In Focus
July 2021

Australia: Locking in Fuel Security – Government programme on industry support and fuel standards

In March 2019 the Australian government released new fuel standards, set for implementation by 01-Oct 2019. At the time the release of the new requirements, after a three-year long review, was widely described as a major disappointment by clean fuels proponents and supporters, as the authorities missed the opportunity to align Australian standards with other developed markets by enhancing standards only cosmetically, not even matching long out-of-date Euro III standards for some parameters in the revised specifications.  

However, a lot has happened since, as Australia’s oil industry was rattled by demand destruction, caused by COVID-19 related lockdowns and movement restrictions over the last year and a half and as announcements of additional refinery closures exposed to the country to a higher dependence on fuel import supplies.

It was on 17-May this year that a joint statement by the Prime Minister and the Minister for Energy and Emissions Reduction was released, addressing how to lock in Australia’s fuel supply security forward. The announcement covers some important fiscal aspects, which are planned to be implemented in order to maintain operations at the only two remaining refining operations in the country, and at the same time support the introduction and implementation of much enhanced fuel standards by 2024, instead of the initial plan of lower standards in 2027.  

The media release under the heading “Locking In Australia’s Fuel Security” addresses the strong action taken by the government to boost the country’s long-term fuel security, which is meant to  help secure Australia’s recovery from the COVID crisis and secure Australia’s sovereign fuel stocks, locking in jobs and protecting families and businesses from higher fuel prices.

Prime Minister Scott Morrison said the Government was delivering on its commitment to maintain a self-sufficient refining capability in Australia by supporting the operation of the Ampol refinery in Lytton (Queensland) and the Viva Energy refinery in Geelong (Victoria). The package will protect the jobs of 1,250 direct employees across the two refineries and create another 1,750 construction jobs.

He also pointed out that earlier investment in Australia’s ability to produce better quality fuels, including ultra-low sulfur levels, will also improve air quality and deliver an estimated $1 billion in lower health costs.

Minister for Energy and Emissions Reduction Angus Taylor said Australia's economy is reliant on fuel and this significant package will not only lock-in Australia’s refineries, but the jobs of thousands of Australians. “Fuel is what keeps us and the economy moving. That is why we are backing our refineries,” Minister Taylor said.

In detail, the programme includes:

  • A variable Fuel Security Service Payment (FSSP) to the refineries, funded by the Government, which recognises the fuel security benefits refineries provide to all Australians. The variable FSSP will cost up to AUD$2.047 billion to 2030 in a highest cost-case scenario;
  • Up to AUD$302 million in support for major refinery infrastructure upgrades to help refiners bring forward the production of better-quality fuels from 2027 to 2024;
  • AUD$50.7 million for the implementation and monitoring of the FSSP and the minimum stockholding obligation (MSO), ensuring industry complies with the new fuel security framework.

On fuel quality improvement aspects the government declares to work with the refineries to bring forward improvements to fuel quality from 2027 to 2024 by co-investing with domestic refiners to undertake the necessary infrastructure upgrades for low sulfur fuel production. The Government will also accelerate the industry-wide review of the petrol and diesel standard to 2021, including a consideration of aromatics levels. This aims to create a Euro-6 equivalent petrol and diesel standard that are appropriate for Australia.

The Government will introduce the Fuel Security Bill to the Parliament in the coming weeks. This bill will implement the FSSP to ensure it can begin on 01-July 2021, and set the key parameters for the Minimum Stockholding Obligation that will commence in 2022. The FSSP has been announced as part of the 2020-21 Budget.

For our readers’ reference, the comprehensive media release can be downloaded from the following link:

Australia’s comprehensive fuel security package also entails other areas, which are deemed as equally important to secure future fuel supplies, essential for the country’s national security and intended to keep fuel prices in Australia among the lowest in the OECD. Among those measures is the plan to invest AUD$200 million in building new diesel storage in Australia through a competitive grants programme.

A minimum fuel stockholding obligation for the industry is considered as a pivotal step to increase the resilience to supply disruptions and protect consumers and the economy. Strategic fuel reserves are a common measure implemented in most developed economies.

