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Delta, Carlyle to Source Railed Bakken Crude


Bypassing both Brent and WTI, Delta and other new owners of East Coast refineries may opt to use Bakken.

MINYANVILLE ORIGINAL As Delta Air Lines (DAL) starts its Trainer refinery three months after its famed purchase of the then-idled 185,000 barrel-per-day (bbl/d) facility from Phillips 66 (PSX), it revealed last Thursday the possibility of jumping on the Bakken bandwagon in an attempt to source cheap crude oil from the North Dakotan shale formation.

Monroe Energy, Delta's subsidiary which acquired Trainer, currently obtains more expensive oil from Europe for the refinery – Brent crude settled on Friday at an $18.32 premium to West Texas Intermediate ("WTI") crude, which tends to trade at a price near that of Bakken crude. Both Bakken and WTI crudes are "landlocked"; as production continues to increase without corresponding growth in offtake capacity, the result is a supply glut and consequent price discount to Brent crude.

The nearby Philadelphia Girard Point refinery is currently owned by Philadelphia Energy Solutions, a joint venture of The Carlyle Group (CG) and Sunoco (SUN). In what is expected to be a paradigm of increasing reliance on domestic energy, it also plans to source Bakken crude in addition to Marcellus shale natural gas as inputs for operations.

During the Deutsche Bank Aviation and Transportation Conference last Thursday, Delta's president, Ed Bastian, provided an update on the company's third quarter financials and operations. The presentation included an announcement that its newly acquired Trainer refinery "is on track to begin jet fuel production by the end of September." Soon afterward, he mentioned that the company is "looking at options to be able to bring in Bakken crude from the Dakotas at net prices that would be equivalent to WTI or even lower," which would "lead to even larger savings."

If Delta's plan to utilize Bakken crude is ultimately carried out, it would effectively be placing a bet that the WTI / Brent spread (price difference between the two crude grades) will not converge in the near future.

Delving deeper into the company's financials, Bastian also explained that while non-fuel and crude oil costs rose 1% and 10%, respectively, over the past two years, costs related to the jet fuel crack spread (difference in price between jet fuel and crude oil) increased by 73% during the same time period. For this reason, Delta argued that purchasing the refinery was a sound investment decision, as it would provide significant savings in the way of stemming losses that were the result of directly obtaining expensive jet fuel for its fleet.
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