Subsidies that could top $2 billion should ensure Australia’s two remaining oil refiners remain open for at least another six years but the generous package has raised questions about the cost to prop up the unprofitable plants and has failed to eliminate worries about fuel security.
After Prime Minister Scott Morrison announced the fuel security package in Brisbane, Ampol and Viva Energy immediately pledged to keep their respective refineries running until at least mid-2027, saving more than 1250 jobs and hundreds of contractor positions. The commitments depend on the support package being passed into law.
They will also bring forward investments – that will now be heavily subsidised – to upgrade the refineries to meet cleaner fuel standards in extensive use worldwide and which will now be introduced here at the end of 2024 instead of mid-2027.
Shares in the companies surged on news of the measures, which will put a floor under their earnings from refining, preventing the heavy losses the industry suffered in 2020 and which drove two other refiners to close their plants.
Ampol jumped 6.1 per cent to $27.51, while Viva gained 7 per cent to $2.13.
“You reduce your volatility of earnings, you get your cash support, you get your capex provided, it’s just a fantastic package,” Bank of America analyst David Errington told Viva CEO Scott Wyatt on a conference call.
“I’m wondering what the catch to all of this is but well done, a great deal.”
National security in terms of having the sovereign capacity to refine oil was a significant driver of the decision, said Mr Morrison in Lytton in one of his first stops in his post-budget tour.
Australia still produced enough oil from the Bass Strait, the North-West Shelf, the Cooper Basin and, if developed, the Beetaloo Basin, to guarantee enough for critical needs. Despite the rise of electric vehicles, the preservation of domestic capability to convert crude oil into fuels such as diesel used by defence, emergency services and agriculture has been a key driver for the push by Canberra to improve security of liquid fuel supply amid heightened regional tensions in Asia.
Mr Morrison said Australia would work with like-minded countries to guarantee the supply of oil and said he would discuss the matter when he attends the G7 summit in London in June.
“One of the most important issues we’ve been discussing amongst like-minded liberal democracies, market based economies, is the security of supply chains amongst those types of countries,” he said.
“It’s part of the discussion I had with [UK Prime Minister] Boris Johnson just last week and I’m sure there will be many more of those discussions in the months ahead over the course of the many international meetings.
“You need to have self-sufficiency here and you’ve got to have partners you can rely on as well. And we’re working both sides of that.”
In the past seven months multinationals BP and ExxonMobil have already decided to close their refineries in Western Australia and Victoria, respectively, leaving the Lytton and Geelong plants the only ones left to prevent Australia becoming wholly reliant on imports for petrol, diesel and jet fuel.
Australian Workers Union national secretary Daniel Walton described the breakthrough deal, which follows about 12 months’ negotiating between the federal government and the refining industry, as “a great result”.
Pressure had been growing on the government to sweeten its offer to refiners after the BP and Exxon decisions and as national security moved up the agenda in the COVID-19 pandemic.
“We’ve been saying for months Australia should never become a nation that can’t make its own fuel, and that we need not reach that dire situation if we get a few policy settings right,” Mr Walton said.
In the past seven months multinationals BP and ExxonMobil have already decided to close their refineries in Western Australia and Victoria, respectively, leaving the Lytton and Geelong plants the only ones left to prevent Australia becoming wholly reliant on imports for petrol, diesel and jet fuel.
Australian Workers Union national secretary Daniel Walton described the breakthrough deal, which follows about 12 months’ negotiating between the federal government and the refining industry, as “a great result”.
Pressure had been growing on the government to sweeten its offer to refiners after the BP and Exxon decisions and as national security moved up the agenda in the COVID-19 pandemic.
“We’ve been saying for months Australia should never become a nation that can’t make its own fuel, and that we need not reach that dire situation if we get a few policy settings right,” Mr Walton said.
In the past seven months multinationals BP and ExxonMobil have already decided to close their refineries in Western Australia and Victoria, respectively, leaving the Lytton and Geelong plants the only ones left to prevent Australia becoming wholly reliant on imports for petrol, diesel and jet fuel.
Australian Workers Union national secretary Daniel Walton described the breakthrough deal, which follows about 12 months’ negotiating between the federal government and the refining industry, as “a great result”.
