Phillips 66 (PSX) Earnings Call Transcript & Summary

That music gets me every time. Now this -- we're very honored to have Phillips 66 and the leadership team from Phillips here with us today. Greg Garland keynoted our conference last year. And this year, we're fortunate to also have Kevin Mitchell, CFO; Jeff Dietert, Chief Economist and Investor Relations; and Mark Lashier, who's moved into the new President role. So thank you all for spending some time with us.

There's a lot to cover in a short period of time for John Mackay and myself. But maybe, Greg, we'll turn it over to you to talk about your key objectives for 2022, how you're thinking about the state of the business, both from a micro perspective and macro perspective and why investors should be tuning in to Phillips 66 now.

Great. Well, Neil, thanks for having us. It's always a pleasure to be with you. I wish you and all the people joining us today via the live stream happy new year. So hopefully, 2022 will be better than 2021 as we think about it. So actually, as we come into 2022, we're pretty constructive. I think if you looked at each successive wave of COVID, it had less impact on demand. We're -- so this starts year 3 of it, and I actually feel like we're moving more to an endemic phase versus a pandemic phase. We'll see if that holds true or not. But certainly, I think governments are less likely to impose lockdowns. I think the population is less likely to want to be locked down. People are just wanting to get out and get about. And so I think we're certainly in the refining business, very constructive coming into 2022. I'll tell you a couple of reasons why. First of all, if you think about on the demand side, demand is doing relatively well. We see gasoline at or above 2019 levels, distillate demands above 2019 levels. So we feel total constructive on the demand side. From the economic perspective, we think 2022 is going to be great. You've got this unleashed pent-up demand coming out. You've got trillions of dollars of stimulus coming into economy. And we think that's all good on the demand side. But the supply side on refining, probably 4.5 million barrels a day of capacity has kind of come out. That's more than we've seen in any other economic downturn, and that's more than the capacity that was added in '19, '20 and '21. And then capacity coming on in the next couple of years is muted. So the supply and demand dynamics look very favorable coming into 2022. The thing is inventory is still low. Gasoline, distillate, fuel oil, jet, all at the bottom of the 5-year range. So that seems really good. So we think we'll be at or above mid-cycle margins in our Refining business coming into 2022. I think that's really important. Now 4Q margins were actually pretty good, almost approaching mid-cycle. They were seasonally lower than 3Q, but when you look at where we kind of ended up on a rent adjusted basis, we're probably $2 a barrel better than where we were in 4Q of '19 and a lot better than we were in 4Q in '20. So another positive sign kind of coming into 2020. So our Chems business really outperformed in 2021. Margins have come down in that business, and we'll talk about the specifics there, but still well above mid-cycle margins in Chems. Our Marketing and Specialties business had one of the best years ever in 2021. We're constructive in that business in 2022. Midstream, we've got some new assets coming on, the C2G Pipeline. Frac 4 will be coming up in 2022. So we think Midstream will be at or above its kind of historical earnings level. And so as we just kind of cruise around the portfolio, we really see us getting back into something approaching more mid-cycle cash flows for us, which would be $6 billion to $7 billion of cash. And so we have the opportunity to think about capital allocation, more degrees of freedom, I would say. So first of all, the first dollar is going to go to the sustained CapEx which is $1 billion. Next dollar goes to dividend at $1.6 billion. We've got a lot of room to think about what do we do with the balance of that. We announced a $1.9 billion capital program for 2022, $1 billion on sustaining, about $900 million of growth. We'll go into the details of that if you want to get to that a little later. But certainly, capital constrained relative to historical allows us to continue to pay down debt. We paid down $1.5 billion last year. We got another $1 billion coming due in April this year. Another $450 million of PSXP debt, which we can think about this year also. And then we're interested to get back to share repurchases. Given where the shares are trading, I think it's time to really restart that. And we're on a good glide slope on our debt repayment. And I think over the next 2 years or so, 1 to 2 years, we'll get back to the $12 billion pre-pandemic levels of debt that we've been targeting. So I think we've got room to do it all in 2022. We've always said that the signposts we're looking for is kind of mid-cycle cash coming out of our Refining businesses, and we think we get there in 2022. So I'll pause there.

That's a great overview, Greg. That's a good place to start, too, which is capital allocation. I think part of the reason that Phillips 66 was a strong performer up until last year was the consistency of capital returns, particularly share repurchases last year, was a tougher year for the stock in part because you guys weren't the natural buyer of the story. As you think about 2022, when do you think you'd be in a position to start reinstating the share repurchase to the extent as possible?

