Heminger advocates for industry's role in improving world

Business News

Gary Heminger

At the American Fuel and Petrochemical Manufacturers Annual Meeting, Marathon Petroleum Chairman and CEO Gary R. Heminger advocated for our industry’s role in lifting people from poverty, enabling widespread prosperity, and enhancing life’s possibilities.

Following is the text from the speech Heminger offered at the meeting in San Antonio, Texas.

American Fuel and Petrochemical Manufacturers Annual Meeting

Gary R. Heminger

Chairman and Chief Executive Officer

Marathon Petroleum Corporation

March 19, 2019

Good morning ladies and gentlemen and thank you for having me here today. Joe, thank you for the kind introduction.

Welcome to San Antonio, a city our industry has embraced for decades. I am hopeful this is not the last time San Antonio hosts our conference, but we are concerned about the mayor’s plans to eliminate internal combustion engines by 2050. We are discussing this issue with the mayor and I’d encourage each of you to reach out and let him know how you feel.

It’s a privilege for me to be here today among people whose work creates such enormous value for our world. I have been in this industry for almost 45 years, and I have never been more proud of what we do, and how we do it. Today I will share my thoughts on where our industry is going, and some of the biggest issues I believe we need to address together. I want to outline a few of the macro-economic factors that are shaping our strategies today, and touch on how I see our industry’s readiness for the future. I will also share a few thoughts on the regulatory environment – both current and proposed.

But first I’d like to talk about why I’m so proud to be a part of this industry. Like many of you, I spend much of my time immersed in numbers – crack spreads… product yields… EBITDA… barrels per day… cubic feet per day… recordable incident rates… and the list goes on. Some of us may find inspiration in numbers – after all, more than a few of us are engineers and accountants, myself included. But what makes me proud to be part of this industry is much more compelling.

It’s the human dimension of what we do – helping to lift people from poverty, enabling widespread prosperity, and enhancing life’s possibilities. Our industry provides well-paying jobs, we work to make our communities better places every day, and we continually improve our environmental performance. Even so, the message to “keep fossil fuels in the ground,” is often framed as something that would make people’s lives better.

That’s one of our biggest challenges – making a meaningful contribution to the discussion about how we can help people live better lives. I believe the starting point should be that we value every one of our fellow human beings – that we should consider every single person to be a resource of infinite value. If we accept this premise, then we must consider how important affordable energy is to everyone’s well-being.

Our industry makes it possible for farmers to till, plant, and harvest more than they ever could without us. We enable them to move what they produce to where there is the most demand, thereby feeding the world. We make it possible for people to transport themselves to markets, hospitals, and schools. Trucks, ships, trains and airliners bring everything we need to warehouses, stores, and our front doors. A huge proportion of consumer goods are made from the petrochemicals we manufacture. And during emergency situations, petroleum-powered vehicles, aircraft, and generators save lives.

This last point is often overlooked until we face an emergency. But we don’t have to look any further back than Hurricane Harvey for an example of what our industry makes possible. Getting our facilities up and running is critical after severe weather, because the fuels we make are primary requirements for effective relief efforts. Members of our industry were prepared, and immediately began providing services for our employees’ families in the aftermath. We jumped into action to stabilize flooded homes and provide the basics that allowed life to resume: food, water, shelter, household supplies, and transportation. We know that when employees don’t have to worry about their families and homes, they can help get our facilities running safely again. And that meant we were able to start supplying fuel more quickly.

We rose to the occasion, as our companies and our employees committed thousands of acts of kindness and heroism. Collectively, our industry donated millions of dollars to humanitarian organizations, coordinated with government agencies, and shared our supplies with neighbors and emergency responders. We lent our engineering and technical expertise to local efforts that restored life to normal. And we manufactured the fuel that powered helicopters, boats, ambulances, and so much more.

We make all this energy-intensive, life-sustaining work possible, reliably and affordably. That’s a tremendous source of pride for us, and one of the reasons I’m still excited about our business after four and-a-half decades.

In addition to the human dimension of what we do, there are always the numbers. In particular, it’s important to take a hard look at the macro-economics of our industry to assess where we are and where we might be going.

