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Delta Airlines Buys Refinery


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#1 SLBunge

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Posted 02 May 2012 - 02:52 PM

FT story

I know a bit about refining and it seems to me that it will be a very steep hill to climb to get this to pay out. US refining assets that are sitting idle have issues and were not profitable before idling. What I know about the CP Trainer, PA refinery would suggest that Delta will have to invest significantly just to get to production.

However, as others have said, it takes balls to be innovative. If they do get this to work the management team will be heroes.
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#2 Rail Paul

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Posted 02 May 2012 - 03:20 PM

FT story

I know a bit about refining and it seems to me that it will be a very steep hill to climb to get this to pay out. US refining assets that are sitting idle have issues and were not profitable before idling. What I know about the CP Trainer, PA refinery would suggest that Delta will have to invest significantly just to get to production.

However, as others have said, it takes balls to be innovative. If they do get this to work the management team will be heroes.


One of the problems with Trainer is that the docking channel silts up rapidly, requiring regular dredging to receive or ship products. And, unlike Marcus Hook, it doesn't have rail access. That will reduce flexibility as some of the Bakken crude is arriving in unit rail trains. I believe the other refineries in the area (Paulsboro, Carney's Point, Marcus Hook, Delaware City) all have rail access.

The other problem is Delta-specific. DL doesn't have much of an airline presence in Philly, I wonder why they selected that location for a refinery?

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#3 Anthony Bonner

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Posted 02 May 2012 - 04:17 PM


FT story

I know a bit about refining and it seems to me that it will be a very steep hill to climb to get this to pay out. US refining assets that are sitting idle have issues and were not profitable before idling. What I know about the CP Trainer, PA refinery would suggest that Delta will have to invest significantly just to get to production.

However, as others have said, it takes balls to be innovative. If they do get this to work the management team will be heroes.


One of the problems with Trainer is that the docking channel silts up rapidly, requiring regular dredging to receive or ship products. And, unlike Marcus Hook, it doesn't have rail access. That will reduce flexibility as some of the Bakken crude is arriving in unit rail trains. I believe the other refineries in the area (Paulsboro, Carney's Point, Marcus Hook, Delaware City) all have rail access.

The other problem is Delta-specific. DL doesn't have much of an airline presence in Philly, I wonder why they selected that location for a refinery?

Because it was for sale and they got a big payment from the state.

Still though, its pretty mockably silly. Its not like jet fuel refiners were making a ton of money off a tight market.
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#4 SLBunge

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Posted 02 May 2012 - 05:32 PM


The other problem is Delta-specific. DL doesn't have much of an airline presence in Philly, I wonder why they selected that location for a refinery?

Because it was for sale and they got a big payment from the state.

Bingo.

I'm not sure that location is a big deal from a product output standpoint. I can't imagine that all of the actual gallons of jet fuel produced in Trainer will end up in Delta planes. I assume they want to ride the crack spread and will likely be selling fuel to anyone on the open market. In fact this must be the case since they don't own pipeline distribution, tankage, trucks, etc.
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#5 Anthony Bonner

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Posted 02 May 2012 - 05:59 PM



The other problem is Delta-specific. DL doesn't have much of an airline presence in Philly, I wonder why they selected that location for a refinery?

Because it was for sale and they got a big payment from the state.

Bingo.

I'm not sure that location is a big deal from a product output standpoint. I can't imagine that all of the actual gallons of jet fuel produced in Trainer will end up in Delta planes. I assume they want to ride the crack spread and will likely be selling fuel to anyone on the open market. In fact this must be the case since they don't own pipeline distribution, tankage, trucks, etc.

No the location doesn't matter. Jet Fuel is fungible, they'll just sell it at market - and I guess they think refining is a great business? Might be better than airlines - one industry recycles its equity capital every 20 years. the other every ten, so I guess in theory its better? If they locked in financing at low rates for a long time it'll probably end up ok - just as long as they don't do anything dumb like invest in anything but the most minor of capacity tinkers.

Either way, the next batch of DAL bond holders will have the refinery at some point in the future, and then they can go and get another tax break to keep it open. Until it goes bankrupt again.

Honestly a nice controlled burn is probably the best option.
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#6 Rail Paul

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Posted 02 May 2012 - 07:06 PM




The other problem is Delta-specific. DL doesn't have much of an airline presence in Philly, I wonder why they selected that location for a refinery?

Because it was for sale and they got a big payment from the state.

Bingo.

I'm not sure that location is a big deal from a product output standpoint. I can't imagine that all of the actual gallons of jet fuel produced in Trainer will end up in Delta planes. I assume they want to ride the crack spread and will likely be selling fuel to anyone on the open market. In fact this must be the case since they don't own pipeline distribution, tankage, trucks, etc.

