The federal government’s new fuel security package that could cost taxpayers $2 billion in the next decade would result in higher petrol prices at the bowser, a recent report to the Productivity Commission has claimed.
The government on May 17 announced that its variable Fuel Security Service Payment (FSSP) to refineries that has been costed up to $2.047 billion to 2030 in a “worst-case scenario”.
As part of the 2021-22 budget, $302 million is allocated to the only two remaining refineries left in the country to ensure they stay open and keep investing in their ageing infrastructure.
To ensure the industry complies with the new fuel security framework, $50.7 million has also been given to implement and monitor the FSSP and the minimum stockholding obligation (MSO).
The MSO requires Australia to maintain oil stocks equivalent to at least 90 days of the previous year’s daily net oil imports as part of the country’s agreement to be a member of the International Energy Agency (IEA).
In September 2020, the government announced its intention to impose an MSO on fuel suppliers as one way to return to full compliance with the MSO by 2026.
The Australian Energy Security for Liquid Fuels report, which examines vulnerable fuel supply chains, by former Treasury advisor turned private economic analyst Alistair Davey found that an MSO imposition on fuel suppliers meant an “across the board” price increase of 3 cents per litre for motorists.
His finding is based on previous regulatory interventions into capital city fuel markets
“The government should design a system that imposes the least cost on industry and ultimately consumers,” Dr Davey said.
The government should design a system that imposes the least cost on industry and ultimately consumers.
His report also found that the last time the government complied with the MSO was in 2011 due to a decline in domestic crude oil production and increased product demand.
Dr Davey said there were no “heightened supply risk” for domestic fuel markets and users because domestic commercial fuel stocks and imports increased in response to demand growth.
He said Australia depended on imports from Asia to fill domestic production and supply shortfall.
“The ongoing presence of domestic refining capacity does not necessarily guarantee ongoing Australian energy security. This is because refineries can be vulnerable to unplanned shutdowns,” he said.
“The retrenchment of domestic refining capacity does not necessarily diminish Australia’s energy security provided we have the means of procuring alternative sources of refined product from overseas.”
In response to the report, a spokesperson for Energy and Emissions Reduction Minister Angus Taylor said not all submissions “should be treated as gospel”.
“In particular, the government rejects the summary that MSO on fuel suppliers will lead to a 3c/litre increase on fuel prices,” the spokesperson said,.
“Notably, this report does not actually model the MSO but relies on analysis from unrelated measures that occurred in 2001 and 1998. This does not reflect on current government policy.”
The spokesperson said the government has committed to meet the IEA stockholding obligation but domestic fuel security considerations are “always our priority”.
“Like the report suggests, the government also considers it appropriate to count stocks coming to Australia in the IEA figure. We held 83 IEA days in March 2021.
“The report’s description of the refinery production payment does not reflect the announcement of May 17, which detailed a variable payment to limit downside risk and pays nothing when refineries are making a profit.”
The spokesperson said the FSSP does three things: protect motorists from future high prices, ensures a sovereign refining capability and protects the many jobs and industries that rely on secure and affordable fuel.
The latest funding comes after BP and United Petroleum were the two big losers in the previous budget cash splash for big oil, promulgated around future energy security needs and delivering higher-grade, lower-sulphur fuel to Australian motorists by 2024.
BP was forced to close its Fremantle-based Kwinana refinery, the largest in Australia, last year and convert it to an import terminal.
The oil giant said the refinery was “highly exposed to excess refinery capacity in the Asia Pacific region”. The facility was 65 years old and losing millions of dollars a year.
More than 600 people lost their jobs when it closed.
A few months later, ExxonMobil shut its refinery at Altona, Victoria, also claiming the facility was economically unviable.
Since 2002-03, refineries operating in Australia decreased from eight to only two: Ampol, which has a refinery in Brisbane, and Viva Energy, which refines in Geelong.
Desperate to shore up the only remaining refineries in the country, the Morrison government introduced FSSP in the latest budget.
This figure assumes that both refineries are paid at the highest rate over the entire nine years in COVID-19-like economic conditions, which is unlikely as the economy recovers, the government said.
The only apparent concession that the refiners have provided to the government from this financial bonanza is to increase the speed at which they would invest in modern processes to reduce the sulphur content in the nation’s petrol – currently among the worst quality fuel in the developed world.
The refiners’ initial target date for reducing sulphur of 2027 has been brought forward to to 2024.
This revised date will have the added affect of helping the government squeeze down harder on car companies to improve vehicle emission standards.
High-sulphur fuel is “poisonous” to modern engine catalyst systems and only by mandating low-sulphur, better-quality fuel can Australia seek to conform to tightening world-vehicle-emission standards.