Most GDP forecasts center around 3 percent. Risk factors tend to ebb and flow. Market turmoil, trade disputes, and rising interest rates are some of the factors we have all been watching. Any of these factors could shift rapidly, and experts around the world will continue to decipher the signs to figure out where markets are going.

Because fuel and petrochemicals are so critical to world commerce, the economic indicators that our industry deals with every day are often good markers for the broader economy. When we look at the demand for petroleum fuels globally, we see strong demand for distillates, driven by industrial production and the movement of goods around the world. The outlook for gasoline demand globally is modest – probably somewhere around a half percent to three-quarters of a percent over the next few years. We still see this as a constructive environment, especially when this is additive to a global gasoline demand base of 26 million barrels per day.

Refinery utilization is another critical factor to keep in mind. If you look back over the last five years, the U.S. refining industry has operated at around 90 percent utilization, and actually a little higher in 2018. As we all know, with that level of utilization, profitability rises.

Another factor we have been looking at are inventory levels. We prefer to look at them on a days-of-supply basis, especially in the United States. For the last few months, distillates have been in a pretty good place if you look at just days of supply – in the bottom half of the five-year average. Gasoline has mostly stayed in the upper half of the five-year days-of-supply range. But in the U.S., exports are an increasingly important factor, and if you look at days of supply including exports, the picture comes more into focus, with both gasoline and distillates at the lower end of the five-year range.

Globally, our forecast on distillate crack spreads looks good. We believe distillate cracks will be very supportive to U.S. refining margins going forward, especially – as I mentioned – with our domestic refining utilization at expected high levels.

At the same time, we see relatively soft gasoline cracks for most of 2019. We attribute this near-term trend primarily to two factors. First is the growth in shale production, which has meant higher naphtha yields, expanding the gasoline pool. Much of our domestic natural gas liquids production growth is being exported, and competing into overseas ethylene crackers at the expense of naphtha feedstocks, which also pressures gasoline supply. And the second factor in soft gasoline cracks is the structural slowing of global gasoline demand growth.

Overall, however, based on projections for the economy, refined product demand, and inventory levels, we see the margin environment for our industry as being attractive.

Our nation’s petroleum refining industry is ready to take advantage of this margin environment. Our strength has its roots in a number of factors. In addition to our well-trained and productive workforce, our refineries have an overall high complexity index. This gives us a greater capability than other regions to adjust our product output to match demand, without extensive capital investments. U.S. refineries are also often located near petrochemical facilities, which allows us to take advantage of synergies like lower-cost petrochemical feedstock delivery.

And of course, there is our access to cost-advantaged natural gas for fuel, power, and feedstock, and our vast domestic crude oil resources.

A great example of our industry’s responsiveness and adaptability is how we have prepared ourselves to produce cleaner fuels, including low-sulfur fuel that meets the International Maritime Organization 2020 rule. U.S. refiners have invested heavily in clean-fuels production, and our industry is ready to meet market demand for IMO-compliant fuel.

This illustrates an important point, not just for our industry, but for any line of work: when we know a regulation is in place, we can plan, invest, and prepare for it. Regulatory uncertainty, on the other hand, can decrease investment capacity as investors move away from our sector. That’s why it’s encouraging that regulatory agencies are making changes. For example, the EPA has focused on continuing to improve air and water quality while ensuring regulations stay within the legal boundaries that Congress established. That’s why the Clean Power Plan – which had been stayed by the Supreme Court over legal concerns – is being rewritten.

That’s also why the EPA is clarifying and streamlining regulations like New Source Review, which has become a much greater burden on U.S. manufacturers than Congress ever intended. The New Source Review permitting process can delay projects and impose unnecessary costs, discouraging companies from investing in their facilities and upgrading pollution controls. Reform, in the words of the EPA itself, can “incentivize investments in the latest energy technologies.”

I think New Source Review reform is summarized best by a state regulator quoted in an EPA news release. He said, “As an environmental regulator, I can tell you that complexity can breed uncertainty. Uncertainty can, in turn, have a chilling effect on projects that could otherwise improve a facility’s efficiency and emission rates.” End quote.

