Geelong refinery ‘doomed without handout’

The threatened shutdown of Geelong oil refinery would mean a critical loss of fuel security for the country and trigger a domino-style collapse of Victorian manufacturing, said Viva Energy chief executive Scott Wyatt, advising that only a government support package can now save the loss-making plant.

Mr Wyatt said the shutdown of one of Australia’s four remaining oil refineries, which have all been hit by fallout from the COVID-19 pandemic, would have serious implications, both nationally and for the state.

“This is not just a national crisis, it’s a state crisis that needs to be addressed,” he told The Australian Financial Review. after Viva flagged a possible shutdown of the 120,000 barrels-a-day plant due to “extreme pressures” on refining worsened by Victoria’s lockdown restrictions.

The federal government is already considering aid measures for the plant, which supports 700 jobs. But Mr Wyatt said action was also needed from the Victorian government, which has been slow to address shipping and energy cost disadvantages that left the Geelong plant uncompetitive even against domestic peers.

Australia already imports more than half its petrol and diesel needs, part of the reason behind Canberra’s strategic storage plan, where all four refineries are vying for contracts with the government to build and manage oil and fuels storage plants.

“In a world where sovereign security and energy security has been brought into sharp focus by the impacts of COVID-19, retaining that refining capacity is absolutely critical for the country,” Mr Wyatt said.

But within Victoria, a closure of Geelong would put at risk other manufacturing and chemical plants, he argued, risking the elimination of a whole sector just as happened with the car industry.

“It needs to be understood that Geelong, Altona, LyondellBasell, Qenos – this is a whole ecosystem of plants that indirectly support each other, and you pull one component of that apart and you risk the whole thing falling apart,” he said.

Constraints in the shipping channel to Geelong costs Viva $20 million a year, while the state has the highest electricity and gas costs in the country, increasing the plant’s energy costs by $20 million-$30 million over the last few years, Mr Wyatt estimated.

“I am disappointed with the speed at which they are moving, and unfortunately time is not on our side,” Mr Wyatt said of the Victorian government’s response, adding that the federal government was reacting more speedily with its review of the sector.

“We need to see the same level of support at the state level.”

“Ultimately it’s going to be a package of support that’s going to be critical for us to have the confidence to continue to invest in the refinery and continue to run the refinery for the foreseeable future.”

The short-term outlook for the plant isn’t helped by the “potentially unachievable” health criteria the Victorian government announced on Sunday for the re-opening of the economy, which means it will be “challenging” to restart all the processing units at Geelong in November as planned, Mr Wyatt said.

“The short-term future becomes easier to manage if there is confidence in the road map and we have more confidence in the long-term future,” he said. Viva has a plan to adapt the site longer term for solar power, storage and hydrogen production.

A spokesman for the Victorian government said only: “We’re aware of the considerable impacts the pandemic is having on business and industry and we’re closely monitoring the situation at Viva Energy and working with the organisation.”

A spokesman for federal Energy Minister Angus Taylor said the Morrison government is providing ongoing support to the refineries through JobKeeper, and is working closely with the sector on its long-term viability. He put the onus on the Victorian government to take action.

“As Viva has made clear, the Victorian Government’s stage 4 restrictions are having a significant impact on the viability of its Geelong refinery,” Mr Taylor’s spokesman said.

“We hope the Victorian Government is working closely with refineries to protect the sector and its workers.”

Australian Workers’ Union Victorian secretary Ben Davis said the closure threat was real but could be averted by a federal and state support package.

The union is not pushing for governments to underwrite losses but to provide a support plan to get the refinery through the crisis.

“We can’t let our refinery capacity go,” Mr Davis said. “As a national security piece and an economic piece that would be a disaster.”

He said the union’s members had been shocked at Viva’s announcement, saying while they knew it was financially struggling talk of closure “came out of the blue”.

The Geelong refinery, which supplies over half Victoria’s fuel, was however half-expected to close six years ago when former owner Shell decided to exit, with few expecting a buyer would keep it running. The threat revived again when the pandemic slashed demand for transport fuels and sent refining margins plunging.

The plant made a loss of almost $50 million in the June half and the damage has continued, with production only at 60 per cent of capacity. The plant’s gross margin on converting oil into refined fuels was just $US2 a barrel in July, less than half the $US4.50-$US5 it needs to break even.

“We can’t go on like that for ever,” Mr Wyatt said, flagging a decision by October.

“We are at a point now where the challenges are so great we genuinely do need some help from the state and federal governments and the engagements we have with them over the next month or so are going to be absolutely critical,” he said.

Shares in Viva, partly owned by global commodities trader Vitol, dipped 0.5¢ to $1.595.

Ampol chief executive Matt Halliday has also warned of risks to Ampol’s Lytton refinery in Brisbane, while ExxonMobil’s Altona refinery and BP’s Kwinana plant in Western Australia have also had to rein in operations this year.

Viva, which owns the Shell branded petrol station network, said its fuels retailing business “continues to show resilience” in the face of the ongoing restrictions in Victoria. Sales volumes in Viva’s Alliance with Coles are holding at more than 50 million litres a week, while retail margins remain “supportive”.

Extracted from AFR

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