While Energy Minister Angus Taylor has highlighted that Australia’s ‘supply chain resilience has meant that during the Covid-19 pandemic, we have not faced shortages’, he, and the government more broadly, have also acknowledged that Australia needs to improve its resilience.
Covid-19 has ensured that the government is starting to consider the scope of the possible crisis, or crises, that may follow the pandemic. Central to this thinking are the implications of increasing strategic uncertainty in the Indo-Pacific—concerns outlined in the defence strategic update released by Prime Minister Scott Morrison yesterday.
These concerns are driving the government to focus on the resilience of our fuel supply chains to disruptions. There’s little ambiguity in the Morrison government’s commitment to ‘delivering policy and regulatory frameworks that support secure, reliable and affordable supplies of energy for consumers’.
But to do so, the government is going to have to solve some enduring policy challenges in a relatively short timeframe. In February, Australia only held 25, 20 and 22 days’ supply of petrol, diesel and jet fuel, respectively. These figures fall well short of the 90-day requirements Australia agreed to maintain in signing the International Energy Agency program treaty.
Our non-compliance with IEA requirements is not a new development. Until this year, the government had been all too comfortable that our oil companies’ near just-in-time supply chains could buffer us from the impacts of a sudden disruption to supply. It’s important to note that the risk-mitigation strategies that underpin the supply-chain arrangements of oil companies stocking Australia remain mostly untested. And it’s hard to argue that these supply chains won’t be susceptible to disruption during a period of sustained regional instability and strategic uncertainty.
On 22 April, Taylor moved to partially address the shortfall, announcing that the government would establish a national oil reserve. Australia spent $94 million to buy oil at a historically low price. Because of a shortfall in domestic storage capacity, the government made a deal with the United States to store Australian-owned oil in its strategic petroleum reserve, one of the world’s most cost-effective long-term oil-storage facilities. It’s a sound economic decision given the dramatic fall in global oil prices in recent months. But these arrangements fall well short of addressing our supply chain vulnerabilities and don’t build national resilience.
That’s why, on 15 June, the government released a request for information to identify opportunities to increase Australia’s domestic fuel storage capacity. While the request is open to all interested parties, oil companies are set to have the loudest voices. But should they?
The oil industry has argued that there are no significant risks or vulnerabilities in their supply chains. Perhaps, then, the oil industry isn’t particularly predisposed to providing innovative responses to this request.
The oil industry uses future-focused market profiles to support assessments of the commercial viability of capital investment in liquid fuel supply. Oil companies will endeavour to maintain a certain level of fuel stock in reserve and try to the best of their ability to make sure that supply meets demand.
But the construction of additional bulk fuel storage will not seem any more commercially viable to the oil industry now than at any other time. And it’s this calculation that has defeated previous efforts to improve bulk fuel storage in Australia. There’s little incentive for oil companies to absorb the not insignificant costs of building and maintaining bulk storage.
In fairness to the oil industry, no one wants to pay more for their liquid fuels at the metaphorical (or physical) pump.
The government’s policy mechanisms for encouraging infrastructure development are also ill-suited to addressing the challenge. The debt-based Northern Australia Infrastructure Facility, for example, wasn’t designed to fund this kind of nation-building effort. So far, Covid-19-prompted infrastructure projects appear to be mainly focused on roads. As we face a global recession, the government’s usual user-pays approach will be no help here either.
Australia’s $3 trillion superannuation sector could be the answer. It’s already a significant investor in Australia’s domestic infrastructure and, by its nature, is a long-term investor. If the government provides long-term certainty on fuel policy, including the necessary regulation, bulk fuel storage could be an attractive investment for the superannuation sector.
Superannuation industry investments could fund the construction of several bulk fuel storage facilities across Australia. As an added benefit, these facilities could end the fuel storage monopolies present in many of Australia’s major ports.
There are several models that could make this investment attractive to the industry. One could see the Australian government, like it has done with the US petroleum reserve, pay a fee to facility owners for long-term storage. Another could involve the Australian government mandating a minimum onshore storage requirement for the oil industry.
The Commonwealth could also invest equity, through superannuation funds, to develop the required storage infrastructure. This approach would likely be far more successful than the Northern Australia Infrastructure Facility’s debt-based model.
If oil companies were to invest in this bulk storage, their boards and shareholders would likely seek double-digit returns. A superannuation fund, especially one that’s looking after taxpayers’ money, would probably seek returns several percentage points lower. As an investor, the Commonwealth could factor the nation-building and national security benefits of the investment into its return-on-investment calculations.
Regardless of the model, someone has to pay for the additional cost of storage.
Covid-19 has created the opportunity to address many of Australia’s enduring security vulnerabilities and policy challenges. It has also created a once-in-a-lifetime chance to question many of the assumptions that have underpinned our policy decisions.
The answer to how we address the challenge of fuel security will likely require a paradigm shift in how we approach nation-building. At the very least, it seems clear that the government will need to look beyond the oil and energy sector to find a palatable policy solution to increasing our national fuel holdings.
Extracted from The Strategist