Fuel For Thought
August 2021



On 17 May 2021 the following media release was published by Australia’s Prime Minister and its Minister for Energy and Emissions Reduction:

“The Morrison Government is taking strong action to further boost Australia’s long-term fuel security by locking in the future of our refining sector.

The Government’s fuel security package will help secure Australia’s recovery from the COVID crisis and it will help secure our 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.

The Prime Minister Scott Morrison said locking in Australia’s fuel security would deliver benefits for all Australians.

“This is a key plank of our plan to secure Australia’s recovery from the pandemic, and to prepare against any future crises,” the Prime Minister said.

“Shoring up our fuel security means protecting 1,250 jobs, giving certainty to key industries, and bolstering our national security.

“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.

“Major industries like agriculture, transport and mining, as well as mum and dad motorists, will have more certainty and can look forward to vehicle maintenance savings and greater choice of new vehicle models.

“This next stage in our plan for Australia’s recovery will create jobs and make our country more self-sufficient and secure.”

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 our 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.

“Supporting our refineries will ensure we have the sovereign capability needed to prepare for any event, protect families and businesses from higher prices at the bowser, and keep Australia moving as we secure our recovery from COVID-19.”

The 2021-22 Budget initiatives include:

  • 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;
  • Up to $302 million in support for major refinery infrastructure upgrades to help refiners bring forward the production of better-quality fuels from 2027 to 2024; and
  • $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.

The variable FSSP has been costed up to AUD$2.047 billion to 2030 in a worst-case scenario.

This figure assumes that both refineries are paid at the highest rate over the entire nine years in COVID-19-like economic conditions, which is unlikely as the economy recovers.

Actual payments are expected to be less than this, as payments are linked to refining margins at the time and to actual production of key transport fuels.

Payments will be made between the following ranges, limiting the downside risk for refineries:

  • Refineries will receive 0 cent per litre (cpl) when the margin marker hits $10.20/bbl (the collar)
  • Refineries will receive a maximum of 1.8 cpl when the marker drops to $7.30/bbl (the cap).

This will mean that the refineries are only supported in downtimes, and will not receive Government support when they are performing well.

Refineries will have an option to extend the support and their commitment out to mid-2030.

The Government is also ensuring better quality fuel is provided across Australia earlier.

We will 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.

Accelerating the necessary major infrastructure upgrades will create up to an additional 1,750 construction jobs, bringing flow-on benefits to the Lytton and Geelong communities.

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 work with both refineries on their plans to consider future fuel technologies and other development opportunities. This will include the refineries’ roles in the roll-out of future fuels, such as electric vehicle charging and hydrogen transport infrastructure.

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 1 July 2021, and set the key parameters for the Minimum Stockholding Obligation that will commence in 2022.

This package implements the Morrison Government’s commitment to the refining sector, announced as part of the 2020-21 Budget, and complements other measures including increased onshore diesel storage and taking advantage of record low prices to store oil in the US Strategic Petroleum Reserve.

▪ IEA: Clean energy transition brings new set of challenges

The shift to a clean energy system is set to drive a huge increase in the requirements for critical minerals, such as lithium, nickel, cobalt, manganese and graphite, which are crucial to battery performance, longevity and energy density, according to a recent report from Paris-based International Energy Agency (IEA).

Solar photovoltaic (PV) plants, wind farms and electric vehicles (EVs) generally require more minerals to build than their fossil fuel-based counterparts. A typical electric car requires six times the mineral inputs of a conventional car and an onshore wind plant requires nine times more mineral resources than a gas-fired plant. Since 2010, the average amount of minerals needed for a new unit of power generation capacity has increased by 50% as the share of renewables in new investment has risen, according to the IEA.

The types of mineral resources used vary by technology. Lithium, nickel, cobalt, manganese and graphite are crucial to battery performance, longevity and energy density. Rare earth elements are essential for permanent magnets that are vital for wind turbines and EV motors. Electricity networks need a huge amount of copper and aluminium, with copper being a cornerstone for all electricity-related technologies, the IEA report says.

