Wed, May 02, 2012 - Page 10 News List

Delta Air Lines to buy refinery to make own fuel

Reuters

Delta Air Lines Inc will buy a Pennsylvania oil refinery from ConocoPhillips for US$150 million, an audacious bid to save money on fuel costs by investing in a sector shunned by many of the biggest oil firms.

Atlanta-based Delta said the first ever purchase of a refinery by an airline would allow it to cut US$300 million annually from jet fuel costs, which reached US$12 billion last year. It said production at the refinery along with other agreements to exchange refined products for jet fuel would provide 80 percent of its fuel needs in the US.

The deal for the idled 185,000-barrel per day Trainer, Pennsylvania, refinery, which has puzzled analysts since it first surfaced last month, will come as some relief to politicians and officials, who had feared thousands of lost jobs and a potential summer spike in fuel costs if the plant was shut permanently.

And while the initial investment is no more than a wide-body jet liner, even including an additional US$100 million to upgrade the plant to maximize jet fuel production, it will put Delta in the unique position of hoping that the recent rebound in refinery profit margins — normally an indication of added costs for a fuel consumer — does not prove too fleeting.

While Delta will remain hostage to fluctuating crude oil costs, the facility would enable it to save on the cost of refining a barrel of jet fuel, which is currently more than US$2 billion a year for Delta and has been rising in the wake of US refinery shutdowns, Delta chief executive Richard Anderson said.

“What we’re tackling here today is the jet crack spread, which you cannot hedge in the marketplace effectively,” Anderson told reporters during a telephone briefing. “It’s the fastest single growing cost in our book of expense at Delta.”

As expected, Delta will effectively outsource all the oil trading requirements for the refinery, an increasingly frequent arrangement for smaller or less-experienced operators.

However, instead of JP Morgan, which had been initially named as the trader last month, oil major BP will supply crude oil to be refined at the plant under a three-year agreement. And BP and former refinery owner Phillips 66 will get a share of the gasoline, diesel and refined fuel to sell, in exchange for supplying Delta with jet fuel in other locations.

It will be a familiar role for BP, which owned the plant in the 1990s before selling it to independent refiner Tosco in 1996 for US$59 million, coupled with some additional assets. Tosco later merged with Phillips, which then merged with Conoco.

The refinery is expected to resume operations in the third quarter, Delta said.

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