Hey guys. I am very happy to have Bill Klesse, CEO of Valero. You know my thoughts on refining, so I will not repeat them. I am still positive. Gene Edwards is here, Eric Fisher is walking around, and Ashley Smith from Investor Relations. Let me hand over to Bill.
Okay, thank you. Thank you, Ed, and thank you everybody for coming. Gene is our Executive Vice President of our Strategy and Corporate Development. Eric Fisher is our Vice President of Corporate Communications. Ashley Smith is Vice President of IR. We are very pleased to be here. We have our safe harbor. Okay, starting out, some of you follow us, but there is sometimes a few people that do not. We are very large. We have 16 refineries. We purchased two this year, 2011. 3 MMbpd of crude and other feedstocks. Our complexity average is about 12. We have 6,800 branded units. 1,300 are company-operated, 300 or so in Canada and 1,000 in the U.S. The rest is basically a jobber dealer type business. We are very large in the corn ethanol. We have 10 plants. They are very well-situated. It has been a very good business for us.
Yes, the excise tax credit is gone, but there is still a mandat. As I will show later, it has been very profitable for us. We also still have mandates in cellulosic and biodiesel, and we are building a biodiesel plant as well because we do have the mandates. If you look at the breadth of our operation, this map shows you the U.S. We are in the U.K. and Ireland with our purchase of the Pembroke Refinery and operation from Chevron. We have our Canadian business as well. The blue is our marketing area. Where the V is represents where we actually are branded marketing. We are in 41 states. The Gulf Coast, many people say we are concentrated in the Gulf Coast, and it is a negative.
I will tell you, the Gulf Coast is the most efficient place to do business, to do this type of business from trades, logistics, frankly, environmental policy and everything. It is a good place to operate. A big part of this business going forward is exports, and this is the place you can export from. 2011 was a great year. Yes, it is absolutely true that it was better in the Mid-Continent, but it was a great year for Valero. We have a chart at the bottom of the page here. The black is earnings, and the blue is cash flow per share. You can see in 2008, we had a very good year in 2008, except that we wrote off $4 billion of goodwill. Then you can see how we progressed since the depths of the Great Recession.
2009 was a difficult earnings year, but things have improved significantly. We had record high contributions from both our retail and our ethanol business that I just mentioned. Valero is very well-positioned to benefit from these changing market trends that we have, the changing market that we're experiencing here. Landlocked crude, it's eventually going to get to the Gulf Coast. The Seaway Pipeline's reversing this year, then we'll expand next year. Longhorn is reversing and will be operational next year. Keystone, we still believe will be built. A lot of things are happening in this business. The Atlantic Basin refinery closures have changed things significantly. Many of you remember we used to talk about how much excess capacity there is in North America, Japan, and in Western Europe.
We used to say 1 MMbpd- 1.5 MMbpd, maybe in North America. 1 MMbpd- 2 MMbpd in Western Europe. We are seeing significant refinery closures. Natural gas is a huge competitive advantage. Exports are a key part of our future here as the U.S. refining industry is extremely competitive in the world. Speaking about exports in a little more detail, we have growth in the developing countries, so Brazil, Colombia. The Atlantic Basin closures I just mentioned. Western Europe, diesel demand continues, and there's closures in Western Europe. Latin American refining issues. Many of you are well aware of the refining issues in Venezuela, in Mexico, Curaçao. Of course, Hess has announced they're going to shut down. Hovensa is going to shut down in St. Croix.
The export market is improving significantly. We put a chart together, two charts at the bottom of the page. You can see PADD 3 is the place that exports are coming from for the reasons I had said a few minutes ago. It is a huge opportunity for this industry, and it's an opportunity for Valero. Then where does it go? You can see on the chart on your right that Latin America is, in fact, the biggest market for gasoline and diesel and these products. Frankly, Europe and the other markets continue. Europe takes diesel. Latin America takes diesel and gasoline. We move products around. Frankly, you'd be surprised how far some of these products can in fact move. Remember, in the United States, we still have high unemployment. We have people very uncertain about their future.
