DL looking at buying an oil refinery?
- Thread starter Kev3188
- Start date
WorldTraveler
Corn Field
- Dec 5, 2003
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This would seem yet one more example of how DL has figured out how get smart despite the obstacles and challenges that face it in the airline industry today.
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Not sure what a refinery costs but given that we are now pushing 40% of costs (or more than $10B per year in jet fuel), it would seem that beginning to control the input prices makes some sense.
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DL has been involved in energy before.... don't remember the details but it was called Epsilon trading. I don't think that entity survived BK.
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Maybe they'll throw in an employee discount for ConocoPhilips products - if also paid by the Amex card.
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Not sure what a refinery costs but given that we are now pushing 40% of costs (or more than $10B per year in jet fuel), it would seem that beginning to control the input prices makes some sense.
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DL has been involved in energy before.... don't remember the details but it was called Epsilon trading. I don't think that entity survived BK.
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Maybe they'll throw in an employee discount for ConocoPhilips products - if also paid by the Amex card.
WorldTraveler
Corn Field
- Dec 5, 2003
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Do refineries stop functioning if the price goes down? No.
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Do airlines quit buying jet fuel when the price goes down? No.
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Are refineries capable of producing mulitple types of petroleum products? Yes
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Does DL potentially gain the opportunity to increase the supply of jet fuel on the market - and potentially reduce marketing and distribution costs with the products "its" refinery produces? Yes
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Is there any reasonable forecast that the price of jet fuel is coming down? I haven't seen one.
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Do airlines quit buying jet fuel when the price goes down? No.
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Are refineries capable of producing mulitple types of petroleum products? Yes
.
Does DL potentially gain the opportunity to increase the supply of jet fuel on the market - and potentially reduce marketing and distribution costs with the products "its" refinery produces? Yes
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Is there any reasonable forecast that the price of jet fuel is coming down? I haven't seen one.
eolesen
Veteran
- Jul 23, 2003
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Some refineries do decrease production when prices go down, but that doesn't help with the fixed costs of ownership and EPA compliance. If it were really that lucrative, why did ConocoPhillips put it on the auction block? To keep gas prices up?
I agree it looks attractive with where crack spreads are today, but as the spread shrinks, so does the benefit of ownership.
Again, it's an interesting gamble, but not one without risks.
I agree it looks attractive with where crack spreads are today, but as the spread shrinks, so does the benefit of ownership.
Again, it's an interesting gamble, but not one without risks.
WorldTraveler
Corn Field
- Dec 5, 2003
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Life is full of risks, for sure.
Not acting and planning for risks that would otherwise be outside of your control can be very costly as well.
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No one on here, me included, is in a position to know if this decision makes sense for DL or any other airline long-term. But given that fuel is pushing to become 40% of the total costs for an airline the size of DL, you have to start thinking creatively about ways to attack the cost problem and ensure a steady supply of jet fuel.
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It is also possible that DL's efforts could turn the fuel business into another profit center for DL - and could also help drive down the price of jet fuel for all carriers.
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As for the economics for the current owner vs. for DL, it is very possible that DL's focus on jet fuel with less of a focus on providing financial returns on petroleum products across the board may result in different economics for DL vs. the results an oil company would consider acceptable.
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Jet fuel is fairly close to home heating oil which is heavily used in the NE US. I'm not a petroleum engineer but I would imagine that optimizing the refinery for jet fuel is possible with the potential to convert it to similar products should the need arise.
Not acting and planning for risks that would otherwise be outside of your control can be very costly as well.
.
No one on here, me included, is in a position to know if this decision makes sense for DL or any other airline long-term. But given that fuel is pushing to become 40% of the total costs for an airline the size of DL, you have to start thinking creatively about ways to attack the cost problem and ensure a steady supply of jet fuel.
.
It is also possible that DL's efforts could turn the fuel business into another profit center for DL - and could also help drive down the price of jet fuel for all carriers.
.
As for the economics for the current owner vs. for DL, it is very possible that DL's focus on jet fuel with less of a focus on providing financial returns on petroleum products across the board may result in different economics for DL vs. the results an oil company would consider acceptable.
.
Jet fuel is fairly close to home heating oil which is heavily used in the NE US. I'm not a petroleum engineer but I would imagine that optimizing the refinery for jet fuel is possible with the potential to convert it to similar products should the need arise.
BoeingBoy
Veteran
- Nov 9, 2003
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Just a few comments...
1 - don't be too swayed by crack spreads. It isn't the difference between the cost of crude going in and finished product coming out of the refinery. It's the difference between the cost of crude at a terminal (Cushing OK for WTI crude, Saudia Arabia for ARAMCO crude) and the cost of finished product at the delivery terminal (NY harbor, for example). As transportation costs increase, the crack spread increases.
