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Policy needed to ensure Australia’s fuel security

16/09/2020 by Nigel Malcolm in Industry news

If the coronavirus has taught us anything it’s that unexpected global events can have major unforeseen consequences for all of us, and that it’s worth insuring against such things with policies, procedures and infrastructure at the ready, should the worst occur.

The US learnt that lesson the hard way when the wealthiest country in the world found itself flatfooted and unable to cope with the pandemic. That was partly due to an earlier decision to close the country’s Global Health Security and Biodefense unit, a team of experts responsible for pandemic preparedness in that country.

Now the thinking may have been that the unit was just another piece of unnecessary bureaucracy – who needs it after all? It’ll probably never happen. If only they’d taken note of the old Boy Scout’s motto: “Be prepared”.

Australia, by contrast, was reasonably well prepared to cope with the pandemic, but there’s another potential global crisis for which we’re less prepared, and that’s a threat to our fuel supplies.

Four old refineries

Our ability to refine crude oil into petrol and other fuels now depends on just four refineries: Mobil’s Altona refinery in Melbourne; Viva Energy’s refinery in Geelong; Caltex’s Lytton refinery in Brisbane and BP’s refinery in Kwinana, WA.

By global standards they’re old, small and inefficient. When it comes to the economics of refining oil, size matters. Bigger refineries produce fuel at a lower average cost per litre because those fixed costs of producing it are spread over more litres of fuel.

To put the size of Australia’s refineries into perspective, Jamnagar, in India, is the world’s largest refinery, producing 1.24 million barrels per day. That’s roughly a quarter of a million barrels a day more than Australia uses each day, and almost 10 times the production of Australia’s largest refinery in Kwinana.

Right now those Australian refineries are under enormous pressure, with demand for fuel well down as a result of the pandemic. Demand for aviation fuel has collapsed catastrophically. In the face of it our refineries have responded by cutting back production and extending maintenance closures. Viva Energy’s Geelong plant, Australia’s second largest, is losing money at a rate that its chief executive, Scott Wyatt, has described as unsustainable.

Vital role

But despite that our remaining four refineries play a vital role in our fuel supplies, producing 65% of our fuel needs. They’ve helped ensure a degree of fuel security in an increasingly uncertain world, but right now our national fuel security is looking pretty precarious. Australia only has enough fuel reserves in storage to last around 50-odd days at best, though in 2018 that got as low as 18 days. It’s well below the 90 days it’s obliged to store under an agreement with the International Energy Agency, and that puts us at risk in global emergencies and uncertain supply.

Back in March this year the Australian government struck an agreement with the USA allowing us to share their emergency fuel reserves in the event of a national crisis. While that can’t be a bad thing there are some obvious problems with it. Firstly, how realistic is it? If it comes to the crunch can America really be relied on to supply Australia’s fuel needs when their own may be under threat? Finally, having our emergency fuel reserves stored in another country just doesn’t offer the same security as having it on our own shores.

In a time of crisis the security of our transport fuel – petrol, diesel and aviation fuel – is absolutely crucial, and nothing beats the security of being able to refine it in our own refineries right here in the country. The problem is we’ve been shutting down our refineries for years. Most recently it was Bulwer in 2015, but before that there was Kurnell in 2014, Clyde in 2012, Port Stanvac in 2009, Matraville in 1985, and Westernport in 1984. We’re now down to half the number we had as recently as 2003.

Now that’s not necessarily a bad thing, because it improves the financial viability of the remaining refineries as the less efficient ones leave the market. But it does raise the difficult question of where it’s all going to end? In the case of transport fuel, narrow economic considerations alone shouldn’t be the be-all and end-all, and they certainly shouldn’t trump national security concerns and the broader economy, when it comes to government policy.

Small, inefficient, old

The central problem for Australia’s refineries is that they’re small, inefficient and old – very old in fact. Mobil’s Altona refinery dates back to 1949 and BP’s plant in Kwinana to 1955. Even the youngest was built way back in 1965. They simply can’t compete with the new, modern mega refineries in India and Singapore, which means it’s more cost effective for oil companies to simply import refined fuel from them.

That increasing reliance on foreign supply for our transport fuels leaves our society and economy increasingly vulnerable to disrupted supplies in the event of an international crisis, and right now we’re seeing how easily that can happen. But despite that, successive Federal governments seem remarkably laid-back about the problem, content to rely on fuel supply chains they think are diverse and well established, and happy to let the market sort it all out.

In an increasingly uncertain world that “she’ll be right” approach is just not good enough. We need Canberra to step up and address the problem and work with the industry to find solutions that will modernise and enhance our refining capacity while improving Australia’s fuel security and providing transport fuels for business and consumers at an internationally competitive price.

The government recently announced a plan to increase diesel storage onshore as well as a $211 million rescue package for the local oil refining industry. There’s also a new obligation on fuel companies to store a minimum number of days’ worth of fuel within the country.

That’s a useful start, but what’s also needed is governments across Australia committing to support a percentage of local product from our Australian refineries. That would strengthen demand for fuel from our local refineries and bolster their chances of surviving in a competitive world with bigger, more modern and efficient foreign competitors. Right now, with low prices and low demand for fuel they need all the help they can get if they’re to survive and help ensure Australia’s vital fuel security.

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