The Australian government has been quick to defend its record on energy security by arguing ‘supply chain resilience has meant that during Covid-19 pandemic, we have not faced shortages’. Despite these claims, the government has been rapidly developing its liquid fuel policy over the last month.

On 22 April, Energy Minister Angus Taylor announced that the government would establish a national oil reserve. Australia is spending $94 million to buy oil at the current low price. At US$20 per barrel, that’s roughly 3 million barrels, or around 30 days of national supply. It’s a sound economic decision given the dramatic fall in global oil prices in recent months.

However, the proposal has exposed one of the problems with Australia’s national liquid fuel supply chains: a lack of bulk storage capacity.

The government has made a deal with the United States to store Australian government–owned crude oil in the US Strategic Petroleum Reserve, one of the world’s most cost-effective long-term oil-storage facilities.

Australia will be able to store its new national crude oil reserve in the US for an initial period of 10 years. Although the oil will be sitting half a world away, it will count towards our International Energy Agency 90-day stockpiling commitment—a commitment we’ve struggled to meet since 2012.

The obvious flaw in Taylor’s US fuel reserve strategy, apart from the impracticality of the storage location, is that it doesn’t address two key questions: how is the crude going to be refined and how long will it take before the fuel can be used in Australia? Unless something happens (which is why we need a sound fuel security policy), this crude won’t ever be refined or used in Australia; it will likely be sold off, hopefully at a profit.

Having an offshore national oil reserve may buy Australia time during a supply crisis, but it will do little to address our supply-chain vulnerabilities. Even offshore fuel reserves are vulnerable because they involve long supply chains and depend on the availability of maritime assets.

The shipping time from the west coast of the US will be up to 35 days. Tanker and insurance rates will be high, which will add to the pain if there’s a conflict. And the US will likely have priority of access to all of the reserve, including Australia’s portion, in the event of a conflict.

On 1 May, Taylor announced the government’s three-part fuel security package.

The first part of the package is a restatement of the government’s 22 April commitment to establish a government-owned oil reserve for domestic fuel security. The second is a commitment to work with the private sector to develop options to increase local storage as quickly as possible. The third involves the government considering a temporary change to fuel standards.

In implementing its fuel package, the government needs to acknowledge that it’s not starting from a zero base. Bulk storage facilities for liquid fuel are already available here and are underused. There are also several projects that, given the renewed focus on energy security, could soon break ground.

Marine services company NT Port and Marine’s facility on Melville Island near Darwin has 30 million litres (189,000 barrels of oil equivalent) of unused tank capacity readily available. This facility is located near a deep-water port and can refuel any vessel with a capacity of up to 50,000 deadweight tons with marine gas oil and/or diesel.

The Melville Island site is one of several underutilised fuel storage facilities in Australia.

Several years ago, a consortium, led by Airport Development Group, proposed establishing and maintaining a long-term fuel supply and storage capabilities in Darwin. Such a development would support Australian and US military operations in the region.

The project, which would cost up to $200 million to build, includes additional fuel storage facilities at East Arm near Darwin, which would support the importation and storage of large quantities of fuel for naval operations and provide opportunities for extra aviation fuel storage. The proposed fuel storage facility would be capable of holding 60 million litres of diversified fuel with the opportunity to expand to 94 million litres, bringing the total storage space in Darwin to 268 million litres.

The federal and Northern Territory governments, as well as that of our US ally, support the idea of an investment in improved jet fuel security in Darwin. But at the same time, they’re unwilling to pay for it through either infrastructure funding or increased fuel costs.

Civil operators, while not against the idea of improved fuel security, are unable and unwilling to pay more for fuel—especially when the profitability of air services in northern Australia is already under pressure. For the oil companies, the northern Australian jet fuel market is too small to make capital investment attractive.

But with a newfound interest from government in energy security and the investment to match, this project could be breaking ground in a year.

Similarly, Darwin Clean Fuels plans to build and operate a $3.3 billion plant capable of producing 100,000 barrels per day of high-quality transport fuels next to the Inpex and Conoco LNG plants at Middle Arm in Darwin. This will take advantage of local production of 250,000 barrels of condensate per day, most of which is currently exported.

Condensate is produced in conjunction with natural gas in areas close to Darwin. The processing of condensate produces 75% less carbon dioxide than traditional crude oil refining. The Middle Arm development would be able to hold the equivalent of around 1.1 million barrels of processed fuels.

Darwin Clean Fuels is completing a bankable feasibility study that could see it breaking ground in 18 months with the right support. The project would support fuel security and reduce imports and also meet the total fuel requirements of the Australian and US defence forces in the area.

The tank storage cost for the project is around $620 million and would constitute a far better investment than a $94 million reserve in the US that we may not be able to access in a time of conflict or fuel shortage.

On average, Australia consumes 1 million barrels per day of transport fuels and imports 600,000 barrels per day from overseas. FGEnergy forecasts that two of four Australian refineries will close by 2027 and none would be able to meet Euro 6 fuel specifications by that time.

The government says its package will help ‘underpin our economic prosperity for the next decade and beyond’. But we should make no mistake that it’s primarily a response to the supply chain vulnerabilities exposed by the coronavirus pandemic.

As soon as possible, the government should prioritise a stocktake of existing domestic fuel storage facilities and examine the planned projects that it could fast-track so that Australia’s fuel security can be ensured in time for the next crisis.

This article was written by John Coyne and Hal Crichton-Standish, a research intern at ASPI.   It was published by The Strategist.

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