2 - refineries can tweak the amount of jet fuel produced but can't produce only jet fuel. So DL would be getting into the petroleum business, not the jet fuel business, with all the headaches/problems that that entails. Anyone ever wonder why there aren't small scale producers in the refining business any longer?
3 - owning a refinery doesn't magically reduce the price of jet fuel dramatically. Besides all the costs of running/maintaining a refinery, there's still the transportation and distrubution costs. A refinery in Delaware county doesn't put fuel in an airplanes tanks in LAX, ORD, DFW, MIA, etc. It'd probably be significantly cheaper to buy fuel in those locations than transport fuel from a refinery on the east coast. The cheapest transportation would be the pipeline, but only to the northeast from Delaware county since the pipeline from the Gulf is a one-way system.
4 - If Conoco/Phillips shut down the refinery, maybe they had a good reason.
Jim
1 - don't be too swayed by crack spreads. It isn't the difference between the cost of crude going in and finished product coming out of the refinery. It's the difference between the cost of crude at a terminal (Cushing OK for WTI crude, Saudia Arabia for ARAMCO crude) and the cost of finished product at the delivery terminal (NY harbor, for example). As transportation costs increase, the crack spread increases.
2 - refineries can tweak the amount of jet fuel produced but can't produce only jet fuel. So DL would be getting into the petroleum business, not the jet fuel business, with all the headaches/problems that that entails. Anyone ever wonder why there aren't small scale producers in the refining business any longer?
3 - owning a refinery doesn't magically reduce the price of jet fuel dramatically. Besides all the costs of running/maintaining a refinery, there's still the transportation and distrubution costs. A refinery in Delaware county doesn't put fuel in an airplanes tanks in LAX, ORD, DFW, MIA, etc. It'd probably be significantly cheaper to buy fuel in those locations than transport fuel from a refinery on the east coast. The cheapest transportation would be the pipeline, but only to the northeast from Delaware county since the pipeline from the Gulf is a one-way system.
4 - If Conoco/Phillips shut down the refinery, maybe they had a good reason.
Jim
WorldTraveler
Corn Field
- Dec 5, 2003
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Here is information from ConocoPhillips website about the Trainer refinery which apparently works in conjunction with the Bayway refinery which it sounds like has more flexibility to produce different types of products... thus it is possible that the Trainer facility is less valuable - and thus could be surplussed more easily.
http://www.conocophillips.com/EN/about/worldwide_ops/country/north_america/pages/east.aspx
According to C-P, the refinery produces more gasoline than jet fuel so it is indeed not predominantly a jet fuel facility.... but since no refinery can exclusively produce one product, it is a given that DL would be getting into the petroleum business - and doing so has to be weighed against the benefits they would gain from what matters to DL, even if they might make some money on other petroleum products.
C-P also indicates the refinery is connected to the US petroleum distribution system via pipelines, barges, etc.
And it is likely that DL would not say "this jet fuel came from our plant" but that whatever is produced is dumped into the whole distribution system and DL then turns around and buys what it needs, being given credit for what the refinery produces.
The refinery was shut down Jan 31, one of two Pennsylvania area refineries that were shut down. C-P cited imports and environmental issues as some of the reasons.
http://articles.philly.com/2012-03-28/news/31250006_1_refinery-conocophillips-buyer
According to statistics from C-P and the US DOT, the Trainer refinery is capable of producing about 5% of the jet fuel burned by US airlines worldwide...
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Bayway Refinery
The Bayway refinery, located on New York Harbor in Linden, N.J., has a crude oil processing capacity of 238 MBD and processes mainly light, low-sulfur crude oil. Crude oil is supplied to the refinery by tanker, primarily from the North Sea, Canada and West Africa. The facility distributes its refined products to East Coast customers through pipelines, barges, railcars and trucks.
The refinery produces a high percentage of transportation fuels, such as gasoline, diesel fuel and jet fuel. Other products include petrochemical feedstocks, home heating oil and residual fuel oil. The mix of products produced changes to meet seasonal demand. Gasoline is in higher demand during the summer, while in winter the refinery optimizes operations to increase heating oil production. The complex also includes a 775-million-pound-peryear polypropylene plant.
Trainer Refinery
The Trainer refinery is located on the Delaware River in Trainer, Pa., about 10 miles southwest of the Philadelphia airport. The refinery has a crude oil processing capacity of 185 MBD and processes mainly light, low-sulfur crude oil. The Bayway and Trainer refineries are operated in coordination with each other by sharing crude oil cargoes and moving feedstocks between the facilities. Trainer receives crude oil from West Africa and Canada.
