Done Deal -- $120M for Refinery

[FWAAA]

Yes, DL's reopening this refinery is a boon for all jet fuel users because DL is adding new fuel to the market which it otherwise would consume. DL's benefit would presumably come because the production from that plant is close to its major NE operations and thus if the economics of the refinery work, DL will have a cost advantage compared to its peers who will be buying fuel predominantly refined on the gulf coast.

On Wednesday, Brent crude closed at almost exactly $13/bbl more than WTI crude. That's a $0.31/gal headwind before that Brent crude has been shipped from the source to the Trainer refinery.

I don't know the answer, but is it possible that the gulf coast refined jet fuel (probably refined from WTI crude) is actually cheaper, all-in, than jet fuel refined from more-expensive Brent crude? Is it possible that this is a major reason the east coast refineries are no longer economical and are being shut down? It might be cheaper, overall, to refine the growing amount of North Dakota and Canadian oil instead of shipping the more-expensive Brent crude from Europe and Africa.

It still appears that alot of people are missing the fact that CP as the former operator of this refinery were not focused on producing exclusively jet fuel. They were interested in generating the maximum amount of revenue and they could play with the mix of products (within the capabilities of the refinery and the limits of the source crude oil). DL is interested in operating the refinery at break even costs; the oil companies needed to see a profit. DL's interest in the deal is because it is focusing on one product whose demand is faster than the demand for gasoline - which is the majority of what most refineries produce - and that is based on global structural issues that DL believes will not change. DL also notes that it cannot hedge for that difference in price - the jet fuel crack spread - which is why US has not been much worse off not hedging than other airlines who have. Thus, DL's decision is to move to another strategy that they believe will provide control and cost savings based on being the world's largest purchaser of jet fuel, according to several reports - and they are specifically targeting the location and size of the refinery to their specific needs. Other refineries in other locations would not deliver the same results.

About the bolded part - I think that DL needs to run the refinery at a profit, not at break even. If it doesn't produce a profit, then from where does DL get the claimed $300 million of annual fuel savings? Simplistically, those 800 million gallons need to be produced for a cost that's $300 million less than the price at which DL could sell the fuel on the open market. Really doesn't matter where the refinery is located; all that matters is that it produce a profit of $300 million each year. That $300 million of profitable fuel can be burned by DL itself (which realizes $300 million of fuel price savings) or it could be sold to other airlines for a $300 million profit and DL could then buy fuel where it needs the fuel at the pump price.

My skepticism is the assertion that refining 800 million gallons of jet fuel (from the crude that's been the higher-priced crude lately) results in any profit, let alone $300 million of average profit. $300 million profit on an investment of $250 million? Either DL just made the investment of a lifetime or something's not adding up. DL hasn't averaged $300 million of annual profit over the long-term doing what it does best: running an airiine. $300 million of annual profit from an investment that's roughly equivalent to one widebody airplane?

See why I'm skeptical? It's not because I hate Delta (like I said the other day - I've been long on DAL since late last summer). It's because I'm skeptical of a customer proclaiming that it can buy a shutdown facility of one of its suppliers and magically make a gigantic annual profit.

 

[UPNAWAY]

WT you seem to be missing the obvious, if DL is no longer buying jet A on the open market jet A will be cheaper for all the others.

 

[southwind]

WT you seem to be missing the obvious, if DL is no longer buying jet A on the open market jet A will be cheaper for all the others.

Then I guess all airlines should be thanking Delta for taking the initiative to lower fuel prices !

 

[WorldTraveler]

I appreciate your candor, and like you I would like to know how the deal is supposed to work. For one thing, DL did say that their calculations were based on using existing crude sources but they are planning to be able to change sources.... Canadian crude has been mentioned. I certainly don't know the details of the modifications that are being done on the refinery but I fully expect that DL is doing them with the intention of reducing the cost of the supply and maximizing the output of jet fuel; I don't know of a single refinery that has been operated with the express intention of maximizing jet fuel production.
Your point is valid in terms of making a profit on the gas that has to be exchanged, but I am simply saying that any company has to operate at a profit and in total, DL's needs for the refinery are not to generate profit levels of the same type that an oil company would expect.

By DL producing its own jet fuel, it will force the price of jet fuel down for ALL users, but there is no logical reason why other consumers would benefit more than DL who is equipping a refinery and intends to obtain crude w/ the express intent of producing jet fuel, not gasoline which is the predominant output of refineries in the US. The modifications to the refinery are intended to reduce the percent of gasoline produced by about 20% and more than doubled jet fuel production.
What are the sources of crude in countries that burn much higher percentages of diesel than the US does? Other types of crude are indeed cheaper but are not as well-suited to produce gasoline which is the primary refined product used in the US.
I think it is highly likely that part of the rationale for DL in the deal is that that they will be obtaining different types of crude than what is typically used in US refineries and that they will obtain part of the benefit from the lower cost of crude.
They have also clearly set up swaps that allow them to get rid of the fuels they don't want in return for jet fuel elsewhere, so it is entirely possible that whatever benefit they provide the market in reduced prices from increased supply, they gain in terms of product which they obtain for their own use through swaps.
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These are valid questions and I hope we will understand how it all works... if it does work, there will be lots of people trying to figure out how to make it work for them.
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It is valid and helpful to have honest, healthy dialogue from a perspective of not knowing answers to questions regarding a deal for which nothing like this arrangement exists.