Yes. I think that -- well, so first of all, I think you're absolutely spot on. We certainly underperformed in 2021. I think a lot of that was questions around our base Refining business and portfolio. As you know, we're more heavily weighted to distillate. We're heavily weighted to heavier, more sour crudes. We think those things are coming our way in 2022. So fundamentally, as we see Refining moving back to mid-cycle, I think we've created the opportunity to really start thinking about buying shares back in 2022, and I am anxious to get to it. We'll see. We want to balance our cash input with our cash output, obviously. But I think constructive in Refining sets up a really strong cash generation for 2022. We think the other businesses are going to be very solid in 2022. We've got a good track record of moving debt. And so I think the rating agencies will hang in there with us in terms of the rating. They removed the negative outlook in 4Q. So we're A3, BBB+, really strong rating. And so I think all things considered, we'll get back to share repurchases this year in 2022.

Yes. And there had been a view from some investors that it'd be difficult to reinstate a share repurchase program until you got closer to that $12 billion debt level. What we're hearing you say today is you have the ability to actually do both, take down...

Yes, I'll actually let the CFO comment on that.

Yes. Neil, I do think we've got a fair amount of flexibility as we look ahead. So as we come into this year, we paid off $1.5 billion of debt last year. We've built cash, so we're in a stronger cash position. So on a net basis, we've actually done better than just $1.5 billion of debt reduction. We've got clear line of sight to debt reduction opportunities in the early part of this year with the $1 billion maturity, the $450 million at the PSXP level that Greg mentioned, which incidentally, that's just with the roll up. As that transaction closes, we have a lot more flexibility, both in terms of the cash that PSXP generates that would have been trapped at the PSXP level, and we have the flexibility around the debt at the PSXP level as well. And so as we think about those debt reduction opportunities, so the positive tailwinds from a margin and a cash generation scenario, we really think we'll be in a position where we'll feel comfortable on paying down debt. And we're in a position to get back into share repurchases and acknowledge that we'll get to that kind of balance sheet target in a pretty meaningful time frame that's consistent with our objectives.

And Kevin, as you think about the $6 billion to $7 billion of cash flow that you can characterize this mid-cycle, we've been through a pandemic. This has been a lot that's changed in the world. Has your view of the normalized cash flow power of the business changed at all?

In aggregate, I don't think it has. I mean, there may be some puts and takes as you go around the portfolio. But as -- bear in mind that the Midstream business is continuing to grow. The Marketing business is on track. We'll report our results in a couple of weeks' time, but we're on track for maybe our best ever year in that segment of the business, which I would say, yes, that's above mid-cycle, but is -- our thoughts around mid-cycle recalibrating in some of that. And we've invested and grown that business as well, and we continue to do that. So as you look all in, and the Chemicals is -- we finally got full mid-cycle plus contribution from Gulf Coast I project, which we never felt got reflected in our valuations in the past. So I think when you look around all this, even if there is some movements in some of the areas, I think the $6 billion to $7 billion and growing, as we continue to advance our projects, whether it's Rodeo Renewed, more projects in CPChem, finalization of Frac 4 and Midstream, so I think that $6 billion to $7 billion is a very comfortable number for us to think about.

And Greg, you came out with your 2022 capital spending levels, which were slightly below our expectations, and it's pretty clear to us you're moving this business more towards sustaining versus large growth spend, at least for now. What would it take for you to shift that focus? And then a bigger picture question, as we look at your sum of the parts, and I know you guys keep your own sum of parts, we have never seen the stock so dislocated relative to its sum of the parts using the forward curve. So what are the steps that you think you need to take to close that discount?

Yes. So I would probably start with -- we've been signaling for some time now that 2022 and probably 2023 are going to be on $2 billion or less in capital. There for several reasons for that. One is Midstream has been one of the big growth drivers, and we just don't see the big investable opportunities in Midstream today that we would have seen 5 years ago. So we're going to -- in 2022, we're going to finish up Frac 4. That's like $130 million, and then -- and we're kind of done. And what's left before us on Midstream the next couple of years is just the smaller one-off type projects. So no big mega projects in Midstream. Obviously, the renewable -- Rodeo Renewed is -- fits into that kind of $2 billion or less regime that we've talked about. And we've previously communicated that to say we're going to be constrained on CapEx, we're going to be on a path to pay down debt, and we get back to allocating capital back to shareholders in terms of increasing the dividend and buying shares. So that's a framework that we're thinking about, Neil, and how we're going to try to operate at least for the next 2 years. I keep saying there's going to be fortunes made and lost in emerging energy. And so I think we're going to be careful about how we invest in emerging energy. Renewables is certainly the easiest one to see. It's molecule management. We know how to do that really well. We've got a great opportunity of Rodeo Renewed. We've probably got some smaller opportunities around the portfolio to do some things like what we're doing at Humber where we're coprocessing or using hydro equipment that has existing capacity available to us, that you'll see us do over the next 2 years, but nothing in terms of big mega projects for the next couple of years beyond Rodeo Renewed.