When you think about the growth, say, in Latin America, it's growing 2.5 x product demand over the last five years. The U.S. has been down. So you actually see that there's a huge opportunity here. For Valero, we've been able to take advantage of this. We represent approximately 25% of the exports that are going here. We think we're very well-positioned. We're building new hydrocrackers, which we'll talk about in a minute. We're going to make very high cetane, very high-quality distillates. For the premium markets in the world, we'll be able to go after. Also, if you think about the new refineries that you hear about and are being built.
In the press today, they are talking about the Brazilian refinery that was partnering with PDVSA, and they are talking about a 230,000-bpd refinery, and the number they are putting in the press is $14 billion. You can see how this network of refining on the U.S. Gulf Coast that is sunk and very efficient can, in fact, compete very well in this business. The closures that we are seeing in the Atlantic Basin and Western Europe. I have just been East Coast. You just think about it is huge. If you had asked me six months ago, if I thought we would have this magnitude of closures, I would not have. I would have said no. But the dynamics in our business are causing this. Crude pricing is a huge driver. This has been a major change.
Now at the bottom on your left, we went ahead and showed a chart on how much closures we are seeing. You can see in the light green, the rest of the world, and the dark blue is the Atlantic Basin. It is very, very significant. There is a refinery on the East Coast today that is on the market. It is still operating. It is of good size. I think it remains to be seen if there is actually a purchaser of that refinery. On the right-hand chart, there is just a different type graph, basically shows the same type of information. But if you look at that, it is about 3 MMbpd of refining capacity that is shut down in the Atlantic Basin. What is happening then with all these announcements, and the margins have improved significantly. You have seen it in everything.
Gasoline, the RBOB contract is up somewhere $0.30-$0.40 a gallon here since the fourth quarter. Crude price has not moved that much. You can see the improvement here. The blue is the Gulf Coast LLS spread 5:3:2, and the red is the New York Harbor based on Brent. Significant improvements here. Also, there is a lot of turnarounds happening here in the first half of the year. You will see, as we move in the summer with these closures, you are going to see refinery operating rates go up from these low 80s that we are experiencing now in the middle of winter. Sure, we have this low gasoline season anyway, and we have had a mild winter in the United States. However, it is now getting very cold in places in Europe. That is why the arbs back open and you are seeing distillates move.
As we then switching gears just a little bit here. In the world, we see distillates growing much, much faster. The distillate is growing maybe 2x what you see for gasoline. Then we have this export scenario we just described. World growing faster, gasoline is growing. Valero is changing its refining output, and we have been working diligently on this over the years. As you look at the chart on your left, you can see today we are about 33% of distillate outputs. By next year, we are going to be this 39%-40% of distillate output. Remember, distillates have better margins as well. If you look at this chart on your right, it just shows you graphically how we are shifting.
Same info we have on the left, but it just shows us that it is a changing output, and this is driven by the market as we see the markets going forward. Just to show a little more about this market, the distillates are growing faster. We expect that to continue in the world. This is how we see the future. Distillate is growing 2x, basically gasoline. We show that product demand growth in the world on the chart on your lower right. You can see that red being distillates gasoline. These products are still growing. We expect demand this year in the world to grow about 1 MMbpd . These things are continuing to grow, but distillate growing faster.
If you go to the chart on your left, we got on-road diesel here because it shifted over this time period, but you can see the gasoline margins. Gasoline will recover. Demand will come back up some as the economy continues to improve, people go back to work. We do not have as part of our strategy going forward, a rapidly increasing demand for gasoline domestically. We expect that there is relatively enough gasoline to supply these markets. Yes, with the closures on the East Coast, we think the margins will improve, though. You can see, as you all know, that follow this industry, that the distillate margins are much, much better. We think they are going to continue to stay high and could actually tighten a little bit more or widen a little wider for us here as we go in the summer.
Distillates are very much a growth business. Think about the world. 25 MMbpd- 26 MMbpd of distillate, 21 MMbpd- 22 MMbpd of gasoline, growing 2x. It is a huge opportunity here, and that is why you see Valero shifting its output. Another reason that the U.S. Gulf Coast can compete in the world, and the U.S. refining industry is very well-positioned, is because of natural gas. Refineries consume a lot of energy. If you look at this chart here, you can see, we did it in per barrels. Just to give you an idea: the U.S. natural gas, $2.60 per million BTUs or per Mcf or around $16 a barrel. Then, if you come up to Europe with the LNG that is coming into Europe and the other gas supplies, we see about $9 per million BTUs or the [$ 50/BOE ].
