Agreement between the Government of Australia and the Government of Hungary concerning Oil Stock Contracts
2.1
This Chapter reviews the Agreement between the Government of Australia and the Government of Hungary concerning Oil Stock Contracts (the Agreement). The treaty action was signed in Canberra on 30 October 2018 and tabled in the Parliament on 12 February 2019. A public hearing was held on 1 April 2019. The Committee’s inquiry into the treaty action lapsed at the dissolution of the 45th Parliament and the treaty was re-referred to the Committee by the Minister for Foreign Affairs on 29 July 2019, following the re-establishment of the Committee in the 46th Parliament. As noted at paragraph 1.13, updated information was sought at this time, and the Department of Environment and Energy (DEE) advised that no additional comment was needed.
2.2
This is the second such treaty action to come before the Committee. It examined the Agreement between the Government of Australia and the Government of the Kingdom of the Netherlands concerning Oil Stocks Contracts (Netherlands Agreement) in August 2018. Essentially, these agreements assist Australia to meet its obligations as a member of the International Energy Agency (IEA), which includes maintaining sufficient oil stocks (Australia has been non-compliant with this requirement since 2012). The agreements formalise arrangements to allow oil stocks held under reservation contracts (also known as ‘tickets’) to be credited towards Australia’s obligations.
2.3
While the Committee was supportive of the 2018 proposed treaty action with the Netherlands, and agrees that Australia’s long-standing non-compliance needs to be addressed, from the information obtained during that earlier inquiry, the Committee was somewhat sceptical regarding the outcome and the overall effect the action would have on Australia’s capacity to address this long-standing problem of non-compliance.
2.4
The proposed Agreement with Hungary follows a similar format to that with the Netherlands. The National Interest Analysis (NIA) is almost identical to the one for the Netherlands Agreement and the Committee notes that the NIA provides no new information regarding Australia’s progress towards meeting its obligation.
2.5
The Committee acknowledges the interrelationship of the separate issues; Australia’s obligations under the Agreement on an International Energy Program (IEP Treaty), and its physical oil stocks. To that end, the Committee will outline information presented regarding the proposed treaty action, before considering in more detail the broader issues and themes it considers less well understood and worthy of further monitoring.
International energy program treaty and IEA obligations
IEA obligations
2.6
The IEA was established in 1974 in response to the 1973–74 global oil crisis. The IEA currently has 30 members including Australia, which became a member in 1979. The IEA’s objective is to promote energy security amongst its member countries through coordinating a collective response to physical disruptions in global oil supply, and in providing authoritative research and analysis on ways to ensure reliable, affordable and clean energy.
2.7
The NIA explains that, as a member of the IEA, Australia is a party to the IEP Treaty. Article 2 of the IEP Treaty requires Australia to maintain oil stockholdings sufficient to sustain national consumption for at least 90 days with no net oil imports (the 90-day obligation). Australia has been non-compliant with this obligation since March 2012.
2.8
The NIA states that Australia submitted a two phase plan to return to compliance to the IEA governing board in June 2016. Under Phase 1 of the plan, Australia will procure up to 400 kilotonnes of oil stock reservation contract tickets in each of the financial years 2018–19 and 2019–20. Under Article 3 of the Annex to the IEP Treaty, Australia can credit stocks held overseas towards its 90-day obligation under the IEP Treaty, provided there is an arrangement in place stating that the country hosting oil stocks will not impede stock transfer during an emergency.
2.9
The NIA notes that this Agreement is as a result of the offer by the Government of Hungary of the opportunity to purchase tickets in its territory to assist in Australia’s return to compliance, and the request for a treaty level agreement governing this purchase, in order to comply with Hungary’s domestic legal requirements.
2.10
The NIA explains that oil tickets give the ticket holder (Australia) a right either to purchase reserved oil stock outright, or to release the stock back to the host market. Both of these options would operate in accordance with the terms and conditions in each ticketing contract. In the event that the IEA declares a global oil supply emergency, oil could either be transferred to Australia for use, or released into the Hungarian market to help alleviate the economic consequences of a supply disruption, depending on the nature of the emergency.
