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Oil-slick politics: Canberra slippery on refinery shutdowns

Last week, Caltex decided to close its Kurnell refinery in Sydney. This closure follows a recent decision by Shell to close its refinery at Clyde in Sydney and it will leave the city without any oil refineries…

Australia’s energy security will fall again after Caltex’s decision to shut its Sydney plant at Kurnell (pictured), but the Federal Government is yet to have a coherent stance on domestic refining capacity. AAP/Mick Tsikas

Last week, Caltex decided to close its Kurnell refinery in Sydney. This closure follows a recent decision by Shell to close its refinery at Clyde in Sydney and it will leave the city without any oil refineries.

Caltex’s decision reduces Australia to five operating refineries. Less than a decade ago, there were eight - at least one in every major capital city. As a consequence of a closure of three refineries in the past decade, Australia’s refining capacity dropped by over 37% – from 861,500 barrels per day (bpd) to 537,000 bpd.

At the same time, the nation’s crude oil and refined petroleum product supply-demand balance has worsened, leading to higher net-oil import dependence. In fact, net-oil imports have increased from 12,000 bpd in 2000 to 519,000 bpd in 2011, the highest on record.

Impact on Australia’s energy security

A combination of refinery closures and increased import dependence has left many worried about Australia’s energy security and, in particular, the security of crude oil and petroleum product supplies that are increasingly sourced from overseas.

The Federal Workplace Relations Minister, Bill Shorten, has warned that there is now a long-term risk to Australia’s energy security. Australian Workers Union national secretary Paul Howes said the situation was a “frightening scenario” for motorists who were already paying a high price for fuel, and a “black day” for Australia’s energy security.

While the immediate effect of the Kurnell refinery closure on Australia’s energy security is minimal, refinery closures and increased import dependence leave Australia increasingly vulnerable to the risk of supply disruption during crises.

In the future, domestic refineries will have limited scope to increase production or divert export cargoes into the domestic market in the event of a breakdown. Replacing domestic production losses with imported product may take time to deliver due to the longer supply chains associated with imported petroleum products.

Domestic refineries provide a much greater degree of flexibility in the product supply chain in the event of an unexpected supply disruption. For example, as the major source of imported refined petroleum products to Australia, the loss of refining capacity in Singapore could be the source of significant product shortages in Australia.

Impact on fuel prices

According to Caltex Australia CEO Julian Segal the closure will not affect fuel prices, pointing to the strength of the Australian dollar, the price of crude oil and the Singapore refinery margin as affecting Australian prices.

Removing Kurnell’s refining capacity of 124,000 bpd can be compared to removing from the international market, the oil from a small oil-producing state such as Brunei or Chad. Kurnell’s refining capacity amounts to 0.4% of Asia’s total capacity. In 2011, Asian fuel demand increased by 2.7%, while regional refinery capacity increased by 2.6%. Unless lost capacity is replaced by adding new capacity elsewhere, or regional fuel demand growth slows down, fuel prices are likely to rise in the short term as a consequence of lower regional refining capacity relative to demand.

In fact, with Kurnell’s closure, Australia is set to become Asia’s biggest importer of fuels - opening up trading opportunities in one of the world’s most profitable energy markets. This has reverberated across energy markets, because Australia burns top-quality fuels, and a rise in imports means more competition for Europe – Asia’s top buyer of such grades.

Asia’s markets for diesel and top-quality gasoline could see higher pump prices, as Australia snaps up diesel and gasoline, while refiners maximise their profits. Recent purchases have tightened supply and increased premiums for diesel to a 15-month high in July. Cash premiums for diesel with 10 parts per million (ppm) sulphur, a grade used by Australia, have more than doubled to above $4 per barrel to Singapore quotes this month compared with $1.80-$2.40 a year ago, boosting refinery margins. Consequently, to suggest that fuel prices will not rise, short of a more detailed regional petroleum product supply-demand outlook, may be a touch premature.

Government and opposition response

As with broader energy policy, the Federal Government has adopted a laissez-faire approach to refining. It does not consider refinery closures as a threat to the security of the fuel supply.

According to Federal Resources Minister Martin Ferguson, the Kurnell decision would not affect Australia’s energy security: “The closure will not jeopardise Australia’s energy security as Australia already imports large amounts of crude oil and finished petroleum products.”

Yet, the Federal Workplace Relations Minister Bill Shorten’s statement - that there is now a long-term risk to Australia’s energy security - contrasts with Minister Ferguson’s long-standing free-market views.

The fact that there is disagreement or a lack of policy coordination in Federal Cabinet on how to respond to, and assess the impact of, refinery closures on Australia’s energy security should ring alarm bells in Canberra. Contrasting comments by two Federal Ministers reveal that energy policy has been long relegated to the free functioning of the markets, with minimum government interference and policy debate.

The lack of debate on the impact of refinery closures and increased oil import dependence is not surprising given that the federal opposition subscribes to similar free market views. The Shadow Minister for Energy and Resources, Ian Macfarlane, did not publicly comment on Kurnell refinery closure, which is indicative of his likely response if he was in the Cabinet. The only voice from the opposition was that of Shadow Treasurer Joe Hockey, who linked the refinery closure to the carbon price, when Caltex made it clear that the carbon price had no material impact on the Kurnell decision.

