed part of the barrel, which is the 11% or 12% that we don't turn into clean product that kind of $2 offset that you see on those margins is a lot bigger deal at an $8 margin than it was at a $15 margin.
So those two factors for me really come in and kind of tamp down that margin capture ability.
Roger Reek from Wells Fargo. Please go ahead. Your line is open.
Yes, thanks. Good morning. Guess I'd maybe like to change the direction a little bit from refining to the midstream. Greg, probably a question for you, but one of the pushbacks we get is with E and Ps changing behavior, maybe a little less production growth in coming years, you've built out a lot in the midstream. Can you kind of characterize for us how midstream should perform in a maybe more static production growth market?
And what your exposure would be to any sort of, let's say, reprice on tariffs or export fees and so forth? Okay.
Tim, I'll let you take that. Yes.
Roger, on that, a couple of things when you look at our portfolio specifically is that we've been in earnest trying to develop MDCs and make sure we get commitments. So those have been very important
for us.
We've got long term commitments, MDCs with good counterparties, investment grade. And so that's been very helpful for our portfolio, especially on the 3rd parties. But then also as a sponsored MLP, we have quite a bit of exposure with regard to PSX. So that helps to also shore up some of our earnings volatility that you could see. But also I just put on a fundamental basis, we do see that there will be facing growth.
Granted everyone's in a state of uncertainty and what's going on out there and they're retrenching a bit, but we still think there's going to be a call on Vantage Shale with regard to global demand to support growth in that area over the next couple of years.
And the
other part I would say just when you look at our portfolio specifically, it's just really that we really participate in the crude side. We're also got a good weighting with regard to the NGL space as well, which actually during this time has been rather resilient and supporting both chemicals, global chemicals demand growth, rescom and then subsequently also going into
the motor fuel pool as well.
Yes. I think the average term across our portfolio is probably 8 ish years. And so we've got some time to ride through this. I do agree that next one to 3 year period, there's going to be fewer investable opportunities in midstream and this is going to become more of a run well and optimized business for many people. I think you'll see some consolidation in midstream over the next couple of years.
And so I think that the model going forward the next couple of years is going to be a little bit different than the model we've executed over the last 5 years. And the other thing I would say is somewhere around 80% probably across the portfolio is under MVCs. And so we think we're really set up well to ride through these next couple of years and still deliver great performance in our midstream business.
Great. And just a follow-up. Kevin, for you, the working capital related to a tax adjustment, can you kind of walk us through working capital expectations into the end of the year? Typically, I think Phillips gets a pretty big pull on working capital. And then part on the tax, when would you expect to recover the actual tax receivable there?
Yes. Okay. So on the tax component, as you see on the financial statement, a significant tax benefit on the income statement, but that's not turning into cash in the current year. That's flowing through the receivable. And on a year to date basis, we've increased our tax receivable by $1,200,000,000 $1,300,000,000 year to date.
And that we would anticipate collecting next year post completion of our 2020 tax return. And so we would expect that to turn into cash sometime in the Q2 of next year. From a broader working capital expectation going into the Q3, you're going to see 2 dynamics going on. 1 is to the extent that the current operating environment stays as it's been, which it appears to be, then from a tax standpoint, you'd still expect to be generating losses. And so you'll have that negative effect on working capital.
But we typically have an inventory draw in the Q4 and we anticipate that happening again this year. And so that will generate some positive cash from a working capital perspective.
Doug Leggate from Bank of America.
Thank you. Good morning, everybody. And I hope you're all doing well out there. Greg, I wonder if I could just pick up on the comment you made there about a slightly different business model for the midstream than we've seen in the last 5 years. I wonder if I could ask you to elaborate on that with specific focus on your ownership structure of PSXP?
Well, I think that I mean, first of all, I think that the upstream and the pace of Julian upstream will determine the pace of opportunities in midstream for any future growth. So we've talked about that a lot. And so we'll see. I suspect we're in a period of stronger capital discipline from the upstream players in a mode of returning more capital to shareholders, which will by definition probably slow the growth of upstream. And conversely, that will limit the investable opportunities in midstream.
Term. So we recognize that, we're supportive of that. We think that's the right thing for the energy space long term in our country. For PSXP, it still highlights the value of our midstream business and we like that. I think that a model that will continue to move forward.
