DL looking at buying an oil refinery?

[BoeingBoy]

Just wanted to be sure you understood "jet and related fuels" isn't what the material you cited said. It said distillate production was about 35% of Trainer's output. Calling all distillates produced "jet and related fuels" is like saying yeast rolls are related to hush puppies. They're both bread but that's the only thing they have in common. All "distillation products" means is that it is a product of the distillation process (the first stage of refining) and most of the distillation products require further refining before being suitable for the end use - cracking, hydrotreatment, reforming, coking, etc.

Jim

 

[SBN580]

My question would be, "Can Delta refine its own JP and use it only for themselves?" Thus making their costs lower and shutting out competitors from using it.

 

[BoeingBoy]

My question would be, "Can Delta refine its own JP and use it only for themselves?" Thus making their costs lower and shutting out competitors from using it.

The short answer is likely no, not without high transportation costs. Like any hub/spoke carrier, DL buys about half it's fuel at non-hub airports. So a plane that goes JFK-GSO-JFK buys about as much fuel at GSO as it does at JFK. While DL could get jet fuel from this refinery to JFK relatively cheaply - a pipeline runs up the east coast near the refinery and on to NYC - the fuel for GSO's supply would have to be shipped by rail or truck at higher cost. So as WT said, DL would have to work out deals with other producers across the country - we'll sell you jet fuel (or gas, diesel, heating oil, whatever) at a discount in the northeast if you'll sell us jet fuel at a discount in the midwest, west, southeast, etc. Of course, ultimately the deals would have to include the the distributors and local retailers of jet fuel - if they don't get a discount on the jet fuel they pump into DL's planes they're not going to give a discount to DL.

Jim

 

[SBN580]

The short answer is likely no, not without high transportation costs. Like any hub/spoke carrier, DL buys about half it's fuel at non-hub airports. So a plane that goes JFK-GSO-JFK buys about as much fuel at GSO as it does at JFK. While DL could get jet fuel from this refinery to JFK relatively cheaply - a pipeline runs up the east coast near the refinery and on to NYC - the fuel for GSO's supply would have to be shipped by rail or truck at higher cost. So as WT said, DL would have to work out deals with other producers across the country - we'll sell you jet fuel (or gas, diesel, heating oil, whatever) at a discount in the northeast if you'll sell us jet fuel at a discount in the midwest, west, southeast, etc. Of course, ultimately the deals would have to include the the distributors and local retailers of jet fuel - if they don't get a discount on the jet fuel they pump into DL's planes they're not going to give a discount to DL.

Jim

I see. But if they just focused on buying other refineries with reasonable access to major hubs such as, ATL, DET, MSP, and SLC, I wonder if financially, it would make sense. Realizing of course you would only be providing for only outgoing traffic. It is all intriguing.

 

[BoeingBoy]

The trouble is that DL has only JFK that is close to refineries. The biggest concentration of refineries as well as some of the biggest refineries is along the Gulf coast - LA & TX especially (TX has 3 refineries whose combined production capacity is equal to the entire east coast refinery capacity). Because of the concentration of refineries, major pipelines radiate from there, like the major one that passes not far from ATL, by GSO, RIC, PHL and on to NYC. So that would be the place to buy a refinery for easier/cheaper transportation. But I'm not sure anyone is selling a refinery in that area.

Southern California has the next biggest concentration of of refineries. The rest of the country has fewer refineries than LA, TX, and CA combined.

Unfortunately, the Trainer refinery is located where transporting crude to the refinery is relatively expensive (most comes from Europe) and transporting finished product out is also relatively expensive except to NYC. Plus it is only able to refine higher grades of crude, which are more expensive. But that's the refinery that's for sell.

Jim

 

[WorldTraveler]

that is right, Jim,
Jet fuel is a commodity. It has to be manufactured to the same standards.... oil companies try to differentiate their gasoline products by using slightly different additives to create a marketing distinction and brand preference but refined petroleum products are strictly controlled.
In order for DL to restrict the output of the refinery for its own use, it would have to maintain its own fuel depots at the airports at which it wants to use that fuel... highly complex and not really workable or necessary given that fuel is a commodity.
It is possible that in the highly unlikely even of severe shortages of jet fuel relative to other petroleum products that DL could use the output from the refinery for its own use FIRST if demand exceeds supply - by mathematically saying that X percent of the fuel capacity at airport Y came from DL's refinery and DL gets first right to use that fuel - but that scenario is highly unlikely and if it happened, the overall economy would be so badly hurt that the industry overall would be damaged.
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The refinery is closest to PHL but the NYC and WAS airports are all very close... the entire capacity of the refinery could be used at airports within 100 miles of the refinery....
but since the refinery doesn't produce only jet fuel, what is more significant is that the PHL area is part of the US pipeline system, including the Colonial pipeline which runs from the HOU gulf coast area to NYC via ATL (Colonial pipeline co's headquarters). Nearly all of the major east coast airports are served by terminals connected to the pipeline - but so are the cities that are home to those airports - and the cities consume far more petroleum products than the airport.
http://www.pipeline101.com/reports/Notes.pdf
Page 9 has a map of the US refined petroleum products pipeline system.
The refinery is not isolated from the rest of the country although transporting fuel between regions does add costs.

