Delta hires consultant to study refinery options

March 14, 2017 11:50 AM

Delta Air Lines has hired a consultant to assess the impact on jet fuel prices if the carrier sells or closes the Philadelphia-area refinery it purchased five years ago to keep fuel affordable, two sources familiar with the process said.  

They said the consultant will also study other scenarios involving jet fuel prices and the refinery sector, including the impact if other refineries close.

The U.S. East Coast refining industry is fighting a battle to survive, with concerns about a second wave of plant closures after four refineries shuttered in the past decade due to the rising costs of acquiring crude.

Dallas-based consultancy Baker & O’Brien Inc was asked to perform a financial valuation of the refinery's assets and study other scenarios, such as other regional refineries closing and the financial impact of new emissions regulations, the sources said.

Baker & O'Brien did not immediately respond to a request for comment. 

Delta, the world’s largest airline, shocked the industry in 2012 when it rescued the 185,000 barrel-per-day Trainer, Pennsylvania, refinery from near-closure, arguing in part that jet fuel prices in the region would spike if the plant closed.

In a statement to Reuters, the airline confirmed that it had hired a consultant to look at the refinery business, but it did not name the consultant and added that it was a routine assessment and not a precursor to selling or closing the plant. 

“Delta has said publicly many times that we are committed to the refinery and that position hadn’t changed," Delta spokesman Trebor Banstetter said, in a statement. "The study was commissioned as a routine evaluation of our investment five years after the refinery was purchased."

The refinery continues to perform as expected as part of the company's broad fuel management strategy, he added.

After profitable years in 2014 and 2015, Delta's refinery lost $125 million last year as refinery industry margins collapsed. The company reported overall net income of $4.01 billion for the year, so the refinery's loss was minuscule for its balance sheet.

Skeptics argued in 2012 that Delta's purchase subsidized competitors, who could enjoy the benefits of lower jet fuel prices without the burden of running a refinery.

The plant’s manager told employees last year that refinery losses were offset by savings for the airline in jet fuel prices, saying the company was going to continue to maximize jet fuel production in the New York market to keep the pressure on prices.

"This negatively impacts our refinery economics, but greatly helps reduce Delta’s fuel cost," refinery manager Jeff Warmann wrote then.

As of December, Delta had decided to start marketing its own gasoline and diesel fuel produced at the refinery, rather than swap it under existing contracts. It was a signal the airline was trying to find ways to mitigate losses at the refinery.

Baker & O'Brien is one of the several firms that bid for the work, according to people familiar with the process. Several consultancies based in Texas focus on helping companies navigate strategy related to their refining operations. Often, these consultancies work with companies that do not have the capacity to do such studies in-house.

The work was authorized by Delta from its Atlanta headquarters, not by Monroe Energy, the refining subsidiary, sources said.

Ed Hirs, an energy economics professor at the University of Houston and a skeptic of Delta's refinery purchase, said the company's board was willing to overlook the refinery's issues when it was making money, but losses will now draw more scrutiny.

"From everything I've seen, the refinery has not been able to pay for itself," Hirs said.

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