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Jet Fuel Intelligence® Energy Intelligence JET FUEL INTELLIGENCE® Copyright © 2019 Energy Intelligence Group. All rights reserved. Unauthorized access or electronic forwarding, even for internal use, is prohibited. Vol. 29, No. 2 www.energyintel.com January 14, 2019 Delta Shores Up Supply Security With Monroe Energy Subsidiary Contents Opec Cuts Start to Bite 2 Six years after Delta Air Lines purchased the mothballed Managing Price Risk 4 Trainer refinery in Pennsylvania, the benefits of vertical Japanese Buy SAF at SFO 4 integration from the refinery to the wingtip are paying dividends — both strategic and financial. Delta’s wholly Pacific Snapshot 5 owned subsidiary Monroe Energy acts as “a strongly correlated hedge on middle distillate production” for the cant loss like most East Coast refineries. As a wholly owned airline, according to its Chief Financial Officer Patrick subsidiary, Monroe Energy has its own board of directors Callan, who took over that role early last year after man- that oversees the refinery’s operations and finances and aging Delta’s fuel purchasing in Atlanta for five years. reports to Delta Air Lines. All of Monroe’s jet fuel output is Delta bought the defunct Trainer plant from ConocoPhillips sold to Delta on an arm’s-length basis linked to New York in mid-2012 and transformed the second-oldest still-opera- Harbor spot markets. The airline sells excess volume tional refinery in the country into a jet fuel machine, with a onward at New York area airports including JFK and 20% jet fuel yield that is double the typical 10% rate across Newark to Delta’s joint-venture partners such as Air France- the US downstream sector. The plant has a nameplate capac- KLM, Aeromexico and others. JFK and LaGuardia are Delta ity of 185,000 barrels per day but is operating at 200,000 b/d hubs. Along with Newark, the three airports serving New and produces around 40,000 b/d of jet fuel — up to 40% of York City account for nearly 10% of total US jet fuel East Coast production. Supply security was a prime strategic demand of about 1.7 million b/d and are growing by at least motive for the purchase, since Delta’s vast operations at air- 2.4% each year: JFK is the largest with 85,000 b/d, followed ports along the East Coast would have been compromised by Newark at 60,000 b/d and LaGuardia with 24,000 b/d by yet another refinery closure following widespread down- that is set to climb sharply once a long-standing rule that stream shutdowns in that region over the last dozen years. restricts flight distances is lifted. The airline currently needs 260,000 b/d of jet fuel to supply The ability to self-supply provided another key moti- its global operations. Callan tells Energy Intelligence that vation for the refinery purchase. Aside from JFK, volumes from Monroe effectively provide a hedge for 30% LaGuardia and Newark airports in the Northeast of its exposure to fuel price risk. Over the last five years, region, Delta supplies its own jet fuel at Boston’s Logan Delta has shaved an average of $200 million from its fuel Airport from the Monroe plant, shipped via barge expenses or some 5¢ per gallon due to direct supplies and down the Delaware River from Marcus Hook, exchanges from Monroe. Pennsylvania then along the East Coast into Boston Harbor. Callan says that supply chain represents signifi- Supplying New York Airports cant cost savings in the relatively high-priced Boston mar- Delta paid $180 million for the plant, including $30 ket, which is also supplied from Canada by Irving Oil from million provided by the state of Pennsylvania under an its Newfoundland refinery due to Canada’s exemption employment initiative — an obligation that has now been from the Jones Act. BP, Royal Dutch Shell and Valero also paid off. The airline has made capital outlays of some market jet fuel at Logan. Shipping restrictions under the $80 million-$100 million a year to operate and upgrade Jones Act that require US-flagged vessels for intercoastal the refinery. The plant was shut down for a comprehen- shipments prompted Monroe to take delivery of a mid- sive maintenance overhaul in the fourth quarter of 2018, range tanker with a 310,000 barrel capacity. The US in what now looks like fortuitous timing but was planned Constitution was built at the General Dynamics shipyard for that seasonally weak period for refining margins. in San Diego — one of only two facilities left in the coun- With gasoline trading at a discount to Brent crude for much try building large Jones Act ships, along with Southwark of the last quarter, the plant would have incurred a signifi- in the Philadelphia Naval