Australia refinery closures raise fuel import reliance

ExxonMobil's decision to convert its 90,000 b/d Altona refinery in Australia to an import terminal means half of the country's refining capacity has been earmarked for closure in the last few months, moving Australia closer to complete reliance on oil product imports.

ExxonMobil announced today it would close the Altona refinery in Victoria state, citing the impact of declining domestic crude production, the need for future capital investments and the competitive supply of products into Australia. The decision comes after BP said in October it would halt operations at its 146,000 b/d Kwinana refinery in Western Australia by the end of April and convert the plant into an oil product terminal.

This will leave Australia with just two refineries — Ampol's 109,000 b/d Lytton and Viva Energy's 128,000 b/d Geelong plants. Ampol is considering the future of Lytton, potentially leaving Australia with just one ageing refinery that will have the capacity to supply little more than 10pc of the country's 1mn b/d oil product market.

The closures, and the prospect of rising import dependence, undermine government efforts to provide financial assistance to the country's refiners, which have been hit by weak margins, lower demand and looming requirements for large investments to improve fuel standards.

Three refineries in Australia were already converted into import terminals between 2012 and 2015 (see table), with similar strategic reasons cited for the changes. Australian refineries are older and smaller than many other Asia-Pacific plants — reflecting their roots in 1940s-60s state government efforts to meet local demand, with little thought given to sales to neighbouring state markets or exports.

This has left operators facing significant upgrading costs to produce better quality fuels in line with standards in other developed countries and regional powerhouse China.

Trade flows

The refinery closures will cut Australia's crude imports but boost demand for oil products, particularly gasoline and diesel. Gasoline makes up about 60pc of Altona's fuel production, with diesel at 30pc, ExxonMobil says. Jet fuel typically accounted for around 10pc, although this fell last year because of tight restrictions on air travel to combat the Covid-19 pandemic.

Australia's four refineries produced an average of 371,000 b/d in January-November last year, or 78pc of their combined capacity of 473,000 b/d. Gasoline and diesel each accounted for around 37pc of total fuel output.

This indicates that domestic output accounted for around 42pc of total oil product demand of 890,000 b/d in the 11-month period. Demand was down by 17pc from the 2019 average of 1.05mn b/d, largely reflecting the impact of Covid-19.

Australia imported 546,000 b/d of oil products in the same period, down from 636,000 b/d in 2019. The country ships some of its imported and domestic refined products to nearby markets including New Zealand and small Pacific island states.

Gasoline imports were about 107,000 b/d of gasoline in 2020 with Singapore and South Korea the biggest suppliers, at 36,000 b/d and 21,500 b/d respectively. Imports are on the rise from India, which more than tripled shipments to Australia to 11,800 b/d last year from just 3,000 b/d in 2019. Imports from China were steady at just over 4,000 b/d last year.

China reliance

The closure of the two refineries will leave Australia even more dependent on product imports, and potentially more reliant on China, its largest trading partner.

China, which has been rapidly expanding refining capacity and product surpluses in recent years, expanded its share of Australian product imports to over 13pc in the July 2019 to June 2020 fiscal year from less than a 0.5pc share 10 years earlier. China accounted for over a quarter of Australian jet fuel imports and 15pc of diesel in 2019-20.

The prospect of increased energy imports from China come as trade tensions between Canberra and Beijing have increased. This has led China to reduce its purchases of Australian coal, potentially cutting Australia's energy trade surplus with China.

Australia's refined product output is likely to average 352,000 b/d in the 2020-21 fiscal year, according to the latest projections from government commodity forecaster the Office of the Chief Economist (OCE) made in December. The OCE has reduced its forecast for 2021-22 production to 324,000 b/d but may have to lower it again to reflect the closure of Altona when it releases its quarterly report next month.

The decline in domestic refinery capacity has come in line with lower domestic crude production, which averaged just 138,000 b/d in January-November last year — down from 327,000 b/d in 2010 and a peak of around 687,000 b/d in the 2000-01 fiscal year. Australia's upstream sector is now focused on producing gas as a feedstock for its LNG export sector, the world's biggest.

By Kevin Morrison