Topic of the Week: Delta Wants to Refine Its Own Oil

April 6, 2012 CF 16 comments

Word is out this week that Delta wants to get into the oil refining business. I would assume the idea is to be able to buy fuel at cost, but I really don’t know enough about the oil business to know whether this is brilliant or completely insane. So which is it?

Delta, Fuel none

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Written by Southeasterner on April 6, 2012. Reply

Completely insane. The Trainer refinery was shut down in September for good reason. The economics don’t work. If Delta really wants to get into the refining business they should be looking at refineries in the gulf coast (which can also supply their main hubs) that actually make money.

I guess on the side of Conoco it’s great news that after 5+ years they finally found a sucker dumb enough to think about buying it.
- Written by DAB on April 6, 2012. Reply
  
  You beat me to it… Completely insane is the only answer (as someone in the refining industry that flys all the time…). I think that this may have made some sense had someone done it in the late 90s. That is when the airlines were strong and refining was in its real death throws.
  
  Let’s look at just one thing: inventory. Does an airline really want to tie up say 150,000 (bbl refinery capacity to pick a mid-sized number) * 100 ($/bbl) * 10 days supply on hand (pretty low) = $150 Million in working capital?
  
  I once heard a long term veteran of the refining industry be asked how business is. His reply “It’s never good.” Really, in the 150 year history of the industry there have been three really good years, 2004-2007, and that is it…
Written by Carl S on April 6, 2012. Reply

Whoa Whoa whoa, An Airline and an Oil Company…. Two “evil” industries becoming one, maybe the Mayan’s were right.
Written by Zack Rules on April 6, 2012. Reply

It would seem to make more sense for Delta to buy a faculity and subcontract it out. But even owning the means of production doesn’t mean a discount. Refining is notoriously low margin so I would gander savings to be minimal.
Written by Bobber on April 6, 2012. Reply

Buy some sand in Canada instead…….
Written by Sanjeev M on April 6, 2012. Reply

Can Delta first fix its award reservation IT system, which is right now probably more volatile and unpredictable than the oil industry….. :)

Seriously I don’t think this is a good idea. I saw a comment where someone said that refineries make money when selling whatever product makes money (whether it be upstream or downstream in the refining process). Making Jet-A 100% of the time is not going to be necessarily cheaper than their current suppliers.
Written by David SF eastbay on April 6, 2012. Reply

Airlines can’t even run an airline let a lone an oil company.
Written by Oliver on April 6, 2012. Reply

Surely that reliable source thought this was a great story to publish on April 1.
Written by Matt on April 6, 2012. Reply

Isn’t the reason for buying a NE refinery due to tight kerosene supplies in the NE?
Aren’t the Philly refineries shutting down b/c of the refineries’ inability to process available crude supplies?
They may save money on the 20% of production that is kerosene/jet fuel, but will it more than make up on the beating they may take on the other 80% of production (gasoline, asphalt, etc)?
Written by Jason H on April 6, 2012. Reply

I hadn’t seen this before this morning where I saw it here first and then in the Wall Street Journal. It is an interesting move by Delta. The WSJ cites potential savings of $20-$25 a barrel for a cost of $100-150 million and a partnership with an energy company. There is also the ability to potentially swap the other products from the refinery for jet fuel discounts from other places.

All that being said, how much does this really differ from what Air Canada does? According to the WSJ article AC buys vessel shipments of fuel and brings it back to their home airports using fuel depots, pipelines, rented railcars and the like.

Personally I like this move even if DL doesn’t actually but the refinery. It shows the ability to think laterally to deal with a problem, something that is in short supply at many airlines.
Written by Eric the Italian Guy on April 6, 2012. Reply

Vertical integration makes for great B-school brain fodder…but the airline industry is nothing like the steel industry and the global marketplace is not like 1890. I saw the WSJ article that Jason H mentioned and the opportunity cost numbers are compelling. I wonder if this is a serious plan or a shot across the bow to DL’s Jet A supply chain contractors.

I seem to recall that Braniff(I) or AA or another airline studied and/or tried this back during the 1970s oil shocks.
Written by Neal on April 6, 2012. Reply

As someone who works in the oil and gas industry, specifically, in downstream (the unit of business where refining occurs) I think this is an idea conjured up by a consultant and sold in. Honestly the refining business is a highly technical operation from forecasting, planning, raw material sourcing, and overall production. These are not skills that are present in an airline.

I don’t even think it is worth talking about their supply sourcing, no economies of scale, refinery upgrades required, etc.

However, The past point that should be acknowledge is safety. Airlines obviously also focus on safety through their entire operation. But refinery safety is again a different skill set and risk that has hopefully been considered.

In the end, Delta will never dedicate the resources required to give this a shot and they will then be stuck selling a further outdated refinery to another consultant.
Written by Cook on April 6, 2012. Reply

Is this a late April Fool’s day joke? I just don’t see it.
Written by Nicholas Barnard on April 6, 2012. Reply

Wait, wait! The key for this being successful is in the second to last paragraph, when they discuss the Bakken shale field of North Dakota. I’m sure Delta’s plan involves retrofitting DC-9s (or maybe Airtran’s 717s?) as fuel tankers and flying them back and forth from ND to PA!
Written by Carson on April 7, 2012. Reply

It makes tons is sense. From all reports Delta would own it but work out contracts for selling other products. The margins are not good at all, however the goal here is not to make money but to cut fuel cost. delta would supply its new hub, new York and probably other close airports. Since delta flies many international flights from ny the cost savings could be huge plus there are many domestic flights that move through ny all the time. Fill up in ny, each time. there is very little risk in this venture and a lot of possible rewards.
Written by A on April 9, 2012. Reply

As I understand it, the northeast refiners are closing because 1. they are old and geared for refining light sweet crude stocks which are more expensive and harder to obtain, 2. environmental regualtions, 3. they don’t enjoy the crack spread mid-continent refiners are getting with land locked (price supressed) North Dakota and Alberta crude. If there were profit in that old refinery an actual refining company would be running it. I would hope the Delta board would be smart enough to realize that.