The Federal Government has pledged to prop up Australia's last two oil refineries – after two of the remaining four announced their closures in the past six months.
Prime Minister Scott Morrison announced today a $2 billion support package for the local oil industry, which would be required to maintain sufficient reserves of petrol and diesel for our national security.
Australia is now down to two oil refineries nationally – and one of those is under a cloud, with its future to be decided within days or weeks.
Australia has been running on fumes for the past five years with just four oil refineries in operation since 2015.
Between 2003 and 2015 there were seven oil refineries nationally.
Most of the facilities closed over the past two decades have been converted to import terminals, increasing Australia’s reliance on foreign oil supply.
Last financial year, more than 90 per cent of petrol and diesel pumped at the bowser was imported, much of it from Singapore, South Korea, Japan, China and the US.
It’s a far cry from Australia’s position 20 years ago, when there were eight oil refineries located strategically around the country.
The gradual disappearance of local oil refining capacity has seen fuel storage levels drop dramatically, from 90 days supply to less than 30 days supply.
As with the demise of car manufacturing in Australia in 2016 and 2017 – squeezed out by rising energy prices and labour costs compared to cheaper neighbouring countries – local oil refineries have struggled to remain financially viable compared to larger facilities in the Asia-Pacific region with much greater production capacities and a fraction of our labour costs.
In last week’s budget, the Federal Government reaffirmed its commitment to roll out a rescue package to keep Australia’s two remaining oil refineries operational.
At the time there was little detail on how much the assistance package would cost taxpayers, and whether the subsidies would be passed on to motorists at the bowser.
Information released today estimated the subsidy would amount to up to 1.8 cents per litre in direct taxpayer funded support.
A statement from Angus Taylor, Federal Energy Minister, pledged to introduce “measures to further strengthen Australia’s long-term fuel security”, fund a “refinery production payment to help maintain Australia’s refining capability,” and offer financial support to “assist the refiners to conduct infrastructure upgrades, subject to consultation with industry”.
The plan is to subsidise facility upgrades that will enable the two remaining refineries to produce cleaner fuel to match the current world’s best practice of 10 parts per million of sulphur for unleaded petrol.
These changes weren’t due to be introduced locally until 2027; the next opportunity for facility upgrades is in 2023.
As part of today's support package, the upgrades will be brought forward to 2023, with local refineries ready to deliver 10ppm unleaded to bowsers in 2024.
However, there was a risk Australia could run out of road before either of the above deadlines and instead become a country that relies solely on imported fuel, which government officials regard as a national security risk.
Why the need for cleaner petrol? Even though there are some examples of new vehicles sold in Australia with sensitive petrol particulate filters (PPF), car manufacturers claim they cannot import such vehicles in vast numbers with the latest and most advanced fuel miser petrol engines – which have much lower emissions – because they have been optimised to run on premium unleaded with 10ppm of sulphur.
Under current protocols, Australia’s premium unleaded is allowed to have up to 50ppm of sulphur, and regular unleaded is permitted to have up to 150ppm of sulphur.
This is partly why Australia ranks as the fifth cheapest out of 33 countries in the OECD for unleaded petrol.
For its part, the Australian Institute of Petroleum (AIP) – the lobby group for the oil industry – says it occasionally imports premium unleaded with 10ppm of sulphur bought at distress prices and blends it with Australia’s 50ppm fuel, bringing the sulphur content down to about 30 to 40ppm, based on analysis by AIP.
However, car makers argue they need certainty on exactly which bowsers have lower sulphur content premium unleaded fuel, otherwise they risk engine failures and costly warranty claims.
It’s worth noting our diesel fuel standards were upgraded to 10ppm in 2009. Despite costly upgrades to local refineries, Australia currently ranks as the sixth cheapest in the OECD for diesel fuel.
Nevertheless, there is a fear that the cost of upgrading Australia’s two remaining oil refineries would likely push up unleaded petrol prices at the bowser.
The 95-octane premium unleaded option would in effect become the new normal, which could spark a voter backlash unless the Federal Government can come up with a scheme to offset price rises.
Either way, it seems taxpayers will be footing the bill – if not at the bowser then through the government’s consolidated revenue tax streams.