Well, let's spend some time talking about the assets in the business line. But before I turn it to John to talk Midstream, let's start on Refining. And Greg, over the years we've known each other. I've always viewed you guys more bearish on Refining than most, and you've generally been right to have had a more cautious view on everything from differentials to IMO. But this is probably the most optimistic I've heard you about the business in some time. So talk about where that renewed optimism is coming from as you think about the macro and specific products as well. Where do you see the value in the barrel?

Just to continue my trend of being the bear versus the bull, I'm just excited about getting back to mid-cycle, Neil. I'm not talking about going out, although that's certainly a possibility I think as you think about the potential setup for 2022. But we are more constructive to getting back to something approaching mid-cycle in our Refining business, so I don't think there's any question about that as we move forward. We're always looking at the asset portfolio. And for us, the perennial underperformers were really San Francisco and Alliance. You saw us, we've made moves around both of those assets do that. But we -- frankly, we test every asset in the portfolio every year at least or sometimes more than once a year as we're thinking about could that be more valuable to someone else or could that be better in some other service. And so you'll see us continue to do that as we think about the portfolio. But I think the 2 big moves around San Francisco and Alliance really helped position our portfolio really well for the future.

How do you think about where we are in terms of the demand recovery? It looks like we're around 99 million to 100 million barrels a day of demand right now. So you're back to pre-pandemic levels, 2019 levels, and part of the barrel that feels still absent is the jet side of the equation. How do you see that shaping out from here?

Yes. So I'll take you back to the earlier comments. I think that we're kind of through lockdowns. And as we shift to a different phase from a pandemic to endemic that we all learned to live with, I think air travel recovers. Notwithstanding all the scenes we saw at the airports over the holidays, but that wasn't people that didn't want to travel. That was really flight crews and weather that impacted that. And so I think we'll see a continued improvement and recovery in jet demand as we move into 2022. And just given where inventories are, I mean, that should be actually a nice tailwind for distillate. Jeff, I'll let you comment on that.

Yes. I think as we look at our portfolio, we're more diesel heavy than our peers. And if you look back at 2019 and really the decade of 2010 to 2020, distillate cracks were $5 a barrel higher than gasoline cracks. And if you look at 2021, the gasoline crack was $2 above distillate, and the jet was a big piece of that. And so as diesel demand continues to grow, and jet demand comes back, we expect to revert back to an environment where diesel cracks are $5 a barrel higher than gasoline cracks, and we see that benefit in our portfolio. I think the other thing that we've seen relative to our portfolio versus peers is that with OPEC taking heavy sour barrels off the market, that heavy sour discount moderated in 2020 and 2021. We're seeing it starting to widen back out. As OPEC puts more barrels into the market, we think they're going to put 2 million to 3 million barrels a day more in, in 2022. So that will widen that differential also. So both those are -- we benefit from disproportionately relative to the market.

And Jeff, while inventories -- or demand is obviously suppressed for jet, inventories are actually quite low for jet fuel. So those struck us that you might actually see a regrade trade as jet comes back where jet starts to trade at a premium again against traditional diesel. Do you see the world the same way?

Yes. We would agree, both in the U.S. and globally, distillate and jet inventories are at the very low end of the 5-year range, yes.

And the last point on Refining is just your views on the crude differentials. To your point, we're starting to see more OPEC-plus barrels come back into this market. Heavy is starting to widen a little bit, including for WCS, although that was noisy with some pipeline disruption. But it does feel like that part of the barrel is coming back, but inland differentials feel like they're going to be structurally compressed. And you guys own a bunch of pipe, including Gray Oak that there are factors are contributing to those tighter differentials. Can the refining system get back to pre-normalized levels of profitability without the benefit of those big crude differentials anymore inland, even if it's offset partially by a better light heavy environment?

Yes. I think we're seeing the market evolve, right? And what we're anticipating is that the heavy sour differentials widen out and that we get an attractive discount on the heavy sour barrels. I think we have seen capacity come into the market on the crude pipeline side. And so the Permian to Gulf Coast differential has narrowed. That probably stays narrow in the near term. I think we are optimistic that there are substantial reserves in the Permian Basin that will be developed. We are starting to see growth there on the crude side, especially on the NGL side. And so we think we'll return to growth in the Permian Basin to offset some of that capacity. The market is going to be more disciplined, so it's not going to grow as rapidly as we saw pre-pandemic. But we are anticipating that, that market is going to grow and absorb some of that capacity. For Phillips 66, the Gray Oak Pipeline is our big pipeline here. We've got substantial long-term commitments supporting the profitability and the returns on that asset.

