NEW YORK, April 11 Delta Air Lines may
partner with JP Morgan to help run ConocoPhillips'
idled 185,000-barrels-per-day refinery in Trainer,
Pennsylvania if the carrier buys the plant, a source familiar
with the matter said on Wed nesday.
Under the proposal, the No. 2 U.S. air carrier would
purchase the refinery and JP Morgan's commodities team would
finance the refining process, including buying and shipping
crude oil from overseas, according to the source, who spoke on
the condition of anonymity.
Delta, which has struggled with high fuel costs, would then
buy the jet fuel from JP Morgan at a wholesale rate, and the
bank would sell the other products made by the refinery into the
market, the source said.
CNBC previously reported the news, saying that Delta is
looking at paying $100 million to $200 million for the refinery.
In addition, CNBC said, at least two oil companies have
partnered with Delta in a swaps arrangement in which they would
give the airline jet fuel in exchange for some of the other fuel
produced by the refinery. The report did not identify which oil
companies are involved in the swap deal.
Another source familiar with negotiations told Reuters no
deal had been sealed and that the Trainer refinery had several
other bidders besides Delta.
A JP Morgan spokeswoman contacted by Reuters declined to
comment. A Delta spokesman said the airline could not comment on
rumors about the refinery.
"JP Morgan is most likely insisting that if they are going
to manage the crude, they are going to manage the product
offtake as well," a veteran oil products trader, who asked not
to be identified, told Reuters.
"There is a lot of financial risk for the Trainer deal.
This would be one way for JP Morgan to keep tabs on what Delta
SUPPLY AND OFFTAKE
Earlier this month, the board of Delta had met twice to
discuss a potential bid in an unprecedented effort to hedge fuel
costs for the airline, the world's largest commercial buyer of
jet fuel, a source familiar with the talks told Reuters.
Trainer is one of three refineries in the Philadelphia area
that have been pushed to the brink of closure by the high cost
of crude oil feedstock and waning fuel demand. The plant makes a
higher percentage of jet fuel than any other refinery on the
U.S. East Coast, accounting for a third of the jet-kerosene
capacity for the region.
The deal would also offer JP Morgan's oil traders a
real-time view of supply and demand near the New York Harbor,
pricing point for the two main U.S. oil product futures
contracts, RBOB gasoline and heating oil -- the
distillates contract used for hedging jet fuel and diesel
Banks are locked in a struggle with the U.S. Federal Reserve
over tighter restrictions on their ownership of physical
commodity assets after the financial crisis.
Agreements on supply and offtake between banks and
refineries are not uncommon, however, with JP Morgan, Goldman
Sachs and Morgan Stanley tied into deals with
independent refiners in the United States, including Alon
, Northern Tier and PBF Energy.
In a study commissioned by Morgan Stanley, consultancy IHS
CERA said in February that supply-and-offtake deals among
independent refiners and banks had allowed many such plants to
stay open after integrated oil companies started to exit
"Many of the buyers have been new entrants to the U.S.
refining sector and lack the resources and expertise to
commercially market production effectively, obtain attractive
financing for inventory and manage unhedged margin risk," the
IHS study said.
"The U.S. banks have filled an important role in regard to
overcoming these issues and have effectively reduced the
barriers to investment funding and successful commercial
HIGH JET FUEL COSTS
Delta spent $12 billion on jet fuel last year, with its
average pricing rising by 31 percent to $3.06 a gallon. Last
year, the company's aircraft consumed 3.86 billion gallons, or
just over 250,000 barrels per day, of jet fuel.
While many airlines use derivatives or even long-term
physical deals in an effort to control their future jet fuel
costs, buying a whole refinery would mark an extraordinary step
to ease the pain of rising prices.
Analysts have said Delta could struggle to make the refinery
profitable after many integrated oil companies and independent
refiners have incurred large losses in their downstream business
as high crude costs squeezed margins.
Tom Claugus, founder of GMT Capital Corp, a hedge fund in
Atlanta that owns Delta Air Lines shares, said earlier this week
that buying a refinery was a bad idea for the carrier.
"It's good for management teams to think very broadly and
look at all sorts of different options, but my own view would be
that owning a refinery borders on the bizarre," he said. "It
would be a significant error."