The fate of Australia’s two remaining oil refineries is expected to predominantly hinge on how much the Morrison government will increase the subsidy for domestic production of petrol and diesel, with eyes fixed on next week’s budget.

Viva Energy chief executive Scott Wyatt indicated several options are still under discussion, including both a flat rate subsidy along the lines of the interim 1¢ per litre subsidy Viva is currently receiving for its Geelong plant, and a variable rate that would increase when margins are weak.

Ampol’s decision on whether to keep its refinery in Brisbane open is due within the next few weeks and analysts expect it will need more than the interim subsidy to keep it open. All of Australia’s refineries have been hammered by the impacts of the COVID-19 pandemic, which slashed demand for fuel and drove down margins.

Ampol’s Lytton refinery in Brisbane lost $145 million in 2020. Bloomberg

Ampol, the former Caltex Australia, did not accept the interim subsidy as it carried out a formal review of the refinery, which lost $145 million last year, with an outcome due by the end of June.

MST Marquee analyst Mark Samter reads the rejection of the interim subsidy, which would be worth $60 million for Ampol, as a sign it needs a higher payment to keep the Lytton refinery in Brisbane running.

“With Lytton I think it is purely going to come down to how the economics of what is on offer look,” Mr Samter said.

“The one thing we know is they rejected the short-term one, which was $60 million per annum, so logically they need a fair bit more than that.”

Viva Energy has already accepted the Morrison government’s interim subsidy for its Geelong plant – which was under serious threat of closure last year – and looks more certain to keep its refinery running.

With the ongoing subsidy scheduled to come into effect on July 1 – and two oil refineries already slated for closure as a result of decisions taken by BP and ExxonMobil in the past six months – investors, trade unions and others have been holding their breath for the highly anticipated announcement from federal Energy Minister Angus Taylor.

A spokesman for Mr Taylor only reiterated that the government is continuing to work closely with the industry and fuel users on the fuel security package, while confirming the production payment would be in place by July 1.

Ampol chief executive Matt Halliday made it clear this week that the final structure of the government’s fuel security package – which includes the subsidy – will be a critical factor in the outcome of its review of Lytton.

“We are continuing to engage constructively with the government on fuel security initiatives with a clear definition of the support mechanisms required before we can complete our review,” Mr Halliday said at the Macquarie Australia Conference.

Macquarie Equities said in March that government support for Lytton is likely to increase, given the closure announcements by BP at Kwinana in Western Australia and ExxonMobil at Altona in Victoria. But the firm said Ampol appears “incentivised to close”, calculating that the shutdown of the refinery would improve returns, cut its direct carbon emissions by 85 per cent and “allow for unshackled capital management”.

Viva’s Mr Wyatt said that aside from the quantum of the support, the most important thing for Viva was that the package is long-term to give confidence to make investments in the Geelong plant. It pushed back planned investments at Geelong from the first half because of that uncertainty.

“That is probably the most important aspect apart from obviously delivering sufficient benefit to the refineries to be confident that we can run them profitably and generate the cash flow necessary to make those investments,” he said, pointing to the importance of the package of measures being in place for when the interim production payment ends on June 30.

In addition to the production payment, the planned fuel security package, announced by the federal government last September, includes minimum obligations to hold stocks of diesel in proportion to an importer’s sales.

Mr Wyatt said that will require additional storage to be built around the country, and allow refineries – which are exempt from the requirement – to benefit from making stocks available to others.

He pointed to options available for the structure of the production payment, including an “x cents per litre” model like the interim arrangement or a variable one which is higher when refining margins are weak.

“From our perspective, we like the concept of a variable mechanism because it does provide support when it’s needed and it allows the refinery to operate on its own when it’s not, but those are decisions for government,” Mr Wyatt said.

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