LNG imports, solar farms, batteries, hydrogen and gas-fired power generation are all on the table for Viva Energy as it seeks to diversify its loss-making refining site at Geelong while tapping new opportunities in clean energy.
The unveiling of the strategy to transform Geelong into an “energy hub” for Australia’s south-east came as the petrol and diesel supplier cheered the market with what was regarded as its first profit upgrade since it listed in July 2018.
Shares in Viva, the owner of the former Shell refinery and petrol station network in Australia, surged 15.5 per cent to $1.755, their highest since before the COVID-19 restrictions kicked off in March. The jump came despite the company’s advice that the refining business would sink into the red by as much as $42.5 million this June half.
Chief executive Scott Wyatt described the overall guidance for the June half as “pretty outstanding”, given the top end of the estimated range for underlying earnings is “broadly” in line with the first half of 2019, despite the devastating impact of COVID-19 on demand for aviation fuel in particular.
Underlying net profit is guided at $20 million-$50 million, compared to $50.9 million in the first half of 2019.
Retail earnings are set to rise 15-18 per cent from the year-earlier half, while commercial earnings will be down by a similar amount, mostly due to the heavy loss of aviation sales. But even in aviation fuel, the decline has been less severe than the 80-90 per cent anticipated, down about 75 per cent.
But the Geelong refinery has been running at a loss all year, with refining margins in the year to date at $US3.10 a barrel, well below the $US4.50-$US5/bbl it needs to break even.
With refining margins expected to remain soft through 2020 and 2021 it was a close-run decision for Viva whether to proceed with expensive maintenance work at the site to keep the plant in operation for another four years, with closure the inevitable alternative.
“It was a very difficult decision because obviously the refinery has been losing money this year and it’s very hard to overlook that,” Mr Wyatt told The Australian Financial Review.
He said the signals from Federal Energy Minister Angus Taylor and the rest of government on the importance of maintaining a domestic refining sector and moves to support the industry through a strategic review were significant in supporting the decision to go ahead with the maintenance. The work will be stretched out over four months now instead of two, starting in July, helping cut the cost to $85 million-$100 million, from the original estimate of as much as $140 million.
“Those sorts of signals are really important for building confidence about the future,” Mr Wyatt said of the government’s acknowledgement of the role the industry plays in energy security, self-sufficiency and regional employment.
The federal government’s intention to set up a strategic oil reserve within Australia also offers the possibility of an additional revenue stream, helping secure the future of Geelong.
Mr Wyatt pointed to the capacity for a new crude tank built at Geelong to store oil stocks on behalf of the government, with Viva potentially able to play a role in purchasing oil, operating and managing the storage, and processing crude when it needs to be released.
“Its a good example of how the government can support the sector in a way that provides benefits to the refinery as well as significance to the country in terms of achieving those strategic stocks objectives,” Mr Wyatt said.
Australia’s four remaining refineries have been struggling with a severe dislocation between fuel supply and demand due to the pandemic, which has slashed demand for fuels and forced down margins, putting the future of the plants at risk.
Viva has already slashed petrol production at Geelong by closing one unit, and is using the federal government’s JobKeeper scheme to support about 1000 employees, including airport refuellers and refinery workers.
The LNG import plan puts Viva alongside AGL Energy and others working on plants to bring natural gas into Australia’s south-eastern region as output is set to decline from the maturing Bass Strait fields.
Viva said a floating LNG storage and supply facility at Geelong would form a “virtual pipeline” from northern gas fields to the southern states. It could supply 80-140 petajoules a year of gas, meeting up to 30 per cent of southern state demand and increasing competition.
Viva will shortly invite expressions of interest from potential partners for gas supply, gas offtake, power generation and the management of LNG floating storage, with Mr Scott saying that process would “flush out” interest.
The solar project could involve generation capacity of up to 27 megawatts, with battery storage helping provide output of more than 59 gigawatt-hours a year.
Viva also advised it would begin its previously planned $680 million share buyback to start to return funds to shareholders from the sale of its stake in a real estate investment trust.
Extracted from AFR