Ampol and Viva Energy are expected to vie with international rivals Esso and BP and fuel storage experts such as Vopak for contracts with the federal government to manage strategic stocks of oil and fuels, as they target an extra revenue stream that could provide a lifeline for their struggling refineries.
While Australia’s refining industry has historically argued that a strategic domestic oil reserve isn’t needed, all four remaining players look set to participate in the government’s request for information on potential storage projects, which opened on Monday.
The government is seeking to cater for up to 15 million barrels of crude oil and refined fuels such as petrol and diesel, and is also studying other options that could prop up the ailing sector, understood to include low-interest loans and rebates on excise.
The prize is potentially significant, with Goldman Sachs analyst Baden Moore estimating that Viva’s gross earnings could jump by up to 18 per cent, if it captured the entire storage opportunity.
He put potential earnings from the project at between $77 million and $116 million, based on an estimated capital cost of $1 billion to $1.5 billion and a cost of capital of 7.7 per cent.
But Ampol, the former Caltex Australia, is keen for a slice of the action.
“As the market leader and an independent, Australian owned company with strategically located and expandable assets nationally, Ampol is well placed to participate in Federal Government-led initiatives focused on supply security and a sustainable refining industry,” a spokesman said.
“The significant global demand destruction resulting from COVID-19 has created a number of economic challenges for domestic refining,” he noted, welcoming the recognition of those challenges by government.
Viva chief executive Scott Wyatt said on Tuesday the company saw a role for its loss-making Geelong refinery site in the storage scheme, with Viva procuring crude that could be stored in a new tank at the site, managing and owning the storage and processing oil when it needed to be released.
“The industry has been working closely with the Federal government on a review of Australia’s fuel supply security and adding additional strategic storage can help with that,” Mr Wyatt said.
“We believe that storing additional crude oil alongside a refinery is an optimal solution as crude has a long shelf life, can be refined into usable products when needed, and can improve the flexibility and supply economics for the refinery.”
BP, which owns the Kwinana refinery in Western Australia, said it welcomed the process to identify opportunities to increase domestic fuel storage and “ease pressure” on refineries and highlighted its track record in secure energy supply for the country.
ExxonMobil, which owns a refinery at Altona in Victoria, said it was reviewing the request for information by federal energy minister Angus Taylor.
Still, EnergyQuest principal Graeme Bethune said that while refiners could in theory build storage and lease it to government he believed it was more likely that existing storage owners like Vopak would host the strategic reserves.
“Australia is more unusual in not having strategic reserves but the refiners have argued that it is unnecessary and there certainly does not seem to have been a disruption during the pandemic,” Dr Bethune noted.
“It’s 40 sailing days from the Gulf of Mexico to Australia so hosting the oil onshore would make it quicker to access if it were here.”
MST Marquee analyst Mark Samter said he hoped the fuel storage program might form part of a broader plan to allow the refining industry to consolidate in some form to allow players to competitively keep open at least the majority of the plants.
Mr Samter said the issue was pressing, voicing doubts around Ampol’s appetite to reopen its Lytton refinery in Brisbane, which is undergoing extended maintenance, in the absence of measures that would support the industry or allow for consolidation.
The industry department has advised the storage program will focus on projects that might not proceed through existing commercial drivers.
It asked for information on the cost, design and location of potential storage facilities, options for financing them and the timing for building them to be able to examine different options and decide on the next steps, to be announced later this year.
The process follows the government’s deal with the US in April to store Australian government-owned oil in the US Strategic Petroleum Reserve. The domestic storage would be the equivalent of 14-30 days of consumption, helping meet the International Energy Agency’s requirement that member countries hold 90 days of net imports of fuels.
Goldman Sachs’ Mr Moore said he believed Viva was one of the best positioned to compete for the increased tankage, helping secure the future of the Geelong site ahead of Viva’s longer-term ambitions to develop it into an energy hub.
He said the successful tender for increased tankage from the government “would drive upside to our valuation”.
“In our view Viva Energy, along with Ampol, have a strong position to operate an east coast solution, while Vopak and Mobil are well positioned in NSW/VIC respectively,” Mr Moore said.
Extracted from AFR