Delta to buy oil refinery

@CNNMoney May 1, 2012: 11:23 AM ET

NEW YORK (CNNMoney) -- Delta Air Lines announced plans Monday to purchase an oil refinery outside of Philadelphia, a novel approach to reducing its fuel costs.

A Delta spokesman said the company believes the purchase is the first of its kind by a major U.S. airline.

Delta (DAL, Fortune 500) will buy the Trainer refinery for $150 million from Phillips 66 (PSXWI), a company that is set to be spun off from energy firm ConocoPhillips (COP, Fortune 500) on Tuesday. The purchase is expected to be finalized by the end of June.

"Acquiring the Trainer refinery is an innovative approach to managing our largest expense," Delta CEO Richard Anderson said in a statement. "This modest investment, the equivalent of the list price of a new widebody aircraft, will allow Delta to reduce its fuel expense by $300 million annually and ensure jet fuel availability in the Northeast."

Delta said it intends to spend $100 million to convert the refinery's existing infrastructure in order to maximize jet fuel production. The site, it noted, offers easy access to New York airports and Delta hubs LaGuardia and JFK.

ConocoPhillips shuttered the Trainer refinery in the fall. Refineries throughout the Northeast have been suffering because they are old and cannot process the cheaper, heavier types of oil that are increasingly in supply from Canada's oil sands, Saudi Arabia, Venezuela and elsewhere.

Richard Soultanian, an energy analyst and co-president at NUS Consulting, called the acquisition "a gamble." Delta, he said, is attempting "to take greater control over one of their biggest inputs," cutting out the costs added by speculators and marketing by intermediaries.

"Owning and operating a refinery is a very different business than what they're accustomed to, so I'll be curious to see how they do that," Soultanian said. "It could be a brilliant move, or it could be an absolute disaster -- only time will tell at this juncture."

BP (BP) will supply the crude oil refined at the facility, which will be operated by Delta subsidiary Monroe Energy. Jet fuel production is expected to begin during the third quarter of this year.

The facility will also produce other products, such as gasoline and diesel, that Delta will exchange for jet fuel produced by BP and Phillips 66. These exchanges, combined with the refinery's jet fuel output, will cover 80% of Delta's fuel needs in the U.S., the company said. To top of page

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