No the location doesn't matter. Jet Fuel is fungible, they'll just sell it at market - and I guess they think refining is a great business? Might be better than airlines - one industry recycles its equity capital every 20 years. the other every ten, so I guess in theory its better? If they locked in financing at low rates for a long time it'll probably end up ok - just as long as they don't do anything dumb like invest in anything but the most minor of capacity tinkers.

Either way, the next batch of DAL bond holders will have the refinery at some point in the future, and then they can go and get another tax break to keep it open. Until it goes bankrupt again.

Honestly a nice controlled burn is probably the best option.


The Delaware River cluster of refineries has a lot of problems, though. High costs, difficult labor situation, pollution legacy, transportation issues, mature market, etc.

The Delaware City refinery workers elected to shut down their plant than offer anything more than minimal work rule concessions. That's a lot different than the union situation in the airline industry, where the bankruptcy court is the club of choice for beating workers into submission and voiding pensions, contracts, etc.

Delta management may have their work cut out for themselves. We'll see.

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#7 Anthony Bonner

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Posted 02 May 2012 - 08:00 PM





The other problem is Delta-specific. DL doesn't have much of an airline presence in Philly, I wonder why they selected that location for a refinery?

Because it was for sale and they got a big payment from the state.

Bingo.

I'm not sure that location is a big deal from a product output standpoint. I can't imagine that all of the actual gallons of jet fuel produced in Trainer will end up in Delta planes. I assume they want to ride the crack spread and will likely be selling fuel to anyone on the open market. In fact this must be the case since they don't own pipeline distribution, tankage, trucks, etc.

No the location doesn't matter. Jet Fuel is fungible, they'll just sell it at market - and I guess they think refining is a great business? Might be better than airlines - one industry recycles its equity capital every 20 years. the other every ten, so I guess in theory its better? If they locked in financing at low rates for a long time it'll probably end up ok - just as long as they don't do anything dumb like invest in anything but the most minor of capacity tinkers.

Either way, the next batch of DAL bond holders will have the refinery at some point in the future, and then they can go and get another tax break to keep it open. Until it goes bankrupt again.

Honestly a nice controlled burn is probably the best option.


The Delaware River cluster of refineries has a lot of problems, though. High costs, difficult labor situation, pollution legacy, transportation issues, mature market, etc.

The Delaware City refinery workers elected to shut down their plant than offer anything more than minimal work rule concessions. That's a lot different than the union situation in the airline industry, where the bankruptcy court is the club of choice for beating workers into submission and voiding pensions, contracts, etc.

Delta management may have their work cut out for themselves. We'll see.

Right - hence my quasi-joke that lighting the refineries themselves on fire is probably the best long-term outcome.

The fact those refineries are on the Delaware River is only part of why the are at the wrong end of the cost curve - as you point out, old labor contracts, etc. There is nothing about the refinery contracts that makes them unbreakable in court, but frankly if you are Delta management you aren't buying them betting on another run through ch. 11 - in fact I'd guess its structured so that you could file the airline w/o filing the refinery

But in terms of actually selling the product jet fuel is more fungible than gasoline is.
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#8 Behemoth

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Posted 02 May 2012 - 08:05 PM

Either way, the next batch of DAL bond holders will have the refinery at some point in the future, and then they can go and get another tax break to keep it open. Until it goes bankrupt again.

Honestly a nice controlled burn is probably the best option.


Seriously. I can't imagine a bond with that as collateral would be terribly attractive. Not the easiest thing to get rid of(!?)
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#9 Anthony Bonner

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Posted 02 May 2012 - 08:16 PM


Either way, the next batch of DAL bond holders will have the refinery at some point in the future, and then they can go and get another tax break to keep it open. Until it goes bankrupt again.

Honestly a nice controlled burn is probably the best option.


Seriously. I can't imagine a bond with that as collateral would be terribly attractive. Not the easiest thing to get rid of(!?)

right now actually not that hard. rates are so low you can pay a huge spread and still end up with what is by any reasonable standard a low cost of borrowing.
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#10 SLBunge

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Posted 03 May 2012 - 12:20 AM

While chattering about this with various colleagues today we were thinking about how you would make a run at this to turn into a good deal. To my knowledge, no NA refinery is aligned to be a primary producer of JetA. It is far less complicated and far less energy intense to produce kerosene than to produce gasoline. If they could find a buyer for the unrefined light streams and/or the diesels and heavier cuts it would be a much simpler refinery with fewer operators etc.

I have no idea if this was on Delta's radar but it is sort of interesting to think about.
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#11 Anthony Bonner

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Posted 03 May 2012 - 12:43 AM

While chattering about this with various colleagues today we were thinking about how you would make a run at this to turn into a good deal. To my knowledge, no NA refinery is aligned to be a primary producer of JetA. It is far less complicated and far less energy intense to produce kerosene than to produce gasoline. If they could find a buyer for the unrefined light streams and/or the diesels and heavier cuts it would be a much simpler refinery with fewer operators etc.