Then, you come up to Asian LNG, it is $12, $13. If you look at this chart and you think about this business for a refinery on the U.S. Gulf Coast, typical average versus an Asian refinery, it is over $1 per barrel of operating costs. We happen to know our own numbers for Pembroke. Looking at European LNG, which we have just switched to natural gas there, about $0.85 lower operating costs on the U.S. Gulf Coast. It is a huge competitive advantage. Several years ago, people talked about some of these big export refineries in India were going to take all the market. I can tell you, we can compete with them very, very well from the U.S. Gulf Coast. What is unique to Valero, so we talked about we are shifting our output, is that how are we doing it?
The way we are doing it is we are building two very large hydrocrackers, and they have been under construction for several years. This is maybe the one thing that does differentiate us from a lot of other companies in this business in that we are making these investments, and they have been in the works for a number of years. Now looking at this table, we just deal with the top two-thirds. The McKee and Memphis, we built two hydrogen plants because we do not have third-party hydrogen. We were generating our hydrogen at those plants from reformers. Thus you are generating hydrogen oil through a reformer to make hydrogen. $ 100 oil to make hydrogen is not very smart economically today. We built hydrogen plants, takes natural gas to hydrogen. Those plants are starting up here. They were completed. One is up, one is coming up.
They contribute EBITDA. You can see over in the last column, we actually have used the very recent numbers here to give you the impact that that has. I would tell you in our appendix, you should get our handouts, our fellows have put together a huge amount of information on hydrocrackers, which we are going to talk about because we feel like a lot of people do not understand the impact that they are going to have on Valero. The next two projects are the hydrocrackers, and one will be done at Port Arthur about mid-year, and the one at St. Charles will be done near the end of the year. You can see the EBITDA contribution that we expect from them. This is $1.1 billion on those two projects. Take off depreciation here. Go ahead and take taxes.
It flows straight through to the bottom line. You can see that this is well over $1 a share. These projects are taking advantage of the low natural gas to liquids and also the market as we see that is making distillate because hydrocrackers make distillate where cat cracking tends to make gasoline. By 2013, we have the full impact that we showed on the previous chart. Now, we just have a little summary here, and I said there is a lot more info in the appendix and different price sets and all the assumptions are in there. If you just look at a 60,000-bpd hydrocracker, that is what these two are, you can see here that you get a liquid volume expansion, and it is magic. Not really. You take the hydrogen, you saturate it, it goes in.
60,000 bbl plus the hydrogen, you get about 72,000 bbl, and this is the yield structure we expect from these hydrocrackers. 12,000 bpd, t his is your gas to liquids. There is an intermediate step, gas, hydrogen, liquid. What is it? It is $2.60 natural gas. Converting it to hydrogen is probably a $50, $60 per barrel margin on those components. You look on this right, of course, it raises our operating costs, but that is all in the EBITDA calculation that I showed you there. We focus—for those that follow us, we work very hard on getting our operating costs down, so you would expect our operating costs to come up at the refineries. There are other synergies we are going to benefit.
From running more crude, these things make a very high cetane. We see cetanes like octane and diesel, so we will be able to blend a premium type diesel product. They are very, very key to us going forward. Just one more on this. We put in some different price sets here just to show you the could've beens, the should've beens, the might've beens. If we had had these hydrocrackers operating in 2008, it would've been almost $1.4 billion. Remember back then, we had very high cracks and higher natural gas prices. You come into 2009, we have lower natural gas prices but lower oil prices, but it still generated here $600 million of EBITDA. Remember, the very first slide I had showed that we had a loss in earnings in 2009.
It shows you that if we had had these operating, that would not have been the case. Now, we have the 2010 price set and the 2011. If you think about it, we have lower cracks, but we have falling natural gas. The benefit is coming from these projects in the margin or the basic crack, but also in the natural gas conversion to liquids. Then, of course, you get out to the 2011. As I said, if we had had them. Now, we had to suspend, or we did suspend these projects in 2009, but 2009 was a difficult year. When you look at crude oil, jumping over to the shales, this crude oil continues to grow dramatically. You can see we think the Canadian crude is eventually going to come to the Gulf Coast.
