Delta Buying a Refinery?

That makes sense, I'm surprised another airline hasn't done it before. But at what point will they be to big to fail?
 
What are they going to do with all the other stuff that it would produce. Gasoline, tar, etc. ? I guess there is a market for all of them, but Delta owning one refinery would put them in the same position as the few independent small refiners that are still around.
 
Except for the fact they it costs them next to nothing for their gas. They will just have to pay transportation and distribution costs. Even if the profits from the refinery are ZERO because it covers those costs, then it will make their airline potentially more profitable.
 
what are the other major inputs to a refinery?
Energy, Water?, Labor?.
Could a refinery, maximized for jet a output, make their own power with other outputs and sell the rest?
Anybody got some pie charts showing typical in/out?
 
jhausch said:
what are the other major inputs to a refinery?
Energy, Water?, Labor?.
Could a refinery, maximized for jet a output, make their own power with other outputs and sell the rest?
Anybody got some pie charts showing typical in/out?
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Supposedly, some refineries (such as this one) get caught between crude oil prices and resistance to raising gasoline prices

There have been several announcements in recent months of refinery closures that will likely impact gasoline supplies (and prices) on the East Coast. Some of those closures have been on the East Coast. Others — such as the Hovensa refinery in the Virgin Islands and some European refineries — supply product to the East Coast.
So why are these refineries closing?
Basically, despite the very popular image of perpetually fat profits for the oil companies, the refining business has been historically poor. If a refinery often operates in the low single digit rates of return — or as has frequently been the case, loses money — oil companies will eventually shut them down. Even if other parts of the business are making money, they won’t keep funding a money loser.
But why do refineries struggle with profitability?
In recent years, demand for gasoline has been down due to high prices in the U.S. As oil prices have climbed, refiners have struggled to pass on all of the increased costs of those higher oil prices to consumers. They would like to sell gasoline for a bit more, but the reduced demand keeps their margins low for the most part. Ultimately some are forced to shut down. That will also mean higher gasoline prices for consumers
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http://www.consumerenergyreport.com...res-lead-to-rising-gas-prices-and-job-losses/

I don't know that Delta could improve on the situation. I suppose it's possible to change the cracking/alkylation process to produce more Jet A instead of gasoline.
 
jmp470 said:
Except for the fact they it costs them next to nothing for their gas. They will just have to pay transportation and distribution costs. Even if the profits from the refinery are ZERO because it covers those costs, then it will make their airline potentially more profitable.
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Not quite. They still have to pay for crude, for the operating costs of the refinery, maintenance, upkeep, marketing the other products. What they will be able to do is eliminate the refinery markup through intercompany transactions.

I would question this deal. Strategically, most businesses move to offload their non-strategic suppliers, not buy them. This is like owning a flight kitchen (most airlines have divested) or hotel chain (so they can cut the cost of crew layovers). Those are non-strategic assets. Most airlines outsource some (or a lot) of their maintenance. A lot (including Delta) outsource ground staff at certain airports, and many outsource call centers.

While Delta may cut the refining margin for internal sales, they still have to market the other products (at commodity pricing), which they might do as a deal with another big refiner/product company in order to try and get preferential pricing on Jet A in different parts of the country. They sure aren't going to transport this from the refinery to all 50 states - it's not worth the cost.
 
wsuffa said:
They sure aren't going to transport this from the refinery to all 50 states - it's not worth the cost.
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Existing refiners don't do that now, Bill. All they do is insert nnn barrels into the distribution pipeline and remove the same number at a terminal near the destination. And pay a pipeline fee. The pipeline is owned by a different company.

-Skip
 
All I ever hear is how refineries don't make any money. It therefore makes perfect sense than an airline purchases one, since airlines don't make any money either.
 
I agree with Bill. This is a non-core business, and most companies are better served to stay in the business they know, and outsource, or just continue to purchase the products that are ancillary.

The energy business, especially refining is very complex, and just eliminating some of the profit in fuel purchases is a large price to pay for the entire investment of acquiring, and operating a refinery. The ROI, must be very low. They have to know this. I wonder what their ulterior motives are for feigning this move.
 
