Fuel industry: Not drowning, waving
It must look like it is a great exodus that defines the future of the Australian fuel industry. With each significant announcement by a major oil company we see another refinery that is too old to upgrade, too expensive to operate and too small to compete shutdown.
While these are valid motives, if we open our minds past refining capacity, we will see that well-informed planning is actually shaping for a great flood, of petrol and diesel, from the Asia-Pacific market and, like Noah, Australia needs a vessel, both ships and tanks, to ensure we float on this tide to our salvation.
For the year ended 30 June 2013, Australia consumed 55,100 ML (megalitres) of petroleum products. If you were to measure this against the nameplate capacities of Australia’s original eight refineries we would have fallen 5,000 ML or 5 billion litres short of requirement.
However, the shortfall in 2012-13 was larger than that, as the six remaining local refineries produced around 36,900 ML, a deficit to requirement of 18,200 ML or 18.2 billion litres.
Do not panic – why will be understood later – but this deficit is set to get worse, as the announced closures of Caltex Kurnell (6,300 ML pa) and BP Bulwer Island (5,910 ML pa) bite. Meaning Australia, by the end of 2015, will be importing more than 55 per cent of its petroleum products.
Having ships deliver petroleum products to our shores is nothing new. We already have Very Large Crude Carriers delivering crude oil at even greater percentages than our projected refined imports.
In 2012-13, according to the Department of Resources, Energy and Tourism, Australia imported 29,500 ML of crude oil to be refined; this amounts to 84 per cent of the crude oil Australia refines.
There will be cries of ‘why not use Australian indigenous crude oil?’ The numbers would suggest that even in 2013, with the decline to six operating refineries using locally sourced crude oil, we would still need to import around 40 per cent of our requirement.
The reason the refiners send our crude overseas and bring foreign crude here is predominately economic and helped, until now, to keep refining jobs in Australia.
The ACCC describe this quite succinctly, “Australian companies generally prefer to export a large proportion of light and sweet crude oil, as these crude oil grades have traditionally generated premium prices in international markets. Australian refineries are also capable of processing cheaper, heavier varieties of crude oil, which are imported.”
Like a sports performance supplement, using cheaper imported crude oil has kept Australian players, close to retirement, in the game. Unfortunately, all aging players succumb to younger competition and right now those fresher players are refineries that are dotted around the world and much bigger and cheaper to run. So we need to understand Australia’s best opportunity of winning will be utilising a foreign import.
The competition in the fuel industry is not a national league, it is the World Cup and the countries with the best teams are set to change. The International Energy Agency (IEA) in its World Energy Outlook 2013 suggests that the lion’s share of crude oil supply through to 2035 will be by non-OPEC countries. The countries that will be at the forefront are the United States, Canada, Brazil and Kazakhstan, extracting in the main light tight crudes (Shale Oil), non-conventional oils and natural gas to liquids.
One critical point to note is that current US laws prevent their crude oil from being exported. With projections indicating that the US will extract more crude oil than is required for its own self-sufficiency, this means that they are set to flood the world market with refined products. While only early days, in 2013 the US was Australia’s fourth largest source of imported petrol.
The same IEA study reported that by 2035 world demand for crude oil would reach 101 Mb/d (million barrels per day). The push from 87 Mb/d in 2012 to the 2035 total comes from the developing powerhouses in the Asia Pacific region, namely China, India and Indonesia who combined increase demand by 15 Mb/d. China alone will contributed to 70 per cent of the region’s growth in crude oil demand. During the same period OECD countries reduce their demand by 8 Mb/d.
Changes in world crude oil supply and demand lead to adjustments in refined product placement. Planned investment in refining capacity world-wide paints an interesting picture. With surplus crude oil in the US many previously mothballed ‘teapot’ refineries are back in production. This increase will see the US market move from being short (supply lower than demand) 1.5 Mb/d of petrol to being long (supply above demand) on petrol by 4.5 Mb/d, a 400 per cent turnaround by 2018.
Countries in the Middle East and Latin America are also investing in further refining capacity, setting out to utilise their sources of indigenous crude oil. While their individual turnarounds will not be as dramatic as the US, each of these markets will reduce their product short to almost balance within a similar timeframe.
