Delta Now Seeks to Dominate the Jet Fuel Marketplace – But With What?

Delta is becoming oil-crazy, and one wonders/worries if its senior executives shouldn’t be concentrating more on operating airplanes than on their one obsolete unprofitable and irrelevant oil refinery.

We earlier extensively analyzed Delta’s purchasing an oil refinery and concluded there was no way it would be a material boost to Delta’s bottom line.

In a possibly spectacular demonstration of ‘Pride Cometh Before a Fall’ Delta’s CEO (maybe that should stand for Contradicted Energy Optimist) Richard Anderson made the extraordinary claim on Friday that their ownership of a refinery will enable them to become a seller of jet fuel and to push jet fuel prices lower.

This is such a stupid claim that it is hard to know where to start in responding to it.

Anderson’s Claim Fails If Taken at Face Value

Perhaps the first thing to do is to take his claim at face value.  If Delta becomes a net seller of jet fuel, why would it want to drop the price it can sell it for?  Wouldn’t Delta want to sell jet fuel for as much money as possible?

Indeed, there are two different and very important reasons why Delta would want to sell jet fuel at as high a price as possible.  The first is simple – Delta’s obligation to their shareholders to create and maximize profit.

The second is obvious, too.  Why would Delta help their competitors by lowering their competitors costs for jet fuel?  Any company buying jet fuel in the US is, 99% of the time, a direct competitor of Delta.  If Delta sells jet fuel at reduced rates to its competitors, it is transferring its potential profit to its competitors, and is also sacrificing its notional cost advantage – a claimed ability to refine their own jet fuel less expensively than their competitors can buy it on the open market.

So, based purely on what Anderson said, his claim is a double nonsense.

But let’s look a bit further.  There’s more nonsense a-plenty.

Delta Is Not and Will Never Be a Net Seller of Jet Fuel

Anderson reveals that the result of the $100 million in upgrades to the refinery will be to increase its jet fuel production from about 14% of total output up to about 32% of total output, becoming approximately 52,000 barrels of jet fuel a day.

How much is this?  Delta uses, in the US alone, about 210,000 barrels of jet fuel a day.

So – how will Delta sell jet fuel if its own refinery makes 52,000 barrels of jet fuel a day and its own internal needs are for 210,000 barrels a day?  It would seem that Delta remains massively a net buyer of jet fuel, not a net seller.

Sure, Delta is trading the other distillation products its refinery makes for another 120,000 barrels of jet fuel (on undisclosed terms) but in total the 172,000 barrels of jet fuel it variously makes and buys is still significantly less than the 210,000 barrels of jet fuel it consumes each day.

Delta’s Trainer Jet Fuel is More Expensive than Imported Jet Fuel

In our earlier analysis of Delta’s purchase of the chronically unprofitable Trainer PA oil refinery from ConocoPhillips, we pointed out that the reason the refinery was unprofitable was because it was costing the refinery more to refine crude oil than is the cost of already refined products (such as jet fuel and gasoline) shipped in from off-shore refineries.

This is a structural problem that ConocoPhillips found unable to resolve, and if Delta hadn’t purchased the already closed down refinery, they would have simply abandoned the refinery entirely.  No-one else seems to have made any offers on the refinery at all, notwithstanding it being offered for sale for more than six months.

Delta Trainer Refinery is Doomed to Buy the Most Expensive Crude Oil

There is an interesting new source of cheap oil that appeared about 18 months ago and which has become increasingly significant – a source of plentiful and cheap oil that is not and will not be available to Delta either.

Delta’s white elephant refinery buys imported crude oil, with the leading price index for such oil currently showing a price of about $97 a barrel (this is known as the Brent price).

But there is also oil produced in the US that is known as North American light or, more commonly, West Texas Intermediate.  It is currently selling at about $84 a barrel.  In other words, a refinery that has to buy at Brent prices is paying 15.5% more a barrel for their oil than a refinery buying at West Texas Intermediate (WTI) prices.

Why is the WTI oil so much less than the Brent?  Primarily due to a lack of distribution capacity to get the oil from the well head to the refineries – this article discusses the issue in detail.

The key conclusion from the article is that a sizeable pricing discrepancy will remain for for the foreseeable future.

Delta’s Trainer PA refinery has no pipeline connection to the oil fields producing the cheap WTI priced crude, and there are no plans to build new pipelines to Trainer.  The map on this page shows the network of current and proposed US pipelines.

So, the Trainer refinery can’t compete against cheaper imported jet fuel and neither can it compete against refineries using cheaper US WTI crude as a feedstock.  A double whammy.

Summary

Delta’s Trainer refinery will produce about one quarter of Delta’s total jet fuel needs.  Delta will trade the refinery’s other output for jet fuel too, but will still have a massive shortfall which it needs to buy on the open market each day.  Delta is not and never will be a net seller of jet fuel in the US.

The Trainer refinery was abandoned by ConocoPhillips as being impossibly unprofitable, in part due to the pricing pressure of imported distillates and in part due to the pricing pressure of other refineries using much less expensive West Texas Intermediate crude as its feedstock.

Both these challenges remain now that Delta owns the refinery.  The difficulties we earlier identified in making the Trainer refinery profitable continue unabated.

Update Monday

On Monday Delta ‘clarified’ the statement of their CEO.

On Friday, CEO Anderson spoke about Delta selling jet fuel; on Monday a Delta spokesman said that the ‘sales’ would be from their wholly owned refinery subsidiary to – ahem – themselves.  The clarification even said that Delta was not allowed, by law, to sell jet fuel on the open market.

So what was Anderson thinking of in his Friday comments?  His strange comments now seem even stranger.