More on Colonial pipeline which is the backbone of the east coast refined products pipeline system.
http://www.colpipe.com/home.asp
Note that Colonial is owned by ConocoPhillips, Shell and the fabled KKR and Koch brothers.

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Note that the NE US is highly dependent both on crude stocks that come from outside the region as well as refined products that are brought into the region by pipeline and other means, including rail and barge.
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It is also possible that part of DL's interest in the Trainer refinery is because of the imbalance of petroleum supplies in the NE... as a very heavily east coast carrier, DL has every reason to be concerned if fuel prices on the east coast rise disproportionatly more than in any parts of the country which they could given that several NE refineries have been closed.
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Thus, DL's interest in the refinery could help to solve some airline industry specific problems, even if DL is the largest beneficiary.

 

[eolesen]

The trouble is that DL has only JFK that is close to refineries.

Of the DL hubs, true. In general, LAX and EWR are probably the two airports closest to refineries (Chevron @ El Segundo and Hess @ Perth Amboy).

I was digging thru some EIA data, and the only other DL hub where there was a refinery nearby appears to be SLC, where there are a couple independent ones (including the one owned by Flying J truck stops, and they purposely favor diesel production vs. Jet-A).

The EIA data brings up another point -- of the regional and nationwide truck stop chains, only FJ elects to run their own refinery. If any other industry were to get itself entangled in production, you'd think it would be trucking. FJ went the other direction -- they started as a refiner who added retail sales...

 

[FWAAA]

If your wife bought a lot of gold jewelry on a regular basis, would it make more sense to buy a jewelry store or a gold mining company? In that case, your problem isn't the markup by the goldsmith, it's the price of gold. As I posted before, DL's problem isn't the crack spread, it's the underlying price of oil. And buying an old, inefficient, closed refinery from a company that knows a lot about refining (a whole lot more than DL does about refining) isn't going to help DL solve its fuel price problem.

 

[BABABOOY]

Of the DL hubs, true. In general, LAX and EWR are probably the two airports closest to refineries (Chevron @ El Segundo and Hess @ Perth Amboy).

I don't believe Hess has a refinery at Perth Amboy. They are located in Port Reading.
Chevron has a Asphalt refinery in Perth Amboy.
Closest and largest NJ refinery to EWR is Conoco Phillips in Linden.

 

[BoeingBoy]

Of the DL hubs, true. In general, LAX and EWR are probably the two airports closest to refineries (Chevron @ El Segundo and Hess @ Perth Amboy).

I wasn't that clear, but that's what I meant - DL's hubs aren't next door to refineries and JFK is the only one that's downstream of the Trainer refinery as far as the colonial pipeline is concerned. Of course, anything within a 100 mile radius of the refinery or pipeline terminal can be served although the amount of fuel needed at a hub isn't really akin to delivering gas by tanker truck to a local retail outlet. The more you can use pipelines the lower the cost of transportation.

WT, the colonial pipeline does run by ATL but as I've said before it's one way, designed and built for transportation from the Gulf to points up the east coast. Colonial isn't going to shut down the pipeline for a few days just so DL can ship jet fuel backwards even if it could pump product backwards through the pipeline (which it can't). So except for NYC, DL's hubs are poorly positioned for low-cost transportation of jet fuel from Trainer to those hubs since the hubs are land locked. Generally speaking, transportation costs increase as the product is shipped in smaller lots - the pipeline can ship whatever amount desired (it just has to fit into the stream of products going through the pipeline), next in capacity would be tanker or coastal barge but with DL's other hubs being landlocked there's still a large amount of rail/truck transportation, and then rail followed by truck.

That's the transportation disadvantage that Trainer faces as far as DL using it's own refined product. Then there's the cost disadvantage that Trainer and other PADD 1 refineries face. Trainer relies on light sweet crude, much of it from Europe (Brent) and west Africa. Being the highest grades of crude, the raw material Trainer uses costs more - the national average price of crude input is less than $105/bbl while PADD 1's average refinery input cost is over $111/bbl. That's about 14 cents per gallon more, which carries all the way through the refining process and applies to the finished product. So jet fuel coming out of Trainer has a 14 cent/gallon disadvantage to refineries in other parts of the country, and even more compared to Rocky Mountain or Gulf refineries.

Jim

 

[whatkindoffreshhell]

If your wife bought a lot of gold jewelry on a regular basis, would it make more sense to buy a jewelry store or a gold mining company? In that case, your problem isn't the markup by the goldsmith, it's the price of gold. As I posted before, DL's problem isn't the crack spread, it's the underlying price of oil. And buying an old, inefficient, closed refinery from a company that knows a lot about refining (a whole lot more than DL does about refining) isn't going to help DL solve its fuel price problem.

HERE HERE!

While I applaud DL management for initiative, I must add they have no business in oil.

Vertically integrated manufacturing was Henry Ford's dream (along with the moving assembly line, which he considered his crown jewel) but that business model is no longer valid.

DL -- stick to what you know.

