Delta Airlines to Purchase Troubled Northeast Refinery

Delta Airlines announced yesterday that it reached agreement with ConocoPhillips to purchase its troubled Trainer refinery for $150 million, preventing the removal of 185,000 barrels per day of refining capacity from leaving fuel markets in the Northeast. The facility had been idled since last year because of difficult financial head winds facing East Coast refiners because of declining domestic fuel demand and they are more heavily reliant on expensive foreign crude oil than its competitors in the South and Midwest. Delta will become the first US airline to own a refinery, which it believes will help them hedge against rising jet fuel prices.

Last year, Delta spent over $11 billion on jet fuel and it accounted for 36 percent of its operating costs. According to media reports, Delta believes the refinery to be worth at least $1 billion and that it acquired a strategic asset for a real bargain. Their CEO, Richard Anderson, released a statement, ""This modest investment, the equivalent of the list price of a new widebody aircraft, will allow Delta to reduce its fuel expense by $300 million annually and ensure jet fuel availability in the Northeast." The Trainer refinery has the capability of producing 23,000 barrels of jet fuel per day and Delta plans to invest $100 million for retrofits to increase that output, which would allow it to directly supply hub routes at La Guardia and John F. Kennedy airports in New York. The airline expects the move to save the company $100 million a year in jet fuel expenses.

The agreement, which finalizes in late June, was hailed by local and state politicians that feared the refinery's 400 direct jobs and upwards of 5,000 related jobs in the Philadelphia area were at jeopardy. Pennsylvania Governor Tom Corbett, offered a $30 million dollar grant to Delta's subsidiary - Monroe Energy, LLC - to keep the refinery operating so long as it agrees to invest $350 million in the site and retain the workforce over a five-year period. Under the terms of the agreement, the refinery will be supplied with crude oil by BP and it will then exchange gasoline and other refined products for jet fuel supplied by Phillips66 and BP found elsewhere in the US while it undergoes upgrades. 

The unorthodox deal has run into criticism from financial analysts that worry the airline has no experience running refineries, which are extremely capital-intensive, are highly regulated, and face very challenging economic straits with expensive crude oil prices. The current price spread between US and Brent crude oil was roughly $14 as of yesterday, and refineries on the East Coast are some of the oldest and least advanced complexes in the industry.  In addition, they also struggle with limited pipeline capacity and thus do not have easy access to cheaper crude. Now that the Trainer facility has been salvaged, observers wait to see the fate of the region's largest facility, owned by Sunoco, which is scheduled to close this summer if no buyer is found. If that happens, 335,000 barrels per day in refining capacity will be gone; further straining gasoline supplies in the Northeast during the height of driving season.