Thanks, Jeff. I want to come back to Chemicals and Renewables in a moment, but I'm going to turn the line over to John Mackay to talk about Midstream.

Thanks, Neil. Maybe we'll pick up just where you left that, Jeff, on Gray Oak and the Permian. I mean, you've talked a lot about Midstream recovering, talked a little bit about maybe some disciplined Permian growth, but also about kind of fewer organic opportunities in Midstream going forward. So can you talk about how the Midstream fits into the overall portfolio at this point, how we should think about it, particularly in light of the PSXP fold in? And is it a business that serves Refining and Chems, and that's it? Or should we think about it as a standalone business going forward as well?

Well, I'll take a stab of that, and I'll get some help from around the table. But clearly, Midstream is a really important part of our portfolio. You step back to 2012, Midstream was like $450 million of EBITDA and now it's $2.2 billion. This year, we'll bring on the C2G Pipeline, we'll bring on Frac 4. So we're still growing the Midstream business. It's just going to grow at a slower rate because we just don't have the mega projects to invest in. They're still pretty constructive around the NGL side of the Midstream business and the value capture we can see there, frankly, from the wellhead all the way through to the Chemical side of the business as we think about that NGL value chain, the value capture. So we're -- it's still going to be a very, very important part of our business. It is just going to be a slower growth opportunity for us over the -- I would say, the next 3- to 5-year window as we kind of move through this period of more constrained investment upstream in the U.S., which generates fewer investable opportunities in Midstream. We still really like the Midstream business a lot. So I'll let Jeff or Kevin or Mark chime in on that.

Yes. What I would add is if you look back to our November '19 Investor Day, the Midstream business is really on track for EBITDA growth. If you look at performance so far this year, it's really looking at approaching a record year. We had the DAPL expansion late last year, so we'll get a full year contribution in 2022 from that. The C2G Pipeline associated with Exxon, SABIC chemical plant is kicking in, in the first quarter, and those volumes are starting to move. And then later this year, we'll have the Frac 4 completion as well. So things to look forward to there.

Yes. John, I would just -- to your specific question around Midstream's place in the portfolio relative to, is it just an integration with Refining and Marketing or is it more stand-alone, it's really both. So we have Midstream assets that are very integrated with the rest of the portfolio, but we also have assets that are very strong, competitive standalone assets in that -- in those segments of the overall sort of Midstream value chain. So whether you look on the crude systems with DAPL down to Beaumont or the Gray Oak Pipeline going Permian to Gulf Coast, those compete with the best of the other assets out there, likewise on the NGL value chain. So this is not just about Midstream there to supply Refining or help offtake product from Marketing. It's a -- it is very much got a strong competitive standalone basis to it as well.

Same perspective on the NGL side with the petrochemicals business. It's really -- it is a stronger provider for CPChem through integration because of its presence across the industry. And it really is a world-class integration both through CPChem and integration that we're working on from the wellhead all the way to the water to market. And the assets are fantastic that P66 had built over the years, and it's going to attract other opportunities as the industry looks to consolidate. And we will strengthen that position in the NGL value chain as well.

That's great. That's really helpful. Maybe I'll pick up on that last comment. You guys have clearly done a lot on the organic side, have done some smaller deals in the past. If we look across the Midstream portfolio, pretty well covered across the board, particularly on the NGL side. You probably haven't gone all the way upstream into something like processing and certainly not really gathering. Just how would you feel about adding something like that to the portfolio? And where is your appetite? And kind of where do you think the market receptivity would be?