 

[WorldTraveler]

Jim,
I don't think it matters at all where DL's hubs are relative to the trainer refinery because the refinery - regardless of who operates - produces a commodity - and there is no reason to believe that DL needs to ship the jet fuel where it most needs it.
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I agree that the typical input of crude has been an issue on the east coast - and while the refinery issue has been in the news, presumably DL and its advisers have considered the problem and are evaluating how operating the refinery can be cost effective. The other side of the equation is that these refineries that are being pulled offline are not being replaced with new refineries....if the demand for jet fuel doesn't drop as fast as the supply or if the supply has to be met with imported refined products, the cost equation might begin to change.
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I have a feeling there are lot more factors involved in the decision than those of us on an internet chat forum can come up with whether the deal makes sense. And there are alot more people who deservedly are paid a whole lot more than us to figure out the solutions to those potential issues to both a potential refinery purchase and DL's overall fuel bill issue.
But it also doesn't change the fact that with fuel purchases of over $10 billion per year, DL has alot of reason to begin to figure out solutions... and again, while we have read alot of reasons why people don't think DL should do this deal, I haven't heard alot of alternatives they should pursue.
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The media remains highly interested in the story, though, and the latest comes with information on DL's current hedges which are larger and for lower prices than what other airlines had previously revealed, so DL is aggressively hedging and should be able to show significant gains from its hedging activity.

http://finance.yahoo.com/news/delta-may-acquire-oil-refinery-131523471.html :
Additionally, Delta Air Lines is involved in fuel hedging strategies, which provide a cushion to the rising fuel prices. Delta Air Lines is 66% hedged for the first quarter at jet fuel price from $3–$3.25 per gallon and 58% hedged for the second quarter at a jet fuel price between $2.75 and $3.25 per gallon using collars and call spreads.
---
Other than waiting for 1st quarter financials, the only other clue as to how effective DL's hedging is will come when UA releases its traffic report for March - which still has not occurred - since UA is the only other major airline that includes fuel price in its data.

 

[Kev3188]

If your wife bought a lot of gold jewelry on a regular basis, would it make more sense to buy a jewelry store or a gold mining company? In that case, your problem isn't the markup by the goldsmith, it's the price of gold. As I posted before, DL's problem isn't the crack spread, it's the underlying price of oil. And buying an old, inefficient, closed refinery from a company that knows a lot about refining (a whole lot more than DL does about refining) isn't going to help DL solve its fuel price problem.

^Truth^

HERE HERE!

While I applaud DL management for initiative, I must add they have no business in oil.

Vertically integrated manufacturing was Henry Ford's dream (along with the moving assembly line, which he considered his crown jewel) but that business model is no longer valid.

DL -- stick to what you know.

We should be so lucky...

 

[BoeingBoy]

Jim,
I don't think it matters at all where DL's hubs are relative to the trainer refinery because the refinery - regardless of who operates - produces a commodity - and there is no reason to believe that DL needs to ship the jet fuel where it most needs it.

The shipping tangent started with a question about whether DL could just use the jet fuel from Trainer if the purchase is made. We've both agreed that the obvious action would be for DL to in effect trade discounts with suppliers in other parts of the country, itself not an easy proposition since there's a supply chain to deal with instead of just refinery operators.

I agree that the typical input of crude has been an issue on the east coast - and while the refinery issue has been in the news, presumably DL and its advisers have considered the problem and are evaluating how operating the refinery can be cost effective. The other side of the equation is that these refineries that are being pulled offline are not being replaced with new refineries....if the demand for jet fuel doesn't drop as fast as the supply or if the supply has to be met with imported refined products, the cost equation might begin to change.

The input cost disadvantage is not easy to get around. It's either accept that disadvantage or update the refinery to handle lower grades of crude, which would make the money to get it up and running look cheap. Trainer has little refining capacity downstream of distillation, which is needed to turn lower grades of crude into as much usable product as a refinery built to use lower grades of crude. Since distillation is the most basic form of refining, changing Trainer to use lower grades of crude effectively involves building from scratch the capability to do the downstream refining processes.

Refining capacity isn't a problem and probably won't be for the foreseeable future. First, U.S. refineries are running at less than normal capacity so there's production slack in the system. Then there's the importation of finished products, including jet fuel, which can be cheaper than adding the capacity in the U.S. Finally, there the movement toward using biofuel - if it gets cost competitive that will mean even less refinery capacity is needed.

while we have read alot of reasons why people don't think DL should do this deal, I haven't heard alot of alternatives they should pursue.

There's still hedging fuel prices...which as you say DL already does and has experience with. I just don't see the cost advantage for this refinery - it's products are more expensive to start with, DL will almost certainly have to pay someone to run it and they'll want a profit margin and there's still the crude price risk to consider (trading jet price risk for crude price risk still leaves price risk). I just don't see a net gain anywhere. I'm also sure that DL has hired some smart people to study whether this is a good idea or not, but sometimes the answer is just "No, it isn't a good idea."

Jim

 

[eolesen]

I'm also sure that DL has hired some smart people to study whether this is a good idea or not, but sometimes the answer is just "No, it isn't a good idea."

And sometimes, smart people are afraid to say "no, it isn't a good idea"