Okay. Good morning, everyone. We will get started here. Looks like we have got a full house. Would like to welcome Bill Klesse, Chairman and CEO of Valero Energy. I will turn it over to Bill.
Well, thank you, Craig, and good morning, everybody. Appreciate you being here. With me is Ashley Smith, our Vice President in Investor Relations, and Matt Jackson. Valero is still the world's largest independent refiner. Obviously, there is more people in our space. That gives us advantages and disadvantages. Advantages clearly are staff support, best practices, looking at a portfolio, comparing between operations. The disadvantage is, obviously, we are not a niche player. Obviously, we are in most of the markets. We have 16 refineries, about 3 million bbl a day of capacity, 6,800 branded units, 1,300 of those are company operated. We have a very large renewable fuels business, 10 ethanol plants that are very strategically located. And we are also building a renewable diesel plant at St. Charles or down by New Orleans with our partner, Darling, that will make renewable diesel.
The significance there is that diesel fits into the California regulations. Looking at our footprint, you can see the blue is our marketing area. The green is our ethanol plants. And we have a very extensive deck here. You should get that deck before you leave. In the appendix, we give you a lot of data. There is a lot of information on assumptions we make as we continue to go through this presentation. But you see our marketing area, and obviously, we have had a strategy of exiting refining on the U.S. East Coast, but not the market, and have a strategy in the Atlantic Basin. We think complexity still matters in this business. We have very strong complexity. Obviously, we have several refineries that are heavy crude, heavy sour crude processing facilities. The Atlantic Basin is a significant area. For instance, today, the Arb is open.
You can send quality diesel to Europe, the EN 590, and the Arb is open back to the United States. It is actually quite strong for gasoline. You can see, we feel that we can play in this basin. It is large. Products move around the basin. Exports are very important to the U.S. refining business as far as operating rate and then ultimately profitability. And we are building a larger presence. When you look at this chart, the red is diesel and the black is gasoline, and you can see how the products move. And you will see, because of the competitive advantage of the U.S. Gulf Coast refining, you will see gasoline move to West Africa from the U.S. Gulf Coast, something you really have not seen before. Looking at just some of the significant market trends that apply to all of us in the business.
But exports are key, as I just mentioned, especially in the growing markets in the Caribbean and South Latin America. The Atlantic Basin closures are having an impact. There have been things closed. I understand we have zombie refineries, and I think they are dead, they just do not know it yet. But the facts are, capacity has shut down. Distillates are growing much faster in the world, and we will continue to see that as well. The shale production of oil and of course, natural gas, is changing the dynamics of the U.S. refining industry for all of us. Natural gas is just a huge competitive advantage, and we will discuss more about that. These are significant trends that affect all of us in the industry. Exports, very key. We have been able to take advantage of it from the U.S. Gulf Coast system.
We do about 25% or so of the export volume that is leaving the States. The important point, though, because some of the politicians have talked about exports, the media talking about exports, this idea of dumping to raise domestic prices is just fallacy. The market is actually pulling this. We actually make more money on exports than we do domestically. It is a much different situation than is represented in the media and in the press. These exports are supporting refinery runs on the U.S. Gulf Coast. Looking at some of the Atlantic Basin closures. If you think the U.S. East Coast, the Caribbean, Western Europe, and there will be many more in Western Europe. We are not the only company that says that. Many of the consultants say that.
I noticed a couple of the majors recently have said that there will be many more refinery shutdowns in Europe. The operating rate on the European refineries is just low, and the competitive advantage is actually to the U.S. W e think you will see more of those occur. We have had poor utilization in some of the markets where we operate. Obviously, Latin American refineries, the Mexican refineries and utilization, Venezuelan refineries. We have a chart in the appendix that shows Venezuelan exports over the years and how they basically have disappeared from the marketplace. Obviously, Venezuela has turned now into more of an importer. You see in the two charts, the blue representing the Atlantic Basin, and they are both the same chart, just showing the cumulative effect. There are shutdowns in this industry.
