UPDATE 2-Delta bets on Bakken crude to boost refinery profits

Tue Jan 22, 2013 2:11pm EST

* Delta to receive Bakken crude at Trainer in Q1

* Airliner lost $63 million at Trainer in Q4, 2012

* Delta expects plant to make modest profits in Q1

By Selam Gebrekidan and David Sheppard

NEW YORK, Jan 22 (Reuters) - Delta Air Lines Inc plans to run cheaper domestic crude at its newly-acquired Trainer, Pennsylvania refinery to improve profits at the plant, becoming the latest U.S. company to cash in on the burgeoning shale oil boom.

After losing $63 million at the refinery in the fourth quarter, the Atlanta-based airline will receive its first crude shipments there from North Dakota's Bakken shale in the first quarter, the company said during its earnings call Tuesday.

Delta's subsidiary, Monroe Energy LLC, was forced to slow production at the 185,000 barrels-per-day plant in November and December after Hurricane Sandy damaged regional pipelines and terminals, leading to the losses, Paul Jacobson, the company's senior vice president and chief financial officer said during the call.

However, the Trainer refinery will bounce back to a modest profit in the first quarter, Jacobson added.

East Coast refiners are eyeing to cut their costs of importing foreign crude, which is significantly more expensive than oil from the recently booming North Dakotan fields. It is much cheaper to rail crude from the Midwest shale play, at an added $12 to $16 a barrel in transportation costs, than to buy oil priced against European Brent, according to analysts' estimates.

Delta declined to say how much Bakken crude the refinery will run, a figure it said will be determined once initial tests were done running the crude.

"As we run this first shipment this quarter, we'll have more color as to what the total potential is, but it is pretty significant," Jacobson said.

Delta has a multiple-years contract with BP plc for crude supply at Trainer.

With its latest move, the airliner joins other East Coast refiners like Phillips 66, which in early January made an estimated $1 billion commitment to ship 50,000 bpd of Bakken crude oil to its 238,000 bpd Bayway refinery in Linden, New Jersey.

The Bakken shale produced just under 670,000 bpd in November, more than OPEC member Ecuador, according to North Dakota regulators' data.

RISKY PURCHASE

The airline bought the Trainer plant in spring last year from Phillips 66, the refining company that was spun off from ConocoPhillips, thereby emerging as the first air carrier to attempt to control its fuel costs this way.

It also made $70 million of capital investments in the refinery during the fourth quarter as it attempted to boost jet fuel production at the expense of other fuels like gasoline.

Trainer was one of three refineries on the East Coast that was threatened with closure since 2011 as the high cost of imported crude that the plants process hit margins, raising the threat of a fuel squeeze in the region.

Before Sandy hit, Delta predicted the Trainer refinery would contribute up to $25 million to the airline's bottom line. But the company's average jet fuel price was $3.24 per gallon in the fourth quarter, including losses of 7 cents a gallon from the Trainer refinery against 5 cents per gallon in hedging gains, according to the results it filed.

Still, the company stood by its purchase in the earnings call.

"If you take Sandy and its effects out of it, everything has gone as planned," Delta's CEO Richard Anderson said.

"Actually, after we've closed the deal on the refinery and spent a lot of time on turnarounds, we're more certain of how prudent that acquisitions was," he added.