RESEARCH PAPER SERIES, 2019–20   8 MAY 2020

Liquid fuel security: a quick guide–May 2020 update

Dr Hunter Laidlaw

Science, Technology, Environment and Resources

This quick guide is designed to answer some of the common questions regarding liquid fuel security in Australia. It also contains a list of key resources to provide context and assist understanding of this long-running issue.

This paper updates and adds to the 2018 Parliamentary Library research paper entitled Liquid fuel security: a quick guide.

1 Background and recent developments

Liquid fuel security is a topic of long-standing debate in Australia. Most recently, it has been raised in relation to the Government’s plan to store crude oil in the United States’ Strategic Petroleum Reserve (SPR), as well as how the ongoing pandemic is impacting liquid fuel supply and consumption.

Australia, as a member of the International Energy Agency (IEA), is a party to the International Energy Program and treaty that requires all member states maintain oil stocks equivalent to at least 90 days of the previous year’s daily net oil imports. The purpose of this requirement is to ensure that oil-importing countries can withstand disruptions to supply by releasing stockpiled oil. It enables member countries to take collective action to release such oil stocks to counter the risk of oil price shocks due to significant supply disruptions.

The IEA 90 day net import stockholding obligation is therefore not solely about providing a secure reserve of oil within a specific country. It is important to note that calculation of the IEA obligation is different to the calculation of the number of consumption days of oil stocks that a country may hold.

At the time of joining the IEA in 1979, Australia was a net exporter of oil and was therefore exempt from the stockpiling requirement. Since then, Australia’s oil production has peaked and is currently in decline. Combined with a reduction in oil refining capacity and an increasing reliance on imported oil products, Australia became non-compliant with the stockholding obligation in 2012. The following section notes major actions being taken to address this non-compliance.

The approach taken to meeting the IEA obligation varies between member countries. Approaches include having government-owned stocks, establishing a separate agency (which could be on behalf of government or industry) to manage stocks, or implementing obligations on industry to meet a government requirement. Many countries use a combination of these approaches.

Many of the issues around liquid fuel security have been an ongoing challenge. The first oil shock in 1973–74 helped precipitate the foundation of the IEA in 1974. Immediately following the second oil shock in 1979, Australia’s National Energy Advisory Committee recommended:

With regard to supply insecurity ... Consideration be given as a matter of high priority to the specific form and location of strategic stockpiles[,] the timing of their purchase, the methods of their release and their relationship to those required as a result of Australia’s IEA membership. Methods of financing or of providing incentives for such stockholdings should also be examined.

During 1986, the Energy 2000 Policy Review for petroleum recognised:

With a growing dependence on imports, Australia would also become more vulnerable to supply disruptions. The disadvantages of this vulnerability will never be easy to quantify and consequently it will be extremely difficult for Governments to decide what level of insurance against disruption would be appropriate.

In a 2013 report on Australia’s fuel security commissioned by the National Roads and Motorists’ Association (NRMA), retired Air Vice Marshall John Blackburn detailed Australia’s long maritime supply chains for liquid fuels, running from or through a number of conflict zones and the resulting vulnerabilities to trading systems, shipping, ports and refineries. Liquid fuel supply routes to Australia are diverse and flexible. Figure 1 shows the origins and diversity in the supply chain for refined liquid fuels in Australia based on 2018 data.

Figure 1: Source flows for Australia’s refined liquid fuel, crude oil and other refinery feedstock (ORF) supply

Source: Department of the Environment and Energy, Liquid fuel security review: interim report, 2019, p. 23.

Around the world, many types of crude oil are produced with differing quality characteristics—the two most important being density (from heavy to light) and sulfur content (from sweet crude with low sulfur content to sour). Much of Australia’s domestic crude oil production is extracted from offshore north-west Western Australia—and much of it is light, sweet crude (or condensate—a very light crude and by-product of national gas production). This oil often doesn’t suit the requirements of our domestic refineries and the products they are refining.