It’s encouraging that federal agencies are more focused on balancing the costs and benefits of regulations, in order to make sure they do more good than harm. It’s also encouraging that many federal agencies have signed the “One Federal Decision Memorandum of Understanding.” This M.O.U., established under an Executive Order, requires that federal agencies streamline the environmental review and permitting process for major infrastructure projects. Under this approach, there would be a single permitting timetable, a single environmental impact statement, and a single decision to be arrived at within two years. The objective is a predictable, transparent, and timely federal review and authorization process. This is critical, because businesses making major investments in our economy need certainty. This is especially true of those investing in our nation’s energy, transportation and other infrastructure projects that help keep the U.S. prosperous and strong.

Regulatory uncertainty is also an issue when it comes to the deeply flawed Renewable Fuel Standard. At many venues, I have to explain the RFS and the system of Renewable Identification Numbers, or RINs, that seem to make it work. I think for many in this room, it’s pretty standard fare. But for the uninitiated, the RFS requires that we blend biofuels into petroleum fuels, in increasing volumes every year, regardless of how much petroleum fuel is in demand. And RINs are essentially the permits to sell our fuel. We can earn RINs by blending biofuels, or we can buy them if we don’t blend enough for the amount of fuel we sell.

The objective of the RFS was to help us achieve energy independence – something the shale revolution is helping to accomplish much more effectively than any mandate ever could. But the RFS never worked, and still doesn’t work on a variety of measures. It has not created a market for next-generation biofuels. Imports are being used to meet RFS biodiesel obligations. And the RINs compliance system adds cost to the consumer, is complicated, and prone to widespread fraud.

The RFS has reached a critical point – politics and the program’s failure are going to drive significant changes. The EPA, for example, is considering what’s called the RFS reset. This will be a rulemaking to better align the RFS mandate with market realities, including actual demand and production capacity for biofuels like cellulosic. This is a useful move.

However, our position remains that fuel markets should be free, competitive, and responsive to consumers – not to government mandates. My company, Marathon Petroleum, was using ethanol in gasoline long before the RFS was enacted. We have no objection to ethanol or other biofuels, but we do have a problem with mandates, because they subvert consumers’ choices and distort markets. We believe petroleum refiners and the ethanol industry should work together, focusing on the viability of liquid transportation fuels as we approach 2022. That’s when the EPA completely takes over the RFS program, and can set blending levels without any statutory guidance – an outcome that neither we nor the ethanol industry wants because of the uncertainty it entails.

Another reason for biofuels and petroleum fuels manufacturers to join forces is that the federal government, and many state governments, continue trying to bend consumer choice away from liquid fuels and toward electric vehicles. As a strong supporter of the free market, I agree people should be able to buy whatever type of vehicle suits their needs. But the $7,500 federal credit for each electric vehicle, as well as state incentives, is a market distortion that makes no sense. Electric vehicles offer few, if any, advantages over internal combustion engines. EVs cost more, don’t work as well in hot or cold weather, have less range, and take huge amounts of time to refuel.

Because of these disadvantages, EVs are projected to be a relatively small portion of the U.S. vehicle market for the foreseeable future. This means they aren’t likely to accomplish the nationwide fuel savings people hope they will. In fact, if we look out through 2030, the increasing fuel efficiency of internal combustion engines is projected to result in ten times more reduction in gasoline demand than EVs.

And on top of that, the government’s market-distorting EV credits are a handout to those who need it least. Americans in the top quintile of income received about 90 percent of the federal tax credits for electric vehicles.

Although the last election has resulted in a number of proposals that could affect our industry, the reality is that some of these ideas have been around for years. One example is a carbon tax, which, to some extent, is becoming a bipartisan idea. Some very prominent, long-time policymakers are arguing that a carbon tax is the best way to let the market pick the most efficient energy source. Drawing on my years of experience with federal regulations, I can tell you we must be very cautious when considering a tax on the most plentiful, affordable, and reliable sources of energy in our nation and in the world. Achieving an outcome that would allow our industry to continue lifting people from poverty, enhancing our energy security, and building our economy, would depend heavily on how the legislation is drafted. Oil, natural gas, and coal make up 80 percent of the energy we all rely on, and a carbon tax would have to be crafted very carefully to ensure it doesn’t harm those who can least afford it.

