Taxpayers pay to stockpile oil, keep refineries going

Andrew Tillett and Angela Macdonald-Smith

Sep 14, 2020

AFR

Australia’s four remaining oil refineries will be subsidised to stay open while new tanks will be built to boost diesel storage under a $2.5 billion plan to strengthen the nation’s fuel security and prevent crippling shortages.

Fuel companies will also face new obligations for storing a minimum number of days worth of petrol, jet fuel and diesel physically within Australia to increase compliance with international fuel security obligations.

The fuel security package will form part of the Morrison government’s gas-led recovery from the coronavirus-induced economic slump and underpin more than 1000 jobs.

Motorists will be spared the cost of the 1.15¢ a litre refinery subsidy with the government ruling out passing the cost onto them. The government argues that propping up the local industry will actually help suppress fuel prices.

“Fuel security underpins our entire economy,” Prime Minister Scott Morrison said. “Not only does it keep Australia moving, the industry supports thousands of people across the country and this plan is also about helping keep them in work.

“Like all sectors of the economy, the COVID-19 pandemic is having an impact on Australia’s fuel industry. The events of 2020 have reminded us that we cannot be complacent. We need a sovereign fuel supply to shield us from potential shocks in the future.”

Rival proposal

However, the government’s plan may fall short according to some stakeholders, with unions developing a rival proposal to slug motorists with a 1.22¢ a litre surcharge to upgrade refineries to meet tougher fuel standards as well as provide new storage.

Viva Energy warned last week that its Geelong refinery would close in the absence of a rescue package from the federal and Victorian governments.

Australia’s other three refineries are also struggling, having reduced output in the wake of the COVID-19 pandemic sparking lower demand for travel.

Under the government’s plan, taxpayers will pay refiners a minimum of 1.15¢ a litre in recognition of their contribution to fuel security if they commit to staying in Australia.

The government will negotiate with industry over the next six months on the design of a market-based refinery production payment. Refiners will also need to find internal efficiencies, such as embracing advanced analytics.

The 1.15¢ figure is in line with the industry’s estimates of what they need to remain viable, with the scheme tipped to cost $2.33 billion over 10 years.

As well as preserving a vital industrial capability on national security grounds, the government argues local refineries help suppress the price of fuel in Australia, with modelling suggesting wholesales prices would increase by almost 1¢ per litre if production ended, adding up to $4.9 billion over a decade.

Monday’s announcements, which form part of the October 6 budget, follows Energy Minister Angus Taylor taking advantage of the crash in global oil prices to buy $94 million of fuel to establish the first government-owned oil reserves.

However, that fuel is being stored in the US within its strategic reserve because of a lack of storage in Australia.

Onshore diesel storage

The new package goes somewhat to offset that, providing $200 million in a new fund to build an extra 780 megalitres of onshore diesel storage.

States and the private sector will be asked to co-invest in building storage, with the federal fund to cover up to 50 per cent of the capital cost.

Priority will be given to projects in strategic regional locations, connected to refineries and have connections to existing fuel infrastructure, with applications opening in the first quarter of 2021.

Up to 950 construction jobs are expected to be created, along with 75 ongoing roles.

The extra storage will help meet new targets, which will be legislated, for minimum fuel supplies within Australia.

Diesel stocks will increase by 40 per cent to cover 28 days worth of consumption, adding about 10 days to Australia’s International Energy Agency compliance total.

Stockholdings of petrol and jet fuel will be locked in at the 24 days of consumption.

By comparison, in March 2012, Australia only held 17 days of petrol, 16 days of jet fuel and 15 days of diesel.

Refinery exemption

Refineries will be exempted from the obligation to hold extra stocks.

Mr Taylor said the government recognised the future refining sector would not look like the past but the package would ensure its long-term viability while also shielding households and businesses from higher prices.

“Our farmers and miners rely heavily on diesel to do their jobs and provide services, while the transport sector sources 98 per cent of its energy from liquid fuels,” he said.

“That’s why it is critical that Australia has control over its fuel security arrangements and the Government is making sure of that.”

To secure the future of the industry, the Australian Workers’ Union has put to Mr Taylor a proposal for an extra 1.22¢ a litre paid by motorists at the pump.

A genuine fuel supply crisis would made COVID-19 look like a blip.

— Daniel Walton, AWU national secretary

The union’s proposed surcharge would fund both the $2.7 billion construction of strategic oil and fuel storage facilities as well as the capital investment required to upgrade the refineries to meet tighter petrol quality standards coming into effect in mid-2027.

“We see that as a very small cost burden for the security it would provide,” said Mick Denton, chairman of the Australasian Refineries Operatives Committee, a body representing employees at Australian and New Zealand refineries, which commissioned BIS Oxford Economics to do the report.

AWU national secretary Daniel Walton said the recommended 1.2¢ a litre rise in petrol prices would be a small price to pay to ensure the country had enough fuel to last more than three weeks, the current limit to Australia’s stockpiles.

“A genuine fuel supply crisis would made COVID-19 look like a blip,” Mr Walton said.

The firm found the relative economic impact of the refining sector was bigger than its size. It found that a shutdown of Australia’s fuel refining sector would result in a $6.7 billion contraction of GDP, a reduction of 0.36 per cent, and the potential loss of more than 5000 jobs.

Knock-on effects to other sectors could trim a further 0.12 per cent off GDP, meaning that up to 0.48 per cent of GDP, or $8.9 billion, and up to 18,800 jobs were at risk from the shutdown of the sector.

Based on the findings, the AWU is pushing for the federal government to underwrite fuel storage capacity through the levy on fuel, of 0.7¢ a litre, that would provide funds to increase storage capacity by 4 billion litres to comply with the IEA standard. The tax would be payable over 30 years.

BP’s Bulwer Island refinery in Brisbane was the most recent closure.

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An extra surcharge of 0.42¢ a litre on petroleum products over five years would raise enough capital to cover the upgrades required at the refineries to meet the petrol standards.

Australia’s self-sufficiency in petrol and diesel production has fallen dramatically over the past 10 years as three refineries have successively closed, falling from 83 per cent of sales to 47 per cent in 2019-20, according to consultancy EnergyQuest.

It also does not hold a reserve with the recommended 90 days of net import requirements, as recommended by the International Energy Agency. Australia currently holds 84 days worth of fuel, which includes stocks “on water” en route.

When measured by actual consumption, Australia currently holds 20 days of diesel, 25 days of petrol, 27 days of jet fuel and 35 days of crude in the country.

In addition to refineries’ pleas for help, backbenchers have urged the government to bolster domestic fuel security because of the vulnerability of sea lanes in the South China Sea in the event of conflict.