Fuel giant Caltex will temporarily shut one of Australia’s last remaining oil refineries for extended maintenance work as the coronavirus crisis wipes out global fuel demand and pressures the plant’s already-battered profit margins.
In a decision that raises questions about the viability of the nation’s three other refineries, Caltex said the Lytton refinery in Brisbane would be closed in May as it brought forward the start of a maintenance outage initially planned for July. The company said it would reopen the refinery when “margin conditions have sufficiently recovered”.
“By taking this action now, we will continue to ensure the safe and reliable supply of high-quality transport fuels,” Caltex interim chief executive Matthew Halliday said. “This decision will result in an improved economic outcome and protect cash flows, while demonstrating our ongoing commitment to the Lytton refinery.”
Demand for Australian fuel refineries has been hit hard by restrictions to arrest the spread of the deadly pandemic as borders close, airlines suspend flights and passengers cancel their travel plans.
The ASX-listed fuel supplier – which is navigating a potential $8.8 billion takeover by Canadian convenience giant Alimentation Couche-Tarde – said it expected jet fuel demand could plunge between 80 per cent and 90 per cent while its refining margin at Lytton had nearly halved in 12 months. From $US7.34 a barrel in 2019, Caltex’s margin crashed to $US5.78 in January 2020 before falling another 28 per cent to as low as $US4.14 in February.
Mr Halliday said Caltex’s maintenance turnaround project at Lytton represented a significant investment in the refinery’s future. He said the decision to bring forward and lengthen the outage was due to the demand downturn and cash flow challenges affecting the facility, as well as the need to spread out the maintenance work to comply with social-distancing measures aimed at minimising the risk of a workforce infection.
Mr Halliday said he believed global markets would return to “something similar” to normal conditions once the coronavirus crisis abated. “Our refinery makes money across a broad range of market conditions,” he said.
“It’s been an extremely challenging period for our refinery and we would expect that for the other refineries in Australia.”
Viva Energy, which runs the Geelong fuel refinery and thousands of Shell-branded petrol stations nationally, last month revealed its refining margins had fallen 30 per cent from $US3.40 a barrel in January to $US.2.40 in February.
Oil and gas analysts on Monday said they viewed Caltex’s decision to bring forward the maintenance outage as a “prudent and pragmatic” response to a rapidly evolving coronavirus situation, which was pressuring end-product prices and refining margins globally.
“We think Caltex’s approach to bring forward its turnaround and inspection given recent margin compression is sensible,” RBC Capital Markets analyst Ben Wilson said.
“While demand for most of its products … continues to take a significant hit from COVID-19-related demand pressures, we believe that these are predominantly short-term issues that Caltex will be able to work through over time.”
Mr Wilson said Lytton was a low-cost refinery that should be well-placed to benefit from significant scaling-back of refinery runs globally in the face of reduced demand in a cyclically driven business.
Extracted from The Sydney Morning Herald