Yes. Well, I would point out, we're obviously virtually integrated to the wellhead, our ownership with DCP. And I'd be remiss to say that I think DCP has done a really great job through the pandemic in terms of managing their cost structure, their portfolio of contracts and just running, doing more with less. They're actually running better. Their emissions profile is down just on every metric. Their personal safety, process safety, everything around DCP has really been hitting on all cylinders. I think the market has recognized that over the past couple of years, and they've had good unit price performance relative to their peer set. And so I think DCP is in a pretty strong position given where they're at, the basins where they compete. And so we virtually get to benefit from that, and Fracs 1, 2 and 3, obviously. And then CPChem benefits also as they buy ethane from DCP. So we like that virtual integration, if you will, from the wellhead all the way through either to the Chems business or out to the ultimate customer. Maybe that's to the water or other Chems facilities. So I think Midstream is probably going to consolidate, John, just given what we see going on in the Midstream business. And we certainly want to evaluate those opportunities. I think the next play Midstream is going to be around consolidation and synergy capture, if you will. We've seen this play out before in this world of ours, and so we know how to do that, I would say. But it's always got to be an eye does it create value or not at the end of the day. You don't want to be big just to be big. You want to be good. And so I think that will be what drives, is there a potential value capture. And at DCP, we've always said, "Look, we'd be willing to home less of a bit bigger, more profitable entity, if that's what it took in terms of consolidation." And so I think as you just think about that Midstream space and how it plays out over the next couple of years, there's going to be some really strong value-creating opportunities in that space through consolidations, mergers, et cetera.

That's great. That makes a ton of sense. Maybe I'll do one more on Midstream before I turn it over to Neil. It's a bit of a transition for him to make a bad pun. Just thinking about Midstream opportunities, we talked about crude, talked of NGL. Something that's kind of started to come up is Midstream opportunities as part of the energy transition. Can you -- are there opportunities there to support the renewable diesel? How does Midstream kind of play into that strategy? Anything -- any kind of thoughts there on carbon capture potentially as well?

Sure, sure. I think we look at our Midstream assets, we look at our Refining assets, we look at all of our assets as potential participants in energy transition is what -- how can we create the most value with the assets that we have and whether it's looking at a refinery as a carbon, hydrogen, electron management facility and how do we optimize around that energy transition or what do we push through these pipes that can create the most value. And if we see an opportunity to repurpose pipes to do that, we'll do that. We've been doing that forever. We reversed a pipeline from Borger to go to take gasoline into the Denver market because we could create a lot of value doing that. So we are always looking at how to optimize those assets. And as those opportunities come up in renewables, we'll take a hard look at it. And we've looked at assets, what it would take to upgrade assets to convert them to transport CO2, and we're getting an understanding of that. And we believe that there's some viable opportunities out there that we can take advantage of at the right time. So absolutely, we're going to create as much value as we can in the energy transition through existing assets.

Greg, we've got some investor questions around utilization over the last couple of months. I loved -- on the Refining side, and I just loved your perspective on that. You did have a tougher second quarter with a lot of FCCs that were down, but actually ran really well in Q3. Is it -- as you look at '22, do you see a stronger year ahead for utilization? For those who are concerned, is there something structural from an operational standpoint? How do you respond to that? And then to tie into that question around utilization is, as jet starts to become a bigger part of the demand pool, do you think that will actually enable utilization to move higher? Because right now, there's a lot of jet that's getting pumped into the distillate pool. And so do you actually think there could be a need for -- to get volumes higher on the Refining side?

Yes. So I mean, first of all, we had a lousy second quarter, Neil. Thanks for reminding me about that. We ran -- but we ran much better third quarter, fourth quarter. I think we're set up to run well coming into 2022. The other thing I think that we were talking about earlier here at the table is all of us have pushed turnarounds from '20 to '21 into '21 into '22. And it's not yet clear to me what the industry is going to have to do from a turnaround perspective in 2022. And so I think that's something else we're going to want to watch as we move through 2022 and what that means for ultimate capacity utilization. I suspect that capacity utilization trend is higher in 2022 as demand trends higher. I think that the industry has done a marvelous job at balancing the yield coming out of the refineries just given what happened to jet and how we were able to take jet and push it into distillate and push it into gasoline and not see jet inventory just go through the roof. And conversely, I think on the flip side of that, you'll see the industry manage that transition really well as we try to rebalance yields coming out of refineries. But I think the PSX and the industry in general did a great job of turning down the refineries when they needed to. We never thought we could get below 70% and run efficiently. We did, and conversely coming back up, I think, the industry. But I think the wildcard is going to be turnarounds for 2020 and what the ultimate impact that really is on the effective capacity utilization.

One thing I would add, Neil, as Greg mentioned earlier, we've, as an industry, eliminated almost 4.5 million refining capacity that's been rationalized, which is more than capacity adds in '19, '20, 2021. And so as we get back to demand exceeding those '19 levels, we should see utilization continue to rise.

That's great perspective. Let's get over to Chemicals. And Mark, I would love your perspective on it. Phillips 66 has long had a mid-cycle view of $0.30 a full chain margin, and we certainly blew through that. I don't know where we are right now, probably high 40s or something like that. Just how do you think about that climb back path back to normal? Or do you think we actually sustain above normal for a while?