Energy analyst, Mark Samter, from equities research firm MST Marquee, told the Australian Financial Review earlier this year in the lead-up to the Altona Refinery closure announcement: “All the government support in the world cannot prevent it from being about one-fifteenth of the size of the biggest refineries in the region, nor does it change the fact that Australia is one of the higher cost places in the world to operate a refinery.”
One industry insider believes the Federal Government has approached the overhaul of fuel standards – and support packages for the two remaining local oil refineries – “like holding a hand-grenade with the pin pulled”.
On the one hand, the Federal Government is under mounting pressure to reduce emissions – some of which is only possible with cars that can operate on cleaner fuel, which would come at a higher price.
But nor does any government of the day want to be responsible for petrol prices to go up overnight at service stations across Australia.
Which is why the Federal Government is considering a plan to directly subside the cost of cleaner fuel and facilities upgrades.
However, having gone to the last election with the promise of “no new taxes”, the Federal Government needs to find a way to pay for it.
The challenge will be convincing the public that maintaining local oil refining capacity is a matter of national interest and national security.
Unless Australia wants to become a nation that imports 100 per cent of its fuel, it seems certain we will all be paying to keep the remaining oil refineries afloat.
As for whether or not Australia will be down to one or two oil refineries by the end of this year, the boss of Ampol – whose remaining facility is under a cloud – told the Australian Financial Review newspaper last week it is still ‘‘a big if’’ whether the company can reach a deal on a government support package to stay open.
The Australian Financial Review reported that Ampol chairman Steven Gregg signalled to shareholders “there was still considerable doubt over whether the government’s fuel security measures would be enough to prevent the closure of the Lytton refinery in Brisbane”.
‘‘If – and it’s a big if – we can come to an arrangement with the government on a support package that gives us the chance to reduce the volatility of Lytton, provide more certainty of earnings and therefore more certainty of employment and fuel security, then we’ll look favourably upon that, but that has yet to be concluded,” the Australian Financial Review quoted Mr Gregg as saying. ‘‘When it is, we will come back to the market with an answer. That should be within the next one of two weeks.’’
Analysts told the Australian Financial Review the Federal Government’s support package, which is due to come into effect on 1 July 2021, “will need to be bigger than the 1 cent per litre subsidy offered by the government”.
A spokesman for the Federal Energy Minister told the Australia Financial Review: “The government has worked closely with the fuel industry on the design of the package to secure our (fuel supply), protect motorists from future high prices, and values the fuel security services Australian refineries provide.”
RUNNING ON EMPTY: AUSTRALIA'S OIL REFINERIES OVER THE PAST 20 YEARS
OPEN Geelong Refinery, Geelong VIC (Viva Energy, formerly Shell). Opened in 1954 and remains open after recently accepting a Federal Government assistance package which amounts to a subsidy of 1 cent per litre.
OPEN BUT FUTURE UNCLEAR Lytton Refinery, Brisbane QLD (Caltex/Ampol). Opened in 1964. As of May 2021 its future was uncertain, with a decision due in June 2021. Could be converted to an import terminal.
CLOSING Altona Refinery, Melbourne VIC (ExxonMobil). Opened in 1949. Closure was announced in February 2021 and is due to be closed some time in 2021 and converted to an import terminal. It was one of Australia's smallest and oldest oil refineries.
CLOSED Kwinana Refinery, Freemantle West Australia (BP). Opened in 1955 and closed in April 2021. Due to be converted to an import terminal in 2022.
CLOSED Bulwar Island Refinery, Brisbane QLD (BP). Opened in 1965 and closed in June 2015. Converted to an import terminal.
CLOSED Kurnell Refinery, Sydney NSW (Caltex). Opened in 1956 and closed in October 2014. Converted to an import terminal.
CLOSED Clyde Refinery, Sydney NSW (Shell). Opened in 1925 and closed in September 2012. Converted to an import terminal.
CLOSED Port Stanvic Refinery, Adelaide South Australia (Exxon-Mobil). Opened in 1963, decommissioned in 2003, and demolition announced in 2009 ahead of environmental remediation of the site over the next decade.
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