National Energy Security Assessment (NESA) Identified Issues: Competitive Pressures on Domestic Refining
Prepared for Department of Resources, Energy and Tourism
29 June 2012
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This document was written by:
Ian TwomeyPhone: +64 4 471 1109, e-mail:
Steve WestPhone: +64 4 471 1153, e-mail:
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Executive Summary
Australia's refining sector is under severe competitive pressure that has resulted in a refinery closure being announced (Clyde) and some other refineries put under review by their owners.The National Energy Security Assessment (NESA) 2011 identified continuing competitive pressures on refineries as a long term watch point for consideration in future NESA and Liquid Fuel Vulnerability Assessments. The Draft Energy White Paper recommended as a key action further assessment of Australia’s liquid fuel vulnerabilities, including liquid fuel supply chain, import and refining infrastructure and critical supply linkages.
This report tested supply capacity in the region under two hypothetical refinery rationalisation scenarios in Australia and considered the following questions as key:
What is the likely outlook for refining in the Asia Pacific region and for the availability of Australian quality refined product;
What are the likely structural changes to Australian import/export supply chains for refined products; and
The nature of any potential energy security impacts.
The methodology for this analysis included modelling Australian supply chains and the impact of hypothetical structural changes to refining on supply; assessing forecasts on global refining and fuel supply; and consultation with the Australian refiner marketer petroleum industry.
In relation to issues of regional capacity, supply chain reliability and supply contingency we found:
Refinery closures would have no significant impact on the wider Asian system as higher demand in Australia and the region for diesel and jet in particular is easily absorbed within spare capacity. While the petrol market is more fractured, the Asian system would adjust to meet additional demand from an orderly refinery closure.
Australian supply chains would adjust to new sources and commercial trading strategies. No new choke points are anticipated as most product imports will come from similar regions as the crude it replaces however adequate import infrastructure remains a watch point. It is likely that any closed refinery would be converted to an import terminal to ensure the market remains well supplied. While overall stock holding falls, crude oil feedstock is replaced by more valuable finished products.
Supply chain diversity and flexibility is retained which provides continued security of supply. Only in the unlikely scenario of no refining sector coupled with a failure of physical oil markets does Australialose the flexibility to redirect and refine some crude oil.
The forecast for the Asian refining market from FACTS Global Energy (FGE) is that refining margins will be under significant pressure in the short term but with some improvement over the rest of the decade. The new capacity expected to come on-stream will exceed the forecast for demand growth – therefore there is a need for refinery closures in excess of those already planned to ensure refinery utilisations (and therefore margins) remain at a level which will result in industry profitability.
The development of ever larger, more complex refineries continues to lower the break-even benchmark that Australian refineries need to compete against. Coupled with the domestic pressures of high local costs and a high US/AUS exchange rate, Australian refineries are likely to remain under pressure into the future.
Australia’s supply chain has been modelled to evaluate the impact of more refinery closures. A base case using 2010/11 data was developed from which the forecast demand and supply profile in 2016/17 was extrapolated. With Clyde closing in 2012, this case assumes six operational refineries. Two specific scenarios are analysed, one with only four refineries operating (two more shutdown) and one with all refineries shutdown and a shift to 100% import supply.
The first scenario is informed by Caltex announcing that its two refineries in Australia are under review.[1] The second is a hypothetical scenario, certainly in the review time frame, purely to test the extreme of the shift to dependence on product imports. During consultation with the Australian refiners as part of this review, they noted that while all Australian refiners are under similar pressure of low margins and increasing domestic costs, each refinery has distinct margins depending on its location, crude processed and products produced. Just because one refinery is being closed does not mean that similar decisions will be made at other refineries.
The import demand these closure scenarios put on the wider Asian refining system is assessed against the FGE refining forecast for 2016/17. FGE give two forecasts - one with firm/likely closures accounted for (including Clyde) and another with closures that may be required to keep the refining market balanced.
Four refineriesoperating / All refineries closedAdditional import capacity required (kb/d) / 175 / 560
Use of Asian refinery spare capacity using FGE forecast which only includes firm/likely closures (%) / 4% / 14%
Additional (and change in) Asian capacity utilisation using FGE forecast which only includes firm/likely closures (%) / 0.5% (83.1%83.6%) / 1.7% (83.1%84.8%)
Use of Asian refinery spare using FGE forecast which includes additional closures (%) / 5% / 16%
Additional (and change in) Asian capacity utilisation using FGE forecast which includes additional closures (%) / 0.5% (84.4%84.9%) / 1.7% (84.4%86.1%)
Source: FGE Annual World Refining Outlook, Hale & Twomey
Closure of another two Australian refineries would not have a significant impact on the wider Asian system and the demand can easily be absorbed within the spare capacity. The utilisation increase even in a 100% import scenario is not particularly high - FGE reported Asian refinery utilisations over 90% in mid-2000. The conclusion that can be drawn is that over the forecast period to 2020 there is likely to be plenty of capacity in the Asian system, whatever decisions individual Australian refiners make about each refinery's viability.
