The country’s two remaining oil refiners are pushing for a big increase in federal government subsidies to keep operating despite a multimillion-dollar surge in profits this year amid conflict in the Middle East.
Ampol and Viva Energy are locked in discussions with government officials over the terms for long-term support that would go well beyond the current subsidy which limits losses and instead guarantees a certain return.
But the push for more support comes as profits from refining have soared due to severe disruptions to oil flows through the Strait of Hormuz.
Viva on Tuesday said gross earnings in the six months to June 30 had more than doubled to $780 million. RBC Capital Markets expects Ampol to report first-half earnings before interest, tax, depreciation and amortisation to reach about $1.3 billion, also more than double the same period last year.
Still, certainty on returns is needed to be able to contemplate costly investments required to maintain and adapt the plants to keep on running, according to industry executives speaking on condition of anonymity, citing the confidential nature of the discussions with the government.
A closure of Ampol’s Lytton refinery in Brisbane and Viva’s Geelong plant would put Australia at the mercy of overseas suppliers – in a volatile and at times tight global market – for petrol, diesel and aviation fuel
Prime Minister Anthony Albanese on Tuesday unveiled plans to study the feasibility of a refinery in Western Australia, even as brokers and the industry raised doubt that such an investment could be viable.
“I expect the government’s feasibility study to reveal challenging economics … from a brand-new refinery in WA,” said UBS analyst Tom Allen.
“A reasonable starting assumption would be that significant Commonwealth funding or subsidies would be required,” he said, adding that it was not unreasonable to secure the country’s energy security and ongoing competitiveness of Australia’s minerals and resources exports.
“Relying on a ‘friends and allies’ model of fuel supply is a wager not a strategy.”
Still, Kingfisher Capital Partners executive director manager Ross Illingworth, whose firm is an Ampol and Viva investor, said it made sense to prioritise the redevelopment of the existing refineries with longer-term incentives for major upgrades, rather than the existing arrangement.
“I think the government should probably ultimately own a refinery, just as a double insurance situation, but I think the more immediate need is to get the other two up to a long-life situation again rather than pretty close to their use-by date and just pushing it out a year or two,” he said.
Instead of another “Band-Aid” package that helped keep the refineries open for a few more years, Illingworth said, the government should be thinking of upgrading the plants with a horizon measured by decades.
Australian Workers’ Union national secretary Paul Farrow said it was “obviously and clearly in the national interest to back our fuel refining capacity”, although he added that any new government support package had to be tied to long-term commitments to employment and investment.
“We must boost local fuel holdings and refining capacity to meet the moment, while also realising our huge potential in alternative fuels for the longer term,” Farrow said. “We cannot bet Australia’s future on fragile supply chains in our ever-more unstable region.”
“Relying on a ‘friends and allies’ model of fuel supply is a wager not a strategy,” he said, referring to the bilateral deals that the government has signed on energy and fuel security with Singapore, Korea and others.
The existing support package for Lytton and Geelong, known as the Fuel Security Services Payment, limits losses by providing up to 1.8¢ a litre on fuels produced when refining margins drop below a set floor.
But UBS’ Allen said that was well short of what is required to proceed with significant investment that would, for instance, lift the production of diesel.
“It is meant to be there as an emergency level of support, but it’s not enough to help get investment in these sites,” Allen said.
“If we are going to stay in refining we can’t just keep offering two- to three-year extensions under a fuel security services package, we actually need to roll our sleeves up and get serious about investing in the longevity of these sites.”
In return for a guaranteed positive return on refining operations, Viva and Ampol have discussed giving up earnings when margins are high, according to people briefed on the talks. Viva and Ampol, which is due to report unaudited financial accounts on Thursday, declined to comment.
Refineries’ future hanging in the balance
A string of local refineries have closed, reducing the number from eight in the early 2000s to just two by 2021, the year that the refinery support package was put in place in a bid to prevent further closures. But the long-term future of the two plants remains hanging in the balance, giving no assurance of any domestic refining past the end of the decade.
The assistance has also been of little use to the refiners, with Ampol never being eligible to receive payments, despite losses at Lytton falling in 2024 and a narrow profit in the first half of last year. Viva has secured payments just twice, including $12.4 million in 2021 and $25.1 million in 2024.
But refiners’ gross profits for turning crude oil into fuels have surged since the United States and Israel launched missiles at Iran in late February.
The refining margin at Viva’s Geelong plant jumped to $US21 a barrel in the June half, up from $US8.20 a year earlier, although production was reduced by a fire at the refinery’s petrol production unit in April.
Ampol’s margin at Lytton of $US25.45 a barrel in the March quarter was already four times higher than at the same time last year, and RBC is forecasting it will average about $US35 a barrel in the June quarter.
But Ampol is about to embark on 70 days of maintenance work at Lytton, deferred from June, limiting its ability to tap the higher returns.
Allen said some investors were concerned that more generous support for the refineries would mean governments had greater influence on their operations. But he said he saw scope for other investors to buy in – particularly those with a lower cost of capital than the refiners – to help back up the expenditure required for new fuel storage and other facilities.
As part of a $10 billion package announced earlier this year, the Albanese government set aside funding to set up a permanent fuel security reserve.
Extracted in full from: https://www.afr.com/companies/energy/oil-refiners-chase-sweeter-support-deal-despite-surging-profits-20260724-p60ic0
