The future of Royal Dutch Shell's refinery in Geelong is "borderline", says one of the company's most senior executives, as mega-refineries in Asia and cheap shipping tip the scale against the local operation.

Shell's global downstream director, Mark Williams, said that Geelong, like other Australian refineries, was facing strong competition from modern mega-refineries in Asia.

"The question is imported crude versus imported products? That comes down to the sum cost differential in the import cost of products versus the import of crude," he said.

Asked where refining at Geelong sat in that question, he said the operation was "questionable".

"It's borderline. It depends a lot on how it performs over the next few years whether or not it will ultimately be a survivor," he told The Australian Financial Review in the clearest signal yet from the company that the refinery's days could be numbered.

"I think you can see the rest of the industry struggling with the same dynamics."

Speculation about Shell's commitment to the Geelong plant has increased following its June decision to close Sydney's Clyde refinery this month. Caltex Australia announced in July it would convert its Sydney refinery into an import terminal.

Mr Williams said the crunch point for refineries came when they required a large capital investment.

"It depends on the refineries being very efficient and producing products that match the markets locally and being able to do that in a way that doesn't require massive investments over long periods of time.

"That's typically what kills a refinery. It can run cash-positive for a very long time but if you have to upgrade it or have a major turnaround you know you sort of hit the wall."

But Mr Williams said that investment would be needed at some point.

"If you don't reinvest in them, they get less and less reliable and obviously safety issues arise which are unacceptable. With the case of Clyde, it became more reliable from a supply chain standpoint simply to close it and go to an import basis rather than try to deal with the unreliability.

The choice to close a refinery was "difficult", he said.

A key aspect of the Geelong operation was the necessity to import the bulk of its crude feedstock, he said.

"Once you start having to put crude on a boat, the difference between putting crude on a boat and product on a boat ain't that much." Mr Williams said there was no structural reason to keep Geelong operating to service the local Australian market.

"With good import infrastructure and a variety of sources and good trading capability, you are probably more secure on the supply side than you are with unreliable refiners."

Shell vice-president downstream Australia Andrew Smith said Geelong manufactured some niche products, such as aviation fuel and bitumen, that produced better margins than "vanilla" products.

"There is a reasonable margin in those niche products because making the vanilla stuff you have got to go competing against a mega-refinery in Asia and that's a tough gig," he said.

 

 


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