Challenges of non-compliance
2.11
The Committee understands that non-compliance with the IEP Treaty has been of long-standing concern. During the Committee’s inquiry into the Netherlands Agreement, the DEE advised that since 2008 only two other countries had been non-compliant with the 90-day obligation: Luxembourg and Turkey. Luxembourg had fallen to 89 days on three occasions and Turkey to 88 days (in 2009) and 86 days (in 2018).
2.12
As noted at paragraph 2.8, in 2016, Australia submitted a two phase plan to return to compliance. Phase 1 involves the procurement of tickets, as described above, and Phase 2 has not yet been announced. The Committee was advised during its 2018 inquiry into the Netherlands agreement that Phase 1 would only provide Australia with a small fraction of its requirement to meet the 90 day obligation and that Phase 2 was not decided, but would be informed by an assessment of the country’s liquid fuel security. Asked what progress had been made with regard to that assessment, the DEE stated that a final report was expected during the second half of 2019. In the meantime some interim advice had been provided to the Minister.
2.13
The Committee learnt during its inquiry into the Netherlands Agreement that the 400 kilotonnes of tickets would only provide Australia with 3.8 days towards its 90-day obligation. At the time of that inquiry (August 2018) Australia held 51–52 days of that 90-day requirement. The DEE advised that as at the date of the current inquiry (April 2019), Australia has 55 days.
2.14
Australia’s non-compliance has been driven by falling domestic crude oil production, along with rising product demand and imports. This has increased Australia’s net imports under the IEA statistical methodology. However, the NIA claims that physical stock levels held in Australia have remained relatively stable.
2.15
With regard to the type of mechanisms that may be included in Phase 2, DEE explained that there are a range of possibilities that the Government could consider:
One of the most frequently used options would be an industry obligation, so all entities that bring fuel into the country and sell fuel would have to hold a certain amount of stock, a certain number of days of stocks. That’s commonly used by EU member countries. Obviously a large strategic reserve is an option as well. The US strategic petroleum reserve is an option that a lot of countries use. The US don’t use an industry obligation; they just hold a very large amount of crude oil in salt caverns. They are two of the obvious ones that countries can use. Others would be what we’re doing here—contracts to hold oil in other countries, whether it be through tickets or whether it be through buying oil and leasing the space.
Practicalities of non-compliance
2.16
During its consideration of both the 2018 Agreement and this Agreement with Hungary, Committee members focused on concerns prompted by proposed treaty actions which seemed to offer little in the way of practical solutions. Neither treaty action appears to address either Australia’s longstanding and significant compliance issues or the possible national interest impacts of fuel security.
2.17
The DEE advised the Committee during the 2018 inquiry that it saw no threat to Australia’s overall fuel security despite its non-compliance with the 90-day obligation under the IEP Treaty. At the 1 April 2019 public hearing, the DEE explained that Australia has never been in a position to meet its obligation in the event of a global disruption:
[The treaties] allow us to respond to what’s called a collective action. If there’s a significant disruption, Australia is called on, as a member of the IEA, to release an amount of oil into the market. We’ve never been able to do that. We’ve always relied either on the amount of oil that’s been held by industry or our exports to reduce our compliance to a certain level. We’ve never held a strategic reserve that we could release in an emergency. These tickets allow us to release that oil into the market in a global disruption. It’s our share of the IEA collective action.
2.18
During the 2018 inquiry, the DEE advised that other measures were being undertaken to address non-compliance, including improved mandatory reporting by oil companies and the creation of the energy security office within DEE.
2.19
Updating the Committee in April 2019, the DEE advised that the implementation of the proposed measures had produced positive results:
… with the mandatory reporting legislation … we have identified another 30 days in our supply chain. So these days can’t be counted against the IEA framework, but there are another 30 days in our supply chain from stocks that have been purchased by Australian entities and are held overseas waiting to come to Australia and then stocks that are in ships on their way to Australia.
