These adjustments have tended to follow an orderly transition over a few years, permitting the market to respond. This has concerned the rationalisation of the refining sectors in established markets comparable to Europe and the United States of America, and the emergence and growth of refining capacity in different regions, specifically Asia.
2.2 Current and impending closures of oil refineries in Australia have raised issues in regards to the viability of Australia’s oil refinery industry, and the potential impacts of declining domestic refinery capability on the financial system, power security and employment within the sector.
2.3 The key oil refining companies—Shell, Caltex, BP and Exxon Mobil—argue that Australia’s oil refineries are at a competitive disadvantage in the region. Decisions to close chosen refineries have been based mostly on commercial issues, as some refineries have been working at a loss.
2.4 As a result, the trend has been to maneuver away from domestic refining to a larger dependence on liquid gasoline imports. This will include changing selected home refineries to import terminals. The businesses haven’t sought government subsidies to proceed the operation of these suboptimal refineries. The oil refinery sector and the Australian Authorities are in agreement that a market primarily based strategy is the best way to meet Australia’s energy wants.
2.5 The Australian Institute of Petroleum (AIP) publication Downstream Petroleum 2011 graphically depicted Australia’s key liquid gasoline infrastructure in 2011 as follows:
Figure 2.1 Key liquid gas infrastructure in Australia
Supply AIP, Downstream Petroleum 2011, p. Four.
2.6 In September 2012, Shell’s Clyde refinery closed. Caltex has also announced that its Kurnell refinery will close by mid-2014. This will leave no oil refineries in New South Wales and 5 domestic refineries in Australia. The Clyde and Kurnell amenities will each be transformed to import terminals.
2.7 These recent closures and people in the final decade have been attributed to home and international trends impacting negatively on Australia’s home refining competitiveness. Many submitters shared the view expressed by Shell Australia that the ‘Australian refining business has been beneath pressure and challenged for some time 
2.Eight From a worldwide perspective, the AIP outlined that vital progress in refining capacity has outstripped demand for these petroleum products. This has led to a worldwide surplus of those merchandise, which the Worldwide Vitality Company (IEA) argued would only be ‘balanced out by lower utilisation of refineries and further closure of refineries in OECD countries  The AIP reiterated the IEA evaluation that:
over the next 5 years, we will see a major structural adjustment occurring by means of the refining sector as we see rebalancing of provide and demand all through every area. They are expecting to see a really considerably totally different global refining crude and product trade over the rest of this decade.[Four]
2.9 The AIP famous the development of the last decade in direction of refinery scale-backs and closures. This trend has been evident within the European and North American refining sectors. The IEA medium term outlook means that:
we are likely to continue to see additional closures of refineries across the Northern Hemisphere. They have additionally signalled that, if those refineries don’t close, extra refineries are going to run at a significantly decrease utilisation fee than has been the follow …
2.10 The AIP maintained that these structural changes have, and are more likely to proceed to occur over an extended time period, allowing the market time to react and adapt.
2.11 Many OECD nations have been dealing with challenges, for instance with eight European refinery closures since 2009, and additional closures seemingly. The Australian Competition and Consumer Commission (ACCC) famous the UK Government’s acknowledgement that it is going through comparable aggressive pressures from competitors in Europe and Asia.
2.12 While industry changes—restructuring and closures in some areas and growth in others—have been occurring internationally, the development, Forestry, Mining and Power Union (CFMEU) contended that as an island continent, consideration have to be paid to Australia’s refining capability.[Eight]
2.13 The ACCC found that the adjustments in Australia’s refining sector have been in line with worldwide trends. The ACCC outlined that in recent years Australia’s refining sector has been characterised by comparatively smaller manufacturing volumes and decrease earnings and charges of return, which it attributed to:
– weaker economic situations and flat growth
– the influence of giant complex refineries in rising economies, corresponding to Jamnagar in India, with the capability to refine petrol to Australian standards at Petroleum Refinery Equipment aggressive prices. Additional deliberate openings of refineries in China and Saudi Arabia are seemingly to add to the availability of Australian normal petrol
– the ability of unbiased wholesalers to entry storage capacity in import terminals and to import refined fuel at aggressive costs.
2.14 The Division of Sources, Energy and Tourism (RET) famous that the vast majority of Australia’s refineries have been constructed in the mid-1950s and mid-1960s. At the time there was a favourable international and home atmosphere, which included: restricted competitive pressures from different refineries in the region; assistance from state governments; tariff protection for defence and business investment functions; and value and demand stability.