The energy sector is emerging as a major force in mineral markets, according to the IEA report. Until the mid-2010s, for most minerals, the energy sector represented a small part of total demand. However, as energy transitions gather pace, clean energy technologies are becoming the fastest-growing segment of mineral demand. In a scenario that meets the Paris Agreement goals, their share of total demand rises significantly over the next two decades to over 40% for copper and rare earth elements, 60-70% for nickel and cobalt, and almost 90% for lithium. EVs and battery storage have already displaced consumer electronics to become the largest consumer of lithium and will take over from stainless steel as the largest end user of nickel by 2040.

As countries accelerate their efforts to reduce emissions, they also need to make sure that energy systems remain resilient and secure, the IEA report said.

“Today’s international energy security mechanisms are designed to provide insurance against the risks of disruptions or price spikes in hydrocarbons supply, oil in particular. Minerals offer a different and distinct set of challenges, but their rising importance in a decarbonising energy system requires energy policy makers to expand their horizons and consider potential new vulnerabilities. Concerns about price volatility and security of supply do not disappear in an electrified, renewables-rich energy system.”

A concerted effort to reach the goals of the Paris Agreement would mean a quadrupling of mineral requirements for clean energy technologies by 2040, the IEA said. An even faster transition, to reach net-zero globally by 2050, would require six times more mineral inputs in 2040 than today.

In climate-driven scenarios, mineral demand for use in EVs and battery storage is a major force, growing at least 30 times to 2040. Lithium sees the fastest growth, with demand growing by over 40 times in the IEA Sustainable Development Scenario (SDS) by 2040, followed by graphite, cobalt and nickel (around 20-25 times). The expansion of electricity networks means that copper demand for grid lines more than doubles over the same period.

The rise of low-carbon power generation to meet climate goals also means a tripling of mineral demand from this sector by 2040. Wind takes the lead, bolstered by material-intensive offshore wind. Solar PV follows closely, due to the sheer volume of capacity that is added. Hydropower, biomass and nuclear make only minor contributions given their comparatively low mineral requirements. In other sectors, the rapid growth of hydrogen as an energy carrier underpins major growth in demand for nickel and zirconium for electrolysers, and for platinum-group metals for fuel cells.

The prospect of a rapid rise in demand for critical minerals poses huge questions about the availability and reliability of supply, the IEA says. Some minerals such as lithium raw material and cobalt are expected to be in surplus in the near term, while lithium chemical, battery-grade nickel and key rare earth elements (e.g. neodymium, dysprosium) might face tight supply in the years ahead. Long term, expected supply from existing mines and projects under construction is estimated to meet only half of projected lithium and cobalt requirements and 80% of copper needs by 2030.

The IEA report identified several vulnerabilities that may increase the possibility of market tightness and greater price volatility:

High geographical concentration of production: Production of many energy transition minerals is more concentrated than oil or natural gas. For lithium, cobalt and rare earth elements, the world’s top three producing nations control more than three-quarters of global output. In some cases, a single country is responsible for around half of worldwide production. The Democratic Republic of the Congo (DRC) and People’s Republic of China were responsible for some 70% and 60% of global production of cobalt and rare earth elements respectively in 2019.

Long project development lead times: On average, it has taken 16.5 years to move mining projects from discovery to first production. These long lead times raise questions about the ability of supply to ramp up output if demand were to pick up rapidly.

Declining resource quality: Concerns about resources relate to quality rather than quantity. In recent years ore quality has continued to fall across a range of commodities. For example, the average copper ore grade in Chile has declined by 30% over the past 15 years.

Growing scrutiny of environmental and social performance: Production and processing of mineral resources gives rise to a variety of environmental and social issues that, if poorly managed, can harm local communities and disrupt supply.

Higher exposure to climate risks: Mining assets are exposed to growing climate risks. Copper and lithium are particularly vulnerable to water stress given their high water requirements. More than 50% of today’s lithium and copper production is concentrated in areas with high water stress levels. Several major producing regions such as Australia, China, and Africa are also subject to extreme heat or flooding, which pose greater challenges in ensuring reliable and sustainable supplies.

These risks to the reliability, affordability and sustainability of mineral supply are manageable, but how policy makers and companies respond will determine whether critical minerals are an enabler or a bottleneck in the global transition to a clean energy system. Today’s mineral supply and investment plans fall short of what is needed to transform the energy sector, raising the risk of delayed or more expensive energy transitions, the IEA report concluded.

