Engineering News

Delta to Spend $100MM to Refurbish Trainer Refinery
May 2 , 2012

Delta Air Lines has agreed to buy a refinery near Philadelphia from ConocoPhillips to offset the risk of higher jet fuel prices.

Delta said Monday that it would spend $150 million to acquire the Trainer refinery, which has been shuttered for six months, after receiving $30 million from the state of Pennsylvania as part of a deal to support job creation.

The airline said it would spend $100 million more to refurbish the plant to increase its output of jet fuel.

Richard H. Anderson, Delta's chief executive, said the investment was a modest one, equivalent to the list price of a new wide-body plane like a Boeing 777. The company estimated it would reduce its annual fuel expense by $300 million, once the refinery was refurbished and operating again.

To achieve similar fuel savings, Delta would have to buy 60 new-generation narrow-body planes like the Boeing 737, a capital investment that would total $2.5 billion, according to a regulatory filing.

Delta said it had also struck a three-year agreement with BP to supply crude oil to the refinery.

As part of the deal, the details of which were not released, Delta said it would exchange gasoline, diesel and other petroleum products produced at the refinery for jet fuel from other sources, like BP and Phillips 66.

Combined with the jet fuel produced at Trainer, Delta said these deals would provide 80 percent of its fuel needs in the United States. The purchase ''is an innovative approach to managing our largest expense,'' Mr. Anderson said in a statement.

The jet fuel bill at Delta, as at other airlines, has soared in recent years as prices for crude oil increased. On average, fuel accounts for about a third of an airline's operating costs, a share that has been rising for much of the past decade.

The International Air Transport Association estimated that the global airline industry's fuel bill would grow by $40 billion this year, from about $177 billion in 2011.

These rising fuel costs have led to painful restructurings for airlines in recent years, helping to push many of them into bankruptcy and spurring consolidation across the industry. The airlines have set up elaborate hedging strategies to try to counter the rising fuel costs. But the hedges backfired when crude oil prices rose or fell in unexpected ways.

Buying a refinery will not erase Delta's fuel bill. The airline will still need to buy crude oil at world market prices. But in justifying the purchase, Delta said the cost of manufacturing jet fuel had risen more rapidly than crude oil costs. It also said that demand for jet fuel and diesel, both byproducts of the refining process, had been rising steadily in recent years, while demand for gasoline was falling, adding to the pressure on jet fuel prices.

Last year, Delta spent $12 billion on fuel, about $3 billion more than the previous year, as oil prices rebounded from their postrecession lows. Fuel makes up 40 percent of Delta's costs.

The company said it expected the acquisition of the refinery to be completed in the first half of 2012. The airline said changes to the plant's infrastructure were to be completed by the end of the third quarter, when jet fuel production would begin. Delta estimated that its fuel savings this year would be more than $100 million.

Analysts have been puzzled by Delta's interest in the refinery, a notoriously difficult business that is chronically unprofitable. Despite the skepticism from oil specialists, investors seem to support Delta's unusual approach. The company's shares have gained more than 10 percent since the beginning of April as word of its interest in the refinery started to spread.

The Trainer refinery is on the Delaware River, midway between Philadelphia and Wilmington, Delaware. It has a crude oil capacity of 185,000 barrels a day, and processes mainly light, low-sulfur crude oil.

Trainer has historically been geared to the gasoline market in the Northeast. But as consumption dropped and light crude oil costs rose faster than other types of crude oil, Conoco's plant has struggled.

Two refineries in the Philadelphia region - the Trainer refinery and Sunoco's Marcus Hook - and one in the Virgin Islands, accounting for half of the East Coast's refining capacity, have been shut down since September.

Delta said Trainer's jet fuel output would be 32 percent of the total daily capacity, up from 14 percent. Its gasoline production will drop to 43 percent from 52 percent, Delta said.

To assuage concerns that an airline has never owned or run a refinery, Delta said the plant would be led by executives with refining experience, including Jeffrey Warmann, who ran Murphy Oil's refinery in Meraux, Louisiana.

Source: The International Herald Tribune

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