Yes, Neil, thanks for the question. You're right. 2021 was a pretty remarkable year for Chemical margins. There's a lot of things that contributed to that. Inventory -- very extraordinarily low inventories because of winter storms and before that, hurricanes and just base demand growth on top of that. You saw margins get up well above what we're seeing today, approaching $0.80 a pound. And now as we've been talking most of the year, at year-end, they tend -- margins tend to come off because of seasonality. We're seeing that, but you're also seeing some preemptive anticipation of capacity coming on over the next 12 to 18 months. And so there's this good creative tension between buyers and sellers out there. You still have notions of price increases out there because I think the sellers say that new capacity is going to take a little longer to come on than the buyers would like to see. But all in all, I think what you're going to see, with the continued multiple of GDP demand growth in the marketplace offsetting that supply introduction, you're going to see above mid-cycle margins throughout the year on average. And so it's not going to be where we saw it last August and September, but nobody thought those things were sustainable. And I think, again, the inventory situation really blew that out, and that attracted the production that normalized the inventory. So we're very constructive. I think that we continue to see strong global economic activity. You've seen some interesting things going on with respect to supply chain. I think things are particularly strong in North America because the supply chain has realigned around North American demands. You don't see as much direct dependence on China because of the logistics challenges. And people -- a lot of people understand that the logistics challenges aren't because there's no products being produced. There's an extraordinarily -- there's strong flow of products, but it's probably not the best use of those shipping containers to move polyethylene around. You can move much higher-value products, but people still need those end-use polyethylene products. And so you're seeing that materialize in other locations that don't require those logistics. So it's all very constructive around above mid-cycle margin continuing into next year as we digest the new capacity that's coming on. So we think it's a great time. It will be a great time, very constructive. Also CPChem has got a very robust capital program. Greg talked about capital allocation. You don't see the CPChem capital budget flow up into the P66 capital budget, but they're going to spend about $1.4 billion in capital next year, so our exposure is about $700 million of that. And there are some very robust projects that are north of 20% returns, so we'll get the benefit of those earnings and those distributions as time goes on. So they've got things like debottlenecking around their U.S. Gulf Coast One project. They've got a fantastic project to take refinery grade propylene and split it into propane and polymer grade propylene. That's going to be built adjacent to the Gulf Coast I project, so there's going to be some synergies to capture there. And one of the key ingredients in polyethylene production are alpha olefins, the comonomers, and that's actually constraining the production of polyethylene today because there's just not enough comonomer to go around. And so CPChem is addressing that through a grass root project at their Old Ocean facility to build another 1-hexene unit that's got fantastic economics. And then at the other end of the spectrum, we've got mega projects that we're working on with Qatar Energies, our U.S. Gulf Coast II project. We're looking to FID this year. And then about a year later, we'll be looking towards FID of the RLPP project that will be located in the state of Qatar. So Chems is a great story, and it's been a fantastic year, but it will be a very good year in 2022 as well.

And Mark, what would it take for you and your partner, Chevron, to move forward on some of these large-scale mega projects? One of the challenges, of course, is the commodity price of steel has gone up so much. And so I think investors are worried about the capital intensity of bringing new units on.

Yes. No, we've been working -- we tapped the brakes on those projects, but never stopped working on them. We've been optimizing the capital around those projects with an eye towards what inflation and what labor productivity could do. And we believe we've got line of sight on that for those projects, and we work very closely with our Qatar partners. And we'll be looking at an FID for robust projects later this year. And we've gotten a lot of comfort around labor productivity in the U.S., particularly around the U.S. Gulf Coast. There's not the number of mega projects underway that we saw 4, 5 years ago when we built U.S. Gulf Coast I. And a lot of the talent is still available and willing and ready to work on a project of this magnitude. And so we're still pretty constructive around the economics. And even more so, as you look down the road when these projects will come online, there's not a lot of other activity in that space. And so it's a pretty good time to be constructing that because people have backed off from these kinds of projects, these kinds of investments. And we've been working a way to make sure that we've got the absolute best position around capital execution for both projects. And we're in a great position to move forward when the time is right.

Greg, I want to finish off on low carbon and energy transition and ESG, but maybe I can ask a bigger picture question to you as an industry leader. It strikes me that over the last 10 years, the industry has been kind of on the back foot when it comes to energy transition when -- and it's not in the form of added investment, but in the way the narrative has been shaped around the value of energy. The value of the barrels that you produce are significant, and there's significant social value and economic value, and we saw evidence of that over the winter in Europe. So how do you not repeat that in the next decade? How do you actually be on the front foot and better illuminate the value of the product that you're producing? And I say that not only in the E context we're going to talk about, but also in the S context, the social value of the service that you're providing.