I still doubt seriously - like one in a billion chance - that any of us here are going to raise an issue that DL and its consultants and its partners in the deal didn't raise and address, and perhaps even in contract language.

 

[BoeingBoy]

On Wednesday, Brent crude closed at almost exactly $13/bbl more than WTI crude. That's a $0.31/gal headwind before that Brent crude has been shipped from the source to the Trainer refinery.

I don't know the answer, but is it possible that the gulf coast refined jet fuel (probably refined from WTI crude) is actually cheaper, all-in, than jet fuel refined from more-expensive Brent crude? Is it possible that this is a major reason the east coast refineries are no longer economical and are being shut down? It might be cheaper, overall, to refine the growing amount of North Dakota and Canadian oil instead of shipping the more-expensive Brent crude from Europe and Africa.

N Dakota/Canadian shale crude are cheap now because it's landlocked - it's expensive to ship from the source to where the vast majority of refineries are - and a pretty high grade crude. However, shipping by rail to upstate NY then barge to the refinery will cost quite a bit more than by the tanker from Europe/Africa, despite the shorter distance. A normal ocean-going tanker can transport 4-6 million barrels of crude per trip while supertankers can transport more. The only less expensive method of transporting crude is by pipeline, but one isn't available from N Central U.S. to PHL. Plus, more demand for the N Dakota/Canadian oil will just increase it's price while less demand for the offshore crude will lower it's price.

Jim

 

[BoeingBoy]

I didn't claim the 52K is a fact...

Makes it easy to claim you aren't wrong when/if DL isn't able to meet those rosy projections....

Tell you what - I'll pick a number and you pick a number and we'll see who's the closest. No qualifiers allowed - put your "truth" on the table....

My number is 30K barrels/stream day (100% capacity for 24 hours) - about 10% of produced product by barre (a 42 gal barrel of crude results in 45 gal of finished product because of additives added). Since DL is refurbishing/improving Trainer it should have no problem operating at 100% capacity for the 4th quarter.

Jim

 

[Jaye Loves Airplanes]

http://www.foxnews.com/us/2012/04/30/delta-air-buys-pa-refinery-from-conoco/

I'm surprised I haven't heard about this sooner. I think all airlines are footing a pretty hefty fuel bill, especially the airlines getting fuel from private airline servicing companies. I work for an Airline Servicing company, and we have a fuel department. Sooo, Delta making this move would be great. Economy boost for PA & not to mention jobs that people really, really need. I wonder how competitive the job market is in PA right now...hmm

 

[WorldTraveler]

Jim,
I have no basis for knowing the downtime and whether a quote of 52K is for 90%, 70%, or any number that is standardly accepted in the refining industry.
But that doesn't matter... whatever metric DL says the refinery will produce in jet fuel is likely the one that the industry uses and will be what is reported.
If you want to bet that the plant can't produce it, make your bet with Delta, not me. I have no basis for knowing whether it is real or not.
I do know that I will trust them on the basis of their $250M investment alongside two partners before I believe someone on an internet chat forum unless that person specifically says they have experience in the refinery industry.... nothing personal.
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I get the issues around the source of the crude. I don't know the answer but again I am pretty sure that DL and C66 and BP had more than one discussion about the issue.
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I suspect we could go back and forth for months - but it's probabliy worth waiting until there is more definitive information and then go from there.

 

[QA4Jet-A]

Makes it easy to claim you aren't wrong when/if DL isn't able to meet those rosy projections....

Tell you what - I'll pick a number and you pick a number and we'll see who's the closest. No qualifiers allowed - put your "truth" on the table....

My number is 30K barrels/stream day (100% capacity for 24 hours) - about 10% of produced product by barre (a 42 gal barrel of crude results in 45 gal of finished product because of additives added). Since DL is refurbishing/improving Trainer it should have no problem operating at 100% capacity for the 4th quarter.

