Last week, the Australian Government released the Energy White Paper, provinding a policy framework for ensuring that the Australian economy enjoys reliable and competitively priced energy supply into the future. Among other things, the paper pointed to the fact that Australia’s national oil storage levels currently fall short of the nation’s obligations under a longstanding international treaty with the International Energy Agency (IEA). Addressing this issue could provide an opportunity to increase competition in the wholesale fuel market in Australia with consequent benefits for both fuel retail businesses and fuel consumers alike.
On 8 April 2015, the Australian Government released the Energy White Paper – the third of its type to be released since 2005.
In releasing the paper, the Minister for Industry and Science, Ian MacFarlane, said its the primary objective was to provide industry and the wider community with greater certainty in energy policy in the future.
“The measures in the Energy White Paper will deliver stable energy policy and efficient transparent markets that give consumers information to make choices about their energy use and industry the confidence to invest,” Mr Macfarlane said.
The paper is comprehensive, and follows more than 16 months of industry consultation and government policy development. The paper sets out a policy framework for electricity, gas and transport fuels into the future. This framework will now be progressed by the Australian Government working in partnership with State/Territory Governments.
Of interest to the downstream petroleum industry, the paper acknowledges that Australia currently falls well short of its obligations under an international treaty with the International Energy Agency. This treaty requires that all participating countries hold – at any point in time – a national fuel volumes that is equivalent to at least 90 days of fuel imports.
The primary rationale of this obligation is to ensure that all participating economies are capable of maintaining economic output for a reasonable period of time (i.e. 90 days) should there be an interruption in the flow of imported fuels into Australia.
This issue was perhaps a lesser risk for the Australian economy in the past given that Australia’s seven domestic refineries had the capacity to increase production to offset any shortfall in the supply of imported fuels.
As more and more of Australia’s oil refineries have closed down, however, Australia has transitioned from an economy that was once a majority producer of transport fuels to one that is now a majority importer of transport fuels.
Theoretically, this change means that Australia is now more exposed to interruptions in imported fuel supply. Given that we are now importing more fuel than occurred in the past, and therefore the storage requirement under the IEA treaty has also increased to the point that Australia’s fuel storage capacity is a little more than 50% of the 90 day storage requirement.
While some will rightly argue that the probability of a significant interruption to Australia’s fuel imports is low given that we source fuels from more than 20 different countries, the fact remains that we are not meeting our obligations under a significant international treaty.
Any decision to exit the IEA treaty risks Australia being perceived as an economy that is less ‘energy secure’ than that of neighbouring economies – a perception that we cannot contemplate if Australia is to compete effectively with neighbouring economies to attract international investment in our national industries and commerce.
And so, we get to the real question that is implicit in the latest Energy White Paper – “What if anything should Australia do about its deficiency in national fuel storage relative to the IEA treaty?”
“The current deficiency in national fuel storage is, at least in our mind, an opportunity to increase competition in the area of the national fuel market that is the least competitive – the wholesale fuel market,” ACAPMA CEO Mark McKenzie said.
Despite there being 12 fuel wholesalers in Australia, 92% of all fuel sold into the wholesale market is sold by just four companies. These same four companies – the four oil majors – currently own and operate the vast majority of fuel terminal infrastructure in Australia.
This fact, coupled with limited availability of independently owned common access port facilities means that the competition dynamic is unlikely to change in the near future without intervention.
“Our firm belief is that the government has an opportunity to develop new and independently owned ‘common access’ port infrastructure to facilitate the entry of cheaper imported fuels from some of the largest refineries in the world,” Mark said.
“By world standards, Australia’s refineries are smaller in scale which means that the unit cost of production is higher than some of the larger and more modern refineries operating in the world. That is why the oil majors are closing down their refineries in this country and replacing them with fuel storage terminals.”
Given the scale of these modern refineries, Australia could actually purchase and ship fuels from these refineries at a lower cost than they can be produced in Australia. But the barrier to the entrance of these fuels is the absence of suitable infrastructure in terms of ports and fuel terminals.
“By targeting government investment for the development of new port infrastructure in cities such as Melbourne and Brisbane, the government can potentially create the catalyst for much needed industry investment in national fuel storage that will allow Australia to meet the IEA requirement and deliver greater price competition within the wholesale fuel market,” Mark said.
“Such an approach would also lower the quantum of government investment compared with government funding of new fuel storage.”
Over coming months, ACAPMA plans to work with the Australian Government and other stakeholders to explore this opportunity in greater detail.