Who knew that the economic solution for the region's beleaguered oil refineries would arrive on a slow train from North Dakota?
Delta Air Lines, the new owner of the Trainer refinery that is scheduled to reopen later this month, on Thursday became the third fuel producer in the Philadelphia area to announce plans to bring in crude oil by rail from the Bakken oil field in the upper Midwest.
Edward Bastian, the airline's president, told an investor conference in New York that Delta plans to replace some imported oil at Trainer with domestic crude brought in by rail. The cheaper North Dakota crude could enhance the airline's plans to produce its own jet fuel, Bastian said.
"It's very early to draw any conclusions, but this could lead to even larger savings," the airline executive told the Deutsche Bank Aviation and Transportation Conference. Delta is counting on its subsidiary, Monroe Energy L.L.C., to generate at least $300 million a year in savings by refining 80 percent of the airline's domestic fuel needs.
Delta joins a fast-growing queue of refiners who are building unloading facilities and securing rail cars to tie into the North Dakota shale-oil boom, where producers are employing the same hydraulic fracturing method used to extract natural gas from Pennsylvania's Marcellus Shale.
Without sufficient pipeline capacity to get the crude oil to refiners, Bakken producers have resorted to moving the stuff by rail. Rail volumes of petroleum products are 41 percent higher so far this year compared with the same period last year, according to the Association of American Railroads.
BNSF Railway Co. on Tuesday announced it now has the capacity to move one million barrels of crude oil a day out of the oil fields in North Dakota and Montana. Rail tanker cars are in short supply.
"I don't think anyone expected it to grow this fast," said Krista York-Woolley, a spokeswoman for BNSF Railway. "We don't see it stopping."
The rapid expansion of the rail network has taken experts by surprise because moving oil by rail is much more expensive than by pipelines. "I never thought we'd be talking about a million barrels a day of crude oil moving by rail," said Tom Kloza, chief analyst at the Oil Price Information Service.
Kloza estimates that it costs about $16 a barrel to transport crude oil by rail to East Coast refineries. Bakken crude currently sells for about $20 less than oil delivered from the North Sea and Africa, so refiners can make a few dollars more per barrel by replacing the imported crude.
Some analysts question how long North Dakota crude will sell at a discount, but Delta's Bastian said Thursday that nothing structural in the market suggests the Bakken's price advantage will shrink "for the next several years."
Other refineries in the region are rapidly building facilities to unload the 100-car "unit" trains that will carry the crude on a six-day journey across half the continent.
Philadelphia Energy Solutions, the joint venture of the Carlyle Group and Sunoco that this month will take over operations of Sunoco's Philadelphia refinery, plans to build a rail yard along the Schuylkill near 35th and Moore Streets to handle up to two unit trains a day. The refinery could take up to 140,000 barrels of Bakken crude oil a day - about 42 percent of the plant's 330-barrel-a-day capacity.
PBF Energy, which operates the Delaware City Refinery in Delaware, in July postponed a $1 billion expansion of the refinery and instead launched a $60 million rail-unloading project to handle up to 100,000 barrels a day of crude by rail. The refinery has a capacity of about 190,000 barrels.
The Delaware refinery is designed to handle heavy crude oil, which means it may be targeting petroleum extracted from Canadian oil sands. The Bakken oil is a light, sweet crude, more compatible with the Philadelphia and Trainer refineries.
But sweet crude produces more gasoline, which is less profitable for refiners than such distillates as diesel, jet fuel and heating oil.
Kloza, the oil analyst, questions whether Delta can accommodate large volumes of North Dakota crude because it is configuring the Trainer refinery to optimize jet fuel production.