Delta Chases Bakken Crude to Boost Refinery Fuel Savings

Delta Air Lines Inc. (DAL), the only major U.S. carrier that owns a refinery, is trying to buy cheaper domestic Bakken crude oil to boost savings on making jet fuel.

Bakken crude can be purchased at a price similar to or lower than West Texas Intermediate, President Ed Bastian said today at a Deutsche Bank AG Aviation & Transportation Conference in New York. Delta’s refinery in suburban Philadelphia now is supplied with more expensive imported crude from BP Plc. (BP/)

Delta is joining oil exploration and production companies working to tap new North Dakota crude supplies released through so-called hydraulic fracturing. Hess Corp. (HES) and Exxon Mobil Corp. (XOM) are among drillers in a region that had 4,141 producing wells through June 30, according to data compiled by Bloomberg.

“There is likely still a fair amount of skepticism surrounding this,” said Fred Lowrance, an Avondale Partners LLC analyst who has a market outperform rating on Delta. “Refineries have been shutting down in recent years due to an inability to make money.”

Securing lower-cost North Dakota crude would boost Delta’s expected $300 million annual benefit from the facility, Bastian said. Spending for fuel, Delta’s largest expense, rose 15 percent in the first half of this year to $5.54 billion.

“It’s a big opportunity,” Bastian said. “It’s huge. We’re working on it actively.”

Fuel Costs

Jet fuel for immediate delivery in New York Harbor closed at $3.25 a gallon today, 53 percent more than in 2010. The crack spread, or the difference in the cost of crude and refined products, has seen 73 percent compounded growth over the past two years, Bastian said.

“We don’t see that necessarily abating anytime soon,” he said. Delta, the world’s second-largest airline, purchased the idled plant in June from ConocoPhillips (COP) for $150 million to help reduce those bills.

Delta’s Monroe Energy LLC subsidiary will start some units this weekend. Most of the facility’s operations are expected to be running by the end of September, Lynda Rebarchak, a spokeswoman for Pennsylvania’s Department of Environmental Protection, said in an e-mail.

Jet fuel produced by the refinery will cover more than 80 percent of Delta’s domestic fuel needs, and the airline will exchange gasoline and other refined products for more jet fuel through multiyear agreements with BP and Phillips 66. (PSX)

New Sources

Delta believes it can outperform savings estimates by exploring alternative sources of crude, Bastian said today.

“We are looking to bring in crude from the Dakotas at net prices of WTI or lower,” he said. “It’s very early to draw conclusions, but this could lead to larger savings.”

Delta rose 3.6 percent to $9.20 at the close in New York to lead gains in the 10-carrier Bloomberg U.S. Airlines Index. That extended the stock’s advance this year to 14 percent.

“Some of today’s relative upside could be tied to the refinery and oil-sourcing talk,” Avondale’s Lowrance, who is based in Nashville, Tennessee, said by e-mail. “They’ve mentioned in the past that a different mix of oil sources could improve the economics.”

East Coast refiners have traditionally processed more expensive North Sea and West African grades priced versus Brent crude, which has traded at a record $27.88 a barrel over U.S. West Texas Intermediate.

Rail Shipments

Refiners including PBF Energy Inc. (PBF) are shipping cheaper crude by train from the Midwest and Canada to plants on the East Coast. PBF is upgrading its Delaware City, Delaware, plant to be able to handle rail deliveries of 110,000 barrels a day by January, more than a fivefold increase, according to an Aug. 24 e-mailed statement.

Delta is talking with railroads about transporting the crude, Bastian said, without offering specifics. Plains All American Pipeline LP (PAA) will complete a rail terminal in Yorktown, Virginia, next year that can handle 60,000 barrels a day.

For the airline, lower costs for Bakken crude may be a “short-term fix” for higher jet-fuel bills, Chris Barber, a senior analyst at Energy Security Analysis Inc. in Wakefield, Massachusetts, said in a telephone interview.

Building and rerouting pipelines in the next four to five years may expand the flow of Bakken oil to the Gulf and East Coasts, erasing the discount, he said.

Production of Bakken crude oil has almost doubled in the last year, surging to 594,000 barrels a day in June, according to the North Dakota Industrial Commission. The Bakken grade gained $4 to a $6 premium over WTI today, according to data compiled by Bloomberg.

To contact the reporters on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net; Paul Burkhardt in New York at pburkhardt@bloomberg.net

To contact the editors responsible for this story: Ed Dufner at edufner@bloomberg.net; Dan Stets at dstets@bloomberg.net

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