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.
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