Vertical Integration

A bit off from our normal topic, but I was quite surprised to hear this morning that the Conoco-Phillips refinery, which has been up for sale, found a buyer, and that buyer is Delta Airlines. The refinery has pipelines going to Philly, JFK and LaGuardia, two of which are Delta hubs. Delta claims this will supply 80% of their domestic fuel needs. Wow. If this works, I wonder if you’ll see other airlines buying their own refineries. Apparently they also have a deal with BP to swap non-jet fuel products for more jet fuel, given that you can’t take crude and make exclusively jet fuel.

It’s partially a fractional distillation process, and you get what’s in the crude, essentially. You can crack your way to lighter hydrocarbons, but can’t go from lighter to heavier. The local angle is, the folks who worked at those refineries will get to stay in business. As the article mentions, refineries have been closing in this area because they are meant to take more expensive sweet crude, and find it difficult to compete with refineries who can deal with heavier, cheaper crude. So what Delta is attempting here is a bit of a risk.

13 thoughts on “Vertical Integration”

  1. I work at the Sunoco Philadelphia refinery. We are basically two refineries that were tied together back in the ’90s. We’re the last refinery standing at the moment.

    Anyway, our “barrels” (42 gallons of crude = 1 barrel) are divided into six parts, refered to as 6-3-2-1. From each barrel, we can configure the process units to make 50% gasoline (3), 40% middle distillates (diesel, kerosene, and jet fuel)(2), and the other 20% is either light ends such as butane or heavy bottoms such as asphalt (1). But the 20% is mostly light ends because the cracker can pretty much turn asphalt into gasoline and diesel. The light ends are used as fuel gas for the yard.

    The other configuration yields 50% middle distillates, 40% gasoline, and 20% light ends/heavy bottoms.

    I’m not 100% sure, but I believe you are incorrect about not being able to make longer hydrocarbon chains from lighter ends. We have “reformer” units and I believe that they do just that, with some limitations. That’s part of how we are able to change the ratio of gasoline to diesel that can be produced from a barrel of crude. Again, I’m just a mechanic there, so I’m not a process expert, but this is my understanding.

    1. I’m not 100% sure, but I believe you are incorrect about not being able to make longer hydrocarbon chains from lighter ends. We have “reformer” units and I believe that they do just that, with some limitations.

      I might be, I’m certainly not an expert either. I’m the first for several generations to not work in oil.

      1. I’m not an expert, but I do remember enough of my organic chemistry, I think. Count the carbons in the reaction chemistry section. The standard encoding of organic molecular diagrams is that each carbon is attached to four other atoms (what the double bonds in rings really mean can be ignored for now) and hydrogens are assumed to make up the count.

        In the first three reactions the number of carbons remains the same, they are just rearranged into structures desired for blending into gasoline. Only the last reaction is different, it cracks long chain paraffins into shorter ones.

        So at least here there’s no gluing together of smaller molecules into larger ones. Prompted by these refinery closings, I’ve been reading up on this and it seems that the big payoffs are in cracking the heavy stuff into lighter, even “light” crude has a lot of many carbon molecules (read up on e.g. coking). Heavy crude is I gather more often sour as well.

        Sour vs. sweet referrers to how much sulfur is the oil; it’s … undesired in outputs and as mentioned in the article death to the catalysts used in reforming and probably others.

  2. It’s 80% of all their fuel needs in the North East. Not system wide. MY GF is delta. They can sell off or swap with others to offset costs on what they can’t supply directly.

        1. Oh, just poking some fun.

          Still, you were internally consistent with the numbers, and spelled correctly, which is more than I can sometimes do sober.

  3. Vertical integration rarely works as intended.

    If you “sell” yourself fuel from your refinery at below market prices to subsidize your flights, the difference between your cost and what you could sell the fuel for is a cost just as sure as buying fuel on the open market because you have foregone revenue.

    If a flight is only profitable with subsidized fuel from that arrangement, you’d be better off canceling the flight and selling the fuel because then you lose the maintenance and personell costs of flying the airplane…

  4. I don’t think this is a very good idea, but it might work. The cultural requirements to run a refinery well are not usually found in airlines, and vice-versa, and refining has not been real profitable for the last several years. Adding a money loser op to another money losing op makes for a bigger money losing op, usually.

  5. I understand Delta got a great price for the refinery (but of course, it was a buyer’s market for the property). What I don’t understand is why Pennsylvania had to further sweeten the deal with $30 million in grants – not loans, but outright grants. I know unemployment payments to the laid off workers would have been substantial in the aggregate, but would state aid have been to the tune of more than $30 million? Does the state have to pony up to ANY employer who threatens to close a plant or reduce its workforce (see, for example, the Philadelphia Inquirer, which got $8 million to move to another office in Philly, and the Akers shipyard, which has gotten I forget how much dollars to build a ship on spec.)

    1. @Jim
      Yeah, welcome to “unregulated” laissez faire American corporatism….. Er…capitalism……

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