2.20
The Committee remains concerned by the practical differences in maintaining an adequate fuel supply, and maintaining obligations under a treaty, where there is no expectation that a 90-day oil stock holdings will ever be able to be maintained. As at January 2019, the DEE reported that Australia has 29 days of consumption cover including 24 days of petrol, 20 days of diesel and 22 days of aviation jet fuel.
2.21
The Committee queried why the 30 days of supply could not be counted towards Australia’s IEA obligations. The DEE explained that the statistical methodology used by the IEA has become outdated and does not accurately reflect the current operation of the oil market. The DEE advised that Australia is pressing for reform but progress is slow:
We are consistently engaging with the IEA, and the IEA has agreed with all the member countries to reform the oil stockholding mechanism and to modernise it, and also to bring more countries into the IEA because its representative nature is diminishing over time because emerging countries are using more oil.
2.22
Asked to identify the circumstances that could threaten Australia’s liquid fuel security, the DEE told the Committee that in broad terms both internal and external events should be considered:
… you would look at things like small-scale disruptions to retail supply chains and refinery outages. You would look at some of the global disruptions … like closure of the Strait of Hormuz. The other sort of things that you would look at would be a complete blockade of all of Australia’s ports.
Obligations
2.23
The following summary of Australia’s obligations under the proposed Agreement is taken from the NIA.
Right to purchase oil stock reservation contracts with entities of Hungary
2.24
Article 5 sets out the right of the Australian Government or Australian entities to negotiate and conclude ticket contracts with private or public entities operating in Hungary.
2.25
Under Article 7, Australia would be able to call on tickets held in Hungary in the event the IEA calls for members to take collective action under the IEP Treaty during a global oil supply disruption.
2.26
Commercial contracts will sit under the Agreement. These will generally give two options to Australia during such a disruption: an option to purchase and an option to release. An option to purchase will involve Australia buying all or part of the previously reserved oil stock outright. The option to release will likely see the cancellation of all or part of the contract, making the oil available again to the market within the host country to help ease the supply issue. The exact operation of these options will be set out in the terms and conditions of contracts entered into with each entity.
2.27
Article 9 obliges Hungary not to impose any impediment (legislative, physical, or by other means) on the removal and transfer of oil stocks held under a ticket contract to Australia from its territory.
Approval and Notification process
2.28
Article 4 provides that the proposed Agreement shall be administered by the Competent Authorities of Australia and Hungary. For Australia, the Competent Authority is the agency responsible for implementing the Agreement, being the Department of the Environment and Energy, or its successor. For Hungary, it is the Hungarian Ministry of Innovation and Technology, or its successor responsible for energy policy.
2.29
Article 5(2) requires contracts for holding oil stocks in Hungary to be approved by the Competent Authority of Hungary.
2.30
A process of government-to-government notification and approval is set out in Articles 6 to 8. This is to ensure Hungary can manage its own stockholding obligations and ensures the ticketed stock is only reported to the IEA as stock credited to Australia (and is not double counted by two countries within the IEA’s stockholding system).
2.31
Australia must seek prior approval from Hungary as to any applicable maximum thresholds of oil stocks to contract on an annual basis, pursuant to Article 6(1) of the Agreement.
2.32
Australia must then seek Hungary’s approval for ticket contracts that Australia has concluded one month before the contract’s intended start date. This notification is to include information relating to the ticket seller, the nature, quantity and location of the ticketed stock, and the term of the ticket contract (Article 6(2)). Hungary shall notify Australia of its approval no later than two weeks before the contract’s intended start date (Article 6(3)).
2.33
Under Article 6(4), Australia is under an obligation to notify Hungary if there is any significant change in the information supplied in accordance with Article 6(2).
2.34
Hungary has the right to withdraw its approval if it identifies a significant inaccuracy in the information provided by Australia under Article 6(2). However, it must first give Australia a reasonable opportunity to have the inaccuracy rectified, and if Australia does so, Hungary cannot withdraw its approval (Article 6(5)).