Yard. New York Tel.: +1 212 532 1112; Fax: +1 212 532 4693. Sales: [email protected]. Customer Service: [email protected]. London Tel.: +44 (0)20 7518 2220; Fax +44 (0)20 7518 2221. Singapore Tel.: +65 6538 0363; Fax: +65 6538 0368. Dubai Tel.: +971 4 364 2610. Moscow Tel.: +7 495 604 8279. Houston Tel.: +1 713 222 9700. Washington Tel.: +1 202 662 0700.Website: www.energyintel.com January 14, 2019 www.energyintel.com Page 2 Sourcing Crude Feedstock an assortment of oil firms, pipeline companies and think Oil market dynamics at any given time determine how tanks, the NPC committee is charged with determining how Monroe Energy sources crude oil for the refinery. At the federal infrastructure dollars should be spent to buttress US moment, feedstock is split 50-50 between domestic and for- supply security. Callan says his participation on the Supply- eign supplies of light, sweet crude coming mainly from Demand Resiliency team is “a great opportunity to highlight Nigeria and other countries in West Africa. The the pinch-points all along the jet fuel supply chain that threat- Constitution brings in domestic supplies from the Gulf en to shut down airports on a daily basis.” Coast, while Monroe also delivers shale oil from the Permian Basin in West Texas by railcar into a depot near the refinery in Marcus Hook. At the time of the refinery pur- Spot Cargo Markets — chase, the wide gap between West Texas Intermediate (WTI) Opec Cuts Start to Bite and Brent made the economics of railcar delivery viable. But those shipments dried up in 2014 when the differential nar- Oil prices are up by more than a fifth since late December rowed significantly. Callan says that railcar deliveries are fea- as Opec production cuts begin to bite. Key Saudi Arabian sible at a spread of around $8 per barrel, which is now the case oil exports are expected to drop to 7.2 million barrels per and is likely to continue through 2019 given current oil market day in January and to 7.1 million b/d in February after hit- dynamics. Monroe is well-placed to benefit from the expected ting a record 8 million b/d in November, Saudi Energy spike in the middle distillate complex from the impending Minister Khalid al-Falih said at a press conference in Riyadh switch in the global shipping industry from high-sulfur fuel oil on Wednesday. “We are serious about restoring balance to the to low-sulfur marine diesel that takes effect from Jan. 1, 2020 market,” al-Falih said. “We are concerned about volatility in (JFI Oct.29’18). Depending on how the situation plays out, the oil market ... We have seen peaks and drops in prices [that Callan says he would not rule out maximizing diesel output are] completely unjustified by the fundamentals,” he added. and buying jet fuel in the open market to benefit from any International Benchmark Brent closed at $61.68 per barrel spike in diesel differentials in the run-up to the spec change. Thursday, up $5.73/bbl on the week and after dropping below But he emphasizes that any benefit to the refinery would help $50/bbl in late December. US price-pin West Texas offset higher fuel bills paid by Delta, as jet fuel prices rise in Intermediate saw gains of $5.50/bbl last week to finish at tandem with any diesel spike (JFI Oct.8’18). $52.59/bbl Thursday. Opec and its non-Opec partners, led by Even though the refinery was configured to mainly pro- Russia, on Dec. 7 agreed to cut production by 1.2 million b/d duce gasoline and diesel for most of its 95-year existence, during the first half 2019, but some traders feared the cuts did those products are superfluous to the plant’s prime objec- not far enough and oil prices languished last month. Al-Falih tive of producing jet fuel under Delta’s ownership. has not ruled out the possibility of extending the deal beyond Monroe trades the refined product output other than jet its midyear expiry but said any action to restore market stability fuel with other firms in exchange for more jet fuel under a could swing either way. United Arab Emirates Energy Minister complex web of exchange deals that can involve, for Suhail al-Mazrouei earlier said the Opec-led deal would be suf- instance, trading gasoline in New York Harbor for jet fuel in ficient to balance oversupplied global oil markets, but warned Los Angeles. For several years, Monroe had a deal with that the US-China trade war and rapidly growing US shale oil Phillips66 and BP whereby those firms took all products production remained potential threats to prices this year. besides jet fuel for their own systems or trading on spot mar- London-based traders tell Energy Intelligence that oil kets.
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