--Clyde Russell is a Reuters market analyst. The views
expressed are his own.--
By Clyde Russell
SINGAPORE, March 3 It's relatively easy to see
Royal Dutch Shell's motivation in selling its Australian
refinery and retail network, but somewhat more difficult to work
out Vitol SA's reasons for buying.
Shell agreed on Feb. 21 to sell its refinery in
Geelong, near Melbourne, as well as fuel terminals and 870
service stations to Swiss-based Vitol for about $2.6
For Shell, the deal means it gets much-needed cash and
manages to dispose of an asset it was planning to close down.
The Anglo-Dutch major had previously flagged shutting down
the 60-year old, 120,000 barrels-per-day (bpd) refinery by 2015,
unless a buyer could be found.
Shell had already closed its 90,000 bpd Clyde refinery in
Sydney, converting what had been the nation's oldest plant into
an import and storage terminal.
Shell wasn't unique in having problems in Australia, with
virtually all the oil majors that used to dominate the fuel
industry making moves to rationalise their businesses.
Caltex Australia is closing its 124,500 bpd Sydney
refinery, leaving it with one plant in Brisbane, while Exxon
Mobil closed its Port Stanvac refinery in Adelaide in
2003, while still operating the 80,000 bpd Altona plant near
BP operates two refineries, in Brisbane and south of Perth,
but they may be up for sale as well, with Vitol Chief Executive
Ian Taylor not ruling out an interest in acquiring the plants.
The problem for all Australia's refineries is that they are
old and small, especially when compared to the giant, modern
complex refineries that have been built in the past decade
The youngest plants, both in Brisbane and both started in
1965, are coming up for their 50th birthdays, and while the have
been upgraded over time, they are well short of the scope and
efficiency of export-focused plants such as Reliance Industries'
1.2 million bpd complex on India's west coast.
The question is why would Vitol decide to invest in a
business in Australia that an established player couldn't run
profitably, and in an industry subject to enormous competitive
pressures from well-resourced global players?
TERMINALS, DISTRIBUTION THE KEY
The key isn't the Geelong refinery, even though Vitol has
said it plans to continue operating and investing in the plant.
Vitol may also be able to run the refinery a bit harder than
Shell, which tends to be a conservative operator, and it may
also be able to use its trading nous to source crude at more
But the real advantage is in the import, storage and
distribution network that comes with the refinery.
Australia's refining capacity stands at just over 500,000
bpd, but demand is closer to 1.1 million bpd.
The country also tends to be a higher user of diesel than
other countries with a similar size economy, given the reliance
of mining and agriculture on the fuel.
Owning import, storage and distribution networks gives Vitol
a leg up in accessing what it believes will be a growing market,
especially as Australia's resource sector continues to grow even
as China's demand growth for commodities slows.
New iron ore mines in Western Australia and liquefied
natural gas plants in the east and northwest will lead
Australian diesel demand higher, while immigration-fueled
population growth means retail fuel demand should also grow at a
faster pace than in many developed economies.
Up until recently Australia's refined products sector had
been a comfortable market dominated by the international majors.
Vitol's deal changes this, and continues a process started
by rival trader Trafigura, whose Puma Energy unit
bought three fuel distributors and retailers in separate deals
early last year.
Macquarie Group, Australia's largest investment
bank, and Glencore Xstrata were also believed to be
interested in buying Shell's Australian assets.
This makes it more likely that any decision by BP or Caltex
Australia to exit the country will attract buying interest.
While Vitol clearly believes there is value in the storage
and distribution sector in Australia, and may be able to run the
Geelong refinery profitably, the challenge is likely to be the
retail station network.
Fuel retailing is highly competitive in Australia, with
prices seldom varying between the major sellers.
Margins are seldom more than a few cents per litre, meaning
that the real profits in service stations is in the attached
This may well prove to be the hardest part of the Shell deal
to get right for Vitol.