The refinery produces a high percentage of transportation fuels, such as gasoline, diesel fuel and jet fuel. Other products include home heating oil, residual fuel oil and liquefied petroleum gas. Refined products primarily are distributed to customers in Pennsylvania, New York and New Jersey via pipeline, barge, railcar and truck, and home heating oil is distributed by tanker.
http://www.conocophillips.com/EN/about/worldwide_ops/country/north_america/pages/east.aspx
According to C-P, the refinery produces more gasoline than jet fuel so it is indeed not predominantly a jet fuel facility.... but since no refinery can exclusively produce one product, it is a given that DL would be getting into the petroleum business - and doing so has to be weighed against the benefits they would gain from what matters to DL, even if they might make some money on other petroleum products.
C-P also indicates the refinery is connected to the US petroleum distribution system via pipelines, barges, etc.
And it is likely that DL would not say "this jet fuel came from our plant" but that whatever is produced is dumped into the whole distribution system and DL then turns around and buys what it needs, being given credit for what the refinery produces.
The refinery was shut down Jan 31, one of two Pennsylvania area refineries that were shut down. C-P cited imports and environmental issues as some of the reasons.
http://articles.philly.com/2012-03-28/news/31250006_1_refinery-conocophillips-buyer
According to statistics from C-P and the US DOT, the Trainer refinery is capable of producing about 5% of the jet fuel burned by US airlines worldwide...
----
Bayway Refinery
The Bayway refinery, located on New York Harbor in Linden, N.J., has a crude oil processing capacity of 238 MBD and processes mainly light, low-sulfur crude oil. Crude oil is supplied to the refinery by tanker, primarily from the North Sea, Canada and West Africa. The facility distributes its refined products to East Coast customers through pipelines, barges, railcars and trucks.
The refinery produces a high percentage of transportation fuels, such as gasoline, diesel fuel and jet fuel. Other products include petrochemical feedstocks, home heating oil and residual fuel oil. The mix of products produced changes to meet seasonal demand. Gasoline is in higher demand during the summer, while in winter the refinery optimizes operations to increase heating oil production. The complex also includes a 775-million-pound-peryear polypropylene plant.
Trainer Refinery
The Trainer refinery is located on the Delaware River in Trainer, Pa., about 10 miles southwest of the Philadelphia airport. The refinery has a crude oil processing capacity of 185 MBD and processes mainly light, low-sulfur crude oil. The Bayway and Trainer refineries are operated in coordination with each other by sharing crude oil cargoes and moving feedstocks between the facilities. Trainer receives crude oil from West Africa and Canada.
The refinery produces a high percentage of transportation fuels, such as gasoline, diesel fuel and jet fuel. Other products include home heating oil, residual fuel oil and liquefied petroleum gas. Refined products primarily are distributed to customers in Pennsylvania, New York and New Jersey via pipeline, barge, railcar and truck, and home heating oil is distributed by tanker.
BoeingBoy
Veteran
- Nov 9, 2003
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I would doubt that. The refineries in the northeast only represent 13% of the refining capacity in the U.S. and just the Gulf coast has 5X the refining capacity of the entire northeast, of which Trainer is a small part. Plus, the U.S. is a net importer of jet fuel - the entire U.S. production is less than demand. Then U.S. carriers with significant international operations burn a lot of fuel refined and purchased outside of the U.S. Since the amount of jet fuel produced from each barrel of crude falls within a narrow range - around 4 gallons per barrel of crude - there's no way that Trainer produces 5% of the jet fuel burned by U.S. airlines worldwide.
Then there that specialization in refining light, sweet crude. In other words, Trainer isn't capable of refining heavy, sour crude so it has to use higher cost crude for the refining process. Plus those "environmental issues" should be worrisome. Like I said, Conoco/Phillips must have a reason for trying to unload it.
Jim
signals
Veteran
OK, to me this sounds brilliant. This might cut fuel cost, not completely eliminate them, and would allow Delta the Divine to not only compete, but bury the competition B)
Kev, this is actually job security.
signals
Veteran
Totally agree.This would seem yet one more example of how DL has figured out how get smart despite the obstacles and challenges that face it in the airline industry today.
.
Not sure what a refinery costs but given that we are now pushing 40% of costs (or more than $10B per year in jet fuel), it would seem that beginning to control the input prices makes some sense.
.
DL has been involved in energy before.... don't remember the details but it was called Epsilon trading. I don't think that entity survived BK.
.
Maybe they'll throw in an employee discount for ConocoPhilips products - if also paid by the Amex card.
signals
Veteran
Black gold will always rebound. Buying a refinery is like guaranteeing a "get gas cheap" card. My financial advisor has said that oil will always be a commodity and it will always make money for investors.
BoeingBoy
Veteran
- Nov 9, 2003
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Richard Branson thought so too about 5-7 years ago - he was talking about buying a refinery. Then the idea faded away. Now he's talking about biofuel production...
Jim
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