Skip Miller said:
Existing refiners don't do that now, Bill. All they do is insert nnn barrels into the distribution pipeline and remove the same number at a terminal near the destination. And pay a pipeline fee. The pipeline is owned by a different company.
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Not always. We tried hard to feed refineries with "our" pipelines vs competitor's long ago at Texaco.

Some States (California) require all pipelines to be Common Carrier. Most don't.

And various modes of transport are common too. Most of the crude coming out of the Bakken is going by rail. Warren Buffett is making a mint.

Tesoro just started shipping Bakken crude they can't process at their refinery there, out to Anacortes, WA. I believe again by rail to another pipeline. Interesting strategic move. They're running out of workable places to build rail terminals up there.

Everyone else is shipping it via rail to pipelines to take it down to the terminals at Cushing, OK.

Killing the pipeline up there was purely a political move. Obama scratching Buffett's back. Buffett will keep saying that he needs to pay more in Income Tax in return. And all that yards yards about his secretary and all that. He makes his money off of equity. He could care less about higher tax on income.

A pipeline out of the Bakken to Cushing would change everything and everyone would scramble. There's a partial pipeline into Canada and across but it's too small.

All sorts of reindeer games going on up there.
 
jmp470 said:
That makes sense, I'm surprised another airline hasn't done it before. But at what point will they be to big to fail?
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Are you kidding? The fact that they would sell a major consumer the equipment to lose their business is surprising. Says to me that the energy sector is planning a big move, either that or the refinery has exceeded it's economic life span and Delta is gonna take another purchase in the shorts like I think it was with the TWA deal (may be Pan Am?) where they ended up with a bunch of end of life equipment and some crappy routes they ended up closing 2/3rds of.
 
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Henning said:
Are you kidding? The fact that they would sell a major consumer the equipment to lose their business is surprising. Says to me that the energy sector is planning a big move.
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Or that Delta has people in charge who have more ability to negotiate long-term Corporate debt (paper) than know how to negotiate a long term fuel contract with oil execs. ;)
 
Both Philly area refineries that have been closed and up for sale have reached the end of their lifespans, and would need significant investment in infrastructure to become competitive. However, the largest hurdle, zoning, and gov't approvals etc already exist, so at least there is a place to do the refining. It would not be a greenfield development site.
 
Where is this refinery ?

They could probably keep one busy if it was close to either ATL or MSP without incurring pipeline fees for their own product.

Question for the petro people:

How much 'middle distillates' (Jet, diesel, HHO) do you get out of a barrel of crude ?
How far can you push the ratios toward that target product (cracking) ?

Just trying to figure out how this could make sense for someone like delta who doesn't need tar, coke or vacuum gas oil (or whatever it is called ).
 
weilke said:
Where is this refinery ?

They could probably keep one busy if it was close to either ATL or MSP without incurring pipeline fees for their own product.

Question for the petro people:

How much 'middle distillates' (Jet, diesel, HHO) do you get out of a barrel of crude ?
How far can you push the ratios toward that target product (cracking) ?

Just trying to figure out how this could make sense for someone like delta who doesn't need tar, coke or vacuum gas oil (or whatever it is called ).
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It is my understanding that the cracking process is pretty limited on being able to bias it toward any one end product... There was a fellow experimental builder here in Wyoming that worked for Sinclair as a production manager and over dinner one night he spilled the details on how it all worked.. it was like trying to drink out of a firehose.. Interesting stuff though... I do remember him saying the bulk of the Jet A was sold to the military bases within 500 miles or so. And most of their oil stock came by pipeline from up north,,, I assumed it was Canada but like a dummy, forget to ask to be sure..
 
weilke said:
Where is this refinery ?

They could probably keep one busy if it was close to either ATL or MSP without incurring pipeline fees for their own product.

Question for the petro people:

How much 'middle distillates' (Jet, diesel, HHO) do you get out of a barrel of crude ?
How far can you push the ratios toward that target product (cracking) ?

Just trying to figure out how this could make sense for someone like delta who doesn't need tar, coke or vacuum gas oil (or whatever it is called ).
Click to expand...

I suspect it's not the actual production that makes sense. Refinery margins are generally (but not always) pitiful.

What it does is allows Delta to reduce price risk by hedging. They will "fix" their crude purchase costs which will allow them to structure finances precisely rather than being subject to market whim.