Different product types generally require different types or quality of crude oil. For example, heavier crude oils are needed to produce heavier petroleum products like bitumen or lubricating oils. Australia has four remaining refineries—these are located in Geelong and Altona (Victoria), Lytton (Queensland) and Kwinana (Western Australia). The relatively remote location of much of Australia’s domestic oil extraction industry, combined with the location of the refineries, means that much of Australia’s domestic oil production is exported and crude oils that best suit refinery requirements are imported.

In relation to emergency stockholdings, crude oil can be stored for long periods, while refined products such as petrol and jet fuel have a shorter shelf life. As quality is likely to change depending on temperature and other storage conditions, stored products can require monitoring. Other considerations include costs associated with turnover of stored product to maintain quality specifications, the type of storage and physical security at the site.

Stocks can be held underground (in rock or salt caverns, like the SPR), above ground (in large tanks) or on the water (in floating storage systems or tankers). Due to quality requirements, only crude oil would generally be stored in underground caverns. Proximity of crude oil storage to shipping, import terminals and refineries also needs to be considered. Many of these issues have been explored in previous inquiries and reports (see the relevant section below).

The Australian Petroleum Statistics provide extensive data on liquid fuels in Australia. During 2018–19, Australian refineries used both indigenous (about 19%) and imported crude and other feedstock (the remaining 81%) to produce a range of products, predominantly automotive gasoline (petrol), diesel oil and aviation turbine fuel. They produced about 29,000 megalitres (ML) of petroleum-based products, while total sales of both domestic production and imports exceeded 60,000 ML.

Imports are sourced from many countries and vary depending on the product type. For example, during the same period, automotive gasoline was imported from South Korea (27%), Singapore (23%) and the Netherlands (16%), while diesel oil came from Singapore (31%), Japan (20%), China and South Korea (both about 14%). Crude oil and other refinery feedstocks also come from a variety of countries, with the highest proportion from Malaysia (31%) and the United Arab Emirates (17%). The balance of imports came from several other countries. Australia also exports some refined products as well as crude oil. In 2018–19, around 6,500 ML of refined products were exported (equivalent to about 20% of refinery production).

Statistics on ‘days of consumption cover’ are also provided for each major product type. These calculations assume there is no change in consumption level, no domestic production of crude oil, no refinery production and no imports or exports. At the end of February 2020, this consumption cover equated to 25 days for automotive gasoline, 20 days for diesel oil and 143 days for aviation gasoline.

As noted above, the IEA stockholding requirement is based on days of net import coverage and uses different methodology—it is a different measure to consumption cover. At the end of January 2020, Australia had 55 days of net import cover or ‘IEA days’. This comprised 52 days held by industry (held domestically by the industry) and 3 days of government-owned stocks (held overseas under ticket contracts).

Recent developments

In contrast to many other IEA members, Australia has not previously maintained a public (or government-owned) stockpile of oil and has instead relied on commercially held stocks—this approach is in the process of changing. Indeed, the first publicly held Australian stocks (equivalent to two days net imports) were reported in the IEA data for October 2018.

The Government has committed to return to full compliance with the IEA 90 day stockholding obligation by 2026, with the full strategy still being developed. Part of the strategy has involved changes to key legislation and the introduction of new reporting requirements for liquid fuels—these changes are already in effect (see further details below).

As detailed in the IEA’s in-depth analysis of Australia’s energy policies published in 2018:

The government is commended for presenting a compliance plan in 2016 which is expected to lead to full compliance with its international obligations by 2026 over two phases. First, the government aims at purchasing “ticket” contracts with oil stockholders abroad and has introduced mandatory petroleum and other fuel data reporting. During a second phase (2020-26), the government aims to build the necessary stocks based on an implementation plan to be issued by 2020.

