Bigger subsidy needed to save Ampol refinery

22^nd February, 2021. AFR

Ampol may need more than double the interim subsidy of 1¢ a litre to keep its Brisbane refinery running after a $145 million loss at the plant last year, which drove down full-year profit at the petrol and diesel supplier by 38 per cent.

Industry sources say the country’s remaining refiners are looking for a subsidy of more than 2¢ a litre from the Morrison government to be able to offer any sort of guarantee to keep the plants open as they struggle with reduced demand and weak margins due to the pandemic. One source said the subsidy would be sourced from a tariff on imports that could translate to 3-4¢ per litre for local production.

Losses at refineries such as Ampol’s Lytton plant in Brisbane mounted during the pandemic.

“My view is still that Ampol would need more from the government than was on offer to save Lytton, quite a large amount more,” said MST Marquee energy analyst Mark Samter.

Ampol has its Lytton refinery in Brisbane formally under review, with a decision due in the June quarter.

Chief executive Matt Halliday would not comment on the quantum of the support the company wanted for Lytton but noted that the recent decisions by BP and ExxonMobil to close their plants put extra pressure on Lytton because swap arrangements for supply with those refiners would fall away.

“As different players move to progress import supply chains, it reduces the size of the available market for local refineries, that’s the challenge,” Mr Halliday told The Australian Financial Review.

“Clearly you can see, given the scale of the losses in the result, conditions are challenged. The reset of those buy-sell or refinery swap arrangements do add further pressure onto Lytton.”

A spokesman for Energy Minister Angus Taylor said the refinery production payment, which was brought forward to January 2021, will support domestic refining over the first six months of 2021, before transitioning to a long-term market mechanism in July.

Lockdowns slammed

“The government is working closely with industry to get the design and value of the long-term production payment right,” he said.

Mr Halliday also took issue with snap lockdowns of cities and states by state premiers, calling for a more co-ordinated and standardised approach to avoid harming the economic recovery and denting consumer confidence.

“We need to have the confidence to be able to manage those outbreaks in a consistent and clear way so that business and people can start making decisions,” he said, pointing to snap lockdowns in Sydney’s northern beaches, Brisbane, Perth and Melbourne within the last six to eight weeks.

“Every time you have a lockdown, even if it’s short and sharp, it affects confidence and that continues to impact our part of the economy in particular.”

Ampol warned of challenging conditions extending into early 2021 after 2020 saw a 56 per cent slump in jet fuel volumes and a 17 per cent drop in wholesale transport fuel volumes. Convenience retail fuel volumes slid 14 per cent.

Shares in Ampol, formerly Caltex Australia, dropped 2.7 per to $25.77 on Monday. The company said net profit on a replacement cost basis – the figure most closely watched by the market – fell to $212 million in the 12 months to December 31. The figure was down from $344 million a year earlier and largely in line with consensus.

The bottom line result, which includes the impact of changing oil prices on the value of inventories. swung to a loss of $485 million. That historical cost net loss also included $337 million of write-downs, mostly announced in the June half.

Mixed reaction

The results drew a mixed reaction from analysts, with Macquarie Equities describing them as “solid” and noting the strong performance in convenience retailing. RBC Capital Markets said they were in line with expectations and highlighted the challenging outlook and “structural headwinds” to the business.

Citigroup’s James Byrne also noted the “soft” outlook for Australian fuel sales volumes and the negative impact of the stronger Australian dollar.

Lytton’s loss of $145 million, flagged by the petrol and diesel supplier in January, compared with a profit of $70 million at the plant in 2019.

Earnings at Ampol’s fuels and infrastructure business excluding the refinery also fell, while earnings at the convenience retailing business rose 43 per cent to $287 million.

“Heading into 2021, we remain focused on cost and capital efficiency and will continue to make decisions to improve returns and deliver growth to shareholders,” Mr Halliday said.

Ampol has refused to accept the government’s interim subsidy available to refiners as it completes its review of Lytton, which could be closed and turned into an import terminal just as BP has decided for its Kwinana plant in Western Australia and ExxonMobil for its Altona plant in Victoria.

Only Viva Energy has accepted the interim subsidy for its Geelong refinery in Victoria, meaning that only its plant is relatively secure out of the country’s four refineries that were running when the pandemic hit.