The future of Viva Energy’s Geelong oil refinery remains in the balance after its losses accelerated in the September quarter, piling further pressure on the federal government’s fuel security measures to prevent the closure of a key manufacturer in lockdown-hit Victoria.
The loss in refining totalled $30 million in the quarter, adding to the deficit of almost $50 million amassed in the June half.
Viva said it was “pursuing all available options” to improve cash flow and stem “unsustainable” losses at the plant and will update the market in December on whether it will continue operations there beyond March 2021.
Rival Ampol advised last week it may close its Lytton refinery in Brisbane after a blowout in losses, while Australia’s other two refineries are similarly struggling with the slump in demand for jet fuel and weak refining margins caused by the COVID-19 pandemic.
Viva is working with the Morrison government on the details of the $2.5 billion fuel security package as it tries to save the plant. That package includes a direct subsidy of 1.15¢ a litre for the local production of fuel, as well as potential contracts for fuel storage that may provide extra revenue.
The government drew up the plan – announced last month – with the twin aims of improving the security of supply in liquid fuels for the nation and preserving critical manufacturing as supply chains come under pressure due to COVID-19 and mounting regional tensions.
But the evidence is growing that those measures will likely only be enough to temporarily stave off the further shrinkage of Australia’s oil refining sector, where three plants have shut down in the past decade. An estimated bill of $1 billion to upgrade the remaining four plants to meet stricter petrol quality standards coming into effect in 2027 adds further pressure.
“Our in-house view is that the proposed government incentives alone are likely insufficient to keep all four refineries open in the long run,” said Sri Paravaikkarasu, an Asian refining expert at consultancy FACTS Global Energy.
“After assessing several factors, FGE expects that Geelong refinery will not survive the COVID-19 debacle, while Ampol’s Lytton refinery will likely make its exit before the implementation of the 10 parts per million sulphur limit in 2027.”
Viva said non-essential spending at the plant is being deferred or minimised to reduce the outflow of cash, including a major maintenance program at one unit that has been pushed back into 2021.
Margins at Geelong were just $US2.30 a barrel in the September quarter, about half of what it needs to break even. Maintenance work currently being carried is to be completed within budget by the end of October, costing $85 million to $100 million.
The owner of the former Shell Australia petrol stations wants to resume full operations at Geelong refinery from early November to improve profitability. But Victoria’s lockdown and other disadvantages specific to the site have hampered efforts to pull it back into the black, as advised by Viva in September.
Viva said the longer-term outlook for refining remains “uncertain” due to the drop in demand for oil products, which it expects to drag down refining margins through 2021.
“The company continues to evaluate the future viability of the refining business and the support contemplated by the Fuel Security Package, and expects to be able to provide a further update on the refining business and decisions on continued operations beyond the first quarter of 2021 will be provided in December 2020,” it said.
Viva’s retail business continues to recover from the stay-at-home restrictions, with total petrol sales in the September quarter excluding Victoria in line with last year. Sales volumes in its Alliance network with Coles averaged 52.3 million litres a week, up 14 per cent from the June 2020 quarter.
But petrol sales in Victoria were down 37 per cent from a year earlier amid the stage four restrictions. The retail business is, however, benefiting from “relatively stronger” retail fuel margins compared with a year earlier and is well-positioned for further recovery as Victorian restrictions ease, the company said.
Viva’s commercial business excluding aviation is performing “broadly in line” with a year earlier, with diesel sales in the third quarter down just 3 per cent.
But aviation sales volumes are still getting smashed, down 76 per cent in the September quarter from a year earlier and showing no improvement from the June quarter. Viva said it expects “modest improvement” in aviation fuel volumes as domestic travel recovers.
Extracted from AFR