May 6, 2012:

Reuters reported that Delta Air Lines Inc will buy a Pennsylvania oil refinery from ConocoPhillips for USD 1 80 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 that the first ever purchase of a refinery by an airline would allow it to cut USD 300 million annually from jet fuel costs which reached USD 12 billion last year. It said production at the refinery along with other agreements to exchange refined products for jet fuel would provide 80% of its fuel needs in the United States.

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 USD 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 doesn’t prove too fleeting.

Mr Richard Anderson CEO of Delta said that 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 USD 2 billion a year for Delta and has been rising in the wake of US refinery shutdowns. What we’re tackling here today is the jet crack spread, which you cannot hedge in the marketplace effectively. Mr Anderson said that 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.

But instead of JP Morgan who 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 USD 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, about a year after ConocoPhillips idled the plant as rising imported crude oil costs, a collapse in demand and tough competition from foreign refiners crushed margins. Delta said that the deal will include pipelines and other assets that will provide access to the delivery network for jet fuel reaching its Northeast operations, including its increasingly important hubs at New York’s LaGuardia and JFK airports. Fuel costs pushed major US airlines into the red for the Q1 although oil prices have since eased from March peaks. US crude traded around USD 105 per barrel while Brent crude was about USD 119 per barrel.

The deal offers a reprieve to one of two key refineries that had been earmarked for permanent closure this year unless buyers were found. Delta will pay ConocoPhillips USD 180 million for the refinery but will receive USD 30 million in state government assistance on the deal, reducing its cost to USD 150 million.

By Reuters