Delta Air Lines Buys Philadelphia Area Oil Refinery From ConocoPhillips

It’s been a little over two years since Delta Airlines took the plunge into the refining business as part of its fuel cost control strategy. The refinery posted a $19 million profit in the third quarter, but has run into problems complying with the renewable fuel standard.

The refinery was reconfigured to maximize jet fuel output, which Delta uses in its daily operations. The plant also produces diesel fuel and gasoline that it exchanges for jet fuel with a counterparty at market rates. “The jet fuel produced and procured through exchanging gasoline and diesel fuel produced by the refinery provided approximately 148,000 barrels (approximately six million gallons) per day for use in airline operations during the September 2014 quarter,” according to Delta’s financial statements.

Delta’s adjusted jet fuel price for the quarter was $2.90 per gallon, which was a favorable result compared with the $2.98/gallon paid by rival American Airlines. Delta’s total fuel costs for the quarter were higher than the corresponding period last year due to increased consumption and hedging losses, but lower market prices for jet fuel and refinery profits helped temper the downside.

Interestingly, the refinery does not blend renewable fuels and as a result must purchase renewable fuel credits known as RINs on the open market. “The refinery is exposed to the market price of RINs. The price at September 30, 2014 was $0.46 per RIN, which exceeds historical averages. We recognized $18 million of expense related to the RINs requirement in the September 2014 quarter, which is included in the refinery’s results. Additionally, we have accrued $79 million related to our unsettled 2013 and 2014 RINs obligation as of September 30, 2014.”

The airline accused an undisclosed party of manipulating the RIN market in its quarterly financial statement and is “pursuing legal, regulatory and legislative solutions to this problem.”

Delta still faces significant exposure to the market price of jet fuel because of its refined product swap arrangement. The reconfigured plant produces greater volumes of jet fuel than before Delta purchased it and the company feels these incremental volumes increase overall market supply and thus put downward pressure on jet fuel prices. “We believe that the increase in jet fuel supply due to the refinery’s operation has decreased the overall market price of jet fuel, and lowered our cost of jet fuel.”

However, that also reduces its competitor’s prices. It will be interesting to see how the recent downward trend in oil prices impacts Delta’s hedging strategy, the refinery’s operations and the RFS litigation.

Refinery representatives were not available to comment.