The ‘pilot phase of the 2 stage compliance plan’ will include the purchase of up to 400 kilotonnes of oil tickets in both the 2018–19 and 2019–20 financial years. Oil stock tickets, which provide a contractual right to purchase or release a certain amount of oil during the contract period, are one approach being taken to address compliance with IEA obligations. These tickets can be used in a collective action and enable Australia to purchase the reserved oil outright or release it to the market. To be clear, stock tickets do not mean that the oil is physically in Australia.

During May 2018, the Government confirmed that a third National Energy Security Assessment (NESA) would be undertaken (originally for completion by mid-2019). One component of the NESA is an assessment of liquid fuel security—this commenced in mid–2018 with an interim report released for consultation in April 2019. Submissions to that process are available here. Information provided during March 2020 Additional Estimates indicates that the review was provided to the Government in December 2019, with a question on notice regarding an expected release date.

Procurement for up to 400 kilotonnes of oil stock tickets for quarters between 1 July 2020 and 30 June 2021 is underway. Registration to take part in the request for tender process is open to entities offering to hold stock in Australia or in a country that has appropriate government-to-government arrangements in place. These arrangements are in place with the Netherlands and Hungary (under treaty arrangements—see section below), the United States, United Kingdom, Germany, Denmark and Spain (under memorandum of understanding arrangements). As of April 2019, another treaty and two MOUs were being negotiated.

In the 2019–20 mid-year economic and fiscal outlook (December 2019 MYEFO), the Government provided an additional $10 million in 2020–21 for up to 280 kilotonnes of oil stock tickets.

Beyond these developments in ticketed stockholding, Australia has negotiated to hold physical oil stocks in the United States. In March 2020, the Minister for Energy and Emissions Reduction and the US Energy Secretary signed an agreement that will allow Australia to lease space in the US Strategic Petroleum Reserve to store and access Australian-owned oil. The Minister has indicated the cost to lease space in the SPR is commercial-in-confidence.

On 22 April 2020, the Minister announced the Government would spend $94 million on oil to store in the US SPR for an initial period of 10 years. The recent drop in demand for oil due to the COVID-19 pandemic has resulted in a significant fall in oil prices. The futures contract price for the US benchmark, West Texas Intermediate crude, even became negative for a short period on 20 April 2020. It is not clear what volume of oil will be purchased under the announcement. The Minister has not specified how much oil will be purchased, but did expect it to buy ‘many millions of barrels’. Some commentators have estimated it could purchase between 2.7 to 3.8 million barrels to more than 5 million barrels of crude.

It was also reported that moving the storage reserve to Australia was a priority, with work to expand domestic storage capacity to be done as soon as possible. The Minister announced that work to identify the best options for further strengthening fuel security would be launched shortly. He indicated this would focus on investment options, supporting the refining sector and assessing the most effective stimulatory options.

Storing crude oil in the US and having tickets in other countries does help Australia meet its IEA treaty obligation. The extent to which it assists Australia’s physical or strategic oil reserve is less clear, considering the time delay and shipping requirements to bring such stock to Australia as well as the challenges in refining it once here. Balancing these factors with potential supply chain risks in the industry remains the ongoing challenge.

Also in April 2020, the Australian Competition and Consumer Commission granted interim authorisation to oil refiners and the Australian Institute of Petroleum ‘to discuss and put in place measures so fuel supplies remain available during the COVID-19 pandemic, and after the economic shutdown ends’. This will enable fuel companies to coordinate on fuel imports, storage and distribution to minimise the risk of shortages. It will also enable fuel companies to discuss the coordination of refining and storage capacity to keep refineries operating—changes in fuel demand related to COVID-19 (such as demand for jet fuel and the suite of fuels currently required) have changed the operating environment for local refineries.

The Minister has also stated that the Government is working on a temporary change to fuel standards that will give refiners more flexibility to adapt their operations while they manage these changes in demand (while also ensuring that motorists and the environment are protected).

