Less than one month after provision was made in the 2020–21 Budget for the design and implementation of a market mechanism to support domestic refineries, BP Australia announced it would cease fuel production at its Kwinana Refinery. Once this refinery is wound down over the next six months, Australia will have three remaining fuel refineries. The continued reduction in refinery numbers has implications for Australia’s liquid fuel security.

Australian refineries

Australia currently has four fuel refineries that commenced operation between 1949 and 1965 (see Table 1). As discussed in the 2013 House of Representatives Report on Australia’s oil refinery industry, Australia had seven operating refineries in 2010–11 (two refineries in Sydney—Clyde and Kurnell that closed in 2012 and 2014 respectively—and Bulwer Island in Brisbane that closed in 2015). Around twenty years ago, Australia had eight refineries (with another at Port Stanvac in South Australia that was mothballed in 2003) which met virtually all domestic fuel demand.

Australia’s extraction of its own crude oil and related petroleum products has declined over the last decade, and much of the relatively small volume we produce is exported to Asian refineries. Domestic oil production is not currently sufficient to meet Australia’s total demand for fuel, even if all of it was refined domestically. A lot of production is condensate (a very light crude and by-product of national gas production). While it could be processed into fuel in an emergency, it is typically not considered commercially viable. As a result, most of Australia’s refined fuel products are either directly imported or refined from imported crude oil feedstock (as discussed in the 2019 Liquid fuel security review—interim report and as shown in the Australian Petroleum Statistics).

The existing Australian refineries are relatively small and old, and have to compete against larger and more efficient refineries in the Asian region. Kwinana Refinery will close due to regional oversupply and sustained low refining margins which make it no longer economically viable. BP head of Australia Frédéric Baudry said the closure was ‘not in any way a result of local policy settings’ but was in response to the ‘long-term structural changes to the regional fuels market’. These changes, particularly the operation of mega-refineries in Asia which have much larger economies of scale and lower operating costs, have been underway for some time. The risk this poses to Australia’s refining industry has been recognised for more than a decade, including in previous National Energy Security Assessments (NESA; completed in 2009 and 2011). During May 2018, the Government committed to a third NESA. One component of the NESA is an assessment of liquid fuel security and an interim report was released for consultation in April 2019.

Recent announcements and the 2020–21 Budget

As discussed in the Parliamentary Library’s Liquid fuel security: a quick guide–May 2020 update, Australia now holds offshore oil stock tickets (contractual rights) and physical crude oil that contribute to the International Energy Agency’s (IEA) obligation to hold stock equivalent to 90 days’ worth of net imports. The latest IEA data for September 2020 indicates that Australia has public holdings equivalent to 6 days of net oil imports (5 of which are held abroad) plus 54 days of net imports held by industry. The Government has previously committed to returning to compliance with the IEA stockholding obligation by 2026. This obligation is a related, but separate, component of Australia’s fuel security.

On 14 September 2020, the Government announced a Fuel Security Package to help industry invest in new fuel storage capacity, create minimum stockholding requirements for key fuels and develop an income-stream for refineries to recognise their contribution to national security and sovereign capability. It also flagged the modernisation of relevant legislation. The Package is supported by the 2020‑21 Budget measure, JobMaker Plan—securing Australia’s liquid fuel stocks, including:

• $3.7 million to design and implement a fuel framework involving minimum stockholding requirements, industry support for new storage infrastructure and the market mechanism for a refining production payment
• $203.7 million over four years for a competitive grants program to support new diesel fuel storage (this follows a June 2020 Request for Information process and will be used to build 780 ML of onshore storage)
• $21.3 million over four years to assist the Government to become more compliant with the IEA obligations and
• $3.3 million over four years to improve reporting and transparency in the liquid fuel market by modernising the Government’s Petroleum Statistics Information Management System.

On 14 December 2020, the Government announced an acceleration of support for domestic refineries. Production payments of a minimum one cent per litre for primary transport fuels (petrol, diesel and jet fuel) will be available to refineries that continue operations in Australia for the duration of the program. The payment will be funded by the Government for six months from 1 January 2021 through a package worth $83.5 million. The longer-term market mechanism for the production payment is still being designed and will come into effect no later than 1 July 2021.

The Government was ‘deeply disappointed’ by BP’s decision to close the Kwinana refinery. The impact of industry support for the remaining three refineries may not become clear until the refinery owners complete their own analysis and review of operations.

Table 1: Australian fuel refineries, December 2020

What does this mean for Australia’s fuel security?

As refineries close, domestic refining capacity and capability reduces and Australia becomes yet more dependent on imports of refined product. Australia’s fuel supply therefore becomes more reliant on industry’s ability to source and ship the necessary fuels when required. Once closed, refinery sites are often converted into fuel import and storage terminals (as announced for Kwinana), so remain important facilities in the fuel supply chain. However, having fewer refineries reduces Australia’s ability to refine fuels if shipping and supply chains are ever severely disrupted for any reason in the future.

The Government’s plans are aimed at addressing these issues and should assist with increasing stockholdings of key fuels in Australia and improving compliance with IEA obligations. While industry sees no problem with relying on fuel imports via a diversity of supply chains (which has increasingly occurred over the last two decades without serious negative consequence), other analysts continue to question how the Government will keep the country and the Australian Defence Force operating ‘in the event of a foreign interruption to fuel supplies coming from foreign owned refineries on foreign owned ships’.