* Delta's Trainer refinery could take 50,000 bpd of Bakken
crude by end year
* Delta eyes chances to ship jet fuel to Midwest markets
By Matthew Robinson
NEW YORK, May 23 Making money in the refining
business is generally a pretty straightforward proposition: sell
your fuel at the highest possible price relative to cost.
But Delta Air Lines, the first carrier to expand into the
refining business, is trying to find its profits by driving down
the price of fuel as much as it can. So far, the airline is
seeing the first sign of success: the company's top officials
point to the drop in the price of jet fuel in its New York hub.
And it expect costs will fall further as Delta ramps up
supplies of cheap crude to the refinery from the Bakken play in
Controlling the company's $12 billion per year in jet fuel
costs was the goal for Delta when it purchased the Trainer,
Pennsylvania refinery in 2012, a move that jolted the rather
static universe of U.S. refining participants and threw up
questions marks from analysts covering several asset classes.
"We're not trying to compete over jet fuel, we're trying to
drive down our margin improvement and drive our highest cost
lower," Delta President Ed Bastian told Reuters in an interview,
referring to the cost of jet fuel.
"We're the only operator of a refinery that wants to see gas
prices come down."
One of the main costs Delta has focused on at the Trainer
plant has been crude. Nearly half of the refining capacity on
the East Coast was facing shutdown at the end of 2011, as well
as plants in the Caribbean that supplied that market, due to the
high cost of importing oil from West Africa and the North Sea.
Facing higher jet costs as its traditional suppliers
dwindled, Delta bought Trainer from Phillips 66. It is now
seeking to drive down costs by tapping into the cheap crude at
the center of the U.S. oil boom. By the end of the year, Bastian
said 50,000 barrels per day of oil from North Dakota's Bakken
region could supply the 185,000 bpd plant at a substantial
discount to internationally purchased oil.
Midwest and Gulf Coast refiners have enjoyed better margins
over the past two years thanks to the Bakken, and other shale
"This is going to continue to grow as we improve the
logistics and distribution capabilities to get more Bakken into
the refinery," said Bastian, adding cost savings could be in
excess of $100 million per year.
In the medium term the plant could take up to half its crude
from North Dakota, and potentially all of its feedstock in the
longer term, Bastian said.
The realization that the Bakken crude, which had been
helping Midwest refiners since production started to surge in
2010, did not come until after Delta had purchased the plant,
according to CEO Richard Anderson. Since then, several East
Coast plants have sought to bring in Bakken crude by rail to cut
Delta had been looking at other ways of controlling fuel
costs, bidding on a refinery on the block in Meraux, Louisiana
and at one point even contemplated buying an oil company, before
buying Trainer, Anderson said.
After restarting the refinery it had bought, Delta is set to
maximize its yield of jet fuel. Output of the fuel is expected
to produce about 40,000 bpd by the end of the year. Supplies on
the East Coast appear to be growing, with inventories now at the
highest level since October 2011, according to U.S. government
Having some say over the price of jet fuel in the region is
particularly important for Delta, which has set out on an
ambitious growth plan to increase its share of the New York City
hub. Delta is the largest buyer of jet fuel in New York, as well
as the country as a whole, making up 20 percent of all U.S.
purchases, Anderson said.
The company took a $63 million loss from the refinery in the
fourth quarter due to slower operations after Hurricane Sandy
struck. Sandy's impact continued to be felt in January. But
Bastian said earlier this year he expects the plant to turn a
profit of $75 million to $100 million in the second quarter.
Anderson noted that since the Trainer plant restarted in
September 2012, jet fuel's premium to traditionally lower priced
fuels produced by refineries has inverted.
"Since we have really had our refinery up and running, we
have brought the jet fuel premium well below low sulfur diesel,"
Anderson told Reuters, noting that the $150 million price tag
was the cost of a Boeing 777.
According to Reuters data, at the start of 2012, physical
jet fuel in the New York Harbor was trading at a $9 premium to
ultra low sulfur diesel. In recent weeks, jet dropped to a
$16.25 discount to diesel.
The company gets about 80 percent of its jet fuel needs
either through the plant's production or by swapping out the
gasoline and diesel it makes to BP and Phillips for jet fuel.
And while the stated aim of the airline's unusual vertical
integration model is lower fuel costs for its planes, there are
signs the company is thinking more like a refinery.
Anderson said the refinery, run by subsidiary Monroe Energy
LLC, was exploring opportunities to ship some jet fuel to the
Midwest to exploit higher prices there.
"There is a $10 crack spread opportunity," Anderson said
referring to the profit the refiner could make, "The crack
spread for jet is double what it is on the coast."