2.15 Nevertheless, despite substantial investments in infrastructure and modernising these ageing facilities, the sector has continued to really feel the pressures of remaining viable in the current surroundings. The AIP found that:
The costs of doing enterprise in Australia as well as the costs of assembly tighter regulatory necessities are rising, with labour and capital costs for refinery construction, operation and upkeep also growing faster than in competitor nations. This implies Australian refineries face rising aggressive stress from mega-refineries in Asia which have large and increasing cost advantages.
2.Sixteen The Australian Government’s Vitality White Paper 2012 (EWP) famous that the domestic vitality sector has been dealing with structural adjustments for some time. The EWP acknowledged:
Our gasoline and liquid gasoline markets are additionally undergoing important structural adjustments, driven by a closer integration with international markets and provide chains, the growing improvement of latest technologies reminiscent of electric autos and various fuels, and increasing sources of supply and demand competitors. These components have introduced new dynamics and transitional pressures in these markets and for some downstream industries (similar to plastics and chemicals) that depend on them for gas or feedstock. The total implications of this have but to be established and have to be intently monitored.
2.17 The AIP argued that while Australia has not been insulated from the wider international trends and pressures, the required structural modifications in Australia’s refinery operations have occurred in a measured and orderly way to allow the market time to respond effectively by producing extra product provide and ensuring supply security.
2.18 At the roundtable listening to the AIP offered the committee with examples of structural adjustments to refining in Australia:
Over the past decade the trade has invested almost $9½ billion in refineries. That includes over $three billion on the Cleaner Fuels program. The business has had an ongoing process for debottlenecking individual refineries in addition to growth of port handling capacities. We now have additionally invested closely in power efficiency and different sustainability opportunities at refineries, and the import terminal infrastructure has been enhanced significantly over the latest decade. By and large, these are elements which have been inside the industry’s control. Nonetheless, we be aware that there are a variety of points that sit exterior the industry’s means to pursue additional enhancements and enhancements in effectivity. Some of those elements are price associated. There can be a variety of broader financial settings that influence what the industry is able to do. That covers general rules at federal, state and local level, approval processes, taxation coverage et cetera.[Thirteen]
2.19 Mr Velins additionally commented on the modifications to Australia’s oil refining sector, stating that:
At its peak, Australia had 10 main refineries, together with 4 luboil plants, plus a number of tiny ones, however immediately only 7, and within a number of years, not more than 5. Particular person refinery capacity is considerably over 100 000 b/d [barrels a day], a small fraction of the scale of regional exporters. Moreover, Australian refineries have shallow berths and hence are unable to use large crude oil tankers, thereby paying extra for crude oil freight than regional suppliers.
Home refining capacity
2.20 The Australian refining sector could be considered as a collection of separate markets. Australian oil refineries operate on a smaller scale than its regional opponents. RET commented that the ‘total Australian refinery capacity represents a very small proportion of world and regional capacity 
2.21 RET famous the 2012 BP Statistical Evaluate of World Vitality discovering that in 2011, the Asia-Pacific refining capacity was equal to 31.Three per cent of the worldwide capacity. Australia’s capacity in 2011 was 2.6 per cent of the Asia-Pacific capability, and only 0.Eight per cent of worldwide capacity.[Sixteen]
2.22 The AIP supplied a breakdown of Australia’s oil refinery capacity for 2010-eleven:
Table 2.1 Australian refinery capability in 2010-11
Capacity ML pa (megalitres per 12 months)
Closing by mid-2014
Closed in September 2012
Bulwer Island (BP)
forty five 430
Source AIP, Downstream Petroleum 2011, p. 5.
2.23 Following the closure of the Clyde refinery, the overall capability of Australian refineries is forty 440 ML per year. RET famous that Australia’s total production of petroleum products in 2011-12 was 36 192 ML, which included 15 390 ML of automotive gasoline, 12 212 ML of automotive diesel oil and 5 452 ML of jet fuel. RET defined that:
A refinery’s capability is the volume of fuel that could possibly be produced by distillation of crude oil working non-stop at an optimum utilisation price. Typically capability just isn’t achieved, because of shutdowns and inherent difficulties in balancing crude inputs with demand for outputs. In some circumstances capacity can truly be exceeded—for example, by increasing using mix elements, which do not should be distilled.