Although some refineries have shut down and look like they will operate again here. This has had an impact, though, if you think about the closures and of course, just the whole demand for distillates in the world driving this. But this is product margins. It is 5-3-2 and based on LLS on the Gulf Coast on your left and New York Harbor, Brent on your right. You can see the second quarter of 2011. As you look at 2012, you can see year to date, it has been a second quarter margins have improved both Gulf Coast as well as in Europe. We continue to see the distillates being demanded by the marketplace and the world paying up to have these products come to them. U.S. refining, it is a global business, and you always have to remember that.
PADDs 2, 3, and 4 have higher utilization. They have a structural advantage, which is obviously location. I remind people that in the golden age of refining, it was all about boiling oil. You needed to process oil. You had great margins, so you just process oil. Obviously, in this period of time, frankly, location trumps everything. If you are in the right location, you just have a huge strategic advantage in the sense of profitability here. PADD 1 and Europe have lower utilization, as we show in this chart. A lot of it has to do just with the competitive nature, crude costs, natural gas costs, operating costs, government help. It is all those things in those markets that make it much tougher to operate in those areas. We have mentioned that distillates grow faster.
The chart on your left is margins, and the one on your right is growth, and growth is 2x- 3x the growth in gasoline. If you go back and look at the margin slide on your left, red is distillate, green is gasoline against LLS, and you can see how the distillate margins just continue to be better. On your right, the growth is better. This is a world business, and that is what is growing. If you went back about 10 years to around 2000, you will see in the world, gasoline and diesel are about the same volume. Since then, distillates have grown much quicker, as I mentioned, and is now a much larger business. It will continue to grow. We expect this to grow.
In Valero's case, going specifically to us then, we are increasing our distillate yield to take advantage of this opportunity the market is offering us. In our system, on your left, the black is Valero and back in 2010, and some of our competitors. Then you can see here as we finish our hydrocracking projects and as well as some of the acquisitions we have made, that we will be in this 39%-40% range, and it moves around a little bit. There is some flexibility in the refining. But you can see we are going to have a much higher distillate yield. So what are we trying to do if you think about our capital spending? We are trying to gain more optionality on the product slate. You try to have optionality on your crude slate, you try to have optionality on your product slate.
The chart on the right just shows this over the period of time, how our distillates are continuing to increase. Our Meraux acquisition last year is part of this that helps us increase and will, in the future, allow us to make even a higher percentage of distillates. Now, we have talked, as others are now, about the changing crude oil situation in the United States. Just looking at the chart at the bottom of the slide, the red line and the orange-yellow line show the changes. But what is happening is the light sweet crude from the shale oil, basically the shale oil production is going to push out all of the light sweet crude imports into the U.S. Gulf Coast. There will still be some crude imports heavy. There will still be some mediums that come.
On the East Coast, there will be some lights that come. But on the U.S. Gulf Coast, it is going to push it out. All we're showing here is how it's already happening over the last six months. Every consultant that we deal with has been increasing their forecasts. I'm sure as you visit with some of the exploration and production companies, every one of them is increasing their production forecasts. This is happening. We thought it would happen in 2015, but now I think we very clearly think it's going to be in maybe the late 2013 or early 2014, that you really are not going to bring in light sweet. The world is still going to sell. Product prices are going to sell off of Brent crude than the incremental crude in the marketplace, Brent-priced crudes. This margin will accrue to companies like us as well.
Domestic crude will sell at a discount to Brent because you don't need that economic incentive to attract the West Africans, the Algerians, the Brent-priced crudes to the U.S. Gulf Coast. It's just plain old economics. It'll just reverse, and that's why you're seeing it today starting, but you'll also see this over time where the domestic light sweet crude is going to be at a discount. That means the U.S. refiner has a better margin as you think about it. We also expect the Canadian heavy crude will eventually get to the Gulf Coast. Some of you that follow me more often, this is absolutely ludicrous what is going on not allowing a pipeline to be built to bring Canadian crude oil to the U.S. Gulf Coast.