Selling the 'other' commodities isn't a problem. Gasoline is in constant demand along with anything else they choose to produce. There's likely a pretty good choice in producing diesel or Jet A so they can adjust as necessary to meet their demands. They can probably contract out the heavier ends if they desired. All those off brands need someone to produce their "quaker state" etc motor oil.
 
N801BH said:
It is my understanding that the cracking process is pretty limited on being able to bias it toward any one end product... There was a fellow experimental builder here in Wyoming that worked for Sinclair as a production manager and over dinner one night he spilled the details on how it all worked.. it was like trying to drink out of a firehose.. Interesting stuff though... I do remember him saying the bulk of the Jet A was sold to the military bases within 500 miles or so. And most of their oil stock came by pipeline from up north,,, I assumed it was Canada but like a dummy, forget to ask to be sure..
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Sinclair? Central and north central Wyoming. Salt Creek and the Powder River Basin, prolly some out of the Big Horn too. They're in a pretty good position in terms of supply. Getting product to market is a bit lousy though. Lots of rail cars...
 
Skip Miller said:
Existing refiners don't do that now, Bill. All they do is insert nnn barrels into the distribution pipeline and remove the same number at a terminal near the destination. And pay a pipeline fee. The pipeline is owned by a different company.

-Skip
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Exactly my point. DL would then have to have executives & employees who know how to negotiate pipeline contracts & distribution contracts. It's non-core to their business, why add the overhead.
 
wsuffa said:
Exactly my point. DL would then have to have executives & employees who know how to negotiate pipeline contracts & distribution contracts. It's non-core to their business, why add the overhead.
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2 words, Profit Margin. The margin is high enough that you can hire in the help and still be way ahead.
 
Personally.. Even as far back as the beginning of airline service I never understood why all the airlines didn't create a "co-op" in the refinery business... Those guys go through a HUGE amount of Jet A and producing it in volume for the major carriers would stabilize the price for them.:idea:
 
N801BH said:
Personally.. Even as far back as the beginning of airline service I never understood why all the airlines didn't create a "co-op" in the refinery business... Those guys go through a HUGE amount of Jet A and producing it in volume for the major carriers would stabilize the price for them.:idea:
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That would require a co-operational mentality. That doesn't happen on Wall Street.
 
N801BH said:
Personally.. Even as far back as the beginning of airline service I never understood why all the airlines didn't create a "co-op" in the refinery business... Those guys go through a HUGE amount of Jet A and producing it in volume for the major carriers would stabilize the price for them.:idea:
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Antitrust, maybe? I'm just guessing here.
 
Henning said:
2 words, Profit Margin. The margin is high enough that you can hire in the help and still be way ahead.
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Is an 8 - 10% gross margin worth the investment, (mostly debt probably) and RISK for this new venture?
 
Anthony said:
Is an 8 - 10% gross margin worth the investment, (mostly debt probably) and RISK for this new venture?
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I would enjoy seeing the forensics on that, but yes when you are dealing with the flow rates we're talking about. Even if you pay $10MM to save 10% of fuel cost at an airline it's a good value.
 
I don't think $10MM for a basis is going to get you there, not to mention the annual operating expenses, capital reserves, etc. :wink2:
 
Anthony said:
I don't think $10MM for a basis is going to get you there, not to mention the annual operating expenses, capital reserves, etc. :wink2:
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:confused::confused::confused: $10MM is the cost of hiring in the talent to handle the oil business and take over the overhead costs that they pay profit on now.
 
Airlines don't even seem to be able to run their core business very well and they're branching out into something they know nothing about? :confused:
 
Clark1961 said:
I suspect it's not the actual production that makes sense. Refinery margins are generally (but not always) pitiful.

What it does is allows Delta to reduce price risk by hedging. They will "fix" their crude purchase costs which will allow them to structure finances precisely rather than being subject to market whim.
Click to expand...

Is the price for crude any less volatile than the price for products ?
 
Everskyward said:
Airlines don't even seem to be able to run their core business very well and they're branching out into something they know nothing about? :confused:
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And then you buy the refinery back from them at a discount rate...:dunno: The thing of interest is not that Delta wants the refinery, it's that there is one to be bought.
 