2.24 The closure of the Caltex Kurnell refinery in 2014 will scale back Australia’s total home capability to 32 620 ML per 12 months. The EWP discovered that the combined effect of the Clyde and Kurnell refineries would scale back Australia’s most refining capacity by 28 per cent.
2.25 The ACCC observed that Shell could also be reviewing its Geelong refinery operations. In its December 2012 monitoring report, the ACCC said:
Shell reported that the way forward for the refinery is ‘borderline and may be impacted when the further capital funding is required to maintain reliability. Because the Geelong refinery requires imports of crude to feed manufacturing, a switch to immediately importing petrol will not be a big soar, in response to Shell, commenting that there isn’t a structural cause to keep the facility operating.
2.26 The 2011 National Power Safety Evaluation (NESA) found that ‘regional refinery progress was thought-about a danger to domestic refining capability as home demand development was more and more met by imports from these large mega-refiners 
2.27 RET noted that the demand for liquid fuels in Australia has ‘risen steadily over the previous decade, and consumption of refined petroleum merchandise is projected to continue to grow  The liquid gas market includes feedstock and fuels, which covers crude oil, condensate, liquefied petroleum gasoline (LPG), refined petroleum merchandise resembling fuels (i.e. petrol, diesel and jet gasoline), and alternative transport fuels comparable to biofuels (ethanol and biodiesel), compressed natural gas (CNG), and liquefied pure gasoline (LNG).
2.28 In 2010-eleven Australia imported around 83 per cent of its crude oil and different refinery feedstock, primarily from Malaysia, Indonesia and the United Arab Emirates. Petroleum product imports are sourced primarily from Singapore (59 per cent in 2010-eleven). Shell noted at the roundtable listening to that lots of the product described as coming from Singapore has been transhipped via Singapore and should have originated elsewhere, equivalent to Taiwan, Thailand or China.
Challenges to Australia’s competitiveness
2.29 The main oil firms all provided evidence to the committee that Australian home oil refineries are working at a competitive disadvantage to other refineries in the area.
2.30 The pressures of excessive native prices, the power of the Australian dollar and the relative age of home facilities, are having significant impacts on Australia’s refineries.
2.31 The CFMEU argued that the high Australian dollar is having an influence, and is ‘hurting all manufacturing  Caltex also claimed that the excessive Australian greenback is having an affect on the refining sector, stating that:
Our margin, which is the distinction between what we pay for crude and what we get for our products, is set in US dollars. So the world of crude oil is a US dollar world and the world by which we promote our products is a US dollar nominated world as properly. We now have talked beforehand about import parity. We have now a US dollar margin and we have A dollar costs. So, to the extent the A dollar costs chew into that margin it leaves much less for the refiner.
2.32 Shell asserted that labour prices comprise round 60 to 70 per cent of fixed costs for refineries, and commented that Australian labour prices are larger than many of its regional opponents:
We’d see that the everyday price for staff in Australia is round 2.Three occasions higher than Korea and around seven instances larger than India. The cost of operating a refinery in Australia, of which labour is one part, but just one element, has increased about three times over the last ten years. A part of that is the Australian dollar, but a part of it is the underlying wage costs.
2.33 The CFMEU acknowledged that wages are a cost issue, however argued that ‘in capital-intensive businesses labour prices are a minority—often a small minority—of operating costs, so they aren’t the biggest factor figuring out what’s going on in refineries in Australia  Labour costs as a part of refining costs are discussed in Chapter 5 on employment points.
2.34 Given the character of the petroleum merchandise, transport is on the core of international movements of these products. During the inquiry, submitters commented on shipping arrangements for transporting oil, together with noting the results of cabotage—a authorized association to reserve the correct to transport goods or passengers inside Australia’s coastal waters to Australian carriers.
2.35 While refiners did not supply any indicative price figures on value implications of delivery regulation in Australia, the most important oil refiners claimed that present shipping regulation in Australia restricts transport flexibility and impacts on their prices. Mobil Oil argued that by restricting their potential to make use of international flagged vessels to maneuver between Australian ports added a value to that domestic movement, which resulted in making it extra price effective to export moderately than redistribute supply nationally. Caltex concurred that anything that increases the costs reduces firm internet returns.
