COLUMN-Australian oil refining industry needs debate, not neglect: Clyde Russell

Thu Apr 3, 2014 12:15am EDT

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(The opinions expressed here are those of the author, a columnist for Reuters.)

--Clyde Russell is a Reuters market analyst. The views expressed are his own.--

By Clyde Russell

LAUNCESTON, Australia, April 3 (Reuters) - That Australia's oil refining industry is uncompetitive in the face of the new, complex plants in Asia is obvious. What isn't so obvious is what should be done about this.

So far two solutions have presented themselves.

The more common one is that the oil majors running Australia's ageing and relatively unsophisticated refineries shut them down and convert the facilities to import terminals for refined fuels, sourced mainly from Asia.

BP became the latest in this trend, announcing on Wednesday that it was closing its 102,000 barrels per day (bpd) plant in Brisbane by 2015, and possibly converting it to an import terminal.

It joins Royal Dutch Shell, Chevron unit Caltex Australia and Exxon Mobil in closing refineries in Australia.

However, Shell has also shown that a second path is possible.

While the Anglo-Dutch major closed its Clyde refinery in Sydney, which was the nation's oldest, it found a buyer for its plant at Geelong, outside Melbourne.

Swiss-based commodities trader Vitol SA agreed in February to buy the 120,000 bpd refinery, associated fuel terminals and 870 service stations for about $2.6 billion.

This came after Shell had flagged it would close the Geelong facility by next year if it was unable to find a buyer.

While Vitol has said it intends to keep operating, and invest in improving, the Geelong refinery, it's believed that the real prize for the trader was the import, storage and distribution network that came with the deal.

This will allow Vitol to gain a foothold in a growing market, one that was previously dominated by the international oil majors.

BP's statement on closing its Brisbane refinery made no mention of whether any attempt was made to find a buyer for the facility, rather simply stating that it was a commercial decision that will improve the company's position.

The idling of BP's Brisbane plant means only four refineries will be left in Australia, BP's other unit at Kwinana in Western Australia, Caltex's Lytton plant in Brisbane, Exxon Mobil's Altona facility in Melbourne and Vitol's Geelong facility.

These have a combined capacity of around 448,500 bpd, while BP's Statistical Review of World Energy pegged Australia's oil consumption at about 1.02 million bpd in 2012.

IMPORT DEPENDENCY RISING

This means that more than half of the country's fuel needs will have to be sourced from overseas, a figure that's likely to rise as the remaining refineries have to be seen as under threat of closure as well.

The youngest of Australia's refineries are the two in Brisbane, and both are coming up for the 50th birthdays.

While the nation's plants have been upgraded over time, they are still too small and unable to match the new, mega-refineries springing up across Asia and the Middle East, many of which are focused on exports.

Up to now, the focus in discussing refining in Australia has been more about the political impact of job losses, especially when seen against the broader backdrop of mounting manufacturing closures, most notably the motor vehicle industry, which will cease building cars locally by 2018.

Concerns over the security of fuel supply are generally dismissed by pointing to the surplus of refining capacity in the region and the competitive nature of the market.

This is all very well in times of peace, but it's not inconceivable to imagine a scenario where fuel shipments to Australia could be threatened.

Conflict between China and Southeast Asian nations over territory in the South China Sea, a political showdown with Indonesia over any one of a myriad of issues, a terrorist attack in the Straits of Malacca are all possibilities that could endanger the movement of fuels by tanker.

At such a time, Australia would have limited options and could easily run short of fuel if a crisis was sustained for any longer than a few days.

Neither the previous Labor Party government, or the Liberal Party which replaced it after last September's election, appear to have any cohesive policy toward energy security, or refining.

The Labor government probably hastened the demise of Australian refining with its carbon tax, which added to the cost of doing business.

The Liberal government wishes to repeal that tax, but there is much more it could do to ensure the future of refining, with measures that wouldn't add to the pressures on an already stretched federal budget.

These include carrots, such as offering tax breaks for upgrading refineries or imposing a tariff on imported fuels. A stick approach could be to tighten environmental regulations for any company closing a facility, thereby raising the cost of mothballing a refinery.

But the future of refining isn't as yet a priority issue for the government, which makes it all the more likely that Australia's plants will be allowed to drift into oblivion. (Editing by Himani Sarkar)

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