We evaluate alternative scenarios for PSXP just like we do for any other asset in our portfolio as we move forward. But at this point in time, we still like MLP structure. I think we would all acknowledge that the lifecycle of an MLP has probably been shortened versus what it was maybe 5 years ago or 6 years ago. Kevin, I don't know, Tim, you want to add anything to that, Nodd, if you've covered it.
Okay. I don't want to elaborate too much on that. But when you see it trading with a 15% yield, Greg, would it make sense to buy that in at some point?
Yes. I think for PSXP, certainly, I would say we're not happy with where the units are trading and we look at that 15% yield and scratch our head a little bit, Doug. But I also think that PSXP has that dapple overhang. And I think that if you look at where the units are trading today, I think most people priced in a complete shutdown of Apple. And so we're not there, but that's in the hands of someone and a judge that hopefully I guess year end or early next year we'll get a determination on that.
So I don't know Tim or Jeff you want to add anything to that. But the overhang is what we're looking at right now.
That's right. Thanks, guys. My follow-up is kind of a broad question. I don't know which one of you guys wants to answer this, but we've got an election in 3 or 4 days, in case you weren't aware. But what do you see as the principal risks to your business, whether it be tax, whether it be regulation, whether it be something like DAPL?
Just give us a quick summary as to how you're preparing for a potential change in
administration? Well, first
of all, for clarity, none of us want to answer that question. So I guess it's all for me to answer it. So I think in a DDD scenario, there's no question that from a regulatory standpoint, it's going to be a tougher environment for all kinds of infrastructure, but energy in particular, Our base case view is probably going to look something more like we saw at 8 years under the Obama Biden administration and what we've seen for the last 4 years. I do think that infrastructure is going to be harder to permit. I think pipelines in particular will be harder to permit.
You can make a case that the existing pipes probably work more in the ground under that kind of scenario. I think without question, corporate taxes are going to go up in that scenario, which by the way should help the MLP structure just in terms of relative cost of capital versus a C Corp. So we're looking at that. And then we'll see where we end up on Climate Solutions, but I think that the odds are probably higher that you have some sort of cost of carbon that emerges with time in a DDD scenario versus the status quo. So that's kind of how we're thinking about it holistically and kind of the impacts to our business.
Jeff, I don't know if you want to add anything.
It's well done. Paul Cheng from Scotiabank. Please go ahead. Your line is open.
Thank you. Good morning, guys.
Good morning.
Great, if I can follow-up on that, but stringed it to Europe with the new time ignore going to get one and most likely get passed very soon. How that you're looking at your asset in Europe and how what's the game plan? Do you need to fundamentally change how you operate the refining and also the retail operation? And the second question.
Paul, I'm sorry, I missed the first part of that question.
The first part is that with the European, the EU going to go on the climate law, how that is going to change your operation and what is the game plan for your European assets? Whether that you need to fundamentally change the way how you operate or that's, I mean, do you have any view that one of the new kind of more how those assets should be? So that's the first question. The second question is that you're somewhat related. In your larger customer in Europe, they're all coming up with a formal energy transition plan.
And if we assume that there's a Biden administration as Doug has asked the question. So does Phillips 66 need to formulate a formal energy transition plan and is that the Fed involved in some form of diversifying into other business, I. E. Your logic and they all get into the renewable or low carbon, the electricity power business. So is that something you guys will be interested or that you say, you know what, this is different and it's not for us?
So I'll take a stab at that, Paul. I think, I mean, first of all, there's aspirational goals out there and there's probably reality and what can actually be accomplished during that timeframe. And so I think our view is that fossil fuels and both in transportation and power generation are going to be around for quite a long time, multiple decades. That doesn't mean there's not more that we can do in terms of energy transition. Obviously, for us, the things that are nearest to us like renewable diesel, those kind of opportunities where you see us starting to move in those areas.
By the way, including in Rodeo, we're looking at make a carbon capture. We're looking at solar in conjunction with that project. So I think you'll see us move in those areas. We're starting to add hydrogen fueling stations in Europe with our partner co op in Switzerland. We're part of the Giga Stack consortium in the United Kingdom, which is essentially green hydrogen where you have offshore wind trellises producing hydrogen be consumed in the industrial base in the Humber side area.
And so I think we continue to study and look at that. We think hydrogen is really multiple decades away from big steps forward in terms of transportation fuel. A lot of it's technology, it's cost. The green hydrogen is probably 5 to 7 times more than just steam reforming of methane. And so I think that there's some opportunities there.