2.35
If Australia calls on tickets held in Hungary (as set out under Article 7 of the proposed Agreement), it must notify Hungary of that decision at least two weeks in advance (Article 8).
2.36
Article 6(6) permits Australia and Hungary to agree to vary the time limits for notification and approval outlined above.
Consultation
2.37
Article 10 requires the Competent Authorities to consult as soon as reasonably practicable: where either Australia or Hungary faces a supply emergency; to resolve difficulties in the interpretation of the proposed Agreement; or if circumstances arise which may be taken into consideration in the exercise of Australia’s purchase options under oil stocks contracts.
Implementation
2.38
According to the NIA, no new legislation is needed for the proposed Agreement to enter into force and it will not bring about any changes to the existing roles of the State and Territory Governments. The legislative authority for the Australian Government to spend funds on entering into and purchasing oil stocks under a ticket contract exists under section 40A of the Liquid Fuel Emergency Act 1984.
2.39
The NIA states that a multi-stage procurement process is being implemented to enable the Australian Government to run a competitive process for the purchase of tickets. The proposed Agreement will allow entities of Hungary to participate in the procurement process.
Costs
2.40
The NIA states that the Australian Government has provided both departmental and administered funding of $23.8 million over four years to implement Australia’s oil stockholding compliance plan. This includes funding for the purchase of up to 400 kilotonnes of tickets in each of the 2018–19 and 2019–20 financial years. The NIA notes that further ticketing commitments may be made under Phase 2 of the compliance plan; options for Phase 2 are currently being investigated.
2.41
According to the NIA, the multi-stage procurement process should ensure value for money when acquiring ticketing contracts. The NIA notes that although the proposed Agreement gives entities in Hungary the opportunity to compete in the tender, it does not guarantee they will be successful. The NIA cautions that, due to the proposed nature of the procurement process, it cannot be specified how much, if any, spending would occur with entities in Hungary under the proposed Agreement.
2.42
The NIA explains that the price of oil or product purchased under any ticket contract will be determined by the market price of the type of oil at the time of purchase and the terms and conditions contained in the specific ticket contract. The NIA notes that details of contracts will be commercial-in-confidence.
Future actions
2.43
This Agreement is likely to be the second of several which formalise arrangements for the Australian Government to purchase tickets through a competitive multi-stage procurement. The NIA considers that it is important to the success of the procurement process that Australia has access to as many tickets as possible to help improve the competitiveness of Australia’s available pool of sellers including Hungary. This will help to ensure value for money can be achieved in the procurement.
2.44
In order to gain access to a broad market, the DEE advised Australia has concluded MOUs with the US, the UK, Germany, Spain and Denmark. Australia has concluded the Agreement with the Netherlands, is negotiating one other treaty, and two further MOUs.
2.45
In order to consider the set of current and future oil stock contract agreements, in the context of Australia’s IEA commitments and the Government’s intention of establishing a pathway to compliance with our IEA obligations by 2026, the Committee will seek in the first half of 2020 a public hearing opportunity with the Department of Foreign Affairs and Trade (DFAT) and DEE in relation to the information and recommendations contained in the final report of the Liquid Fuel Security Review.
Conclusion
2.46
The Committee reiterates its concern over the length of time it is taking to devise and implement a solution to Australia’s non-compliance with its IEA obligations, noting that we became non-compliant in 2012 and made a commitment in 2016 to return to full compliance by 2026. The Committee considers that Australia will have to take significant action if it is to meet that commitment.
2.47
The Committee is mindful of the connection between Australia’s obligations under the IEA and its physical oil stocks and will continue to remain informed on both issues.
2.48
The Committee supports the Agreement and recommends that binding treaty action be taken.
2.49
The Committee supports the Agreement between the Government of Australia and the Government of Hungary concerning Oil Stock Contracts and recommends that binding treaty action be taken.