2 National resources

Key legislation

• The Liquid Fuels Emergency Act 1984 provides the legislative basis for contingency planning and the management of liquid fuel emergencies in Australia, including the power to control industry-held stocks, production by Australian refineries and fuel sales. This Act was amended through the Liquid Fuel Emergency Amendment Act 2017 to enable the government to enter into commercial oil stock ticket contracts (see this Bills Digest). Current agreements include:

– the Netherlands: an agreement was signed on 13 June 2018 to enable oil stocks held in the Netherlands under oil stock reservation contracts (tickets) to be counted towards Australia’s 90 day IEA obligation. Details of this treaty with the Netherlands are available on the Joint Standing Committee on Treaties webpage and the associated National Interest Analysis. The Committee recommended the treaty action be taken and it entered into force on 19 October 2018.

– Hungary: an agreement was signed on 30 October 2018 for similar purposes. The Joint Standing Committee on Treaties noted the proposed agreement followed a similar format to that with the Netherlands and that the National Interest Analysis was almost identical. Details of the treaty are available on the Committee webpage and the associated National Interest Analysis. The Committee recommended the treaty action be taken and it entered into force on 11 December 2019.

• Mandatory reporting requirements for the production and stockholdings of liquid fuels, including petroleum, biofuels and other products, commenced from 1 January 2018 under the Petroleum and Other Fuels Reporting Act 2017 and associated Petroleum and Other Fuels Reporting Rules 2017. The associated Bills Digest provides additional information.

Department of Industry, Science, Energy and Resources

• The Australian Petroleum Statistics is a monthly report that provides data on ‘petroleum products, exports and imports of petroleum products and crude oil, production of crude oil and condensate, refinery input and output, and stocks of petroleum products’. These statistics are collected at the national and state level. They provide data on days of consumption cover for each fuel type (Table 7), days of net import cover (‘IEA days’; Table 7A) and additional information on stocks intended for consumption in Australia (such as those overseas or on-board vessels; Table 7B).

• The mandatory reporting of selected fuel data commenced on 1 January 2018. These statistics are incorporated into the Australian Petroleum Statistics.

• The Australian Energy Statistics provides the overall production, consumption and trade statistics for energy in Australia, including the transport sector.

• The Department supports the Energy Sector Group of the Trusted Information Sharing Network (TISN) for Critical Infrastructure Resilience. This group shares information on ‘security issues and practical measures to improve the resilience of energy infrastructure to all hazards’.

• The Department is responsible for the Liquid Fuels Emergency Act 1984 and the government response to any national liquid fuel emergency, including the National Oil Supplies Emergency Committee (NOSEC; within the COAG Energy Council) and the National Liquid Fuel Emergency Response Plan that details the agreement between the Commonwealth and the states and territories relating to the declaration and management of any liquid fuel emergency.

• The Resources and Energy Quarterly from the Office of the Chief Economist provides details on both global and domestic oil production, consumption and forecasts. The Office also published the Australian Energy Projections to 2049–50 (last updated November 2014) with longer-term projections of energy consumption, production and trade for economic sectors, including transport.

• The Australian Liquid Fuels Technology Assessment (October 2014) provides an overview of current and potential liquid fuel production technologies, as well as levelised cost estimates to 2050. In addition to an overview of 18 different production technologies, information is provided on the potential of the technology in the Australian context, and barriers and opportunities associated with each technology.

• The Department supports the development and investment in Australia's petroleum resources (for example, see their offshore petroleum exploration webpage). The Offshore Petroleum Exploration Acreage Release is used by the government to promote petroleum exploration in offshore waters. The Australian Petroleum News is an occasional newsletter on matters relating to offshore oil and gas in Australian waters.

Geoscience Australia

• The Australian Energy Resources Assessment (last updated in 2018), provides details on Australia’s identified and prospective oil resources, production statistics and outlook. Several maps are available that provide summaries for liquid petroleum resources across Australia.

• General information on Australia’s petroleum resources.