Our region is also undertaking major refinery investment. China, the butt of all investment talk in any industry, is responsible for the major share of refinery growth. Converse to popular opinion this is not, currently or in the future, going to be the main source of pressure on the region; not for refines at least. This is because the Chinese authorities are looking at remaining in supply balance as demand grows, as well as indicating that capacity in all sectors will be more focused inwards rather than for export.
What starts to apply the further pressure locally are the refining ventures in India and North Asia South Korea and Taiwan. While there is some relief with closures in Australia and Japan, the majority of these refineries have been planned with export volumes as their underwriter. Add this volume to the reduced opportunities to export petrol into other regions of the world and you have a completely different situation from that which existed when Australian refineries were originally built.
From the changed headwaters for crude oil, to the new streams of refined products, comes the flood of fuel in our region.
The traditional market for an Asia Pacific refiner, taking the excess of supply, no longer need refined petrol and in the case of the US could be feeding refined products back into our region, creating a long in the supply of petrol in the market Australia participates in. This is a massive change and one that puts downward pressure on margins, flushing out any refiner who cannot make economic production runs. This has become the flood that has deluged Australian refining.
What is transpiring is a watershed moment in Australia’s liquid energy future and one that should be embraced. The major oil companies are not drowning, they are waving in changes that will see them take advantage of this wash of refined products.
The most recently announced refinery closure, that of BP Bulwer Island by mid-2015, includes plans to alter the facility to become an import terminal. Shell’s Gore Bay and Clyde facilities and Caltex’s Kurnell Refinery, both in NSW, followed this same script. These will be added to the existing 54 seaboard terminals around Australia, 70 per cent of which are owned by major oil companies.
The Australian Government, in the issues paper to inform preparation of an Energy White paper stated that, “Energy policy needs to underpin the day-to-day reliability, longer term security and the cost of energy in an efficient and competitive market.” Their goal is to put “downward pressure on prices” that will help relieve “cost-of-living pressures and improve business competitiveness.”
It should be recognised that reliability and security, in the fuel industry of the future, has at its core interdependence between Australia and an every growing diversity of regional supply points. Like with other industries, Australia will start the value chain by supplying crude oil to international partners, importing back a product economically better refined overseas. To try and disrupt this supply chain efficiency with plans for independent fuel security will indenture Australian’s to higher priced fuel at the pump or higher taxes to facilitate subsidies to local producers.
There is a catch 22, and while Australia wants the market driven economic influences of a highly competitive regional fuel supply chain to flow through our economy there is a dam at the wholesale level of Australia’s petroleum industry that requires policy planning.
The ACCC understand the reasons for this when they stated in the Monitoring of the Australian Petroleum Industry Report 2010, that “for independent resellers, obtaining access to import infrastructure at a competitive price (whether by owning or leasing) is another significant challenge”, there has been little action to address the issue.
It is not that Governments have lacked recognition of the challenge, with the Energy White Paper 2012 highlighting that the “timely development of new import terminal capacity” is a task that needs to be addressed.
The Government has placed importance on the development of nationally significant infrastructure and given that the development of open access terminals for petroleum storage assists the progress of independent wholesale suppliers, it is imperative for the Government to address this challenge.
Where there has been the development of open access terminals for petroleum storage we are seeing new marketing investment emerge and with that renewed wholesale competition. Already during 2013, around $800 million (estimated) has been invested in the Australian Petroleum Industry through the purchase of Neumann Petroleum, AusFuel and Central Combined Fuels by Puma Energy. It is important for the Government to understand that much of this investment is centred around; and contingent on the open access terminals in Queensland, the Northern Territory and Western Australia.
Through investment in the planning and development of open access import terminal capacity the Australian liquid fuels user, transport, mining, primary industry and the family motorists, will benefit from increased wholesale competition. By providing the framework that encourages supply competition and a diversity of international supply, there will exist a greater prospect for reducing cost-of-living pressures and improve business competitiveness.
The great biblical flood gave the world a similar opportunity for renewal.