Both the Government and the Opposition have the responsibility to ensure that there is adequate account taken of the impact of refinery closures and increased oil import dependence on Australia’s future energy security for the long-term benefit of consumers and the Australian economy.

Comments welcome below.

Join the conversation

11 Comments sorted by

  1. Freestyle Cyclists

    logged in via Twitter

    Bike lanes are much cheaper than oil refineries.

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  2. Byron Smith
    Byron Smith is a Friend of The Conversation.

    Ministry assistant, ecologcal ethicist and PhD candidate at University of Edinburgh

    Thanks for this contribution and your analysis and links.

    I'm a little surprised you didn't reprise (or at least link to) your earlier analysis Australian oil extraction decline.
    https://theconversation.edu.au/australias-growing-oil-imports-are-an-energy-security-issue-7749

    Isn't the closing of refineries a reflection of Australia having passed peak liquid production back in about 2000 and undergoing considerable contraction since then? Indeed, if LPG is excluded and we just focus on conventional…

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    1. Matthew Thompson

      Editor at The Conversation

      In reply to Byron Smith

      Hi Byron,
      There's a link to that earlier article of Vlado's in the third paragraph of this article.

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  3. Michael Brown

    Professional & academic

    Is energy security really an issue when we are exporting huge volumes of LNG and have monster coal reserves?

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  4. Stephen Prowse

    Research Advisor

    The argument about energy security is rather a strange one since we still have a national refining capacity, we have large reserves of gas and coal and we already import refined petroleum and crude oil. If there is a shipping crisis, we will not be able to import either refined petroleum or crude oil so refining oil in Australia will not have any impact on energy security. There may be other reasons to refine oil in Australia.

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  5. Margo Saunders

    Public Health Policy Researcher

    Note to Editor: I was stunned to read the headline for this article which indicated that somehow the city where I reside had something to do with oil and refineries. Knowing that Canberra doesn't have much of an oil industry, I read on. Yes, it is fair to say that, 'there is disagreement or a lack of policy coordination in Federal Cabinet' and therefore that issues concerning refinery closures and Australia’s energy security 'should ring alarm bells in Canberra', in the same way that you might say that issues should ring alarm bells in Washington. But the lazy use of 'Canberra' as an all-purpose and often gratingly inappropriate short-hand for the federal government? Surely The Conversation can do better than this. Who knows -- you might even start a trend!

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  6. Joseph Bernard

    Director

    Just another causality of the two speed economy..

    yes the price is cheaper now, there is competition.. take away the competition and once the mining boom goes south, we then will bear the costs of the double header costs of:

    - We are in a world where there is increasing competition of resources.. australia will be competing with an increasing demand from all other countries for energy.

    - Everyone knows we are in a two speed economy which has artificially held high our Australian dollar.. What happens when the mining boom declines which some have recently speculated will be sooner rather than later.. Increased competition and lower buying power..

    - The capital cost of building a new refinery, which will have limited time to get a return on investment as we have past peak oil means once closed it will stay closed..

    conclusion.. I suspect this will weaken the robustness of our economy for little / dubious gains.

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  7. Peter Kardashinsky

    Retired Engineer

    Lack of debate in this area is not new. I was in the industry for over 30 years, and in all that time it was very difficult to engage anyone in government.

    As early as the mid-1990s, declining local crude-oil supply, the quality of the local crude, the changing demand pattern for oil products in Australia, and increasing competition from Singapore and Indian refinery expansions were all brought to the attention of the governments of the day as threats to the local industry.

    In the late 1990s…

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  8. John Newlands

    tree changer

    Few seem to have considered the impact of a shift to gas as a diesel substitute. A combination of factors such as a steady oil price rise or termination of the diesel rebate could see tens of thousands of trucks and buses, perhaps even tractors and private cars switch to LNG or CNG fuel. Currently Australia uses about 20 Mt a year of piped gas and exports another 20 Mt of LNG, set to treble. As a first guess I suggest Australia could use 10 Mt of gas as a transport fuel.

    This would have major price and volume effects. In round terms liquid diesel retails for about $40 a gigajoule if you think $1.40/L for 35 MJ. Piped gas users such as power stations couldn't live with fuel prices heading in that direction from the current $4 or so per GJ. Therefore Australia could achieve some transport fuel independence but the rest of the system would fall apart.

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    1. Peter Kardashinsky

      Retired Engineer

      In reply to John Newlands

      John,

      Couple of points.

      1. The diesel price ($1.40/L) includes excise tax of $0.38-0.40/l, not applicable to gas.

      2. The export price for the Gladstone LNG project has been reported as $10/GJ. (but crude oil dependent, with this price for $80/bbl crude?) That would imply their (pre-liquefied) gas cost of around $2-4/GJ (they don't publish this, so you have to estimate from their return on investment).

      I think you are quite right in saying that piped gas users could not stand a price anywhere near the current diesel price, but I don't see that price as part of the equation. I think there is opportunity for some of the marginal LNG that would be otherwise exported (abut 40 Mt +) being diverted into local transport use, at a price not much more that $10/GJ.

      Hence, for the rest of the system (the piped gas users) it will be business as usual.

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