• A map of the major petroleum resources and pipelines (as at December 2018). This link also has a map of the proposed 2019 offshore petroleum exploration acreage release areas and existing petroleum titles.

Major industry representatives

• The Australian Institute of Petroleum (AIP) represents the downstream petroleum industry that is involved in the refining, wholesaling and retailing of petroleum products. Details on the state of the industry and recent developments in the region are provided in their latest Downstream Petroleum report. Several other resources and factsheets, including those on Australia refineries, fuel pricing and supply security and reliability are available on the AIP website.

• The Australian Petroleum Production & Exploration Association (APPEA) represents Australia’s oil and gas exploration and production industry.

• The Australian Pipelines & Gas Association (APGA) represents the pipeline infrastructure sector, particularly gas pipelines, but also oil.

• The National Roads and Motorists’ Association (NRMA) commissioned Retired Air Vice Marshall John Blackburn to provide advice on Australia’s fuel security in 2013 and these reports formed part of the NRMA’s submission to the 2015 Senate inquiry (see below). The reports can be found as the two attachments to Submission 18.

Previous inquiries and reports

The Parliamentary Joint Committee on Intelligence and Security recommended that measures be taken to ensure a continuous fuel supply to meet national security priorities in their report of March 2018 on the Security of Critical Infrastructure Bill 2017.

The Senate Standing Committee on Rural and Regional Affairs and Transport held an inquiry into Australia’s transport energy resilience and sustainability and reported in June 2015. Among other topics, the report covered Australia’s liquid fuel stockholdings and supply chain, threats to liquid fuel security and the role of government in fuel security. Submissions to the inquiry were received from many key stakeholders.

The House of Representatives Standing Committee on Economics held an inquiry into Australia’s oil refinery industry (report tabled in 2013). Chapter 3 provides background and impacts of declining refinery capacity in Australia. Chapter 4 covers these issues in relation to energy security, self-sufficiency and stockholdings (among other topics).

National Energy Security Assessments were released in 2009 and 2011. The third assessment is in progress. The Liquid Fuel Security Review will contribute to this assessment. The assessments consider ‘human and environmental threats to the adequate, reliable and affordable delivery of liquid fuel, gas and electricity to the Australian consumer’. They have typically examined the likely effects of a ‘shock scenario’ that results in disruption to the global supply chain and the effect this would have on Australia’s liquid fuel supply.

The Liquid fuels vulnerability assessment provides an overview of the liquid fuel situation, world oil outlook and an overview of oil shock vulnerabilities. This includes an analysis of a hypothetical major supply shock scenario (Singapore petroleum outage for 30 days). The adequacy and vulnerability of Australia’s liquid fuel stockholdings, including in relation to the IEA requirements, is also considered. This report by ACIL Tasman was published in October 2011 and was an update to their 2008 review.

Commissioned reports

Several reports have been commissioned to inform the government and assist in the development of policy on fuel stockholdings. Costings and other underlying assumptions were correct at the time of reporting but may have changed.

Global Oil Market – a review paper by Cape Otway Associates (November 2016) provides a comprehensive review of the oil market from the early 1970s onwards, plus an outlook for future developments and new challenges that the oil market may face in the next few decades.

Oil market responses to crises: an historical survey by ACIL Allen Consulting (June 2014) provides a review of oil markets and oil shocks and their effects, including effects on Australian policy.

The Review of market resilience to oil supply disruptions by Hale & Twomey (June 2014) is focussed on market disruptions that introduce significant pressure but don’t disrupt the market’s ability to function. This provides a review of the mechanisms available in the supply chain that promote resilience to disruption and how these are used by companies in Australia to manage disruption.

Australia’s maritime petroleum supply chain by Hale & Twomey (June 2013) provides an overview of how the maritime supply chain for oil operates in Australia. It also describes how the petroleum market interacts with the shipping supply chain and petroleum tanker dynamics.