We continue to work our battery technology. We're working on next generation batteries in our research and development, solid oxide fuel cell development, also in our research and development areas. And so we've got quite a bit going on in terms of energy transition within the portfolio. But the nearest easiest steps for us to take are really to move towards lower carbon intensity fuels like the projects at Rodeo, like RISE. Also we're Humber, we're making about 1,000 barrels a day of renewable diesel going about 4000 to 5000 barrels a day here shortly.
We've got a project San Francisco actually comes on, I think, Q1 next year. Dan, you want to talk about that, what we've got going on?
Yes. So we've announced the big project at Herndale, but before that comes on, while we're still running fuels refinery there, we're converting 1 of our hydrocutors to be able to run soybean based oils to make renewable diesel. And that unit will produce about 9,000 barrels a day at a very attractive capital efficiency on that project and that sets us up to begin the setting up our supply chains in the Rodeo and our marketing chains on the other side of that for the renewable diesel out of Rodeo. The next step we'll take then is the commercial agreement we have with RISE, who is building 2 renewable diesel facilities, 1 in Reno, 1 in Las Vegas, where we will supply the feedstocks and take all of the renewable diesel offtake, and be able to put that into the California market. That's our next step forward in kind of late 'twenty and 'twenty one.
And then we would expect to have the permitting done sometime in 'twenty two and begin the conversion of the Rodeo refinery to eventually have the largest renewable diesel facility in the world and make about 50,000 barrels a day of renewable diesel. Feedstocks for that are premise to be about 80% of the harder to process feedstock. So that's used cooking oil, fats, oils, greases, tallows from a variety of sources around the world. And Bordeaux is really uniquely positioned because, a, we sit in the California market where there's a high demand for lower carbon intensity fuels. And secondly, we have water access to the Far East to bring in all of these difficult to process renewable feedstocks.
So the second piece is that is a hydrocracking facility. We have 2 high pressure hydrocrackers there that will be converted to both process renewable feedstocks and very capital efficient. At the end of the day, we will convert the facility and build the pretreatment facilities for total capital cost of about $1 per gallon per year of capacity. That's 50% cheaper than anything else we've seen announced and sometimes 3 times cheaper than some of the competing projects we've seen announced. So we feel really good that by 2024, we will be a major player in the renewable fuels in California and other places in the United States.
I think just to highlight the $750,000,000 to $800,000,000 that's one of the biggest projects we have in the portfolio at this time. So we're making a substantial investment
there. Thank you.
Manav Gupta from Credit Suisse. Please go ahead. Your line is open.
As you mentioned about 80% lower CI feedstock and 20 percent most likely soya bean and canola. Generally in the current market, what kind of discounts are these lower CI harder to process feedstock carrying versus soybean oil? So soybean oil is trading at $0.33 per pound. Like where are these harder to process feedstocks trading at a discount to soybean oil?
I think Manav, there's a fair amount of variance from region to region on the feedstocks and the transportation costs to get them from point A to point B. So I think the important thing is that we have the flexibility as we operate to pick the lowest cost feedstock in the market. And it's similar to high complexity refining where you've got a lot of flexibility on what feedstocks and what yields you have. We're building in with the pre treating capability that flexibility to take advantage of the lowest cost, most optimal feedstock in order to produce the renewable diesel. So we're I think well positioned in that regard.
Okay. A quick follow-up is, you initially mentioned storms that hit you both in chemicals as well as the refining part. Is there any kind of opportunity cost you lost out because of all these hurricanes? Or can you just give us a sequence of like which of the facilities that did get impacted by subsequent hurricanes that hit the Gulf Coast?
Yes, I'll take a shot at that on the with the first one, if you recall, it seems like a long time ago now, but on August 25, we shut down the Lake Charles facility for Hurricane Laura and ended up being down all the whole month of September because of the power infrastructure in the General Lake Charles region that was essentially completely destroyed. We did not start restarting that facility until early October. And in fact, we didn't have full power back into the refinery to be able to operate as anything that we wanted to until October 5. Unfortunately, then on October 9, Hurricane Delta came essentially right back up the same path. And while it was a lower intensity storm, we still had to shut back down and essentially start over.
Power infrastructure held up a little better in that timeframe. So about the middle of October, we started restarting the Lake Charles facility. So today, we're back up and running there. We've still got a few units left to start, but we will be market dictating the rate, but we'll be at everything that we want to be up will be up and running here within the next week or 10 days at Lake Charles. In Alliance, we shut down September 13 for Hurricane Sally, which was originally pointed right at Alliance.