Jim

Jim & WT, Just to add to the fun... Do either of you know if the outbound pipeline(s) will be dedicated to Jet-A only or will they be shipping Diesel, Heating Oil, possibly Gasoline as well? If it is not a dedicated Pipeline, how much product (Jet-A) will be wasted in a 'Cut'? I doubt the 'Trade Off' Fuel will be delivered back to the Refinery as they probably don't have inbound feed lines. Another thought, Pipelines have 'Down Time' too for pump Mx etc. so I'm curious as to the amount of Storage Capacity the Refinery has as well. They should have Hold Tanks until the Jet-A is proven to meet ASTM D-1655 spec before it can be released. Then if they are cracking like crazy, they may need storage to move Spec fuel to a 'waiting to deliver' tank if they are running other product through the pipeline(s). I have no idea how big this Refinery is. Perhaps you do?

 

[eolesen]

Pipeline may be cheapest, but IIRC, there's the option to ship via barge to JFK...

Oh, and oil closed at a three month low today,closing below $100.

 

[BoeingBoy]

Jim & WT, Just to add to the fun... Do either of you know if the outbound pipeline(s) will be dedicated to Jet-A only or will they be shipping Diesel, Heating Oil, possibly Gasoline as well?

While I don't know for sure, I'd be surprised it there wasn't a conntection to the big pipeline that runs from the Guf to NYC (Colonial pipeline??) There is also probably a crude pipeline for offloading ships/barges as well an outbound line for loading refined products.

If it is not a dedicated Pipeline, how much product (Jet-A) will be wasted in a 'Cut'? I doubt the 'Trade Off' Fuel will be delivered back to the Refinery as they probably don't have inbound feed lines.

As I understand it (which may not be right) the big pipeline running to NYC uses specific gravity to separate product - different products flow steadily when the pipeline is in operation and product is added or drawn off using specific gravity to determine the end of one product and the start of another. So jet-A would presumably be added to jet-A flowing through the pipeline or if there wasn't any going through the pipeline added between products both having enough difference in specific gravity to distinguish them from the jet-A. Obviously there is some mixing of products at the boundary between them but with the quantities involved it makes so little difference it's not worth worrying about.

Another thought, Pipelines have 'Down Time' too for pump Mx etc. so I'm curious as to the amount of Storage Capacity the Refinery has as well. They should have Hold Tanks until the Jet-A is proven to meet ASTM D-1655 spec before it can be released. Then if they are cracking like crazy, they may need storage to move Spec fuel to a 'waiting to deliver' tank if they are running other product through the pipeline(s). I have no idea how big this Refinery is. Perhaps you do?

I have no idea how much storage capacity is on-site at Trainer or available for lease in the vicinity, but you're right about pipeline requiring down time. The thing about Trainer is that it uses distillation with some capability of reducing the sulfur content of refined products. Thus the need for high grade crude. It doesn't do cracking, although that may be part of improvements that DL will do.

Jim

 

[BoeingBoy]

Pipeline may be cheapest, but IIRC, there's the option to ship via barge to JFK...

With the big pipeline running right by Philadelphia on it's way to NY, I assume that will be used but don't know for sure. Coastal barge would be quite a bit more expensive, but could be used.

Jim

 

[BoeingBoy]

Jim,
If you want to bet that the plant can't produce it, make your bet with Delta, not me. I have no basis for knowing whether it is real or not.

Curious since you said that those (me) that said the DL wouldn't be able to get as much jet-A from the refinery as they're predicting were wrong. That would indicate that you know how much Trainer will produce...otherwise how do you know that my number is wrong?

Jim

 

[FWAAA]

WTI closed at $98.49/bbl and Brent closed at $112.20/bbl. Prices down 6% on the week, but the spread between WTI and Brent continues to exceed $13/bbl and Brent is the primary crude refined at Trainer.

Summary of prices including a link to DL's refinery decision: http://money.cnn.com/2012/05/04/markets/oil-prices/

 

[QA4Jet-A]

Jim, Your post...
As I understand it (which may not be right) the big pipeline running to NYC uses specific gravity to separate product - different products flow steadily when the pipeline is in operation and product is added or drawn off using specific gravity to determine the end of one product and the start of another. So jet-A would presumably be added to jet-A flowing through the pipeline or if there wasn't any going through the pipeline added between products both having enough difference in specific gravity to distinguish them from the jet-A. Obviously there is some mixing of products at the boundary between them but with the quantities involved it makes so little difference it's not worth worrying about.
All pipeline deliveries require several things, a start test, middle test and end test. Gravity is one, C&B is two, Millipore is three, Free water is four and a Flash Point if the fuel went thru a Multi-Product pipe. Several factors weigh in on lost product in cutting a Batch. Pipe size & flow rate. Usually 'Cut' Fuel is sent to a Regular Gasoline tank to be diluted. Yes, Gravity is one of the main factors but the others are just as important. As for the amount wasted, it is usually small but I have seen several thousand gallons of Jet-A sent to a Gas tank! Enough to fuel several flights. Thus the reality of utilizing a Multi-Product pipeline! Then, when it is all said and done, how does the FAME factor fit in the picture?