On this slide here, because we've gotten questions, Ashley and Matt have gotten questions from many of our investors about, well, you got the light sweet crude, and this is going to affect you on the mediums, it'll affect you on the heavies because we have the coking operation as well. If you look at this slide, what we put together here, you see the Gulf Coast 5-3-2, and then we have the crude mixed in here. It's against Brent. We did it against Brent so you could see it. If you just jump over, for instance, to well, the first column on the left is Brent, so there's your margin. Then if you jump over to, let's say, Maya, here we have a discount of about $12 to Brent.
You can pick your number, but you can see Valero, because it has complexity, is still able to capture a larger gross margin. You see that with the Mars or the medium sours, you see it with the heavy sours. All we have is, sure, we're not making as much money as the PADD 2 refineries and the PADD 4 refineries where their location is so good. But the future is still very bright for us as these crudes continue to come to the Gulf Coast, and complexity still does matter. As Brent will be the price-setting crude, we can run lots of light sweet crude. We can run about 0.5 million in the Gulf Coast market, including Memphis, without any capital investment. Obviously, we're like others. We're looking at pre-flashing and things like that. But I will tell you, getting permits is very difficult.
We just think you're going to have the U.S. refining industry, and this is true for the other guys on the Gulf Coast as well, is very competitively positioned in the world. We think we're going to be able to compete. Quite frankly, before this natural gas, this was still one of the only manufacturing businesses in the United States that can compete in the world because we were exporting even before the competitive advantages I'm talking about. The other one that's huge for us now is natural gas, and it's huge for our industry, and Valero takes advantage of this. We process in just the refining group when we're running everything about 600 million cubic feet a day. Every dollar then is $600,000 a day in your operating cost.
Remember when we had $9, $10, $11, $12 natural gas and we have $2 natural gas? You could see what a huge reduction in our cost structure. We actually put this chart together so you could see it a little clearer. If you look at the bottom on your left, the red, this is just at $2, and we know it's higher than that today. But just looking at $2, you see $0.47 a barrel, and then look what happens around the world. If you go to Western Europe, our Pembroke refinery is about $9 a million BTUs, and you see the delta there. Or if you go to the Asian, remember years ago, Reliance was going to kill us. Everybody was concerned that Reliance was just going to swamp us. Look at the difference in the cost structure where you're having to process natural gas.
Remember, refining takes a lot of energy. If you're generating that energy from oil, then you're using $100 oil. You can see that the competitive advantage from natural gas is absolutely huge. This shows up in operating costs or in hydrogen costs, so in cost of goods sold, but it's still a cash item. Unique to Valero is our projects. We ourselves have an internal growth story or organic growth. It's very significant. They're coming to a completion. We have here, we've built some hydrogen plants to take advantage of the low natural gas where we do not have third-party gas, third-party hydrogen. So low price natural gas, we built the hydrogen plants because there was no third party hydrogen available. We did that at McKee and Memphis and have a very good return.
But the big projects for us are Port Arthur and St. Charles hydrocrackers. As we look at them here, we're going to be complete very early in the third quarter at Port Arthur and fourth quarter at St. Charles. Then they have about basically a two-month start-up. It's eight-nine weeks start-up period. These projects are still on track. The startup period, because we're going to follow it rigorously. These are high pressure units, so it is going to take us about two months to start up. We'll have them operating at Port Arthur late third quarter. So in the fourth quarter, we'll see the benefit of this unit. At St. Charles, we'll see the benefit of the unit near the end of the first quarter of 2013, so we'll get the whole benefit in the second quarter of 2013.
In 2013 then will be where we'll see all this cash flow from these projects. I'll show you, we have it here in the last column. It's over $1 billion of EBITDA, but I have another slide here to show you in different price sets. Very significant projects for Valero. We have questions about where do all the economics come from? The fellows put this chart together. We have a volume expansion of about 20%. This is in the mode that we intend to operate. You can get higher volume expansion in different modes. We're going to maximize diesel production, as you would expect based on the other slides. It shows you that you get this lift from natural gas to hydrogen to liquids.
