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* Crude distillation unit began operation last week
* Refinery seen returning to full operations
By Janet McGurty
NEW YORK, Sept 24 (Reuters) - Delta Air Lines Inc's 185,000-barrel-per-day refinery in Trainer, Pennsylvania, has begun producing jet fuel, a source familiar with the situation said on Monday.
Last spring, Delta made the bold move of buying a refinery from Phillips 66 to control fuel costs for its fleet.
The refinery, which was shut in late September 2011, has been undergoing maintenance and upgrading, and began restarting earlier this month.
The refinery restart is within the expected time frame given by Delta's Monroe Energy earlier this year.
Last week, the crude distillation unit began operation but at half rates, ahead of the restart of the second crude heating unit.
The sulfur recovery unit restarted, but unforeseen issues with the 53,000-barrel-per-day gasoline-making fluid catalytic cracking unit will delay the restart of that unit, the source said.
The second crude oil heater is undergoing extensive maintenance and is expected to come back up in a week or so, the source said.
Delta bought the refinery last spring from Phillips 66 to control fuel costs. ConocoPhillips shut the plant at the end of September 2011 as it sought to minimize exposure to high-cost, low-margin East Coast refinery operations.
Although the plant was preserved at shutdown to be able to be restarted with a minimum of damage to piping and units, problems with the gasoline-making fluid catalytic cracking unit were found during a major turnaround on the unit that began in early July.
Delta expected to spend about $100 million to increase jet fuel production at the refinery to 52,000 bpd, or about 32 percent of output, while reducing production of gasoline.
Monroe signed a three-year deal with BP Plc to supply crude oil to the facility. Under a product-offtake deal, Monroe will exchange gasoline and other refined products from Trainer for jet fuel from Phillips 66 and BP elsewhere in the country through multi-year agreements.
Delta is the first U.S. airline to buy an oil refinery, aiming to manage rising fuel costs. The airline expects the refinery to reduce its annual fuel bill, which reached $12 billion last year, by $300 million.
Delta President Ed Bastian told a Deutsche Bank conference earlier this month that Delta could save even more as the carrier was looking to bring in Bakken crude from North Dakota to supply the refinery at prices that could be equivalent to West Texas Intermediate or lower.
The refinery currently processes more expensive crude from the North Sea and Africa.