Supposedly, some refineries (such as this one) get caught between crude oil prices and resistance to raising gasoline priceswhat 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?
http://www.consumerenergyreport.com...res-lead-to-rising-gas-prices-and-job-losses/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
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.
They sure aren't going to transport this from the refinery to all 50 states - it's not worth the cost.
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.
That makes sense, I'm surprised another airline hasn't done it before. But at what point will they be to big to fail?
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.
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 ).
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 ).
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..
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
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.
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.
Antitrust, maybe? I'm just guessing here.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.
2 words, Profit Margin. The margin is high enough that you can hire in the help and still be way ahead.
Is an 8 - 10% gross margin worth the investment, (mostly debt probably) and RISK for this new venture?
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:
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?
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.
Is the price for crude any less volatile than the price for products ?
And then you buy the refinery back from them at a discount rate... The thing of interest is not that Delta wants the refinery, it's that there is one to be bought.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?
Hedging helps deal with volatility.
Check post #7. That's not the only citaton with that information; I've seen it a lot lately.And then you buy the refinery back from them at a discount rate... The thing of interest is not that Delta wants the refinery, it's that there is one to be bought.
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?
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.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
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."
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