April 5, 2013 / 4:45 AM / 5 years ago

COLUMN-Time for Australia to decide if it wants oil refining: Clyde Russell

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

By Clyde Russell

LAUNCESTON, Australia, April 5 (Reuters) - Is Australia prepared to see all its ageing oil refineries closed down in the face of Asian competition or should the industry be deemed strategic and eligible for government protection?

That’s the question that should be asked after Thursday’s announcement by Royal Dutch Shell that it would close its Geelong refinery in Victoria state and convert it to an import terminal if a buyer couldn’t be found.

Given the parlous state of Australia’s refining industry, it seems closure and conversion is a far more likely outcome for the 55-year-old plant, which can process 120,000 barrels per day (bpd).

If it does close, Geelong will be the fourth refinery to shut since 2003, reducing Australia’s capacity by about 40 percent to just 408,600 bpd by 2015.

The country consumed about 1 million bpd of crude in 2011, according to BP’s Statistical Review of World Energy.

This means that if Geelong does close, domestic refineries will be able to meet only 40 percent of 2011 demand levels, and likely considerably less of 2015 demand as consumption is expanding given the heavy use of diesel in remote mining operations.

Shell has already closed the Clyde refinery in Sydney, a 90,000-bpd plant that was the nation’s oldest and is now an import terminal.

A similar fate awaits Sydney’s other refinery at Kurnell, with owner Caltex Australia planning to convert the 124,500 bpd plant to an import terminal by the second half of next year.

Exxon Mobil’s Port Stanvac refinery in Adelaide stopped processing in 2003 and started complete demolition last year, thus ending any chance of its revival.

This leaves BP Plc’s two plants, at Kwinana south of Perth and in Brisbane, Caltex’s Lytton plant in Brisbane and Exxon’s Altona operation in Melbourne as refineries that may still be operating by 2015.

The problem for all of these plants is their age and the need for significant investment for them to remain competitive with the complex, export-orientated refineries in India and Singapore, as well as the likelihood of increased Chinese exports of refined products.

BP’s 140,000-bpd Kwinana plant, the nation’s largest, was commissioned in 1955 and its 90,000-bpd Brisbane operation in 1965.

Caltex’s 108,60-bpd Brisbane refinery started in 1965 and Exxon’s 80,000-bpd Altona plant commenced operations in 1955.

This means the youngest plants in Australia are about 48 years old, and while they have undergone regular upgrading, they are likely no match for the new mega-plants such as Reliance Industries two refineries at Jamnagar on India’s west coast, which have a combined capacity of more than 1.2 million bpd.

Although both BP and Exxon maintain they are committed to keeping their plants operating, it does appear that the oil majors would be willing to explore options for their Australian downstream operations.

An Exxon executive, who declined to be identified as he is not authorised to speak to the media, told me they would love to sell the Altona refinery, but there aren’t any suitable buyers around.

It’s entirely possible that Australia could meet all of its fuel needs from imports, but the question has to be asked whether this is a good idea.

The obvious risk is geopolitical, with any crisis affecting sea lanes such as the Straits of Malacca outside Singapore likely to have an immediate impact on fuel availability.

Once refineries are closed and converted to import terminals, they can’t be rushed back into service in the event something goes wrong and building a new one would likely take too long in the event of a genuine regional crisis.

So far the government of Prime Minister Julia Gillard seems quite sanguine about the refinery closures, with what little concern expressed being more about the loss of jobs than energy security.

Former Energy Minister Martin Ferguson, who resigned last month after siding with attempts to replace Gillard with her axed predecessor Kevin Rudd, said at the time of the announcement of the closure of the Kurnell refinery that there was no threat to the nation’s fuel supplies.

If Geelong does close, and the threats of closure over other refineries come to fruition, it’s hard to see how the government could remain so ambivalent about energy security.

There was public concern when Singapore Telecommunications bought the number two Australian mobile phone operator Optus in 2001 amid fears that a strategic asset was falling into overseas hands.

Imagine the concern when the public realises that they are reliant on refineries in Singapore for their petrol, and if the taps are turned off, Australia would have few options to secure supplies short of launching military action.

Does this mean the government should be subsidising oil refineries similar to what they do for the car manufacturing industry?

The government has in fact added to the burden of domestic refineries by subjecting them to the carbon tax, which doesn’t affect their offshore competitors.

The car industry has received almost A$4.5 billion ($4.3 billion) in assistance in the past 10 years, split between the three local manufacturers, namely General Motors’ Holden unit, Ford and Toyota.

While politicians from both the ruling Labor Party and the opposition Liberal Party talk up the benefits of having a car industry, the real motivator is keeping manufacturing jobs alive in an increasingly globalised industry.

In many ways refining is far more sensible an industry to subsidise given its strategic nature, and any assistance could be tied to commitments to upgrade and modernise the facilities to give them a fighting chance against regional competitors.

However, politicians rarely act until the crisis is real or perceived as such by the voting public, so the refining industry will have its work cut out trying to get something from the government, especially with a federal election due in September.

The refiners will also have to figure out for themselves whether they are in Australian downstream operations for the long haul or whether they want to exit.

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