Clark1961 said:
Hedging helps deal with volatility.
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So Delta can hedge better than Big Oil companies? Hedging should help them with the price of Jet-A right now but no, they feel the need to buy the refinery to push the hedging risk upstream to the crude price level?

I'd love to read more about the internal decision making here... we don't know enough about this yet. It does sound a bit like "hell yes, then we'll be too big to fail!"

-Skip
 
Ya know, what might make sense here is if Delta is buying the refinery with a partner like GE. Dunno if GE would go for it but a deal like that would give Delta cost control while reducing the cash investment required.
 
Henning said:
And then you buy the refinery back from them at a discount rate...:dunno: The thing of interest is not that Delta wants the refinery, it's that there is one to be bought.
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Check post #7. That's not the only citaton with that information; I've seen it a lot lately.
 
Everskyward said:
Airlines don't even seem to be able to run their core business very well and they're branching out into something they know nothing about? :confused:
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I was going to say that but wanted to be nice.......for once. :)

Pretty much the root of the issue. They gotta know more about the airline business than oil refining......right? :confused:
 
Skip Miller said:
So Delta can hedge better than Big Oil companies? Hedging should help them with the price of Jet-A right now but no, they feel the need to buy the refinery to push the hedging risk upstream to the crude price level?

I'd love to read more about the internal decision making here... we don't know enough about this yet. It does sound a bit like "hell yes, then we'll be too big to fail!"

-Skip
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Yeah- I'd like to understand this decision too. Vertical integration is a business model, and I suppose this makes more sense than buying Boeing. They better make sure they keep the employees because the products and working environment are very different than theirs current offering. If they get it to work they could get a price advantage in the Northeast because their competitors may well have to buy Jet A from them depending on how the distribution is structured.
 
This article explains their intentions somewhat better.

Delta Air Lines Inc (DAL), burdened by the soaring cost of jet fuel, is seriously thinking of making some of its own by buying an idled ConocoPhillips (COP) refinery near Philadelphia, people familiar with the matter said Thursday.

Delta, the world's second-biggest airline by traffic, is in talks with Conoco to acquire its Trainer, Pa., facility at a cost of $100 million to $150 million, one person familiar with the matter said. Delta would hire an outside firm to run the refinery.

The move could help supply Delta's operations at La Guardia airport and John F. Kennedy International Airport in New York, and save it most of the so-called crack spread, or the difference charged by a refinery between the cost of a barrel of crude and a barrel of jet fuel. In March, the spread between jet fuel and Brent crude, which is the benchmark that determines the price of most crudes delivered to the East Coast, was $12.85 a barrel, according to energy consultancy IHS Purvin & Gertz. The Trainer refinery, idled since October, has a processing capacity of 185,000 barrels a day, including 23,000 barrels a day of aviation fuel, according to the U.S. Energy Information Administration.

As refining jet fuel produces byproducts such as gasoline and diesel fuel, Delta would swap that output with a partner or partners, who would sell it. In return, Delta would be able to lock in, through those same partners, lower jet fuel rates at other airports where its planes refuel.

>snip<

But refining is also a challenging business--as demonstrated by a wave of refinery closures and divestitures in the U.S. East Coast--as refiners pay a premium for crude purchases and face declining demand for automotive fuel. Some analysts were skeptical about Delta's potential involvement in what is seen as a capital-intensive and declining industry.

"We are a little uncomfortable about the company going outside its core expertise," said Hunter Key, an analyst who covers Delta for Wolfe Trahan & Co. "I can't recall any other airline buying a refinery."
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http://online.wsj.com/article/BT-CO-20120405-713323.html
 
Skip Miller said:
So Delta can hedge better than Big Oil companies? Hedging should help them with the price of Jet-A right now but no, they feel the need to buy the refinery to push the hedging risk upstream to the crude price level?

I'd love to read more about the internal decision making here... we don't know enough about this yet. It does sound a bit like "hell yes, then we'll be too big to fail!"

-Skip
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Hedging has nothing to do with size and everything to do with goals. A refiner will hedge to maximize profit while an airline owned refinery might hedge to minimize cost. Buying a refinery doesn't make much sense to me otherwise since it's such a low economic margin attached to a large environmental risk. There are times and places when refineries are a great investment. A refinery in North Dakota makes a lot of sense right now. Elsewhere in the US? not so much, maybe the Gulf Coast...
 
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