Australia’s capacity to refine crude oil is set to hit a fresh low this year as its four remaining refiners juggle an extreme drop in demand for jet fuel, a slump in refining margins and tough restrictions on working at plants due to COVID-19.

Caltex Australia has already advised it will temporarily shut its Lytton refinery in Brisbane – the country’s biggest – in May as it brings forward maintenance work due later in the year. The shutdown is likely to last at least four months and possibly longer, with an improvement in current weak refining margins required to reopen the plant.

Viva Energy is meanwhile reviewing major work at a central unit at its Geelong plant, currently due for August-October.

ExxonMobil has reduced production at its Altona refinery, and BP is adjusting production at its Kwinana plant in Western Australia and will delay a major maintenance shutdown scheduled for early 2021.

Australia’s capacity to refine crude oil into transport fuels such as petrol, diesel and jet fuel has already halved since 2003, with the closure of old, inefficient refineries in Adelaide, Brisbane and Sydney, unable to compete against mega-plants built in India and China. That has increased the country’s reliance on imported fuels, with that dependence increasing during maintenance shutdowns at the remaining plants.

All four remaining plants, if fully operating, have a combined capacity of about 50 per cent of the country’s normal transport fuel needs, according to consultancy EnergyQuest. Their total capacity is under 500,000 barrels a day, less than half the size of the huge Jamnagar plant in India.

An extreme imbalance of demand between fuels is also causing problems for refiners, with both Caltex and Viva reporting a collapse of up to 90 per cent in aviation fuel demand. Petrol and diesel consumption is also softer than normal due to the COVID-19 restrictions on mobility, although diesel is still in demand for mining and agricultural industries.

The imbalance has caused concerns that more refineries will suspend operations as they run out of storage for jet fuel and petrol, with a knock-on impact on local diesel production.

Still, refiners remain confident of security of supply of diesel and petrol through well-developed international supply chains. A Minerals Council of Australia spokesman said the group expected no impact on diesel supplies through the maintenance work.

NRMA spokesman Peter Khoury also is not worried, at least from a local security of supply point of view.

“The reality is we are importing more and more, which is obviously disappointing, but there is no reason to believe any demand can’t be met,” Mr Khoury said.

Refining margins have meanwhile been sinking, with Viva reporting a March quarter margin of just $US2.70 a barrel, leaving it struggling to break even. Caltex’s refiner margin edged up marginally in March to $US4.62 a barrel but was 47 per cent down on a year earlier.

Analysts anticipate a further softening: “Refining margins are expected to weaken further near term as demand remains exceptionally weak,” said Credit Suisse energy analysts, pointing to negative gasoline “cracks” – the difference between the price of petrol and crude oil – in early April.

This was a “challenging” year for refiners worldwide even before COVID-19 hit, said London-based FACTS Global Energy, which says some higher-cost refineries may be shut down, and then struggle to reopen.

Federal Energy Minister Angus Taylor said the government was focused on the long-term viability of refineries.

“We are working constructively with the fuel sector on a domestically focused fuel security approach,” he said, noting that Caltex’s move to bring forward maintenance at Lytton let it “use the downtime productively while securing the future operation of the refinery”.

A spokesman for Exxon said the group had incrementally reduced production at Altona during the pandemic to support the ongoing safe operation of the plant, which produces about half of Victoria’s refined fuel needs.

“We are undertaking a range of initiatives to manage the supply demand balance and keep Altona Refinery in operations despite significant deoptimisation,” he said.

“We continue to have security of fuel supply, however, we are actively managing an oversupply of product due to a significant decrease in global demand, particularly for jet fuel.”

The spokesman said Exxon had adjusted processing units to minimise jet fuel and reduce petrol production, and was repurposing tanks at Altona and potentially also at the Yarraville terminal to store excess fuel.

At Kwinana, BP “has made, and will continue to make, necessary adjustments to its production in response to demand changes”, a spokesman said.

“The current restrictions on people and activity at the refinery does mean that we need to defer pre-turnaround preparations and this in turn will delay the start of the turnaround activity that was scheduled for early 2021,” the spokesman said.

“This decision has not been made lightly and our turnaround team and contracting partners have been advised of the delay and will adjust planning accordingly.”

He added that BP is a member of the National Oil Supplies Emergency Committee and is regularly engaging with government on its work to maintain reliable and efficient fuel supply.

Extraxcted from AFR