The heads of two of the country’s remaining four refineries have signalled that their plants could shut down without government support as soft refining margins and a slump in fuel demand due to COVID-19 push plants into the red and costly upgrades loom,

Viva Energy chief executive Scott Wyatt said a decision would be made by late June whether $100 million-plus of maintenance work needed to allow the Geelong refinery to run for another four years can be justified given expected soft refining margins. The work had been planned for August but is under review.

“The world has changed, so we are now having to review that [decision] again,” Mr Wyatt told the Macquarie Australia Conference, noting Viva had already closed the petrol production unit at Geelong.

Asked whether the government could support the continued operation of refining in Australia, he pointed to the important part they play in energy security, noting that federal Energy Minister Angus Taylor had also made that point.

Caltex Australia interim chief executive Matt Halliday signalled that the issue of government support would come into play to warrant the restart of its Lytton refinery in Brisbane, which was closed early this month for extended maintenance and hinges on an improvement in refining margins to be restarted.

“We’ve been very clear that we need to see margins restored before we would consider the restart decision and clearly … the topic of fuel security – much as we don’t see an issue with fuel security in Australia at the moment, in fact the world is awash with products – clearly the conversation has been re-energised,” Mr Halliday said at the conference.

“As we look into restart decisions there will be very active conversations with government as part of that contemplation.”

The refiners have seen demand for jetfuel crash up to 90 per cent due to COVID-19 restrictions, while petrol demand has dropped by up to a half. The refining margin at the Geelong plant recovered to $US4.60 a barrel in April, which Mr Wyatt said was around break-even, signalling that the plant was lossmaking in the March quarter when the average was only $US2.70 a barrel.

The global refining industry is “undoubtedly in crisis times”, said Sri Paravaikkarasu, head of Asia Oil at consultancy FACTS Global Energy in Singapore, pointing to the risk that Australia’s four refineries do not go ahead with investments to meet stricter sulphur standards for petrol in 2027.

“In the current weak environment, [a] few refiners may cancel their capital expenditure plans and opt for early closures,” she said.

Mr Taylor said he was in regular contact with all of the Australian refineries including Viva and Caltex regarding the “challenges” the sector was facing during the pandemic.

He pointed to Mr Wyatt’s comments of early signs emerging of a recovery in fuel demand, which he said would help ease the pressures on refineries as the economy started to come out of hibernation.

“The government is focused on the long-term viability of refineries,” Mr Taylor said.

“Building on our security downpayment of the $94 million to purchase crude oil, we are currently working with the entire fuel sector on a broader, longer term fuel security package that is domestically focused,” he added, referring to the federal government’s move last month to buy reserves of oil that would be stored in the US. That is to be followed by a move to boost storage of reserves within Australia.

Mr Wyatt said sales volumes at Viva’s petrol stations dropped 34 per cent in April compared to a year earlier due to the pandemic, although pointed to a slight pick-up at the Coles Alliance sites this month.

“It’s pretty early days,” he said. “There are some encouraging signs that volumes are starting to improve as we see more traffic on the roads but I think we’ve got a long way to go on that.”

Viva said demand for jetfuel slumped about 75 per cent in April, less than anticipated, but Caltex reiterated it expects a 80-90 per cent dive. Both are cautious about a recovery in demand for aviation fuels, which is expected to lag a rebound in road transport fuels.

Downward pressure

Viva, which owns the former Shell refinery in Geelong and the Shell-branded petrol station network in Australia, has already closed a petrol production unit and a small crude distillation unit at the site to better align production with the slump in demand.

“Refining margins have been challenging for the last couple of years and are particularly challenging at the moment,” Mr Wyatt said.

“And I think with the drop in oil demand it feels like we are going to have a lot of downward pressure on refining margins through the rest of the year, which is why we are rethinking the turnaround.”

Australia’s capacity to convert crude oil into transport fuels has been slashed over recent years, with the closure of two refineries in Sydney and one in Brisbane, as well as one in Adelaide several years earlier.

Caltex, which was until recently the subject of takeover interest from Canada’s Alimentation Couche-Tard, has reduced weekly hours at its convenience retailing stories by 15-20 per cent “to align with current reduced customer activity”. Pay for the board and executive team has been cut by 20 per cent, and by 10 per cent for senior leaders, for a three-month period.

The company has refocused on internal initiatives to unlock shareholder value, including a potential IPO or trade sale of a 49 per cent interest in its core retail network, expected in the December half.

Extracted from AFR