Delta to buy oil refinery

[Ought Six]

http://money.cnn.com/2012/04/30/news...-oil-refinery/

[dharma]

Yes, because who says an oil company knows more about running a refinery than an airline? :face palm:

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.

And, if you wanted proof of how totally they fail to understand the market, there it is.

On the other hand, I'll bet Phillips is ecstatic.

[Pablo Escobar]

Shouldn't they have purchased a refinery near their hub?

I know that refineries can be tweaked to maximize certain grades, and in this regard, the math could favor the airline and I can think of several ways to model that outcome.

I guess what they are "banking" on is that the jet fuel they produce is fungible. IE, if they produce it in New York, they can sell it locally to the other airlines, and then buy it where they need it at about the same price, avoiding the shipping costs, and only suffering from some ineffeciencies.

From an investment point of view, it all depends on how much they are able to capture other local airlines with their excess production, with a refinery tweaked to jet fuel maximization.

I would have to see the ratios of pre to post tweaking, with the associated cost breakdowns, in order to model the idea.

Dharma, I know you are in investments, and the obvious, attempting to professionally direct a symphony, when you've only grew up training for and playing baseball, is pretty self evident.

but with all of the refinery closings going on around the US, you would think that you would be able to get a very good supply of experienced refinery managers at a decent cost to at least jump start your new ownership, correct?

[dharma]

One can tweak a refinery to maximize middle distillates (jet fuel/diesel/heating oil/kerosene) at the expense of light distillates (principally gasoline) to some extent, but it's not like you can go 90% one way or the other; more like 60:40, at best. Note that I'm simplifying tremendously here. A lot depends on feedstock, refinery capability, etc., and it's expensive to change the mix very much at all (note they're spending $100 million to do so).

Theoretically, one can turn almost any hydrocarbon molecule into just about any other hydrocarbon molecule, but in reality, it's too money and energy intensive to, for instance, crack the heavy distillates (e.g., asphalt) into more useful molecules—which is why asphalt is plentiful and cheap.

It may not be too hard to hire a refinery manager, but I wouldn't bet on it; the baby boomers are retiring, and there's an entire age cohort after them which trained very few industrial chemists and petroleum engineers.

More to the point, though, Delta plans to make their real return avoiding all those middlemen (what middlemen? Most oil companies are vertically integrated, and margins are razor-thin) and speculators. Refiners love speculators—they allow refiners to lay off risk and decrease price volatility. I'm not really clear on how cutting these guys out is going to help much.

And, most of all: you notice Delta isn't buying from Conoco-Phillips, but from Phillips 66? What's that? It's the entity into which C-P is spinning off all its refineries—because the business is lousy. So, when the experts can't make any money at it, why should a bunch of guys who run an airline (another lousy business) do it any better?

[Samen]

Something to do with tax?

EU carbon tax for airlines.

Drop in a bit of waste oil or algae oil and call it bio fuel.

New York is the place for flights to and from EU, as Pablo said also trade with foreign airlines to get "carbon tax beneficial" fuel in EU.

Did one Google search and China for all...

BIOFUELS REDUCE CARBON EMISSIONS TO AVOID 75% OF THE EUROPEAN “CARBON TAX”
http://www.chinastudygroup.org/biofu...arbon-tax.html

Also emission tradings could come into count.

[Exodia]

"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."

Having been part of an aquisition where the parent company had no experience in the market, I'll put my chips on major growing pains.

[Pablo Escobar]

Now that's an interesting thought samen. Oil consumed within a company could avoid sales and excise taxes, a 20- 30% savings?

[dharma]

Good point about taxes, though I'm not sure how well it will work; New York's laws are ridiculous. For instance, "you must register as an aviation fuel business if you are an aircraft operator that imports kero-jet fuel into New York State in the fuel tanks of its aircraft, for consumption in the state". And, of course, that business owes taxes. Seriously?

In any case, a couple more details: Delta will receive $30 million in state subsidies "designated to improve infrastructure and create jobs". They are also getting pipeline infrastructure that will move jet fuel to their hubs at JFK and LaGuardia Airports as part of the refinery deal.

Delta figures owning their own refinery will cut out $300 million in expenses annually, paying for itself the first year. I'm damned if I can figure out from where those savings are going to come. Either they're right and soon all airlines will own captive refineries, or there's going to be a spectacular mess. It will be entertaining either way.

[Oric]

I know : Cheap gasoline for executives

[Pablo Escobar]

http://www.zerohedge.com/contributed...s-oil-refinery

zero hedge discussion with reader comments.