Again, this goes back to my point about the human dimension of what we do, especially concerning our most vulnerable. If we, as a society, agree that every human being is valuable beyond measure, then we should not be shy about asking anti-fossil fuel activists what “leaving it in the ground” would mean, when there are noaffordable, reliable alternatives available – not now, and not for the foreseeable future. It would mean hundreds of millions of people around the world who want a better life – a life of greater prosperity, mobility, and independence – would have to forego the advantages of affordable, energy-dense fuels and petrochemicals. I believe we must place a much higher value on our fellow human beings’ aspirations.

Those who advocate keeping fossil fuels in the ground tend to suggest it’s a lack of political will that prevents wind and solar from completely replacing fossil fuels. But wind and solar are not energy-dense… they cannot be stored economically… and they are not always available. Fossil fuels overcome all these problems, and no amount of political will can change that. If we try to short-circuit this by mandating less-reliable energy sources, we have to contend with huge trade-offs.

That’s not to say that alternative sources of energy don’t have a role, because they certainly do. We should use wind, solar, geothermal, hydropower and other sources where they make sense. But we care about our fellow human beings, so we must acknowledge that reliable, plentiful and affordable energy is critical to improving their lives.

But even as developing nations face problems that could be alleviated with plentiful, reliable, proven energy technologies, organizations like the United Nations, the International Monetary Fund and the World Bank have made it their priority to favor costly, less-reliable sources of energy like solar and wind for development projects, rather than the types of energy that can spur genuine prosperity.

The message we are sending is that lifting other people from poverty is not our top priority – that the satisfaction of seeing others use alternative energy is more important. But I think all of us – regardless of our industry or our ideology – believe in the infinite value of every person. Consider this quote from the World Bank:

“Inclusive economic growth is the single most effective means of reducing poverty and boosting prosperity. Yet most economic activity is impossible without adequate, reliable and competitively priced modern energy. This is why access to energy is so important in the fight against poverty.” End quote.

This is a clear-eyed view of energy’s importance, and I’m sure everyone in this room would agree. But when it discusses climate change, the World Bank seems unable to see the role of reliable energy in alleviating poverty. In 2016, the World Bank launched its Climate Change Action Plan, calling it “the defining issue of our time.” This is at odds with the World Bank’s own research, that shows access to affordable modern energy could make life immeasurably better for millions of people.

Ladies and gentlemen, it is our industry’s obligation to insist that we can safeguard people, communities, and the environment while also meeting humanity’s growing need for affordable, reliable energy and petrochemicals.

Our industry has helped reduce U.S. air pollutants dramatically over the past few decades, even as vehicle miles traveled have increased just as dramatically. Refiners and petrochemical manufacturers have reduced greenhouse gas emissions by tens of millions of tons through technology improvements and operational efficiencies.

As just one example, at Marathon Petroleum, we have an intensive focus on energy efficiency that has helped us avoid millions of tons per year of greenhouse gas emissions. From 2002 through last year, we reduced our refinery emissions intensity by over 20 percent while increasing our output by more than 480,000 barrels per day.

The energy-efficiency improvements we have made have not only improved our emissions profile – they have also saved us hundreds of millions of dollars. After crude oil, energy is the single largest expense for our refineries, so we have ample economic incentive to be as energy-efficient as we can be. We have a team of energy coordinators designated specifically to track hundreds of energy metrics, identify performance improvement opportunities, and ensure that energy efficiency is designed into proposed capital and expense projects. And we implement these technologies and processes without mandates or other forms of government intervention.

As an industry, the engineering and technical skills of our men and women are unsurpassed. We deploy their talents to provide petroleum products more affordably, safely, and with an ever-improving environmental footprint. We are all competing for the business of billions of people who want better lives for themselves and those they love, and we deliver on their expectations more and more, with every year that goes by. We have spent billions of dollars on achieving dramatic sulfur reductions in our fuels… on increasing the efficiency of our flares… improving processes with advanced catalysts and mechanical designs… on high-tech control rooms that enhance efficiency and safety… on advanced analytics and process controls that allow us to increase reliability and mechanical availability.