In a way, this is a gas to liquids project that takes advantage of low cost natural gas making basically diesel fuel and some gasoline blend stocks here. You get to see this here. All the price assumptions are in our appendix here, so you can see how we're doing this. Now speaking of the price sets for the hydrocrackers, the column on your right is the one that compared to the table I just showed you. If you go back to 2009 and think about that year, dismal year for refining, dismal year for all businesses, dismal year for your business as well. We would have been profitable at that period here. What did we have? We had much higher natural gas prices. We had lower distillate cracks because of the great recession taking hold.
It was still a big contributor to our company, even in that environment. Come out to 2011, what do we have? We have lower natural gas prices. We still have very good distillate cracks. That's over $1 billion of EBITDA or over $1 a share of earnings that we expect from these two large projects for the company. Switching gears completely here to the ethanol business. It's been a very good business for us. We're a significant player. We're about third in this business. We've gotten our money basically back from when we bought in at the depths in 2009. This year, it's starting out slower because of, frankly, gasoline demand's been low, thus ethanol, there's just been too much ethanol.
As the markets are firming up now, we are profitable in this business, and it's been a fine addition to our portfolio and a fine addition to add value for our shareholder. In our retail business, we don't speak much about it because refining is so large in our company. This is the company-operated retail both in the United States and in Canada, and we show that by the blue and the red on the chart on the left. You see the contribution in EBITDA. It's been a very steady contributor. The number of units has stayed roughly about the same. Retail yields a lot of free cash flow. Returns have exceeded our cost of capital significantly. In 2012, it started off slow like a lot of things have, but the second quarter looks very good to us.
One of the things that we're very focused on is improving our operations, those that have followed the company. We bought a lot of refineries that have been underinvested. Certainly, they were under optimized. We've continued to work very diligently on this. Our goal is to be a first quartile refiner across our system. You can see some of the progress we made. The chart on the upper right is energy efficiency. You can see how that's been improving for us. Mechanical reliability has improved significantly. We're now borderline, but we're on the first quartile. Last year, we jumped the whole quartile. We have many programs underway.
Our employees have bought into this diligently because reliability in a way almost is really the most important measure because it tends to, if you're reliable, then you're really safer, you're environmentally compliant, you can just see regulations in everything, that reliability. You're always available to operate. You can see that at the bottom. It was a big jump and we intend to stay in the first quartile. Slipped a little bit here year to date, but we've had a lot of things going on as well. We work diligently on the weaker performers in our portfolio as well. For us, we've been a large capital spender. We've had in the years, of course, we have regulatory capital, we've had turnarounds, but we've also had this whole reliability, this whole area of investment that's going on.
In 2011, the orange is our, what I'll call economic projects that are really very strategic to us because they provide our internal growth, but they're economically driven. You can see in 2012, our spending is still about $3.5 billion, so we think we're on track in that area. Next year, the key on this slide is with those projects are completed at year-end, Diamond Green Diesel, the two hydrocrackers are finished, and you can see our capital spending next year. There'll be some carryover spending in the first part of 2013, but you can see our capital spending is going to drop $1 billion- $1.5 billion next year. Over time, I think you'll see it continue to drift lower without some other opportunity that comes along.
With the earnings power we're getting from our own projects, the macro view of all the things I've mentioned, low natural gas, export volumes, the internal hydrocrackers, and of course, lower capital spending, we see that we're going to have significant free cash flow, and we have been returning it to the shareholder. If you look at the chart on the right, you can see in 2011, we returned between dividends and stock buybacks over $500 million. So far this year, we've done over $200 million. We've been buying our shares because we think our shares are very undervalued.
We've also raised the dividend last year. I've told people our company will look at the dividend here in the July board meeting as a dividend meeting. We will look at that because at that point in time, we will have the Port Arthur hydrocracker finished. We'll see how things are going because we still intend to be and will continue to be investment-grade debt. That's very, very important to us. If you think about how much oil we're buying every day, we need to be investment grade. So very important, we will continue to maintain that. We paid off debt last year. We paid off some debt this year, although we had to pull on some of our other instruments here, use some of our cash.