2.36 In its December 2012 report Monitoring of the Australian petroleum trade, the ACCC discovered that the Australian refining sector had not too long ago recorded comparatively low net profits. It commented that as home petrol prices are based on import parity, Australian refiners and suppliers have a limited potential to move on costs which can be ‘out of line with international finest observe for refinery production 
2.37 It is usually acknowledged that giant refineries in the Asian region characterize a aggressive problem to Australia’s refineries. Mobil Oil noticed that ‘the true competitors in Australian refining is just not the opposite Australian refineries but the much bigger refineries elsewhere 
2.38 The Nelson Complexity Index is a measure of secondary conversion capacity in comparison to the first distillation capacity of any refinery. It supplies an insight into refinery complexity, indicating investment depth, price index and worth of further potential of a refinery. It additionally allows for some degree of comparability between refineries. Shell noted that Australian refineries have been working at around the eight or 9 index mark, in contrast to the Asian surroundings the place the typical has risen from 6.5 to over 10, with the Jamnagar refinery in India having an index of 14.
2.39 When comparing Australia’s refineries with those in Asia, the AIP commented that:
In terms of dimension, all the [Australian] refineries sit within the vary of 4½ to 8½ thousand megalitres per annum, which is a capability of about eighty,000 to 145,000 barrels a day. By comparison with other refineries around the Asian region, the Australian refineries are comparatively small, sitting within the mid-vary of the pack. Jamnagar refinery in India is considered one of the largest refineries. It has a complete capacity of about 1,200 thousand barrels a day processing—substantially larger than the total Australian processing capability.
2.Forty Further, the AIP discovered that other elements are also affecting Australia’s refining sector:
In recent times the surplus refining capacity in the Asian area has pressured refiner margins to very low levels which are exacerbated by excessive Australian dollar exchange rates. Whereas all refineries will face low margins for some years to come back, many Asian refineries are supported by nationwide governments which are pursuing refining self-sufficiency aims rather than commercial imperatives.
2.Forty one Similarly, Shell commented that:
Over the last 10 years the operating prices of working smaller scale refineries in Australia have grown to be as a lot as operating a refinery two to 3 times their size in Singapore or the Middle East.
2.Forty two BP Australia presently has refineries working in Perth and Brisbane. It noticed that:
Some of our locally primarily based competitors have closed, or are closing their refineries. While not privy to their choice making it’s BP’s expertise that Australian refining does suffer a competitive drawback which is born from the next working cost-base and lack of economies of scale compared to regional rivals.
Whilst the materiality of these greater costs current themselves in a number of the way they are dominated by labour prices, the relative age and scale of Australian refinery belongings and the excessive Australian dollar.
2.43 Different submitters additionally agreed that Australian amenities are dealing with constraint challenges. For example, Mr Eriks Velins commented that:
The refineries, albeit debottlenecked and upgraded to meet new product specs, have grown previous, with no longer an skill to achieve globally aggressive economies of scale due to the low progress in native demand and an inability to compete in the main product export markets.
2.Forty four The AIP described Australian refineries as being affected by ‘legacy constraints and commented that:
They had been designed to fulfill a selected domestic crude provide and demand set of fundamentals—that is, a candy crude to be processed with a high deal with petrol as opposed to diesel. The new Asian refineries are significantly more complicated of their operations than the Australian refineries. That gives a spread of opportunities to process a much wider range of crudes. That additionally enables them to process crudes more intensively than the Australian refineries can typically and capture a much wider vary of alternatives to reinforce refinery profitability.
In relative terms, the operational and building costs within the refining sector are greater in Australia than across Asia, and the Australian refineries are challenged by having a better energy intensity for a similar level of complexity compared with the Asian refineries.[Forty two]
2.Forty five Mobil Oil agreed with the AIP evaluation that Australia is going through appreciable aggressive challenges in the area. It commented that:
Now we have a excessive price of compliance and higher taxes. We’ve got high and rising costs throughout our infrastructure and particularly in utilities—electricity and water. We’re topic to increased labour prices. Despite the fact that there has been some very good work in improving productiveness, we still have very high absolute labour costs in comparison with the remainder of the area and, in fact, we now have a excessive Australian dollar.[Forty three]
2.46 Caltex operates refineries in Sydney and Brisbane. Following a review of its refineries, Caltex determined to close the Kurnell refinery in Sydney by mid-2014, and convert it into an import facility. Its Lytton refinery in Brisbane will continue to function.