Under the FSSP programme, the government will pay domestic refineries a minimum one cent per litre of primary petrol, diesel and jet fuel they produce. To receive this production payment, refineries must agree to keep operating for the duration of the programme. Fuel Security Service Payments began on 01-Jan 2021, as the government is working with the industry on the long-term arrangements for the payment.

Industry response

Soon after the government media release was published, Viva Energy came out with a press release, confirming the agreement reached with the government to implement a long-term Fuel Security Package to support Australia’s refining industry. In the statement, Viva welcomes the FSP announcement and commits to the implementation of ultra-low Sulphur gasoline and further progression towards harmonisation to Euro 6 vehicle emissions standards in Australia.

Underneath are some of the key points of Viva’s press release:

  • As part of the FSP, the Federal Government intends to bring forward the requirement for ultra-LSG to the end of 2024. To produce refined fuel to this specification requires substantial upgrades to the Geelong Refinery.
  • To facilitate this, the Federal Government intends to provide a 50% (up to a maximum of AUD$ 125m) contribution towards the capital upgrades necessary at Geelong to produce ultra-LSG. The Company currently expects the capital upgrades to cost up to AUD$ 250m and is conducting assessment work to commence the project to deliver this by the end of 2024. In conjunction, it is anticipated that the upgrades will also involve energy efficiency improvements, and potential work toward further harmonisation with Euro 6 vehicle emissions standards.
  • Viva Energy and the Federal Government have also agreed to bring forward important work to assess Australian gasoline and diesel specifications, and particularly the aromatics content of fuels, in order to seek further progression towards harmonisation to Euro 6 vehicle emissions standards. This work will be brought forward to the second half of 2021, and should the review result in further changes, the Federal Government has made available additional funding for any identified capital spend (up to AUD$ 26m), or for adjustments necessary to the FSSP setting to allow for operating expenditure increases.
  • The Company has long supported the continued improvement in Australian fuels standards where there are direct benefits, and looks forward to working with Government and industry to identify future pathways.

Ampol Limited, formerly known as Caltex Australia, also welcomed the government programme and announced its decision to keep the Lytton oil refinery operational for the medium-term with Federal Government and support from the Queensland State Government. Although Ampol intends to commit to refining until at least mid-2027, under the legislation, Ampol retains flexibility to withdraw from the package and pursue an earlier conversion to an import terminal in the case of persistently low refinery margins, or other materially adverse events including changes to the Fuel Security Services Payment by future governments.

Ampol also expects to be entitled to receive the one-off short-term refining support payments which were announced by the Federal Government in September 2020, which should be in the order of AUD$40m for production in the first half of 2021.

In addition to the proposed benefits, the Federal Government will provide a grant of up to AUD$125m to the Lytton oil refinery, to undertake infrastructure upgrades to produce ultra-low Sulphur petrol in accordance with fuel quality standard changes by the end of 2024. Ampol expects this support initiative will cover approximately half of the required investment at Lytton to produce ultra-low Sulphur petrol.

Refining Commitment

In order to receive the benefit of the FSSP and ultra-LSG capital grants, refineries will be required to commit to continued refining operations until 30 June 2027 – aligning the refining commitment with the benefit of the FSSP. In addition, an option to extend the program to 30 June 2030 will be made available for future election. Subject to the package being approved and finalised, Viva Energy expects that it will commit to the package.

In the event that a commitment to continue refining is made under the legislation and not ultimately satisfied, refiners will be required to repay a proportion of funds received under the programme. Such repayments will not be required in circumstances of force majeure, or where operating conditions or financial performance are substantially loss making over an extended period, notwithstanding receipt of the FSSP.

Our opinion

The Asian Clean Fuels Association welcomes the decision and steps taken by the Australian government and the country’s oil industry towards implementing significantly improved fuel specifications. The gradual move towards Euro VI, deemed as a standard designated for a 1st world country, is the right step towards reducing pollution and improving air quality.

Australia, a large-scale fuel importer for many years already, has allegedly been overpaying for its fuel supplies in the past, as sub-standard fuel grades were imported, handled as boutique fuels. A further and complete harmonization to internationally traded Euro VI standards, as produced and consumed in China, South Korea and other exporting countries would further benefit the country’s fiscal budget and the consumers.      

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