As the midstream sector continues to gain strength, more upstream companies are entering the space.

Thus far the downstream has largely held back from midstream involvement, but one company that hasn’t taken such a conservative approach has been Phillips 66. The company is a joint venture partner in DCP Midstream, the largest midstream company in the U.S. according to Midstream Business’ most recent rankings. This gives it an obvious stronghold in the sector. However, recently the company has been making more direct inroads to the midstream, thanks to opportunities presented by increased liquids production.

“We see opportunities in our midstream and chemicals businesses, but we have no plans to shrink our refining business, which is still our core,” Jim Webster, Phillips 66’s general manager, midstream, told Midstream Business.

While some downstream companies have been slower to move into the midstream because of a lack of NGL assets, Webster said the company has a distinct advantage in that its value chain includes refining and additional sources of NGL.

Greenfield opportunities

He added that the company will explore opportunities to locate midstream operations at existing locations where infrastructure, labor and other resources are readily available. The midstream division will also explore greenfield opportunities for fractionation, waterborne terminals and rail activity.

Phillips 66 is fairly new and a public company spin-off from ConocoPhillips Co. in May 2012. The company’s asset base at the time of the spin-off included global downstream, midstream and petrochemical assets.

“Part of our vision is to double the enterprise value of our company based upon its historical implied value ... [W]e are very purposeful in how we structured Phillips 66 from the very beginning and the assets that went into the company,” Greg Garland, the company’s chairman and CEO, said during an analyst meeting in April. “We believe that our main business segments are more valuable together than they would be separated, and we test that continually. We have access to lower cost of capital. Looking across the value chain, we can optimize. We can direct capital to its highest and best use, and we can grow quicker.”

He said that by the end of this decade, the company anticipates between 3 million barrels per day (MMbbl/d) and 5 MMbbl/d of NGLs to be produced. This will present strong investment opportunities for the entire industry of between $100 billion and $150 billion in new infrastructure, including gathering, processing, fractionation and LPG exports. Increased ethane production is making the U.S. “the best place in the world to make petrochemical investments today,” according to Garland.

Consistent with its midstream growth strategy, the company recently announced the Sweeny Fractionator One and Freeport LPG export terminal on the Texas Gulf Coast, which represent a total investment of more than $3 billion. Both projects will capitalize on their proximity to other company assets with the Sweeny Fractionator One benefiting from its location to the nearby Sweeny refinery, while the Freeport LPG terminal will be located at its existing marine terminal.

The fractionator will have a capacity of 100,000 bbl/d and includes associated caverns for storage, pipeline access to Mont Belvieu and the new Freeport terminal. This terminal will be able to load up to eight very large gas carriers (VLGC) or about 150,000 bbl/d. This capacity can be increased by four VLGC, and the company is also considering adding a condensate splitter and more fractionators in the area.

“Speed in managing these projects is key and our existing assets—infrastructure and partnerships—allow us to move more quickly in the NGL business. We can leverage our footprint because of our company’s size, strength and financial flexibility,” Webster said.

Phillips 66 anticipates EBITDA of between $400 million and $500 million per year for the Sweeny fractionator as new pipelines from the Eagle Ford and Permian will touch the facility. The Freeport terminal’s close proximity will also provide the company with a competitive advantage as it is located closer to deep water than ports in the Houston area, Tim Taylor, the company’s executive vice president of commercial, marketing, transportation and business development, said during the analyst meeting.

Cross-Channel Connector

The company is also using existing assets for its Cross-Channel Connector project that will help alleviate bottlenecks in transporting refined products to the Houston Ship Channel.

The project will reactivate a pipeline under the channel and expand another line to transport products from the south side of the channel to Magellan Midstream Partners’ and Kinder Morgan Energy Partners’ systems on the north side at Galena Park and East Houston. The project is scheduled to come online in the fourth quarter of 2014 with an initial capacity of 180,000 bbl/d and could be expanded to 230,000 bbl/d via a potential second phase of construction.

The Sweeny hub will be one of the centerpieces of the company’s midstream growth as Webster said there are several billion dollars of NGL opportunities at the location in the next several years, both through expansion as well as potential acquisitions.

“We will concentrate our efforts near production centers and where NGL is getting to market. Historically, this has been the Gulf Coast, but regions such as the Marcellus and the Utica are growing rapidly, so it is logical to consider those as well,” Webster said. Indeed, production is so great that Webster anticipates NGL production to increase to meet both domestic demand and increases in LPG export demand.

2014 capex

As evidence that refining will remain central to Phillips 66’s operations, the company will spend $1.1 billion on refining projects out of its $4.6 billion capital spending program this year. The midstream will actually account for slightly more of this spending, at $1.4 billion, compared to its more developed refining segment.

Like most midstream players, Phillips 66 recently created an MLP, Phillips 66 Partners. The IPO was held in July 2013, and the company intends to utilize dropdowns, acquisitions and organic growth to reach its full potential in the midstream. Until the MLP is large enough to develop its own projects, its potential assets will incubate within Phillips 66 before being dropped down.

“Our intent for the partnership is to get it to scale so it has a balance sheet and can borrow, issue equity, invest and ultimately take projects on its own or make its own acquisitions,” Garland said during the analyst meeting.

He added that the company is likely to adopt a quicker pace with dropdowns with about $1.5 billion worth of possible assets that could be acquired by the MLP in the future. However, company officials declined to mention specific dropdown acquisitions.

“As a matter of practice, we do not plan to provide specific guidance on timing and type of future dropdowns. Our strategic direction is to use the MLP as a growth vehicle for Phillips 66 in the midstream sector,” Dennis Nuss, senior adviser, refining and commercial communications at Phillips 66, told Midstream Business.

First dropdown

The partnership’s first post-IPO was a $700 million dropdown of the Gold Line System and the Medford Spheres. The 681-mile refined products Gold Line System has 132,000 bbl/d of maximum throughput capacity and connects Phillips 66’s Borger, Texas, refinery to its Cahokia, Ill., refinery, with access to its Ponca City, Okla., refinery; as well as terminals in Kansas City, Kan.; Wichita, Kan.; and Jefferson City, Mo.

The Medford Spheres, located in Medford, Okla., are two refinery-grade propylene storage tanks that have a working capacity of 70,000 bbl and feature interconnections from the Ponca City refinery to Mont Belvieu via third-party pipelines.

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