The pandemic has accelerated refinery closures globally as refiners and oil majors acknowledge that some sites have become permanently uneconomical amid depressed refining margins, fierce regional competition, and expectations of declining road fuel demand in the long term. For many countries, the closing of refining capacity means increased dependence on imports and heightened risk of fuel supply disruption in case of a major regional or world conflict.
Nowhere is this more evident now than in Australia, which will soon find itself with just two operating refineries, including one under review for potential closure, compared to eight operational sites 20 years ago.
Due to its geographical position, Australia has lost the competition in the refining business as small and old refineries cannot rival the booming oil processing capacity in Asia, particularly China and India.
Also due to its location, Australia—with reduced refining capacity—will increase its dependence on fuel imports from Asia, including from China, relations with which have deteriorated significantly over the past months, severely affecting energy trade.
Governments need to realize that the importance of refineries as strategic assets of national security has diminished since World War II, and an all-out global conflict with today’s warfare capabilities would cut not only fuel imports to oil-importing nations but also crude flows, Reuters columnist John Kemp argues. In case of a war, refineries in countries dependent on crude imports would be worth nothing if blockades of shipments and shipping lanes cut off crude flows to feed those refineries, Kemp says.
This may be true in case of a global armed conflict, but Australia, due to its proximity to China, is thinking about its national security even when a refinery with a processing capacity of just 90,000 barrels per day (bpd) closes.
This will happen when ExxonMobil converts its Altona refinery into an import terminal. The refinery is no longer considered economically viable, the U.S. corporation said this week, in the second such announcement from a supermajor in just a few months, following BP’s decision to cease production at the Kwinana refinery in Western Australia and convert it to a fuel import terminal.
The U.S.-China trade war and the Australia-China geopolitical and trade spat of recent months, as well as the heightened uncertainty on global energy markets in the pandemic, is exacerbating the national security challenge for Australia.
The country will have two more import terminals and two fewer refineries, which will inevitably raise its import dependence.
The refinery closures also highlight the wobbling energy strategy of Australia’s government, which has yet to draft a comprehensive plan how to adapt the world’s top coal exporter to the challenges posed by climate change, according to Reuters columnist Clyde Russell.
Australia has a strong pipeline of solar and wind power projects, which could help it achieve the fastest transition to an overwhelming share of renewable sources in its energy mix, according to data and analytics company GlobalData.
However, growing shares of renewable electricity will not mask the fuel import dependence.
So Australia will need to import more fuel and will likely import it from those new large regional refineries that have killed its small decades-old facilities.
“The continued growth of large-scale, export-oriented refineries throughout Asia and the Middle East has structurally changed the Australian market,” BP said in October when it announced the decision to convert the Kwinana refinery into a fuel import terminal.
“Having fewer refineries reduces Australia’s ability to refine fuels if shipping and supply chains are ever severely disrupted for any reason in the future,” Dr. Hunter Laidlaw from the Parliamentary Library wrote in December.
“Even before these refineries close, more than 90 percent of Australia’s refined fuels are coming from overseas, leaving the nation seriously exposed to any crisis that impacts on maritime supply chains,” Jamie Newlyn, Maritime Union of Australia (MUA) Assistant National Secretary, said after Exxon’s announcement this week.
“If a pandemic, military conflict, natural disasters, or an economic shock cuts the flow of fuel to Australia, the situation would be catastrophic, with every part of the nation grinding to a halt,” Newlyn added.
The fact that Australia will likely increase its dependence on Chinese fuel imports is also a concern, especially amid the difficult relations of the two countries in recent months.
Australia’s petroleum imports from China have more than doubled over the last five years, Australian energy advisory firm EnergyQuest said this week.
A whopping 98 percent of all petroleum sales in Australia in 2019, the last ‘normal’ year, came from imports of crude or refined products. Australia’s imports from China accounted for 14 percent of refined product imports, according to EnergyQuest data.
“Australia also imports from Japan, Singapore and Taiwan where there are also cuts to refining capacity so imports from China could increase further, replacing these. A return to “normal” growth in petrol, diesel and jet fuel would also increase Chinese imports,” EnergyQuest said.
Extracted from Oil Price