Although diesel is now the highest demand grade in Australia, the Asian market will easily be able to adjust to supplying increased volumes if more Australian refineries close. Australia already imports nine billion litres of diesel and diesel has relatively similar specifications across the more advanced economies in Asia. The demand from Australia and other developed countries, along with the wider Asian system needing to export volumes into Europe from time to time, has resulted in many refineries upgrading to the capability to produce and export the higher quality diesel. This trend is continuing as China and India move their cities onto similar higher quality specification diesel.
Along with diesel, the Asian refinery system has excess jet production and this is forecast to continue. The excess forecast for both grades on FGE's refinery balances is greater than the incremental demand from any number of Australian refinery closures.
Petrol is different in that the Asian market is more fractionated between different qualities and Australia does not currently import large quantities so the market has not adjusted to this requirement. In the scenario of only four operating refineries, petrol import volumes would be about three and a half times more than volumes imported in 2010/11. This is a significant change and would likely take time for more refineries to adjust their facilities to produce Australian grades. As refinery closure decisions take a considerable period of time and planning, the system would likely have sufficient time to prepare for any upcoming requirement.
Over this decade, FGE is forecasting the Asian petrol balance will move from surplus to shortage. The shortage is forecast to be met from surpluses forecast for the Middle Eastern and European refining systems. While product flows may change, there is not expected to be any problem securing petrol supply. The impact on Australia is likely to be the large Indian export refineries focusing east into Asia rather than west to the Middle East, United States and Africa (as is currently the case) and North Asia looking to shift more supply into Australia.
While it will take some time to adjust to an incremental requirement for Australia's grades, particularly petrol, refinery closures do not come out of the blue. Market participants in Australia advised it would be at least a two year process moving through a closure decision and for establishing new supplies. It was noted that Clyde had been indicating possible closure for over ten years.
A company’s import strategy if closing a refinery is likely to be a mix of term and spot supply. They will make the decision depending on their supply options and trading strategies. This is no different to the way imported crude is secured. Most product imports will be coming from similar regions as the crude it replaces so it is unlikely to create any new potential choke points.
Companies will also change their inventory strategies to adjust to product supply rather than refining. Crude and intermediate product inventories will no longer be required, although some of this loss will be offset by the need to increase finished product inventories. Product inventories increase because supply replenishments occur on large shipments rather than as a continuous flow from a refinery. However overall commercial inventories will decline – we calculate by around 150 million litres for any refinery closure (about 2% of Australia’s reported stocks).
Consumption cover petrol (days) / Consumption cover diesel (days) / Consumption cover (days) / Total stock (million litres)Base case 2010/2011 / 19.1 / 18.5 / 28.6 / 4,346
2016/2017 six refineries / 20.2 / 15.6 / 25.0 / 4,219
2016/2017 four refineries / 21.9 / 16.0 / 23.3 / 3,934
2016/2017 no refineries / 24.3 / 18.1 / 19.6 / 3,304
While a reduction in commercial inventory would indicate a reduction in supply security, in practice much of the stock held in a refinery is required for operation and therefore not readily useable in an emergency. We estimate useable stock only reduces by around 60 million litres for any refinery closed (approximately one third of a day's demand). Offsetting this impact is the benefit of holding more stock as finished product (by about half a day for each refinery closed) and the benefit of having more ships on the water travelling to Australia which would provide significant flexibility in a supply shortage.
The loss of commercial inventory will impact Australia’s perceived oil security as measured by its compliance to the IEA requirement to hold inventory to cover 90 days of net import demand. For any refinery closed, Australia’s current deficit against the IEA target would increase by 105,000 tonnes (about 1.6 days of net imports) which would require physical emergency product stock to offset.
The refineries are all in centres of high product demand (large cities). Therefore in most cases a closure decision is likely to be accompanied by a decision to convert the refinery to an import terminal as the company will still want to meet its market demand. Our assumptions on inventory change assume this conversion.
Other than the inventory impact discussed above, it is difficult to apportion a supply security impact to the change in supply from importing rather than refining in the normal business environment. However supply security also needs to consider scenarios that are outside normal business conditions, particularly major global disruptions to oil markets.
