The potential closure of Caltex's Kurnell oil refinery raises questions about the health of the wider industry and whether Australia actually needs a refining capacity, writes Angela Macdonald-Smith.
The likelihood that Caltex Australia will close at least one of its oil refineries has heightened fears that the whole industry has only a limited future as estimated losses climb to $1 billion a year.
Caltex chief executive Julian Segal yesterday put the focus firmly on the Kurnell plant in Sydney, which is responsible for most of the company's $60 million pre-tax loss in the first quarter.
But he said the problems being faced by Caltex's two plants would be common across the local industry, which comprises five other operating refineries owned by oil majors BP, Royal Dutch Shell and ExxonMobil.
Australia's seven refineries - the eighth was mothballed in 2003 - have long struggled to compete because of their small size and outmoded design compared to huge new plants coming into operation in India, China and Singapore.
They are little suited to the types of crude oil produced in Australia and have to rely on imports from as far away as West Africa.
In a business where scale is all important, Australia's plants are suffering in comparison with giants overseas operations such as Reliance Industries' plants at Jamnagar in India, where capacity is almost double that of the whole Australian industry.
Some Asian refineries process 500,000 barrels of crude oil a day, while Australia's typical plant handles little more than a fifth of that. The huge refineries run at high utilisation rates to ensure returns in a low-margin environment, piling on the pressure at smaller rivals.
Adding to the woes of local players is the strength of the Australian dollar and rising labour and maintenance costs throughout the resources sector.
Analysts believe most of the plants are running in the red, with CLSA estimating the whole industry is losing about $1 billion a year.
None of the other refiners would comment yesterday on the profitability of individual plants but all admitted the environment was as tough as it had ever been.
Shell, which last year opted to close its Clyde refinery in Sydney and convert it into an import terminal by mid-2013, has given no assurances about the future of its second plant in Geelong.
"The viability of the Australian refining business will be determined by factors including supply and demand in our region, performance relative to competitors and the impact of regulation in Australia," said spokesman Paul Zennaro.
"Australian refineries face significant challenges including competition from new mega-refineries in Asia."
Similarly, ExxonMobil declined to say whether its only remaining plant, the Altona refinery in Victoria, made money.
It refused to offer any long-term guarantees on its local operation.
"Clearly all refiners are facing significant challenges at the moment in Australia with a whole range of issues [involving] the general status of the refining business around the region: the value of the Australian dollar is complicating life for local manufacture; the advent of a carbon price on our industry is going to add to our costs of doing business here, etc," said spokesman Alan Bailey. "We have all those sorts of pressures on us just like any other refiner in Australia."
ExxonMobil has spent about $250 million on improving Altona over the last three to four years including a major maintenance shutdown last year.
"We are continuing to focus on doing what we can to ensure the ongoing viability and profitability of that refinery to the extent that the market allows it," Bailey said.
BP also operates two refineries in Australia, the Bulwer Island plant in Brisbane and the Kwinana plant in Western Australia. Kwinana is thought to be one of the more profitable plants because of its product mix, which includes aviation fuel, its ability to process local WA crude oil and its strategic location close to diesel-hungry mining operations.
"Strong demand in the mining sector is helping our commercial sales but the high dollar, skills shortages and rising input costs are reducing refining margins," said spokesman Jamie Jardine.
Most investment analysts calculate Caltex Australia will benefit financially from closing the business which has become a millstone in comparison with its buoyant marketing unit.
Deutsche Bank estimates that Caltex's net asset valuation will rise by 8 to 9 per cent with the closure of one refinery, or as high as 41 per cent with the higher-risk strategy of closing both plants.
But the spectre of 100 per cent reliance on imported petrol and diesel has triggered dire warnings of an economy dangerously exposed to global oil markets, raising price risk for motorists.
"The Kurnell refinery plays an important role in Australia's energy security," Australian Workers Union national secretary Paul Howes said.
"We cannot afford to reduce our domestic refining capacity. Retaining a local manufacturing presence would give Caltex greater flexibility, and would be an important safeguard for motorists should there be a spike in the cost of imported fuel."
Others disagree, pointing out that the prices paid by Caltex's marketing businesses are set by import price parity.
Australia already imports 25 to 30per cent of its refined fuels, while its refineries rely on overseas supplies for most of their crude oil.
"About 80 per cent of the product transport fuels produced by the refineries in Australia is actually made from imported crude, so by actually swapping between product and crude you haven't made any significant difference because you still have the problem of importing fuel," Mr Segal told the The Australian Financial Review yesterday.
"The industry is very good at keeping customers supplied."
Signals from Canberra indicate that the federal government is also relaxed about the impact of increasing reliance on fuel imports.
In the draft energy white paper released in December, the government openly acknowledged the likelihood of further refinery closures but said that Australia's links with global supply chains and its status as a net importer should not imply a threat to energy security.
"A lack of oil self-sufficiency does not in itself compromise or reduce Australia's energy security," the white paper said, going on to warn that pursuing self-sufficiency in fuels could impose "unnecessary higher costs" on consumers without any material economic or strategy benefit.
Even so, many observers believe in the value of retaining some local refining presence rather than leaving the nation to rely completely on imported fuel.
"There is a case for having refining here, though the economic case is not strong," said UBS analyst Gordon Ramsay.
"The case for refining revolves around other issues such as supply availability, while the oil companies have to consider all stakeholders - including their shareholders".
CLSA's Mark Samter suggested there was a case for keeping two refineries - one on each coast - to protect against supply shocks.
BP's Kwinana plant and ExxonMobil's Altona plant might be the most suitable because they were the two which could run most easily run on locally sourced crude oil, he said.
But in reality a strategic reserve of fuel, along the lines of the Strategic Petroleum Reserve in the US, probably made more sense for Australia.
"I think it's a better option to have a strategic reserve of product rather than sustain that industry to perpetuity but it's a government decision one way or the other," Mr Samter said.
with Kevin Chinnery and Mark Skulley
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