Over the past 12 months, ACAPMA has been engaged with other stakeholders in a discussion with the Australian government about the need for, and design of, new laws seeking to increase Australia’s fuel security. Government emphasis on the need for these laws has increased over the past 12 months in the wake of the COVID pandemic, despite the fact that the real problem observed during COVID was one of demand destruction – not supply availability (nor affordability) of transport fuels in Australia.
But the reality is that the public perception of the announced closure of a further two refineries in the last 12 months – effectively reducing the number of Australia’s refineries from 7 at the start of this century to just 2 in the near term – is that Australia’s ability to navigate a fuel crisis created by future geopolitical unrest has been substantially reduced. The Federal government is understandably seeking to respond to this issue.
The 2021-22 Budget papers released on Tuesday night formally allocated funding for the advancement of two measures designed to increase Australia’s national fuel security. The first of these is a ‘carrot measure’ that proposes the introduction of a fuel security payment that will be paid to Australia’s domestic refiners to encourage them to continue to produce fuels in Australia. At this stage, VIVA Energy has committed to retain refining in Geelong, and subject to Ampol’s decision in respect of Lytton, this payment will be made to the two rcompanies left standing in the domestic refinery market.
The second measure is a ‘stick measure’ that will increase the amount of fuel that the nation’s refiners and importers – big and small – will need to hold in their operation at any point in time. Unless these businesses have spare storage capacity now, these measures will likely require investment in new storage infrastructure by fuel refining and importing businesses.
“The interplay of these ‘carrot and stick’ measures presents a potential risk of two unintended adverse consequences in the Australian fuel market. That is, an increase in fuel prices across the country and a distortion in market competition”, said ACAPMA CEO Mark McKenzie.
On the face of it, there is considerable merit in providing business incentives for Australia to maintain domestic refining capacity. That said, the provision of a production subsidy to some market participants and not to other suppliers of fuel in the market (i.e. importers), risks distortion of market competition. This is particularly the case in respect of the future operation of the fiercely competitive Australian wholesale fuel market.
Perhaps more significantly, however, the requirement for a substantial increased investment in fuel storage assets and fuel stocks is likely to put upward pressure on fuel prices in all Australian markets. It goes without saying that if the government introduces an increased requirement for storage, that will come at a cost to Australian fuel business (in Capex and Opex terms). These costs will ultimately flow through to consumers at the fuel pump.
Ironically, the pursuit of this legislation (and the possible associated consequences) mean that the fuel industry is potentially going to be squeezed between the competing objectives of (a) the Australian Department of Energy on fuel security, and (b) the objectives of Federal Treasury and the ACCC in terms of keeping fuel prices low and ensuring fair market competition in a post pandemic era.
“These are essentially ‘wicked’ issues. As a consequence, there is a need for all of us to tread very carefully given the substantial risks to fuel businesses, fuel market competition and fuel consumers”, said Mark.
It is for this reason that ACAPMA has been working, and will continue to work with, the Australian Government and other industry stakeholders, to ensure that the Government is fully aware of these risks and advances a legislative framework that minimises them.
Further information on this matter will be provided to members as the legislative process develops. In the meantime, members with concerns on this issue are invited to contact ACAPMA directly (email email@example.com or call 0447 444 011).