Delta Deal Guarantees Domestic Oil for Pennsylvania Refinery

Jul 21, 2014 1:46 pm ET

(Updates with analyst comment in eighth paragraph.)

July 21 (Bloomberg) -- Delta Air Lines Inc., the largest U.S. carrier by market value, is trying to cash in on the biggest oil boom in the nation’s history by bringing more domestic crude to its refinery near Philadelphia.

The Atlanta-based airline signed a five-year agreement with Addison, Texas-based midstream company Bridger LLC to supply the Trainer, Pennsylvania, refinery with 65,000 barrels of crude a day, more than a third of the plant’s capacity.

Delta is hoping that greater use of domestic crude will help it turn a profit at the refinery, which it bought from ConocoPhillips in 2012 in an attempt to control prices and supplies for its fleet. U.S. crude production has risen 55 percent since the start of 2010, making prices cheaper than in the rest of the world.

“We definitely believe domestic crude will be competitive versus foreign alternatives,” Graeme Burnett, Delta’s senior vice president for fuel optimization, said by phone July 18. “We want to push the levels of domestic crude as high as we can.”

Trainer is 100 miles (160 kilometers) from New York Harbor, the delivery point for gasoline and diesel futures on the New York Mercantile Exchange. Delta imported about 140,000 barrels of crude a day to feed the plant in April, mostly from Nigeria and Norway.

Brent crude, the European benchmark, was $4.70 a barrel more than West Texas Intermediate in Cushing, Oklahoma, at 1:25 p.m. New York time. Brent futures have settled above the U.S. benchmark every day since Aug. 17, 2010.

Jet Fuel

Conoco shut the refinery in 2011, citing poor economics. Delta lost $41 million operating the refinery in the first quarter and booked $107 million in fuel hedging gains. Delta uses the refinery’s jet fuel and trades the gasoline and other products for more.

The five-year length of the agreement shows Delta’s commitment to the plant despite the losses, said Robert Campbell, the New York-based head of oil products research at Energy Aspects Ltd., a London-based research firm.

“It’s certainly not a move you’d expect from people getting ready to walk away from an investment,” he said.

Bridger is acquiring 1,300 crude-by-rail cars and has a contract to load 80,000 barrels of crude a day from Enbridge Inc.’s rail terminal in Eddystone, Pennsylvania, onto barges that can deliver crude to Trainer. Delta may build a pipeline connecting the Trainer refinery to the terminal, Burnett said.

Lower Price

Bridger will initially deliver Bakken crude from North Dakota to the refinery, Chief Executive Officer Julio Rios said in an interview at Bloomberg’s Houston bureau July 18. The sourcing may change over the length of the contract depending on economics and the refinery’s needs, he said.

So long as the U.S. restricts exports of crude oil, American producers will have to price their crude low enough to be competitive with imports, Campbell said.

“The price of domestic crude will have to adjust lower to make refining profitable,” he said.