Refiners seek decade to adapt to new fuel standard

Peter Ker
May 21, 2017
AFR

Australia’s oil refiners have asked the Turnbull government to give them 10 years to adapt to new gasoline standards that would force regular unleaded petrol to be phased out and cost the refining industry more than $1 billion. 

Among several proposals to reduce pollution and emissions from vehicles, the government has raised the prospect of tightening sulfur content standards in petrol from 150 parts per million down to just 10 parts per million. 

That proposal is a concern for Australia’s four remaining oil refiners, which would collectively have to spend more than $1 billion upgrading their ageing refineries if the new standards were enforced.

Viva Energy chief executive Scott Wyatt said the sulfur proposal loomed as another headwind for his company’s refinery at Geelong in Victoria, which is already under pressure from rising gas and electricity prices.

“It is something that I am quite concerned about in terms of how the government progresses that policy, and if it does, how we transition as a refining business,” he told The Australian Financial Review.

If the government moves to that requirement we will need to invest in desulfurisation capacity at Geelong because we don’t have the units capable of taking all that sulfur out of the gasoline, which will cost us between $250 million and $300 million.

“When it is complete it will have no margin benefit to the refinery other than compliance with government fuel standards. It will actually reduce overall production yields from the refinery and increase our operating costs by about 7 per cent.”

Mr Wyatt said he could understand why the government wants to keep pace with fuel standards overseas, and said the refiners wanted a decade to enact the changes.

“We are not alone in this, there are three other refineries and the industry has proposed to government to phase this out and move towards this new fuel specification by July 1, 2027, which gives enough time to do the work,” he said.

“It will take about five years to implement, two years to plan for then three years of actual construction across the site. It will be the single biggest investment in capacity upgrading at Geelong in decades, and it will employ hundreds if not thousands of people during that time.”

Respiratory irritant

The government is yet to confirm its preferred schedule for the sulfur limits to be enacted, but it suggested two to five years in a recent discussion paper titled “Better fuel for cleaner air”.

A non-profit group called “Doctors for the Environment” said in a submission to the government that sulfur dioxide was a respiratory irritant and the stricter sulfur standard should therefore be enforced by 2020.

Aside from Viva, the stricter standards would affect ExxonMobil (which operates the Altona refinery in Melbourne’s west), BP (which operates the Kwinana refinery south of Perth) and Caltex, which operates the Lytton refinery near Brisbane.

Mr Wyatt said he was encouraged by the industry’s engagement with the government so far, and he hoped financial incentives would be offered to those refiners that adapted to the new fuel specifications quicker than expected.

“The way they have approached it on a number of occasions is to set a compliance date and provide an incentive for early adoption, that is a successful model,” he said. 

“As a principle that is something that we would be very supportive of and we have advocated for from a Viva perspective.

“I have been really encouraged with the engagement we have had [with government] and I think there is good understanding of the implications for our business and the significance of that investment on top of the programs we have got and the challenges we generally face in manufacturing in Australia.”

According to accounts recently filed with ASIC, Viva Energy’s revenue in 2016 was 14 per cent lower than in 2015.

But a $1.37 billion gain from selling property and equipment into the Viva Energy real estate investment trust ensured the company’s profit after tax of $1.21 billion was much improved on 2015’s after-tax profit of $159.8 million. 

Viva is majority owned by Dutch energy trader Vitol, and it acquired the Geelong refinery and hundreds of Australian service stations from Shell in 2014.