In the hypothetical case of having no refining sector, Australia would lose the ability to refine domestic crude production (while much domestic crude does not suit Australian refineries in an emergency it could be run albeit at reduced rates - forecast production would load four refineries at about 75% producing about 30% of Australia's product demand). Other factors that limit diversity or flexibility and hence impact energy security during a severe short term supply disruption include: increased dependence on Singapore as a supply location, increased dependence on export refineries controlled by other sovereign states and dependence on international shipping although supply routes are likely to remain fairly diverse.
The scenarios necessary to cause this sort of market disruption (effectively some sort of market failure) are of low probability. Analysis of the disruption events over the past thirty years show that they are not this severe - the markets kept operating and crude and product could be secured (albeit at higher prices in most events). It is possible those events would have had a similar impact on Australia in the case of Australia having a refining system or if it had been completely dependent on imports.
Hale & Twomey: National Energy Security Assessment (NESA) Identified Issues: Competitive Pressures on Domestic RefiningPage 1
Table of Contents
Executive Summary......
1.0Introduction......
2.0Methodology......
2.1Modelling summary......
3.0Asia Pacific refining outlook......
3.1Refining margin background......
3.2Global refining outlook......
3.3Asian refining outlook......
3.4Asian product balances......
3.5Forecast variation......
3.6Asian refining outlook summary......
4.0Australian refining and product flows......
4.1Refining of domestic crude......
4.2Refining/import split......
5.0Supply changes from refinery closure......
5.1Refinery closure scenarios......
5.2Impact on Australia's ability to source adequate supply......
5.3Supply diversity/resilience impacts......
5.4Inventory impacts......
5.5Import supply arrangements......
5.6Potential choke points or market barriers in altered supply chains......
5.7Shipping......
5.8Price impacts......
5.9Impact on supply security during a global emergency......
6.0Summary......
Appendix 1: Model Structure......
Appendix 2: Model Output......
Glossary
APS / Australian Petroleum Statisticsbbl / Barrel
FGE / FACTS Global Energy an international petroleum consultancy
IEA / International Energy Agency
LR Tanker / Long Range Tanker; Can be Aframax tankers around 80,000 tonnes capacity or Suezmax tankers which can carry around 120,000 tonnes. While normally used in crude oil trade, tankers up to Aframax size are now used for some product trades (50-80,000 tonnes).
Middle distillates / Term used to reflect a cut of crude oil from which both jet fuel and diesel are produced. Most refineries can swing some production between these products so are often reviewed collectively.
mmb/d / Million barrels per day.
MR Tanker / Medium Range Tanker normally carrying 30-40,000 tonnes. Main type of tanker used in the product market.
NESA / National Energy Security Assessment
OECD / Organisation for Economic Co-operation and Development.
RET / Department of Resources, Energy and Tourism
White products / Term used to cover the non-black (fuel oil based) products from refineries - particularly petrol, jet fuel and diesel.
Hale & Twomey: National Energy Security Assessment (NESA) Identified Issues: Competitive Pressures on Domestic Refining
1.0Introduction
Australia's refining sector is under severe competitive pressure that has resulted in a refinery closure being announced and other refineries under review by their owners. When Mobil shut its Adelaide refinery in 2003, the number of refineries in Australia dropped from eight to seven. More recently Shell has decided to close Clyde refinery in Sydneyand convert it to a product import terminal in 2012 and Caltex has announced both its refineries are under review.
The National Energy Security Assessment (NESA) 2011 identified continuing competitive pressures on refineries as a long term watch point for consideration in future NESA and Liquid Fuel Vulnerability Assessments. The Draft Energy White Paper recommended as a key action further assessment of Australia’s liquid fuel vulnerabilities, including liquid fuel supply chain, import and refining infrastructure and critical supply linkages.
The Department of Resources, Energy and Tourism (RET) wants to evaluate the impact on Australia's liquid fuel security from the potential structural change in Australia's supply chains. This work should enhance the understanding of the relationship between the domestic refining sector and energy security.We note the NESA defines energy security as the adequate, reliable and competitive supply of energy to support the functioning of the economy and social development.
2.0Methodology
This paper initially reviews the outlook for the Asia-Pacific refining market and discusses the impacts on Australian refineries from that outlook. With that background the impact on supply security from refinery shutdowns within Australia is then assessed. The analysis looks at how the supply pattern changes, the likely source of imports, the likely change in inventories and the contracting method for supply by direct imports.
While the discussions on refinery closures are generic (not specific refineries), the scenarios are analysed for a 2016/2017 period with the base case assuming six refineries in operation (Clyde converted to an import terminal). Two specific scenarios are analysed, one with only four refineries operating (two more shutdown) and one with all refineries shutdown and a shift to 100% import supply.