We got lucky with that one and that it of course moved off a little bit and we did not take a direct hit. We chose to keep Alliance down because we had some maintenance planned for October anyway and rather than restart and shut back down for that, we just moved the maintenance back up. Maybe fortuitously, maybe only in 2020 can you say being down is fortuitous, But Hurricane Zeta came right through that area 2 nights ago. And so we were already down, obviously, and didn't have to shut back down for that one. Power was out again in the area.
We expect to get power back today or tomorrow to aligns. But we had pulled forward some work that we wanted to get done there that was difficult to do in future turnarounds. We anticipate continuing to execute that work sort of through mid December and then position ourselves to be ready to restart Alliance in the New Year, assuming the market conditions are there and giving us the signal that we need to bring on more capacity. We have enough to right finding capacity in the Gulf Coast, obviously, to cover all of our marketing needs right now and any commitments that we have to our customers. And we'll as we gave guidance earlier, we'll let the market tell us what utilization ought to be in the Q1.
And Madhur, just to follow-up on chemicals. So CPChem took down several of their facilities on the Gulf Coast in anticipation of those storm events. They were probably more fortunate in that they really were not impacted. Everything is back up and running normal now.
Matthew Blair from Tudor, Pickering, Holt. Please go ahead. Your line is open.
Hey, good morning, everyone. Greg, do you have an update on whether that potential $0.05 PE increase for October is going through? And do you expect to see the normal seasonal impact in PE later in the quarter? Or do you think that low inventories could provide some support on pricing?
Okay. I'll let Tim answer that. Yes.
It looks like at this point in time that that increase is going to get pushed. There's been a really nice run up up to this point in time and demand has been good. But we think it's more due to seasonality than it is anything else, which usually at this time of year you see a seasonal effect in demand in the cans business.
Yes. I think that you think about margins, so were kind of $0.18 full chain margins in Q1, dollars 0.10 in Q2, dollars 0.19 in Q3 on an IHS marker margin basis. And today they're $0.28 to $0.29 So they're above mid cycle. And I think it's been driven by a combination of things. One is demand has been fundamentally good across the globe, but we see it in Asia, Europe, we see it in North America, strong demand.
And then there's been some impact in terms of the hurricane. So at some point at one point, there was about 20% of the U. S. Ethylene capacity was off line because of the Hurricane Laura. And so that's had some impact.
Inventories have come down on the ethylene side. So that's really always positive for margins. And so I think our view is coming into the Q4, we have kind of this seasonal weakness or pause, if you will, in terms of the petrochemical space. But we're relatively optimistic about petrochemicals for next year.
Sounds good. And then just turning to renewable diesel. So thanks for the update on the feedstocks. I want to ask about the permitting in California. Normally that's kind of a challenge.
Do you anticipate an easier route this time because of the nature of
the facility? Could you just address that?
Yes, I think you're correct. It is always difficult to permit anything in California and it is a very rote process at the end of the day and there are many steps that we have to go through. The biggest permit that we have to get is a land use permit in Contra Costa County and that will require full court press with many full court press with many stakeholders in the state of California the day before we announced. So we had multiple conversations in Sacramento, everywhere from Governor Newsom's office to Cal EPA to CARB, to local legislators, to the local Contra Costa County Board of Supervisors. And I would say that we were met with great enthusiasm for this property across the board from those that are going to be responsible at the end of the day for actually permitting it.
In the meantime, the permit is in, it's been deemed complete by Contra Costa County, which really starts the process for them. So they will hire independent third party to do the environmental assessment of that and that is all beginning. So we're there and ready to help support them through that. We haven't seen really any opposition at this point to the project. And I think as people are understanding more and more the benefits of us doing this project is as we mentioned the environmental benefits and NOx, SOx and greenhouse gas reductions.
We think the permitting process will flow through and on its kind of normal timeline and look forward to getting that permit in early 2022.
Theresa Chen from Barclays. Please go ahead. Your line is open.
Hi. Going back to some of the earlier comments on supply rationalization in the market and just thinking about the overall demand supply balance for refining capacity, how do you view the probability weighted quantity of supply that is new supply that's coming into the market in the Middle East and Asia?
Yes. So there's about 1,000,000 barrels a day scheduled for 2020, highly likely that some of that gets pushed out into 2021. We're seeing a slowdown in activity from a COVID perspective and its impact on labor as well as capital cost reductions in the industry. So I think those barrels are going to get pushed out. As we look today, there's not a real reason to rush any of these projects into service.