Yes. It's a great question. And I've always said, we have a great story to tell. We just got to do a better job of telling it in terms of the value of society that the products that we make every day. And I do think that we -- it's incumbent on us to be out there on our front foot versus our back foot in terms of the story and what we do. But I also think the industry, and I think PSX, in general, are doing a good job of addressing our assets and what's going on in our assets. So we announced a 30% reduction in emissions intensity around our existing assets. And we also announced Scope 3 reductions, one of the first companies that have done that. And so I think we're trying to meet societal expectations about a lower carbon future, but do in a very thoughtful way. And we've announced -- the targets we've announced are -- they're meaningful. They are achievable. They're backed by real projects, so that we know we can achieve these things by 2030 that we've set out to do. So I think that part of that is building that societal trust that we're part of the solution, and we're problem solvers. Energy has been a business of transition for 140 years, so this isn't really new to us. And we're scientists and we're engineers, and we like to solve big challenges and big problems. And so I think the people of energy will step up and be part of the solution here, Neil, and not part of the problem. And we need to be viewed that way by society because they use our products every day. And many times, our products are embedded in such a way that they don't realize they're using these products in everyday life. And so I think every opportunity we get to highlight the value of the products, along with what we're doing to reduce our emissions footprint, is going to be an important part of the story as we move forward.

Yes. Well, I'm here for that, and let's talk about some of the specific projects, starting with Rodeo Renewed. Where are we in terms of permitting, project timing? I think there's still a misunderstanding around feedstock where there's a perception, and we talked about this over the holidays, that project being a more of a soybean-based refiner when you guys have developed some of the pretreatment capacity to bring in alternative feedstock. So talk about that project high level and maybe you can address some of the -- your views of these perceptions around the economics.

I'm going to let Mark talk about Emerging Energy, but I just want to comment on that last thing. And when you think about Rodeo Renewed $800 million investment, the biggest part of that investment is around feed pretreatment, so we can run a wide range of feedstocks. And we'll optimize the carbon intensity, just like we optimized the crude advantage around Rodeo Renewed. So I think that's a really key piece that this is probably going to be one of the most flexible plants on the planet in terms of what it can run and certainly be one of the largest. It'll be the lowest investment cost per unit. It'll be the lowest operating cost per unit, and it sits in the best market in the world for renewables. And so we really like Rodeo Renewed. So Mark, I'll let you pick up from there.

