Delta Airlines recent announced that it plans to purchase and refine petroleum from the Bakken. Delta is the only major U.S. airline to own a refinery, the Trainer facility in suburban Philadelphia, and the first to make this move to purchase cheaper domestic oil at a discount to reduce the impact of rising oil prices on their bottom line.
Delta President Ed Bastian said that Bakken oil is comparable in price to West Texas Intermediate, versus the more expensive imported crude currently being used in their Philadelphia refinery.
Securing lower-cost North Dakota crude would boost Delta’s expected $300 million annual benefit from the facility, Bastian said. Spending for fuel, Delta’s largest expense, rose 15 percent in the first half of this year to $5.54 billion.
“It’s a big opportunity,” Bastian said. “It’s huge. We’re working on it actively.”
Jet fuel for immediate delivery in New York Harbor closed at $3.25 a gallon today, 53 percent more than in 2010. The crack spread, or the difference in the cost of crude and refined products, has seen 73 percent compounded growth over the past two years, Bastian said.
“We don’t see that necessarily abating anytime soon,” he said. Delta, the world’s second-largest airline, purchased the idled plant in June from ConocoPhillips (COP) for $150 million to help reduce those bills.
Delta’s Monroe Energy LLC subsidiary will start some units this weekend. Most of the facility’s operations are expected to be running by the end of September, Lynda Rebarchak, a spokeswoman for Pennsylvania’s Department of Environmental Protection, said in an e-mail.
Jet fuel produced by the refinery will cover more than 80 percent of Delta’s domestic fuel needs, and the airline will exchange gasoline and other refined products for more jet fuel through multiyear agreements with BP and Phillips 66. (PSX)
Delta is currently in talks with rail companies about transporting the oil to their refinery in Philadelphia. Infrastructure limitations have been an ongoing problem with getting oil from the Bakken to market, leading to local glut and discount to the WTI index. Recent increases in rail capacity, however, have reduced this discount. So, this move by Delta may be a fairly short-term fix, but it’s the first move by a major airline to target domestic oil directly this way is new.
It will interesting to see if Delta’s action is copied in the near future by other companies looking to reduce the costs of energy inputs. As oil prices rise, Bakken produced oil ought to become more practical. While the current infrastructure limitations should improve and eliminate the discount, imported oil will still face increases shipping costs, reducing it’s competitive edge.