2.Forty seven In its submission to the inquiry, Caltex suggested that it had carried out an exhaustive evaluate of its two refineries. It contended that:
These refineries lost about $200 million (EBIT) in 2011, with the higher part of the loss arising from the Kurnell refinery. Like many manufacturing plants, Caltex’s refineries face strong import competitors and growing costs.
Caltex has not been capable of finding an economically enticing approach to make the Kurnell refinery sufficiently aggressive within the Asian market. Caltex has therefore determined to shut Kurnell’s refining amenities within the second half of 2014 and convert the location to a significant import and fuel storage terminal.
Caltex’s Lytton refinery in Brisbane will proceed operating as the company has identified a variety of opportunities to enhance performance, and quite a lot of potential targeted incremental funding options, to drive sustained enchancment.[Forty four]
2.48 Caltex noticed that all refineries are completely different by way of capabilities and their economics, and contended that even government intervention, similar to offering a ‘tax holiday would not have changed the company’s resolution about the Kurnell refinery.
2.49 Shell’s downstream businesses supply round 25 per cent of Australia’s liquid petroleum requirements. Shell agreed with industry assessments that home refineries are underneath stress from the mega refineries within the area, which ‘have lower operating prices and might produce giant portions of top of the range products from cheaper crude oil and feedstocks [Forty six]
2.50 In making its determination to close its NSW Clyde refinery and convert the facility to an import terminal, Shell argued that it:
not solely recognised these world pressures and that Clyde was unable to compete on this market but also that fuels to Australian specifications are extra readily obtainable within the portions required to service this vital NSW market.
2.Fifty one When contrasting the Clyde refinery to the large refinery in Singapore, Caltex argued that the Singapore refinery was ‘an incredibly extra flexible machine that ‘could make merchandise for a variety of different countries; it might modify its schedules on a much more frequent basis [Forty eight]
2.Fifty two Shell indicated that a quantity of things influenced the Clyde closure:
– There may be growing excess refining capability in our area;
– Clyde is a small scale refinery compared to its regional competitors and was not capable of generate the returns needed to justify additional funding (For example, Clyde competed with regional refineries which produce 1.2M barrels per day versus 70,000 barrels per day at Clyde); and
– Shell can entry enough supply of Australian-grade merchandise in the market.[Forty nine]
2.Fifty three Further, Shell argued that:
Each refinery is different however one factor remains the same – a refinery needs to generate a positive cash circulation to justify ongoing operation and the numerous quantity of reinvestment required year on year. Simply overlaying costs will not be enough. /p>
Moreover the notion of “cross subsidisation from different extra worthwhile segments of our enterprise is flawed as there isn’t a enterprise purpose to do that given the entry to ample provide of gas merchandise in extremely “liquid markets and, from an inner perspective, each Shell business unit is predicted to carry out and contribute to the overall enterprise. By means of cross subsidisation you have got the potential to reduce the profitability of the overall enterprise thereby further reducing the power to access accessible capital. 
2.Fifty four Shell submitted that its evaluation showed Clyde refinery’s long-time period projected money flows as adverse, as the refinery’s prices have ‘almost doubled in the last decade and in US greenback phrases they’d almost tripled 
2.Fifty five Mobil Oil argued that Australia’s six remaining oil refineries are ‘small by regional and world standards and undergo economies of scale disadvantages versus many giant regional refineries  It said:
Many of these giant regional refineries are newer and more gas efficient and have extra sophisticated processing services than Australia’s home refineries. Regional refining capability is rising (expansions or new builds) at a fee which currently exceeds product demand development and that is miserable refinery margins. This trend shouldn’t be anticipated to vary before the latter part to this decade.
2.Fifty six Mobil Oil’s Port Stanvac refinery in South Australia ceased operations in 2003, and was permanently closed in 2009. The AIP noted that as one of many smallest refineries within the area, the Port Stanvac refinery couldn’t compete towards the bigger and more subtle Asia-Pacific refineries.[Fifty four] The ability will probably be demolished and the site ready for future industrial use.
2.57 Mobil Oil’s remaining refinery, the Altona refinery in Melbourne, is a key a part of Victoria’s vitality provide chain, providing around 50 per cent of the state’s petroleum wants. It continues to operate in a ‘very difficult business setting, going through substantial competition from overseas refineries which have cost and scale advantages not available to Australian operators [Fifty five] Mobil is also one in all the largest importers of petroleum fuels into Australia.
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