Sure. Thanks, Greg. Yes, and it really -- maybe some of the confusion is the first step was to convert a unit to a very direct and very simple process to take soybean oil, canola oil, and that's our first step to get our foot in the marketplace. We're producing renewable diesel today based on that. But the big project, the Rodeo Renewed will address exactly that, to allow us to process everything from soybean oil to corn oil, canola oil, used cooking oil, animal fat, anything that we can get our hands on across the planet to process. And we've got a great commercial organization that's -- we've got offices in London and Singapore that are out there procuring feedstocks for Humber today, so we know that we're developing the relationships out there. And again, it's going to be about carbon intensity and value and how we can capture the most value with the right feedstocks at the right time, and we're sitting right there on the water in San Francisco. So we've got the world at our doorstep to get the right feedstocks in there. And we've got a very low capital base because we were able to convert those existing assets, and that's a great lead in to the bigger discussion around renewables that you asked. And while Rodeo Renewed is the cornerstone of our renewables efforts, we established an Emerging Energy group. I believe it was announced at this conference a year ago. I wasn't yet on board, but I joined a couple of months later. And one of the most exciting things that I've been learning about over the last year, the Emerging Energy activities that we have going on. And so we built this organization with some of the best and brightest in the company, and we've asked them to really go out and scour the opportunities and then bring those back. And we put them under the lens of capital discipline, okay? What makes the most sense for us? How can we create value around Emerging Energy? How do we use existing assets? And where do we have a competitive advantage? And that team helped us narrow the scope to 4 key pillars around renewables, around batteries, around carbon capture, around hydrogen. And not all of those are on the same time scale. Clearly, renewables, we've got to step up, and we're going forward with Rodeo Renewed. And related to that, we made an investment in soy process -- soybean processing that is at Shell Rock, Iowa to get about 4,000 barrels a day of soybean oil to support that, not as the only feedstock but as a component and really to learn more about that. And a lot of what we're investing in today are opportunities to create value, but also to learn more about those value chains. You've seen our investments in batteries around NOVONIX. That's a similar opportunity. We've participated in that value chain for a number of years. We produced especially material that is used to produce synthetic graphite. And we've got great demand, and we've got lots of opportunities to partner with producers that want to make synthetic graphite, both in Europe and in North America. As those value chains want to localize, so they're not dependent on the supply chain all the way back to China to produce lithium-ion batteries in Europe and North America. So we're partnering with NOVONIX to have a very low carbon path to synthetic graphite to support lithium-ion batteries. And then for longer term, we've got our Energy Research & Innovation Group looking at other battery technologies that would not necessarily be for electric vehicles, but more geared towards managing electricity from wind and solar power, the intermittency. And so we can support our facilities, and we can also support the grid through these battery innovations that we're looking at long term. Around carbon capture, we've got opportunities around many of our facilities to look at carbon capture. We talked earlier about the potential to repurpose some of our assets to move carbon, and we're going to be able to do that quite cost effectively as we learn more about the challenges and opportunities with carbon capture. And then there's hydrogen. We're a massive consumer of hydrogen. We know a lot about the production of hydrogen. Hydrogen, as we produce it today, produces a lot of CO2, so it's a great carbon capture opportunity. We've got programs underway in Europe where we're selling hydrogen today as a transportation fuel in Switzerland, and we're looking at expanding that. And we've got opportunities at our Humber Refinery to take wind power from the North Sea and to produce hydrogen for use at our Humber Refinery. So we're developing these opportunities. We're understanding these businesses. And then we want to very critically analyze whether we can create value, get a competitive advantage in any of these value chains and then expand that across our portfolio. So we're learning to walk before we run always with an eye towards value creation. We've got to return an acceptable return well above our weighted average cost of capital. One of the newest things coming over the horizon very quickly is sustainable aviation fuel. It's a kind of a next nearest neighbor to renewable diesel. We've had engine manufacturers. We've had airlines approach us about getting bigger in sustainable aviation fuel, and we've got line and sight of our first steps in doing that. You've seen us announce alignments with Southwest Airlines to help understand their needs around sustainable aviation fuel, where we can produce, how we can produce, what the economics are going to be. We've announced a deal with British Airways from our Humber Refinery where we're producing sustainable aviation fuel today. And these are drop-in aviation fuels that are good to go as they come out of the refinery. So we've really developed an incredible palette of opportunities that allow us to pick and choose what makes the most sense for us, how we can leverage our existing assets, how we can create value that our investors expect in this area.

Mark, that sounds a great overview. I'll close with this question as it relates to Clean Energy business or the low carbon business. You've come out with a $2 billion target for the earnings power of that business over time. And between needle coke and good returns here from Rodeo Renewed, I would think you'd be a lot on the way towards that. But any quantification that you could provide or perspective of where you are on that journey?

You're an astute investor. As we look at Rodeo Renewed, we think about half of that will come from Rodeo Renewed, and the rest of it will be in bits and pieces. These are smaller investments as we learn our way. But clearly, we've moved stronger into battery, the battery value chain, so we see that being a big part of it. And then you'll see other smaller investments that will contribute to that. Nothing line of sight yet the scale of Rodeo Renewed, but I think you'll see sustainable aviation fuel get a strong role there. There's a lot of evolution going on around the regulatory environment, and we believe that it will move to the same kind of level that you see around renewable diesel to provide the incentives to do that. Because when you think about flying across the Atlantic or flying across the Pacific, you need that energy density that liquid hydrocarbons can provide. I'm not ready to get on an airplane that's battery powered to fly across the Pacific or that's hydrogen fueled to fly across the Atlantic. We're going to need liquid hydrocarbons to do that, and we're focused on how to create that sustainable aviation fuel to meet the demand that our partners and others that are going to need.

I think that's emerging challenge, Neil. If you think about kind of 10 million barrels a day globally of aviation fuel and how are we going to source that, how are we going to try to make that happen, how that competes relative to renewable diesel, it's going to be an interesting mix as we move forward. Our team always say there's going to be fortunes made and fortunes lost in Emerging Energy space, and returns are going to be our guiding star here. And if we can't find something that generates a 10% or better return, so comfortably above our weighted average cost of capital of 10%, we're just not going to do it. We'll give the money back to shareholders in this space. I think the good news is in the year that we've embarked on this Emerging Energy journey, we've probably uncovered more opportunity than we even envisioned when we said that a year ago, we wanted to have a $2 billion Emerging Energy EBITDA business. And so I take the [ over ] on the $2 billion in 2030.

All right. Well, guys, thank you. Terrific conversation, wonderful way to start the year. It would have been better in Miami, but we'll do it probably next year. And thanks. Here's to a great year for you guys.

We look forward to it, Neil. Happy new year.

Happy new year.

Happy new year, everybody.

Happy new year.