Pressure had been growing on the government to sweeten its offer to refiners after the BP and Exxon decisions and as national security moved up the agenda in the COVID-19 pandemic.
“We’ve been saying for months Australia should never become a nation that can’t make its own fuel, and that we need not reach that dire situation if we get a few policy settings right,” Mr Walton said.
In the past seven months multinationals BP and ExxonMobil have already decided to close their refineries in Western Australia and Victoria, respectively, leaving the Lytton and Geelong plants the only ones left to prevent Australia becoming wholly reliant on imports for petrol, diesel and jet fuel.
Australian Workers Union national secretary Daniel Walton described the breakthrough deal, which follows about 12 months’ negotiating between the federal government and the refining industry, as “a great result”.
Pressure had been growing on the government to sweeten its offer to refiners after the BP and Exxon decisions and as national security moved up the agenda in the COVID-19 pandemic.
“We’ve been saying for months Australia should never become a nation that can’t make its own fuel, and that we need not reach that dire situation if we get a few policy settings right,” Mr Walton said.
But independent MP Bob Katter said the refinery “bail-out” was only a tiny step towards self-sufficiency and pledged to move amendments to the bill including the measure to include ethanol, waste-to-diesel plants and a requirement for public servants to drive Australian-built electric cars in the cities.
The Australian Automobile Association also questioned how much the taxpayer funds would improve fuel security, given Australia’s refiners imported 81 per cent of the crude oil they processed in financial 2019, while electric vehicle proponents attacked the government’s support for refiners while doing little to support the take-up of clean EVs.
Don’t get days like this too often.
Two refineries saved and a decade of funding to ensure we continue refining at @ampolaustralia Lytton and Viva Geelong, long into the future @ Caltex Lytton Oil Refinery https://t.co/kAUDH71Tzq
— Daniel Walton (@DanDanWalton) May 17, 2021
For Viva and Ampol, however, the package of measures will strengthen balance sheets and enhance their ability to pursue growth investments, including in clean energy. Viva is already developing a low-carbon energy hub at Geelong, which will include LNG imports and hydrogen, while Ampol also has green hydrogen in its sights for Lytton, with the company flagging it will release its decarbonisation strategy later this week.
Mr Wyatt said Viva now expects to invest more than $500 million at Geelong including the refinery upgrade and energy hub projects over the next six years. The refinery made a cash loss of more than $200 million last year.
Ampol expects support of up to $108 million a year based on its current output of petrol and diesel, but that maximum limit would only be reached if margins are low, with subsidies falling away when margins are high. It will also get up to $125 million for its refinery upgrade, a subsidy of 50 per cent and will retrospectively collect about $40 million from the government’s interim refining support package that it had previously declined pending the review of Lytton.
Refiners will also benefit from an exemption from a 40 per cent increase in the minimum requirement for fuel suppliers to hold diesel stockpiles, which is due to come into effect on July 1, 2024. While the details of those “minimum stockholding obligations” have yet to be nutted out, analysts said the exemption would put refiners in a strong position relative to pure importers.
The measures come after a horror year of losses for Australia’s shrunken refining sector, as the impact of the COVID-19 pandemic slashed demand for transport fuels and depressed refining margins, threatening to wipe out domestic refining altogether.
They have effectively staved off the closure of Lytton, where Ampol initiated a formal review last year and where most analysts had anticipated a closure decision by June 30. Ampol said as recently as last week there was still “a big if” over its future with the decision hinging on the government measures.
The refiners’ commitment to keep their plants running until mid-2027 comes with a three-year option to extent that date. Ampol CEO Matt Halliday noted the company still has the flexibility to withdraw from the program and close Lytton early in specific circumstances, including “if the market conditions went through the floor”, resulting in persistently low margins, or if a new government altered the package.
“Both the board and I believe this direction is absolutely in the best interest of shareholders in maximising value from what is a v v strategic asset,” Mr Halliday said of the decision to keep Lytton open with the help of the measures.
The package includes as much as $2.05 billion in the “fuel security service payment”, up to $302 million in support for upgrades to meet stricter standards for the limit of sulphur in petrol, and $50.7 million to implement and monitor the payment and the minimum stockholding obligation included in the new fuel security framework.
Extracted from AFR