I have no idea if this was on Delta's radar but it is sort of interesting to think about.

You obviously know the refining math better than any of us, but I was under the impression that for many reasons the Delaware river refineries were only still around because of funkiness surrounding gasoline rules and transport in the northeast. For decades the thinking was running them was only better then closing them and having to post terrifying environmental remediation bonds.

Like I think even optimized it would still suck at making kerosene.

If what you are saying is true why wouldn't the prior owners have tried it?
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#12 SLBunge

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Posted 03 May 2012 - 12:25 PM

You obviously know the refining math better than any of us, but I was under the impression that for many reasons the Delaware river refineries were only still around because of funkiness surrounding gasoline rules and transport in the northeast. For decades the thinking was running them was only better then closing them and having to post terrifying environmental remediation bonds.

Like I think even optimized it would still suck at making kerosene.

If what you are saying is true why wouldn't the prior owners have tried it?

From what I know, you are not wrong about why the Delaware River refineries still exist. Particularly the environmental consequences side.

As far as why the prior owners wouldn't have tried it, I imagine the answer is that it wouldn't have made sense unless they had a partner like Delta who was focused solely on JetA. I don't think you could turn a profit doing this but Delta likely isn't thinking of the refinery as a profit center.

One of the things that makes refining difficult is that you have all of these products you have to deal with when processing crude. From asphalt to butane. And you need capacity in order to be able to optimize everything so that what comes in goes out (plus whatever you flare). And the value side of refining, in general, would force you to go to light products rather than heavy (kerosene is sort of mid- to heavy).

So, if all Delta cares about is JetA, they could really focus on crude processing and distillation and then trade or sell the light streams off the distillation column which may help the Delaware River refiners because it will essentially lighten their slate and allow them to produce more gasoline or produce it more easily.

I'm still trying to shake this out in my head. I don't think this idea is completely laughable so I'm trying to figure out how they climb the value curve.
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#13 Anthony Bonner

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Posted 03 May 2012 - 12:57 PM


You obviously know the refining math better than any of us, but I was under the impression that for many reasons the Delaware river refineries were only still around because of funkiness surrounding gasoline rules and transport in the northeast. For decades the thinking was running them was only better then closing them and having to post terrifying environmental remediation bonds.

Like I think even optimized it would still suck at making kerosene.

If what you are saying is true why wouldn't the prior owners have tried it?

From what I know, you are not wrong about why the Delaware River refineries still exist. Particularly the environmental consequences side.

As far as why the prior owners wouldn't have tried it, I imagine the answer is that it wouldn't have made sense unless they had a partner like Delta who was focused solely on JetA. I don't think you could turn a profit doing this but Delta likely isn't thinking of the refinery as a profit center.

One of the things that makes refining difficult is that you have all of these products you have to deal with when processing crude. From asphalt to butane. And you need capacity in order to be able to optimize everything so that what comes in goes out (plus whatever you flare). And the value side of refining, in general, would force you to go to light products rather than heavy (kerosene is sort of mid- to heavy).

So, if all Delta cares about is JetA, they could really focus on crude processing and distillation and then trade or sell the light streams off the distillation column which may help the Delaware River refiners because it will essentially lighten their slate and allow them to produce more gasoline or produce it more easily.

I'm still trying to shake this out in my head. I don't think this idea is completely laughable so I'm trying to figure out how they climb the value curve.

But then why doesn't the entire industry work that way, where when you have these clusters of refinery capacity they each choose their own niche to focus on and then sell their waste products to the other ones?

Don't most refineries have more than one reactor(Is that the right term of art?)
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#14 SLBunge

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Posted 03 May 2012 - 01:30 PM

But then why doesn't the entire industry work that way, where when you have these clusters of refinery capacity they each choose their own niche to focus on and then sell their waste products to the other ones?

Don't most refineries have more than one reactor(Is that the right term of art?)

The industry could work that way but doesn't.

"Reactor" is a specific type of vessel at a refinery. Typically used in hydro-processing where you inject hydrogen into a hydrocarbon stream in the presence of a catalyst. The reaction that takes place results in a more clean burning hydrocarbon stream.

Distillation, hydro-processing (reaction), cracking, etc. are all terms of art.

Not sure what you mean about having more than one reactor. Do you mean multiple pieces of processing equipment that can run oil in parallel?
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#15 SLBunge

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Posted 03 May 2012 - 01:43 PM

Something just popped into my head : taxes.

If Delta is making a claim that they are producing jet fuel for their own purposes, could they pressure the government that they are being taxed twice if taxed first when it goes from their facility to pipeline and second when it is pumped into the planes at the terminal?

A small percentage of relief there would be pretty valuable.
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