We expect that we're going to be able to pay down some of our debt in the next several years, as well as looking on our dividend. I also mentioned that we think our stock is undervalued. If you think about the strategic priorities, you expect this from us, and you expect this from every refiner, that they're going to be safe, environmental, and regulatory compliant. This is what you charge us with. You expect that from us. We maintain our investment grade. We continue to improve. We work this diligently. We complete these value-added projects. We continue to look at our portfolio. That's this advantage we have. We have excellent data on 16 refineries. We can see how each refinery is performing. I will tell you, as you know, all refineries are not created equal for a lot of reasons.
We get to look at this. We will continue to work our portfolio as we go forward. We want more access. We're working that obviously in the Atlantic Basin. We look at other things in some of these other businesses. Obviously, in South Texas, we are having a boom. The Eagle Ford is a boom. Our retail group continues to look for opportunities to do more between San Antonio and the Gulf of Mexico. Our goal is to increase long-term shareholder value. Today, we just believe we're an excellent buy for many of the reasons I've said. We're well positioned in this changing market. We benefit from the exports. The shales, the U.S. is going to be competitive on crude costs. We're very competitive on natural gas costs. All these NGLs are coming.
The butanes, the pentanes are coming. They're going to have to find a home. There's huge opportunity here. It's a huge opportunity for all of U.S. manufacturing. United States has a huge resurgence here. If you think about our country, where do you build plants? Resource advantaged, consumer advantaged. You would have said a few years ago, Middle East, Far East. Today, where do you say? You say U.S. because it's hugely competitive. We need our administration and government authorities to get behind this. We can put a lot of people to work in very good jobs. We continue to maximize our cash flow from retail and ethanol. The capital's going to fall. We'll have that free cash flow. We've said we're going to return cash to the shareholder.
We demonstrated this, quite frankly, in 2006, 2007. We clearly were giving cash back to the shareholders. We've demonstrated it in 2011, already year to date in 2012. Our future looks to be bright. If you think about us, we're very undervalued. For all you that did come this morning, thank you for coming this early. I appreciate it. Thank you.
We got a few minutes to open up any questions if anybody has any.[audio distortion]
Okay. Well, thank you very much.
I think, Bill, I think we have a couple questions right here.
[audio distortion] that much. I think obviously nobody sees that collapsing back. So what happens to your strong buy case, in case actually something that no one expects that the spread gets narrower again? So what's the competitive advantage then?
Okay, so what's the competitive advantage for, I'll say Valero, if the WTI Brent or WTI LLS spread narrows? Well, Valero first off is getting advantage of this widespread at McKee and Ardmore. We get it just like the other guys that you've visited with. We obtain that. At McKee and Ardmore, if, for instance, your scenario happened, then obviously the profitability of those plants would come down. But I will remind you that they will continue to have a strategic advantage as these other companies that you've heard have a strategic advantage, because you have to move that oil to the U.S. Gulf Coast, so they'll have the advantage of tariff. If the tariff is $3 or $4 on these pipelines that are getting built from Cushing to the Gulf Coast, they'll have that advantage.
As long as the Midwest market, Chicago say, has to import products from the U.S. Gulf Coast, as long as that continues, and we expect that to continue, then the margins will be very, very good for refiners in that group, just not as good as today. For us then, you come to the U.S. Gulf Coast. Well, really, when we look at it's actually a comparison against Brent. The world's product prices are being set by light sweet crude that's priced against Brent, and we'll still have this crude that's coming to the Gulf Coast, so we'll have a competitive advantage. And a big part of our output is going to go internationally. I think the profitability, I think the story is very, very intact. And the oil is coming significantly.
If you didn't get the oil and you still have to bring light sweet crude, then our premise of domestic sweet crude selling below Brent price crude obviously would not be true, because you have to attract the light sweet crude. But to be honest, we do not see that, nor does any consultant that's coming to see us. They see us. Everybody is raising these forecasts. And the amount of oil in North America between the heavy and the lights, this idea that the U.S. could never be self-sufficient, I think is a lot more possible today than it was in the past.
Actually, I think with that, we're going to have to cut it short. We have the next presentation.