Analysis: Australia's fuel trade jumps as plug pulled on refineries

SINGAPORE Thu Jul 26, 2012 5:55am EDT

A Caltex sign is seen at a petrol station in Melbourne April 22, 2010. REUTERS/Mick Tsikas

A Caltex sign is seen at a petrol station in Melbourne April 22, 2010.

Credit: Reuters/Mick Tsikas

SINGAPORE (Reuters) - Australia is set to become Asia's biggest importer of fuels, opening up trading opportunities in one of the world's most profitable energy markets, as ageing Caltex and Shell oil refineries near Sydney shut and other plants look vulnerable.

The trend will reverberate across energy markets since Australia burns top-quality fuels and a rise in imports means more competition for Europe -- Asia's top buyer of such grades.

That means Western buyers and other Asian users of diesel and gasoline could see higher pump prices, as Australia snaps up cargoes, while refiners making the fuel rake in fatter profits.

Rising imports may allow trading houses such as Vitol and Glencore, and refiners in South Korea, Japan and Taiwan, to tap a fuel market that was until now supplied by major oil firms which dominate Australia's refining business.

"Australia is a big fish and it is getting bigger," said Chris Gascoyne, managing director of consultancy FACTS Global Energy in Singapore.

"It is one of the few countries where the price of gasoline, jet fuel and diesel is determined by the cost of import rather than the cost of production. It's a market that you would love to sell in," he added.

Australia is already Asia's top importer of diesel, while combined with rises in jet fuel and gasoline imports in the next five years it is on track to surpass Indonesia as the biggest fuel importer, consultancies FACTS and JBC Energy say.

Diesel demand in Australia is expected to rise at a steady pace of about 2 percent up to 2015, boosted by a once-in-a-century resources boom that needs fuel for excavators to dig up minerals and trucks to ferry iron ore, coal and equipment.

At the same time, ageing Australian refineries are being closed as their owners grapple with higher global oil prices, a drop in Australian crude output, as well as rising labor and financing costs due to a strong local dollar.

BUILT IN THE 1920s

Reflecting these pressures, Royal Dutch Shell (RDSa.L) will close its 79,000 barrels-per-day Clyde Refinery near Sydney in September -- built in the early 1920s and the oldest in Australia.

Caltex Australia (CTX.AX) also confirmed this week the closure in 2014 of its 57-year-old Kurnell refinery, which has a capacity of 124,500 bpd. Both refineries will be converted to import terminals.

CEO Julian Segal said the loss-making Caltex plant lacked the scale to compete with modern refineries in Asia, while Australia faced a "challenging business environment".

Analysts say the 108,600-bpd Lytton plant, also operated by Caltex, and Exxon Mobil's (XOM.N) 80,000-bpd Altona refinery remain vulnerable to closure although both firms have said they will continue operating these plants.

Australia's total refining capacity will fall by 25.5 percent to 593,000 bpd by 2015 after the announced closures and could decline by another 30 percent if Altona and Lytton shut.

The shutdown of Clyde alone will raise Australia's fuel imports by 26 percent to about 340,000 bpd, according to FACTS.

The closure of one more refinery like Kurnell will boost imports to 420,000-450,000 bpd, surpassing Indonesia, the consultancy said. Indonesia now imports about 397,000 bpd of gasoline, jet fuel and gasoil.

INCREASED OPPORTUNITIES

As well as being Asia's top diesel importer, Australia is the second-biggest jet fuel buyer and shares third position with Vietnam for gasoline, according to FACTS.

Existing suppliers may not give up their market share easily. Caltex, which provides about a third of all transport fuels in Australia, has said it remains committed to supplying the market despite the move to close Kurnell.

Australia's diesel imports have already been rising ahead of the closures. Exports from Singapore jumped more than 50 percent in June to over 450,000 metric tons (496,040 tons), or 3.4 million barrels, from May, data from the city-state showed.

"This will provide increased opportunities for traders, refiners, terminal operators and shippers," Gascoyne said.

Shell, Exxon and Chevron have largely secured diesel and gasoline barrels from their Singapore refineries, with BP (BP.L) buying their requirements from both Singapore and North Asia.

The purchases have tightened supply and increased premiums for diesel to a 15-month high in July.

"Diesel will remain the tightest, with Australia expected to continue ranking number one among importers in Asia Pacific ahead of Indonesia till 2017 at least," said David Wech, managing director at JBC Energy.

Cash premiums for diesel with 10 parts per million (ppm) sulphur, a grade used by Australia, have more than doubled to above $4 a barrel to Singapore quotes this month compared with $1.80-$2.40 a year ago, boosting refinery margins.

Australia will need to import about 5.4-6.6 million barrels a month of diesel just with the Clyde Refinery shutting. That's almost equal to Europe's average monthly imports last year, said Suresh Sivanandam, an analyst at Wood Mackenzie.

Refiners in Singapore, Japan, South Korea and Taiwan are Asia's top producers of cleaner-burning fuels and will be the main suppliers to Australia. India's Essar Oil (ESRO.NS) may be another supplier, Sivanandam said.

Yet, upward pressure on fuel prices may be limited as the Middle East and Asia build more refiners and churn out surplus oil products, analysts say.

According to FACTS, the Asia-Pacific region exported around 170,000 bpd of gasoline in 2011 and 600,000 bpd of gasoil.

Australian fuel prices have always been higher than the regional trading hub Singapore to discourage local refiners from exporting. The retail price of diesel is a sum of Singapore price, plus shipping cost and taxes and administrative costs.

MORE CLOSURES

Australia's refining outlook is unlikely to improve soon as a new carbon tax raises operating costs for refineries further.

"Australia is now a significantly more costly place to operate a refinery in than what it was a few years ago," FACTS' Gascoyne said.

Strict environmental laws have also prevented refiners from upgrading their facilities to process cheaper high sulphur crude, Wood Mackenzie's Sivanandam said.

"There is only one refinery in the West Coast (Kwinana) that will definitely run as it's the only refinery in Western Australia and it's very close to the region where all the mining activities are taking place," Sivanandam said.

(Editing by Manash Goswami and Ed Davies)

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