Got it. And turning back to the West Coast, thank you for all the color on the renewable diesel projects and your thoughts around that. I was curious to hear how you view the whole electrification theme given the recently ordered ice fan from Newsom's office and the 9 other states in the U. S. Considering similar orders as well as the legislation introduced to Congress to mandate it on the federal level.
Can you talk about your views on these aspirations maybe meeting wall of reality?
So, yes, I'll take a stab and then Bob can help me because he's pretty active in this area. But I think these are aspirational goals. And I think that I think the signposts we're going to watch for is when 1,000,000,000 if not 1,000,000,000,000 of dollars start flowing in infrastructure investments around distribution, power generation, etcetera, that you could truly electrify the fleets. So I'm probably more bullish on low carbon fuel standard as we think about it moving from California to Oregon to Washington State, maybe to the East Coast. And so I think the more near term easier things to do in terms of renewables that can lower carbon intensity, Those make sense that you can earn good returns doing those projects.
And I think the electrification is going to take a long time to get there. Yes.
And I think we would agree with the AFPM has got a statement out there that we would stand behind solidly too and that Governor Newsom doesn't actually have the authority to do what his aspirational executive order laid out. And you just think about the logistics of banning ICE in California, but there's these states around the call, Arizona, Nevada and Oregon that have car dealerships too. So it's hard to understand how this actually becomes a reality when there really isn't enough electricity in California today for base
demand. Benny Wong from Morgan Stanley. Please go ahead. Your line is open.
Hey, good morning team. Thanks for taking my questions. Good morning. The first one is around morning, Jeff around Alberta production limits being lifted in December. Wanted to get you a sense, what you think that might have an impact on Canadian crude differentials and how it might cause you to shift your feedstock sourcing strategy given you guys are one of the largest importers of the Canadian crude?
Hey, Manny, this is Brian. Hey, on Canadian crude, until just a few weeks ago, it was it's 4,200,000 barrels of pipeline capacity out of Canada and there wasn't 4,200,000 barrels of production with Suncor issues and Polaris pipeline issues. Now we're starting to see the production come back. We're starting to see more production than pipeline capacity. So our view is over time and it will take some time, we think that the differentials will start to widen out to variable rail rates, which we see about $13.50 off of WTI.
So that's good for us. Every dollar is about $100,000,000 for Phillips 66. So we continue to watch that. Actually you've seen the past few weeks the differentials were under $10 and now as of yesterday $10.60 so they're already starting to expand.
Great. Thanks for the color there. My follow-up is maybe for Greg. Greg, you and your team has always had a longer perspective of the world and that often translates into how you run the business. And I think in the past, you have guided us to think about Phillips 66 generating a mid cycle EBITDA of about $9,000,000,000 recognizing it's at certain times, but just wanted to get your thoughts and maybe a degree of confidence if that mid cycle level EBITDA generation is still reasonable.
And if it is, how do we get back there? Is it refining rationalization alone? Can it get back to us there? Thanks.
Yes. I think shorter term, we still got a little bit of inventory overhang we've got to work through. I mean directionally inventories have been moving the right way. So we feel relatively good about that. But I think that we won't clean it up in 4Q.
We may get a shot at it in 1Q. Certainly, we think as we approach the summer driving season in 2Q that we'll have an opportunity to see margins more normalized and for us. So we're talking about CB Chem. Essentially, the market margin is above mid cycle today. Our midstream business is going to continue to perform well.
Our Marketing and Specialty business has been a very consistent $1,400,000,000 $1,600,000,000 EBITDA business. So the real question mark on the PSX portfolios is when does refining get back to mid cycle conditions. And so we probably got a shot at doing that kind of mid year next year. So I don't know Jeff or Bob, you want to add anything to that.
Yes. I would just add that at CPChem, the addition of U. S. Gulf Coast 1 came at a time when margins were declining. And so the earnings power of that facility has really not been shown in a mid cycle margin environment.
So I think that will be supportive of higher contributions from CPChem.
We have reached the end of today's call. I will now turn the call back over to Jeff.
Thank you for your interest in Phillips 66. Before I wrap up, I'd like to thank Brent Shaw for his significant contributions to the Investor Relations Group. Brent's been promoted to another role at Phillips 66. And I'd like to welcome Shannon Holley to the IR team. Thank you very much for your time today and please call Shannon or me with any questions.
Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.