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Letter from Australia: Downstream rescue package may be wishful thinking

The Canberra government has tried to throw the country’s refineries a financial lifeline in an existential struggle

Australia’s fuel demand has been sent spiralling down by Covid-19’s impact on the economy, with GDP contracting in the second quarter by 7.1pc. One of country’s four remaining refinery operators, Viva Energy, warned in early September that without government help it would likely have to permanently shut operations at its Geelong facility in Victoria.

And the mounting pressure on the industry prompted Australian prime minister Scott Morrison to announce a mid-September series of incentives to be rolled out in the 2020-2021 budget. The rescue package aims not only to help the industry survive the current downturn, but also to improve its long-term economic viability.

But it is not immediately clear whether these long-term ambitions are realistic, given the Australian refining sector has been rationalising capacity for decades and existing plants are still too small and outdated to compete with Southeast and East Asian rivals.

Throwing a rope

The Morrison administration’s fuel security package is worth more than A$2.5bn ($1.78bn). The plan provides funding for new domestic diesel storage capacity, with the government setting aside an initial A$200mn for a competitive grant programme to build 780mn litres of onshore diesel storage. There will also a six-month consultation process with industry over new minimum stockholding obligations and the design of a refinery production payment programme.

7.1pc – Q2 GDP decline

“Fuel security underpins our entire economy,” says Morrison. “We need a sovereign fuel supply to shield us from potential shocks in the future.”

The federal government will cover up to 50pc of the diesel storage project costs, with state and territory governments and the private sector expected to shoulder the rest. Applications for projects in strategic regional locations and connected to refineries and existing fuel infrastructure will be prioritised when the process begins early next year.

Morrison also proposes establishing a minimum stock holding of 24 days’ worth of both gasoline and jet fuel, alongside a diesel buffer of 28 days. And he envisions the introduction of a 10-year, A$2.3bn production payment programme available to refiners that commit to staying in Australia and upgrading their facilities.

Stiff competition

The rescue package is not just about helping with current depressed gross refining margins; it also seeks to address the twin problems of ageing domestic infrastructure and regional competition. Australian refineries have been closing since 1984, with three facilities—at Clyde, Kurnell and Bulwer—having shut down in the last decade alone.

Viva said its Geelong oil refinery could be the next to close permanently if the Victorian government does not scale back the state’s heightened social quarantine measures by November. It has welcomed Morrison’s proposals, but CEO Scott Wyatt says his firm needs not only need a speedy rollout but also Victorian government measures aimed at getting the plant operating at full capacity.

“We need a sovereign fuel supply to shield us from potential shocks in the future” Morrison, Australian government

And whether Australia’s refineries will be able to return to a business-as-usual scenario in the near future remains a major question. The country’s motorists have reined in their fuel purchases as state lockdowns have bitten, and Australia’s international aviation traffic has also been largely grounded.

The country faces the same challenges faced by refiners everywhere else in the world: such as when might a coronavirus vaccine arrive and how effective it will be; or if companies might permanently adopt some element of working from home even in a post-Covid environment.

But Australian refiners are particularly vulnerable to any negative structural changes in demand. Their rivals in Asia are far more complex, enjoy better economies of scale and were already searching for new markets before the pandemic arrived owing to intensifying regional competition.

And the emergence of privately owned mega-refineries in China, which have started to win export licences from the government, will only further complicate the long-term business case for Australia’s small-scale downstream facilities.

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