The existential threat that has enveloped Australia’s refineries due to the COVID-19 pandemic has put the Morrison government over a barrel, escalating pressure on it to step in immediately with a more generous assistance plan to save a sector critical for fuel security and local manufacturing.
The risk of closure goes beyond the two plants owned by listed companies, with the patience of multinationals ExxonMobil and BP to struggle on with their ageing and inefficient plants through a prolonged slump also expected to be growing thin.
For plants that have been hanging by a thread for years, the pandemic risks being the last straw, despite assistance in the wings through the federal government’s proposed $2.5 billion fuel security package.
“We’re getting close to the point where we need to start talking about the word ‘rescue’,” Daniel Walton, national secretary of the Australian Workers’ Union, told AFR Weekend, reflecting on Ampol’s advice on Thursday that is examining the closure of its Lytton refinery and the broader risks to the sector.
“It can be be overplayed how serious a situation we find ourselves in.”
With Ampol to decide on the fate of its Brisbane refinery by next June and Viva Energy due to announce the fate of its Geelong plant this month, two of the country’s four remaining refineries are on formal notice of possible shutdown.
The other two are clinging on, grasping for the potential lifeline of the Morrison government’s proposed measures, which include a direct subsidy on locally produced petrol, diesel and jet fuel.
“We’ve got enough alarm bells being triggered across the industry that if I were the ministers responsible I would be having a long and hard think over the weekend about getting the refining industry and worker representatives together to say what is it going to take to keep a refining industry going in this country through the pandemic and beyond,” Mr Walton said.
It can be be overplayed how serious a situation we find ourselves in.
— Daniel Walton, AWU
“There are big decisions coming down the line. As reviews take place across the board – I am sure they are all taking a close look at the moment – a strong and helpful hand taken by government is going to help shape these reviews in a positive direction.”
Federal Energy Minister Angus Taylor reiterated the government is “working closely” with Ampol and the rest of the sector to implement the fuel security package.
Still, the closure threat is “very, very real,” said MST Marquee energy analyst Mark Samter. He regards it as “highly likely” that Lytton closes and likewise Exxon’s small Altona plant in Victoria, and doubts BP would want to hang on at Kwinana in Western Australia.
“You would have to say it is safe to assume Australian downstream isn’t too exciting for [Exxon],” Mr Samter said.
“With BP you just have to look at their new corporate direction and think a crappy little carbon-intensive refinery in the back end of nowhere isn’t at the top of their list for corporate priorities.”
With the package of measures set to take six months to be finalised, listed players Ampol and Viva may need faster action. That may provide at least a temporary reprieve from closure for plants that are a valuable part of their supply chains and also provided a combined $187 million to their gross earnings in 2019.
Still, as Ampol chief executive Matt Halliday emphasised, for the sake of shareholders, losses that have piled up to $141 million for 2020 to date at Lytton can’t be tolerated for much longer.
“It is is important to realise that the pressures that the industry is facing are very extreme, so we will continue to engage with government on their package but we need to be realistic about the outlook for these assets,” Mr Halliday said.
Viva’s Geelong plant, which made a loss of almost $50 million in the June half, is also expected to have extended that deficit in the September quarter. The plant’s gross margin on converting oil into refined fuels was just $US2 a barrel in July, less than half the $US4.50-$US5 it needs to break even.
“There’s no doubt that the huge fall in aviation demand has made a difficult situation even more challenging,” said Graeme Bethune, principal at consultancy EnergyQuest.
“It’s a matter of to what extent they can weather the storm until things pick up again.
“If I was sitting in the government’s shoes I’d be trying to make sure there was a long-term sustainable plan but in terms of short-term issues you’d expect that companies wd be able to raise debt or equity to cover themselves over that period.”
With that all-important refining margin being a benchmark set by Asian supply and demand, a broader recovery across the region is more critical than a revival in Australian consumption of fuels.
But among 10 key Asian markets, only China has seen domestic fuel demand return to growth, according to Fitch Solutions, which says regional consumption may only return to 2019 levels by 2022 due to border closures, movement restrictions and labour disruptions.
Fuel margins have tanked accordingly throughout Asia.
“The margins for gasoline and diesel are less than half of where they were a year ago, and jet fuel only a fifth as COVID-19 hits demand and bloats stocks,” Fitch said.
Refiners operating in remote, higher-cost markets are particularly impacted, with Fitch pointing to plant owners in New Zealand and the Philippines mulling permanent closure as well as those in Australia. Meanwhile, timelines for some planned new refineries in China, India, Malaysia, Thailand and Vietnam have been pushed back, Fitch said.
BP and ExxonMobil said they are working with the federal government as it consults on its package of fuel security measures, which Exxon said is “an important first step in support for our industry”.
The package includes a 1.15¢ per litre “refinery production payment”, which would in return require plant owners to commit to continued operation and is budgeted to cost taxpayers $2.33 billion over 10 years.
BP said it’s continuing to “make the necessary interventions to maintain sustained operations in response to the demand impacts, low oil prices and refining margins”.
Mr Walton said that from a fuel security point of view, saving local refining is “absolutely paramount”.
“No-one wants to find themselves in a situation where we don’t have the capacity to refine fuels if supply lines are cut off, especially with regional tensions growing,” he said.
“The public is not prepared to sit back and let these plants disappear without a solution.”
Extracted from AFR