* BP to supply crude, BP and Phillips 66 to swap fuels
* Deal seen aiding US gasoline, diesel supplies
* $100 million to be spent to re-tool facility
* Delta to get $30 mln in state funds for jobs,
By Karen Jacobs
April 30 Delta Air Lines Inc will buy a
Pennsylvania oil refinery from ConocoPhillips for $1 80
mi llion, 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 the first ever purchase of a
refinery by an airline would allow it to cut $300 million
annually from jet fuel costs, which reached $12 billion last
year. It said production at the refinery along with other
agreements to exchange refined products for jet fuel would
provide 80 percent of its fuel needs in the United States.
The deal for the idled 185,000 barrel per day Trainer, Pa.,
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 $100 million to upgrade
the plant to maximise 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.
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 $2
billion a year for Delta and has been rising in the wake of U.S.
refinery shutdowns, said Delta Chief Executive Richard Anderson.
"What we're tackling here today is the jet crack spread,
which you cannot hedge in the marketplace effectively," Anderson
told reporters during a phone briefing. "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, which 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 $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 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 U.S. airlines into the red for the
first quarter, although oil prices have since eased from March
peaks. U.S. crude traded around $105 a barrel on Monday,
while Brent crude was about $119 a 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. De lta will pay ConocoPhillips $180 million for the
refinery, but will receive $30 million in state government
assistance on the deal, reducing its cost to $150 million.
"This announcement means the preservation of more than 5,000
jobs at the Trainer facility and in related industries,"
Pennsylvania Gov. Tom Corbett said in a statement.
But at the same time it will raise questions among oil
sector analysts about whether the rush to revive one of the
half-dozen East Coast facilities that has been shut in recent
years may be premature given lingering questions over whether
these plants can compete without access to cheap crude.
Profit margins in April rose to their highest since 2008,
according to a Credit Suisse analysis, and are up more than 60
percent from the average of last year as the planned closure of
some 1.5 million bpd, including two refineries in the Caribbean,
threatened to cut East Coast capacity to just a third of its
peak in 2008. The cuts are deeper when factoring in Europe.
But in addition to Trainer, private equity fund The Carlyle
Group is in talks to buy the biggest refinery in Philadelphia,
potentially pulling another plant back from the brink.
The analysts at Credit Suisse say another 2.6 million bpd of
refining capacity across the globe must be shut "to hit the
"sweet spot" utilization level of 87 percent".
The Delta refinery would be run by a leadership team headed
by Jeffrey Warmann, who last ran Murphy Oil USA's Meraux,
East Coast refineries, among the oldest and least advanced
in the country, have been hammered by a series of bad turns: the
2008 recession that cut demand; the rapid injection of ethanol
into the U.S. gasoline mix; tougher environmental norms; and the
rise of new, more sophisticated plants in India and elsewhere.
The final blow for many has been the surge in cheap shale
oil production from North Dakota and West Texas, which has
handed a bounty of cut-priced crude to Midwest and Gulf rivals
who are now running their plants flat-out.
WILL IT WORK?
Robert Mann, an airline consultant in Port Washington, New
York, said Delta's statement did not address how it will handle
exposure to fluctuations in energy prices or refined product
costs or the actual refining process costs.
"It's clearly a very innovative approach, but I think it
will be a number of years before we know whether it actually
works out," Mann said.
Delta is the world's second-largest air carrier, behind
United Continental Holdings. The airline expects the
purchase to add to its earnings in the first year of operations.
Delta's Monroe Energy LLC unit expects to close the purchase
in the first half. JP Morgan Chase advised it in the
purchase, Delta said.
Delta shares were little changed in extended trading after
the announcement, which was widely expected.