Australia’s two remaining oil refiners, Ampol and Viva Energy, intend to keep their plants running for another six years thanks to a deal with the federal government that could award them billions of dollars in subsidies and helps fund upgrades to meet cleaner fuel standards.

Shares in the two surged after the news of the total $2.3 billion-plus fuel security package, which will protect the companies’ earnings from refining when margins are weak, preventing the heavy losses that the industry suffered in 2020 and drove two other refiners to close their plants.

“Both the board and I believe this direction is absolutely in the best interest of shareholders in maximising value from what is a very, very strategic asset,” Ampol chief executive Matt Halliday told investors. The petrol and diesel supplier had its Lytton refinery under review for possible closure.

Ampol will keep running its Lytton oil refinery in Brisbane until mid-2027. Bloomberg

Ampol shares jumped as much as 9.9 per cent, while Viva rose up to 9 per cent in morning trading.

“This is such a good deal what’s the catch?,” Bank of America analyst David Errington asked Mr Halliday rhetorically as investors digested the major impact it will have on Ampol, including the freeing-up of its balance sheet to pursue growth investments and potentially acquisitions.

Ampol will also retrospectively collect about $40 million from the government’s interim refining support package that it had previously declined pending the outcome of its decision on the Lytton refinery. Mr Halliday noted

Ampol said it intends to run Lytton until at least mid-2027 thanks to the support package that includes a payment of up to $108 million a year for the plan if margins are low and a further grant of as much as $125 million to upgrade the refinery to meet cleaner fuel standards, now brought forward to the end of 2024 from mid-2027.

The company still has the flexibility to close Lytton earlier than 2027 and convert the site into an import terminal in specific circumstances such as persistently low margins, changes to the subsidy package by future governments or a one-off, force majeure-type incident, Mr Halliday said.

Viva also said it will run its Geelong refinery through to June 30, 2027, with a further three-year option to extend the plant’s operation.

“It’s a good outcome for the refining sector and it’s a good outcome for the company and the people here in Geelong,” Viva chief executive Scott Wyatt told The Australian Financial Review, noting the support payments only kick in when margins are low.

“It’s also a good outcome for government and for the country because it will secure refining capacity for an extended period of time and that allows us to continue to play what we think is a pretty important role in the country’s energy security

The measures come after a horror year of losses for Australia’s shrunken refining sector, as the impact of the COVID-19 pandemic slashed demand for transport fuels and depressed refining margins, threatening to wipe out domestic refining altogether.

Multinationals BP and ExxonMobil have already decided to close their refineries in Western Australia and Victoria, respectively, leaving the Lytton and Geelong plants the only ones left to prevent Australia becoming wholly reliant on imports for petrol, diesel and jet fuel.

Australian Workers Union national secretary Daniel Walton described the breakthrough deal as “a great result”.

“We’ve been saying for months Australia should never become a nation that can’t make its own fuel, and that we need not reach that dire situation if we get a few policy settings right,” he said.

The support package for the sector, which has been in negotiation for six months, was formally announced by Prime Minister Scott Morrison in Queensland on the first stop of his post-budget tour.

Mr Morrison said the decision was effectively a choice between paying the money or losing the 1250 jobs and paying another 1¢ per litre for fuel.

However the support package will not mean a levy on motorists, Mr Wyatt said.

Mr Wyatt said the Prime Minister’s announcement “provides important and welcome structural support to the refining sector in Australia,” noting that the Geelong plant suffered a greater than $200 million loss in 2020. Without the support, the plant would not have been sustainable, and its closure could have caused the loss of more than 700 direct jobs.

He said it would enhance Viva’s ability to invest in the “energy hub” it is planning at Geelong, which includes LNG imports, energy storage and solar power.

Ampol, which was due to decide this June half whether to keep its Lytton plant open and said as recently as last week that there was still “a big if” over its future, said the government measures mean the plant will continue to run.

The Lytton refinery directly supports more than 550 manufacturing jobs and indirectly supporting hundreds more.

The package includes as much as $2.05 billion in the “fuel security service payment”, up to $302 million in support for upgrades to meet stricter standards for the limit of sulphur in petrol, and $50.7 million to implement and monitor the payment and the minimum stockholding obligation included in the new fuel security framework.

Extracted in full from: https://www.afr.com/companies/energy/ampol-viva-to-keep-refineries-open-after-subsidy-deal-20210517-p57si1

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