Refiners give no early guarantees on plants

Australia's oil refiners aren't giving any early guarantees about the future of their struggling plants even as they welcomed the federal government's $2.5 billion support package, which includes a direct subsidy that some fear could set a precedent for other parts of the business world.

The measures, which include competitive grants to increase diesel storage capacity and a payment for locally produced petrol and diesel, stand as a potential lifeline for the sector.

They are intended to head off the risk that any of Australia's four remaining refineries will join the four that have closed since 2003, and to beef up the country's lagging security on fuel supply.

Viva Energy chief executive Scott Wyatt, who last week said the company's Geelong refinery would close in the absence of rescue measures, said the package was important to improve the broader viability of refining, not only through the "extreme" pressures of COVID-19. But he signalled that was only part of the longer-term solution.

"The refining sector in Australia is at a critical crossroads at the moment and it needs confidence to retain refining operations and the ongoing investment that is required for the future, and this package goes a long way to achieving that," Mr Wyatt told The Australian Financial Review.

"Help from the state government to overcome some of the competitive disadvantages specific to Geelong is obviously also important and I also recognise that Viva Energy as a business also need to continue our efforts to improve production and efficiency."

Mr Wyatt reiterated that Viva would provide an update in October on the future of the Geelong plant, which supports about 700 jobs.

Ampol, the former Caltex Australia, which is reviewing the future of its Lytton refinery in Brisbane, said it was seeking more information on the measures to understand how they would help.

Bump for shares

"Global and domestic conditions for refining remain uncertain and extremely challenged," an Ampol spokesman said.

"While we are currently focused on the restart of operations at Lytton, we will continue to review our refining operations."

Shares in Viva jumped 5.6 per cent at $1.61, while Ampol rose 1.7 per cent to $24.02.

BP, which owns the Kwinana refinery in Western Australia, and ExxonMobil, which owns the Altona refinery in Victoria, both said they would work with government over the next six months as the details of the measures are nutted out.

"These are complex commercial and public policy issues," a BP spokesman added.

But automotive groups voiced worries that motorists could be unfairly burdened with the cost of the package, while James Voortman, the chief executive of the Australian Automotive Dealers Association, which oversees the interests of 3500 car dealers nationwide, also said it was important that businesses and motorists were shielded from higher fuel costs as a result.

“We will closely monitor this package as it is designed over the next six months, and we note the government's commitment to protect businesses and governments from higher fuel costs,'' Mr Voortman said, while adding that improving fuel security in Australia was crucial.

Mark Butler, Labor's energy spokesman, described the subsidy as a "petrol tax", and said that one way or another, motorists would pay.

Obligations for suppliers

Refiners have been hammered by the COVID-19 pandemic, which has slashed demand for jet fuel and petrol, and sent margins plunging, driving some plants into losses. Longer term, the companies also face hefty investments at their plants to meet tighter quality standards for petrol starting in mid-2027.

EnergyQuest principal Graeme Bethune said those macro issues were still lurking, notwithstanding the support policies.

"If things get back to normal, in terms of air travel and things like that, then it will help the Australian refineries get back to a more sustainable level," Dr Bethune said.

"If that doesn't happen, if international air travel stays depressed for years, then that's just going to increase the pressure and the problem will keep recurring."

The aid package includes obligations on suppliers of petrol, diesel and jet fuel to keep a minimum level of stockpiles to cushion the market in the case of a supply disruption.

The obligations will increase the level of diesel stocks to 28 days from the present 20 days, while stockpiles of petrol and jet fuel each need to be at least 24 days.

The four refineries will be directly exempt from the requirements, but they will apply to wholesale suppliers so will still affect the plant owners.

The "refinery production payment" of 1.15¢ per litre requires owners to commit to continued operation to receive the funds, expected to cost taxpayers $2.33 billion over 10 years.

The subsidy was met warily by Grattan Institute's Tony Wood, who said that once started, subsidies were hard to stop and inevitably led to other industries looking for their own hand-out.

The measure should therefore have a very firm sunset clause, said Mr Wood, who was more positive about the storage initiative although suggested the cost should be directly added to the fuel excise.

Australian refineries will be prioritised in the competitive process for the diesel storage initiative, which will fund an additional 780 million litres of onshore storage.

While the grant program, which will open in the first quarter of 2021, will be open to all proposals, the focus will be on projects in strategic regional locations, those connected to refineries and those with links to existing fuel infrastructure.