That and then the sweet crude continues to grow rapidly, both from production and from the heavy projects that are happening in the Midwest. So it is going to push all this crude out. This chart at the bottom shows you that we have about 1 MMbpd of light, sweet crude that comes into the U.S. Gulf Coast. We think in this 2014, 2015, 2016 period, we are going to push it all out of the U.S. Gulf Coast. The important thing to note is we believe that you are going to see LLS will sell at a discount to Brent because there is no attraction to bring Brent or West African into the U.S. Gulf Coast. Jumping over to our ethanol business, it has been a great investment for Valero. We are very proud of this investment. We got in in 2009, in a difficult year.
The important point to note here is over the 2.5 years, we basically got all our cash back out of this business. I mentioned earlier, the excise tax is gone, but the mandates are still there. For people like us that blend fuels, you have to use it. There is still a market, and we expect this to be a profitable business for us going forward. It has been a terrific investment. Our retail business has just been excellent. You can see on your left our EBITDA from this business. It has been very consistent here over the last few years. The red is Canada, the blue is the United States. It is the company-operated retail business.
If you look at the chart on your right, you'll say, "Jeez, he said on the first page it was only 1,300 units." But in Canada, we control the fuel at all of our branded units. This is just showing the fuel. We're the only company operate around 300 of the Canadian units. But we control the fuel. We actually set the pricing in Canada, even at the independent stores. Both these businesses, the ethanol business and the retail business, have generated very strong cash flows. We are constantly working to improve our refining performance. We're very, very aggressive here. We are going to be a first quartile refiner in most of these, and I use the Solomon Associates indexes, but it's a benchmarking. It's a very good survey. It shows how you stack up. We've had dramatic improvement here.
You can see our energy is approaching first quartile, but the one we're most proud of is between the surveys, we are now on the borderline or first quartile in mechanical availability. We're spending significant effort and money here to become more reliable operation. Remember, many of the plants we bought were old, under-invested. Looking now at our capital spending and our cash, we have been a large capital spender over the last several years. 2011, we spent about $3 billion. You can see our budget for this year is $3.4 billion. But as we complete these very large hydrocracker projects, our capital spending will fall dramatically here, as you see on the chart. We'll get down into this $2 billion-$2.5 billion range. You can see that our expectation is to have a huge amount of free cash flow as we go forward here.
We're very strong financially. We got this free cash flow coming to us. We raised our dividend this year. We bought some of our shares. We actually had some shares we bought in December that carried over into January, as shown on this slide. We ended the year in a very strong cash position. Lots of liquidity. We paid off debt last year, and as was mentioned, tripled our dividend here near the end of the year. In the last two slides here, just to sum up, you can see our strategic priorities. Obviously, we are focused on safety, environmental, and regulatory. You expect us to be that way. We're going to maintain our investment-grade rating. Our refinery performance is improving. We're optimizing our portfolio. We strategically have added some refineries. We're not going to issue equity.
We have done these accretive transactions, but our goal is to increase our shareholder value. I will tell you, we think, and I suppose every CEO thinks this way, our stock is cheap. It's cheap for the reasons I'm saying. Our cash flow expectations, our improvement in our operations, our raising of our dividends. We think we're very, very cheap. We are well-positioned for these changing market trends that are happening in our business. The Atlantic Basin closures, the export markets, low natural gas, crude and feedstocks coming to the Gulf Coast. We're also well-situated in the Mid-Continent. We think our company is very well-positioned. Strong cash flows from our other businesses. We have said very clearly our intent is to return more cash to the shareholder going forward.
I want to thank each of you for your interest today, and thank you for coming.
Questions. [Matt], yeah.
It is more of a macro question. Obviously, with the DOE gasoline demand numbers here in the U.S. have been exceptionally weak. But when you try and look at same-store sales from some of the refiners, they do not really seem to match up. Do you have any sort of thoughts, or do you have a level that you would throw out from what you guys have been able to see throughout your network?
Gene, you want to answer?
