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May 1, 2012

Delta Air Lines Buys a Refinery, Becoming its Own Oilman

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Delta Air Lines will become its own oilman after purchasing a refinery in Pennsylvania.

Delta Air Lines on Monday announced it had reached an agreement to buy a disused oil refinery near Philadelphia, a move which many industry pundits promise to puzzle over for years to come.

Monroe Energy, a wholly-owned subsidiary of Delta, will buy the Trainer Oil refinery in Trainer, Pennsylvania — on the Delaware River about 10 miles south of Philadelphia — from ConocoPhillips subsidiary Phillips 66 for $150 million, the airline said in a statement. Trainer can process 185,000 barrels of oil daily, making it the third largest refinery on the east coast.

Pennsylvania’s state government will contribute $30 million to infrastructure improvements. Monroe will spend another $100 million to maximize the plant’s jet fuel production.

Pennsylvania Governor Tom Corbett says the move will save 5,000 jobs in the state. ConocoPhillips halted operations at the plant last year, and planned to shut it down for good if it couldn’t find a buyer soon.

Delta says the new refinery will fulfill 80% of the airline’s fuel requirements while saving them $300 million a year. The largest airline in the US, Delta spent $11.7 billion on fuel in 2011, making up 36% of its operating costs, up from 30% in 2010. Fuel is Delta’s biggest expense, as it is at nearly every airline.

“Acquiring the Trainer refinery is an innovative approach to managing our largest expense,” said Richard Anderson, Delta’s chief executive officer in 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. This strategy is aligned with the moves we have made to build a stronger airline for our shareholders, employees and customers.”

In addition, Anderson told the Times that Delta would need to buy $2.5 billion worth of new, more efficient aircraft to see an equivalent fuel savings.

The airline also says they expect the facility to come online by the third quarter of 2012, helping them to realize a fuel savings of $100 million this year.

But it won’t necessarily be easy.

While the demand for jet fuel from Delta will be fairly consistent, the oil refining process doesn’t allow a refinery to produce only jet fuel. The refinery will also pump out gasoline and diesel, for which markets are more cyclical. ConocoPhillips wants out of the refinery business precisely because the refining business is too erratic. Also, east coast refineries pay more for crude oil than those on the Gulf of Mexico or on the west coast, simply because they must use more imported oil.

Because it’s not economically feasible to transport from Philadelphia to Delta cities across the country, through a marketing agreement with Phillips 66, Monroe will swap the various products made at Trainer for jet fuel distributed at more distant airports.

Delta’s purchase could benefit east coast drivers, as well, the Associated Press points out: if the Trainer refinery were to close, the reduced supply of gasoline would lead to higher prices at the pump.

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