This illustrates an important point: pairing good economics with good environmental stewardship is possible. Businesses like fuel and petrochemical manufacturers design, finance, and implement the energy technologies that contribute to the world’s growing prosperity, while continually doing so more efficiently.

When I point out that our emissions are down while throughput is up, there’s an acknowledgement that yes, there are emissions associated with our manufacturing processes. And we are transparent about it, just as we are transparent about our safety performance and other measures for which we hold ourselves accountable.

As I’m sure everyone in this room knows first-hand, the media, the public, and investors hold us accountable as well. And that’s how it should be. Unfortunately, this doesn’t hold true for alternative energy sources. In our line of work, we often face unfair, unbalanced scrutiny, while the progress we have made – and continue to make – receives little or no attention.

Many of us in this room have similar success stories – emissions reductions, safety milestones, community contributions, and more. We need to make sure they are more widely heard in the market. In an industry not known for high-profile story-telling, this may be a shift for some of us. But hoping criticism will blow over is unrealistic, and keeping a low profile is not an option going forward. Simply conducting our business responsibly, efficiently, and profitably is no longer enough. We need to advocate for ourselves and for each other. And, like it or not, we also need to address topics we traditionally have been less vocal about.

In late 2015, the Financial Stability Board launched the Task Force on Climate-related Financial Disclosures. In mid-2017, the TCFD issued its recommendations for consistent, comparable climate-related disclosures by companies, and later that year, Marathon Petroleum issued a report addressing TCFD recommendations. We issued our second report last fall, and for those of you here today who have not yet published such a report, I can tell you that the benefits of such transparency are significant.

Although enterprise risk management had long been an ingrained part of how we do business, we had never addressed climate-related scenarios in any external company publication, before that first report in 2017. It has given us the opportunity to be much more explicit with our stakeholders about the resilience of our business, even as we contemplate theoretical carbon-constrained scenarios. It gives us additional opportunities to tell investors and others about our governance, energy efficiency, water usage, safety commitment, and much more.

Most importantly, it gives us a standardized way to discuss the risks and opportunities of a potentially carbon-constrained future. This is critical to investors, who want to know that we are good stewards of the environment and their investment, but also that we are positioning ourselves to be profitable for the long term, under conditions we have tested against climate-related possibilities.

By responding to the TCFD’s recommendations, these reports can help our industry counter the narrative from those who see us only in a negative light. And as you know, there is no shortage of groups with that outlook. There are groups that want to completely re-order our society by eradicating every trace of the fossil fuels industry, and there are others that oppose our industry, but don’t call for such radical measures. But make no mistake: they all see our industry as an impediment to a healthy, prosperous world, rather than a contributor to it.

In other words, despite their differences, they are united against us. That unity is not something we, as an industry, can claim.

I believe that if we are going to help shape the conversation about our industry’s future, we need to be united, involved, and able to seek common ground with others who have similar interests. I understand we all have our principles. For example, Marathon Petroleum’s position is that we support free markets, and that government policies should encourage market-based solutions that allow for the most effective and efficient approaches to emerge. On that basis, we believe the Renewable Fuel Standard should be repealed as unworkable. So, does this mean we should oppose the EPA’s reset effort on the Renewable Fuel Standard that leaves the mandate in place?

I don’t believe so. That would mean we sacrifice our ability to provide input, and deny ourselves a seat at the table. One of those inside-the-beltway sayings that seems appropriate here, is that if you’re not at the table, you’re on the menu.

I don’t suggest that we, as an industry, must march in lock-step on every detail of every issue. But knowing that powerful groups want our industry to go extinct, means that on the big issues – those that are existentially important – we need to stand shoulder to shoulder. We also need to be unapologetically transparent about what we do and how we do it.

Ladies and gentlemen, we are privileged to be part of an industry that empowers global prosperity, and does so more cleanly than ever before. Global gasoline and distillate demand are forecast to grow, and U.S. refiners and petrochemical manufacturers are advantaged not just by efficient operations and low-cost fuel and feedstock, but also in our capacity to accommodate the world’s growing need for clean fuels and advanced products that petrochemicals make possible. In short, as we devote our expertise and our energies toward this noble industry that improves innumerable lives, we have every reason to be proud of our work and bullish on the future of the refining and petrochemicals industry.