How much oil do you get for $94 million?
With the crude market in turmoil and prices at record lows, the Energy Minister Angus Taylor made his move, purchasing oil at dirt cheap prices and arranging for it to be stored in the US.
Then he embarked on a round of media appearances, telling the ABC’s morning program: “We would expect it would buy many millions of barrels of oil, and a million barrels is about a day’s worth of supply for Australia, but it’ll depend on the price.”
The Minister’s office told the ABC that the amount of oil purchased could not be disclosed. It was commercial-in-confidence.
Angus Taylor announced the purchase more than a month after the Government announced it had leased storage space in the US to begin building Australia’s strategic reserves.
In mid-March, shortly after the deal to lease US storage space, West Texas crude was selling for around $US20 a barrel but the exchange rate was heading down, plunging below 58 US cents.
Right now, on the spot market, a barrel of West Texas crude will cost about $US16 a barrel with the exchange rate around 65 US cents.
The Minister is correct. The nation has indeed purchased “many millions of barrels”, although some might challenge use of the word “many”. These calculations suggest the Government has purchased somewhere between 2.7 and 3.8 million barrels.
As the Minister pointed out, Australia consumes about a million barrels a day, so $94 million worth will barely last a long weekend.
IEA praises Government’s ‘wise move’
The International Energy Agency requires its 30 member countries to have a strategic petroleum reserve equal to 90 days of the previous year’s net oil imports. Net-exporter members are exempt, but that doesn’t include Australia.
Since 2001, when the agreement was struck, Australia has rarely complied because over the years we’ve become more of a net oil importer, so the strategic reserve requirement has increased.
The International Energy Agency described the Government’s purchase as an important achievement.
“It’s a wise move. The timing couldn’t be better,” IEA executive director Dr Fatih Birol said.
The IEA chief considers the need for strategic reserves no less necessary just because the world is currently awash with oil.
“The energy business is a long-term business,” Dr Birol explained.
“It’s true there’s a lot of oil in the market today, but you can’t be sure about conditions in the future.
“Oil is still the most important commodity on financial markets and we know the world is likely to experience many geopolitical tensions which may require some oil self-sufficiency in the future.”
Strategic reserves are also seen by the IEA as a necessary protection from damaging extreme weather caused by climate change.
Australian oil reserves stored offshore
Whatever the benefits of a strategic oil reserve, they are reduced by storing it in the US. It takes at least two-to-three weeks to ship it to Australia and that may not be possible during a crisis.
Australia has about 30 days of supply onshore and another 22 days’ worth making its way to Australia on tankers.
In other words, the volume of oil stored on Australian soil is well short of the IEA’s 90-day requirement.
“The Australian Government needs to consider storage capacity at home as well,” added Dr Birol.
Angus Taylor is working on that, but it’s an issue Governments and industry officials have been wrestling with for the best part of a decade.
The major problem is where do you put it?
A single site would be a long way from most other parts of the country.
Strategic reserves are normally stored as unrefined product because crude oil can be stored for longer periods than petrol or diesel.
Ideally, the site should be near a deep water harbour and refinery.
Once a site is chosen it could take several years to get the necessary building and environmental approvals even before the facility and its infrastructure can be built.
Oil reserves useless if they can’t be refined into fuel
Mark McKenzie, the CEO of the Australasian Convenience and Petroleum Marketers Association, said it’s a huge undertaking, which he argues is unnecessary.
Mr McKenzie represents fuel wholesalers and retailers. Everyone involved from the refinery gate to the service stations.
“The big challenge will be finding the investment capital for that big storage facility and also finding the seaside land to allow a vessel to pull up at a terminal,” he said.
“We’re already basically spreading our risk by contracting with 20 or 22 different oil producing countries, so it’s not concentrated in any one supply line.”
Australia’s oil refining capacity is also cited as a problem for utilising onshore crude reserves.
There are only four local refineries left, which currently meet around 45 per cent of the country’s fuel requirements.
That means, if it came to the crunch, Australia could not make full use of its strategic reserve immediately without the massive cost of building new refining capacity to complement the new local oil storage.
Extracted from ABC