Our same-store sales have been relatively flat year-on-year, even though the DOE stats second half of the year were down 3%, 4% nationwide. We're not seeing it. I don't know if it's because of our locations. We're predominantly in Texas, but we also have some in California and Colorado and Arizona. Then I look at the other data. I think The Pantry just came out with something this week that was in the press. They said their stores were down 7%. Maybe, it's some are less and some are better. That's all we can tell. We are seeing some contradictions in the DOE data, q uestion whether gasoline demand is really off as much as what they're saying it is. I don't know if they're understating supply or overstating exports or what it is, but our guys are digging into it right now.
The PADD-to-PADD data just doesn't seem to add up. We're a little curious about that. But you look at the Mastercard data, it does look like the U.S. as a whole demand is off somewhat, but the absolute number's what's a little bit in question.
I would also add, just to finish, we sell fuel to everybody. We still have 8.3% unemployment. We have a housing industry that's in crisis. We have 25% of homes that are underwater. We have California, which is a big market, has 11.3% unemployment. So there's a big segment of our customer base that's not working or has a very uncertain future. We believe very strongly as the economy continues to improve. People get back to work, although we understand it's going to be slow, get people back to work, they feel better. This is a purchase that people have. As a percentage of disposable income, it's high, but it's not out of sight. So we think you'll see a recovery in these volumes eventually. But yes, the data looks weak for this time of year.
Are you seeing lots of variability between, say, California, Colorado, and Texas, or is it relatively flat across the board?
No, we see quite a bit of variability. As Gene was saying, Colorado's very weak, where Texas is much stronger. But you're exactly right.
Bill, when the hydrocrackers are coming on, could you just talk about how that actually happens? Do you ramp them up and bring them back down? Just some thoughts for the year of 2013.
Well, we're going to bring them up and leave them up. It'll take us about six weeks for a good startup. Our people have been in these units for a year. Our operators. For us, these are huge projects. Obviously, they're $1.5 billio- $2 billion when you count everything around them. But we have extensive training. We finished the Port Arthur one, let's say, in June. We start up here in July. It's expected to be operational in August. St. Charles, near the end of the year, will start up in probably the first quarter. That's why we say the true contribution will be in 2013. But as far as shutting down and turnarounds, because I got that question earlier, no. We're prepared to get these units going.
There may be a few tie-ins, but they're very quick events. We get them up and running. Six-week startup. High pressure units, so very orderly, very detailed startup.
On the closures that you've seen, do you think that's enough to sustain some of the margins, or do you think the margins have just spiked because of the shock of those closures? If that's the case, would you think about hedging?
Well, we think that the demand is going to recover on some of the gasoline, some of the distillates. Look at the distillate demand. You didn't ask about that, but it's very,very weak. We've had a weak winter, a mild winter this year in the U.S. So we believe that you're going to see some of these volumes come back up. This closure level is significant. It's significant. Basically, 1 million barrels a day out of this market. Having said that, exports are key to the future of the U.S. refining industry. The last part of the question is hedging. We do some hedging. Obviously, we had the Brent- WTI hedge last year, which some of you that follow us know. Paper markets are very much part of our business. We do some of it, but a lot of that stays pretty confidential.
One final question. You've said the refining industry is very competitive in the U.S. You've given the hydrocracker uplift. You've improved your operational performance, b ut the multiple is still just ridiculous. So, what do you think is holding back when you think about the company for the shares?
I think there's been a huge change in our business that's occurred here over the last year. Huge. I'm not sure the whole marketplace recognizes. Look at today, I think we still have a Brent- WTI spread of $16. We got Bakken crude at minus $ 40 -something against LLS. We have very major trends that are changing, and I don't think the marketplace has realized them. We, the U.S., are going to back out all the foreign sweet crude and some of the medium crudes out of the U.S. Gulf Coast here in a couple of years. All this oil's coming to the U.S. Gulf Coast at very low natural gas prices. There's a huge opportunity for resurgence of manufacturing in the United States.
All these trends, and then in Valero in particular, I do not think we have gotten the recognition about how much our operations are improving and how much this impact is going to be from the projects that we have actually been investing in over the last few years. That is why I said I think our stock is cheap.
Thank you very much, Bill. T hanks, everyone from Valero here, and everyone—