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Imperial weighs sale, conversion of Dartmouth refinery

Imperial Oil's Dartmouth refinery is partially obscured by Arctic sea smoke rising from Halifax harbour on Monday, Jan. 24, 2011.

Andrew Vaughan/The Canadian Press

Oil companies are pulling back from refining. Airlines are getting in.

Imperial Oil Ltd. put a "for sale" sign on its Nova Scotia plant Thursday, continuing an industry restructuring of the highly competitive North American refining industry.

Delta Air Lines Inc., meanwhile, said its recent purchase of a New Jersey refinery is a way to save on soaring fuel costs, which have hammered the airline industry's bottom line.

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Refineries on the East Coast have been hit hard by high international crude prices, slumping demand and tough competition from offshore rivals as well as domestic refineries that process discounted North American crude.

Imperial Oil – Canada largest refiner – said Thursday that it hopes to sell its 88,000-barrel-a-day plant in Dartmouth, and if it can't find a buyer, would consider converting it to an import terminal.

"The Dartmouth refinery operates in the highly competitive, oversupplied Atlantic basin, which is open to significant global competition," Imperial vice-president Gilles Courtemanche told a news conference.

"Demand has declined in recent years, and despite tremendous effort by our employers, the refinery has not met financial expectations and returns," he said, adding it has been losing money for years.

The news in Nova Scotia comes as oil companies move to sell or shutter three refineries in the Philadelphia area, and as plants in Europe and the Caribbean are being closed. Two years ago, Royal Dutch Shell PLC converted a refinery in Montreal to a terminal to handle imported petroleum products after failing to find a buyer, throwing hundreds of employees out of work.

Mr. Courtmanche said the company has a list of potential buyers – possibly including non-refining companies – but cautioned that only one of every two refineries that have been put on the block in the Atlantic market has sold.

The Dartmouth refinery purchases its oil from producers offshore Newfoundland as well as foreign suppliers. It employs about 400 staff and contractors.

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Delta Air Lines, meanwhile, purchased ConocoPhillips Co.'s refinery in Trainer, Pa., for $150-million (U.S.) and plans to spend another $100-million to upgrade it. Delta said the deal will allow it to reduce soaring costs of jet fuel.

Jet fuel costs rose 10 per cent in the past two years, but the crack spread – the difference between the price of crude and refined fuel products – has soared 73 per cent in that period, Delta president Ed Bastian said Thursday.

"The refinery is a bold idea," Mr. Bastian told an investor conference in Boston.

It will supply 80 per cent of Delta's U.S. jet fuel needs and cut $300-million (U.S.) out of the airline's annual $12-billion fuel bill. Fuel is the biggest expense for airlines and generally represents about one-third of their operating costs.

Gasoline demand in the U.S. market is at 20-year lows, Mr. Bastian noted. But airlines have no choice but to fill up their planes with jet fuel, even if one-third of the seats are sitting empty.

To get the $300-million by buying new, more fuel-efficient airplanes instead of investing in the refinery, Delta would have to spend $2.5-billion and buy 60 new-generation aircraft, he said.

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One key challenge for East Coast refiners is the differential in crude costs – with internationally traded crudes selling at more than $15 (U.S.) a barrel more than landlocked North American oil. That differential has allow Midwest refineries to grab a bigger share of the market for gasoline, diesel and other products.

As a result, refiners are eager to secure access to cheaper crude from the North Dakota and Canada, and have been using rail cars and Great Lakes tankers to move crude beyond the reach of current oil pipelines.

Enbridge Inc. is already planning to reverse the flow of a key pipeline in Ontario to bring Western oil to Imperial's refinery at Nanticoke. And this week, the company said it will reverse that Line 9 pipeline back to Montreal to supply domestic oil to Suncor Energy Inc.'s refinery in that city.

Mr. Courtmanche said Imperial expects the large price differential between North American crudes and international ones to shrink considerably once pipeline companies open new access to the U.S. Gulf Coast from the oversupplied hub in Cushing, Okla.

Enbridge and its partner, Enterprise Products Partners LP announced Thursday the completion of their plan to reverse the Seaway pipeline, which will carry 400,000 barrels a day from Cushing to Texas.

But the Imperial executive said the company is not motivated by that temporary phenomenon, but rather by the prospect of continued weak demand in northeastern North America and increasing competition from both domestic and foreign refiners.

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