Oil refineries at breaking point as fuel slump drags on

Nick Toscano

August 31, 2020

The Age

Australia’s four remaining oil refineries are being pushed to breaking point by a sharp slump in fuel use with operators fearing demand will stay below pre-pandemic levels for the foreseeable future and less air travel is here to stay.

Oil refiners are closing down plants in Asia and America, and there are fears Australian facilities could be next with two ASX-listed fuel suppliers racking up losses of more than $50 million each over the past six months from their refineries in Geelong and Brisbane.

“Aviation demand, which last year was 19 per cent of our business, will certainly take considerable time to come back, and probably to a different level,” fuel supplier Ampol’s chief executive Matt Halliday said.

“For retail fuel demand, Victoria’s stage 4 restrictions clearly have future impact there. We expect further volatility, which is why we are positioned with a very strong balance sheet.”

Viva Energy and Ampol, which have slowed output from their refineries for extended periods in a bid to weather the enormous strain on their profit margins, are now facing the reality of an uncertain and much slower-than-expected recovery in petrol and jet fuel consumption. Parts of the country remain in lockdown, borders are shut and planes are grounded. Mr Halliday said he does not expect the challenges to abate any time soon.

Analysts and industry insiders say the pandemic-driven oversupply and increasingly uncertain recovery prospects raise the risk of permanent refinery closures unless the government steps in with an urgently needed financial lifeline.

“These refineries, without some form of government support, are extremely challenged,” MST Marquee analyst Mark Samter said.

“If it were left up to the equity market, I think they would rather see those refineries close than stay open, but clearly they carry some national significance, so I guess the government has got a decision to make.”

In the past decade, three Australian oil refineries – which process crude oil into refined products such as petrol, diesel and jet fuel – have closed down as the domestic sector struggles to compete against the mega-refineries of south-east Asia with their vastly larger scale and lower operating costs.

“Refining, frankly, is a pretty capital-intensive, relatively unattractive industry from a profitability perspective,” Mr Samter said. “COVID has added another layer to it.”

Federal Energy Minister Angus Taylor is in talks with Australia’s four oil refiners – Ampol, Viva, BP and ExxonMobil – “to ensure the long-term viability of the sector”, a spokesman for Mr Taylor said.

Mr Halliday said he believed the government understood the pressure facing refineries and that the market conditions were likely to “remain challenging”.

“That’s well-acknowledged by the government, and we’re having engagement across government as we talk about the outlook for the sector,” he said.

Mr Halliday said this year’s dramatic fuel demand destruction, which drove down global crude oil consumption by more than 30 per cent, could herald permanent changes and is raising big questions for the sector to face.

“Is aviation going to go back to where it was? No, probably not. There’ll be some level of permanent demand destruction,” he said.

“What takes its place? Will it be people spending more time in their cars, less on public transport … more time on driving holidays instead of aviation travel? There’s going to be a different margin mix within the business and a different distribution of demand.”