The Stock on the water analysis by Hale & Twomey (February 2013) reports on the typical quantity of liquid fuel that Australia and New Zealand have in the ‘tankers at sea’ category (known as ‘stock on the water’). This includes where the stock is typically located based on an assessment of the route between the source location and the destination for import tankers. Stock that is held in tankers at sea cannot be counted towards the IEA stockholding obligation; however, due to the long supply chain for liquid fuels to Australia, they can comprise a significant volume of fuel.

The National Energy Security Assessment (NESA) identified issues: competitive pressures on domestic refining report by Hale & Twomey (June 2012) provides a review of Australia’s refining outlook in relation to regional developments and modelled the impact that structural changes to refining may have on Australian supply chains. This followed the 2011 NESA that recognised the significant competitive pressures being felt by Australia’s domestic refining industry.

NESA identified issues: Strait of Hormuz by ACIL Tasman (July 2012) provides an economic assessment of a significant disruption to shipping in the Strait of Hormuz, at the mouth of the Persian Gulf. The economic modelling was based on a relatively short disruption (full capacity was restored by the third week) that didn’t result in a physical disruption to liquid fuel supply in Australia.

Australia’s emergency liquid fuel stockholding update 2013: Australia's International Energy Agency oil obligation ‘main report’ by Hale & Twomey (October 2013) provides an overview of Australia’s compliance under the IEA stockholding obligations and some cost options for returning to compliance. It analyses four emergency stockholding options and provides some estimates of the stockholding compliance gap going forward to 2033. This was an update on the July 2012 report National Energy Security Assessment (NESA) identified issues: Australia’s international energy oil obligation that examines options for holding emergency stock to meet Australia’s oil IEA obligations. It reviews global stockholding models that may be suitable for Australia and the likely costs to implement.

Australia's emergency liquid fuel stockholding update 2013: oil storage options & costs by Hale & Twomey (October 2013) provides an update to their earlier work on Australia’s oil stockholding obligations. It updates the options and costs associated with large scale emergency stock holdings, including the facility, stock and operational costs.

Australia's emergency liquid fuel stockholding update 2013: ticket markets by Hale & Twomey (October 2013) provides an expanded discussion of a ticket market in Australia and associated costs. It analyses using a non-IEA country as provider of the ticket stocks and the creation of a domestic ticket market. This was updated in the Ticket market pricing update report (April 2014) to reflect new pricing in the international ticket market. Further information on ticket markets and options for developing ticket markets was provided in Additional advice: ticket markets (June 2014).

3 International Energy Agency (IEA)

The IEA provides a monthly report on oil stock levels in days of net imports for member countries.

The World Energy Outlook provides a global perspective to demand and supply projections to 2040 and discussion of major global trends in the energy sector.

The Energy Supply Security 2014 report provides an overview of Australia’s policies and industry context in relation to energy security for oil and gas.

The IEA published an in-depth review of Australia’s energy policies in 2018. Chapter 1 provides an overview of Australia’s energy statistics and policies. Chapters 2 to 5 cover oil, natural gas, electricity and the integration of renewables into the energy system. Part II of the report (Chapters 6 to 8) discusses transformation in the Australian energy system in relation to climate change policies, energy efficiency and renewable energy.

The IEA oil website contains information on global oil trends and links to other relevant reports and data. This includes their annual analysis and forecast for global oil demand, supply refining, and trade, in the Oil Market Report series.

The IEA is reported to have agreed with member countries to reform and modernise the oil stockholding mechanism. It remains to be seen whether or how this may change the way the 90 day oil stockholding obligation is calculated—particularly in relation to stocks that are intended for consumption in Australia and are held on board vessels at overseas ports or at sea (which are not currently counted) . In December 2019, the IEA Governing Board requested that the Secretariat:

… bolster global oil security by continuing to assess the potential of the IEA stockholding system and working closely with Members to assure each country’s ability to effectively contribute to a collective emergency oil response and by further enhancing cooperation with Association countries in responding to oil disruptions.

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