▪ EU carbon market emissions fell 13.3% in 2020 –EU Commission

Greenhouse gas emissions regulated under Europe's carbon market fell by 13.3% last year, with those from the airlines sector down by almost two-thirds, the European Commission reported in April this year. Around 40% of the European Union's output of greenhouse gases is regulated by the Emissions Trading System (ETS), the bloc's flagship policy for tackling global warming which charges companies for the right to emit carbon dioxide (CO2). "As one of the sectors most vulnerable to the COVID-19 pandemic, aviation saw the steepest reduction in emissions," the Commission said, citing a 64.1% fall.

Emissions in the power sector fell 14.9% on lower electricity consumption and factors including the replacement of coal with gas-fired power generation. Industrial emissions were down 7% on average with the sharpest drop seen in the iron and steel sector. Total verified greenhouse gas emissions from stationary installations, such as power plants and factories, were 1.331 million tonnes of carbon dioxide equivalent (CO2e) in 2020, a drop of 11.2%.

Emissions from the aviation industry were 24.5 million tonnes of CO2e, compared with 68.2 million tonnes CO2e in 2019, the Commission said. While lower energy demand generally helped reduce emissions, the Commission noted it is "not possible with current data to determine how much of this reduction can be attributed to gains in emissions efficiency". The figures, based on more than 95% of reported emissions from participating sectors and countries, were slightly lower than analyst expectations based on raw data which were published during the same month.

▪ G20 fails to agree on climate goals in communique

Energy and environment ministers from the Group of 20 rich nations have failed to agree on the wording of key climate change commitments in their final communique, Italy's Ecological Transition Minister Roberto Cingolani said after the meeting, which took place in late July. The G20 meeting was seen as a decisive step ahead of United Nations climate talks, known as COP 26, which take place in 100 days' time in Glasgow in November. The failure to agree common language ahead of that gathering is likely to be seen as a setback to hopes of securing a meaningful accord in Scotland.

Cingolani told reporters that the ministers could not agree on two disputed issues which would now have to be discussed at a G20 summit in Rome in October. "Commitments made today lack substance and ambition. It is now up to G20 heads of state and government to discard this document at the October leaders' summit," said online activist network Avaaz. Italy holds the rotating presidency of the G20, and Cingolani, as chairman of the two-day gathering, said negotiations with China, Russia and India had proved especially tough. Cingolani said that in the end China and India had declined to sign the two contested points.

One of these was phasing out coal power, which most countries wanted to achieve by 2025 but some said would be impossible for them. The other concerned the wording surrounding a 1.5-2 degree Celsius limit on global temperature increases that was set by the 2015 Paris Agreement. Average global temperatures have already risen by more than 1 degree compared to the pre-industrial baseline used by scientists and are on track to exceed the 1.5-2 degree ceiling. "Some countries wanted to go faster than what was agreed in Paris and to aim to cap temperatures at 1.5 degrees within a decade, but others, with more carbon based economies, said let's just stick to what was agreed in Paris," Cingolani said.

Ahead of COP 26, environmental activists had hoped that the G20 gathering would lead to a strengthening of climate targets, new commitments on climate financing, and an increase in countries committing to net zero emissions by 2050. "The G20 is failing to deliver. Italy's G20 tagline is 'People, Planet, Prosperity', but today the G20 is delivering 'Pollution, Poverty and Paralysis," said Avaaz. Cingolani said the G20 had made no new financial commitments, but added that Italy would increase its own climate financing for underdeveloped countries.

The urgency of climate action has been brought home in recent weeks by deadly floods in Europe, fires in the United States and sweltering temperatures in Siberia, but countries remain at odds over how to pay for costly policies to reduce global warming. Despite the two points of disagreement, Cingolani said the G20 had put together a 58-point communique and that all the countries agreed that decarbonisation was a necessary goal. "This is the first time that the G20 has accepted that climate and energy policies are closely interconnected," he said when asked which aspect of the package he was most pleased with. "What happened today would have been unthinkable four months ago," he added.

Ahead of the full communique, the Italian presidency released a summary of the deal, under headings such as "the fight against climate change," "clean energy", "climate financing, "research and development" and "smart cities." It referred to a 2009 accord that developed nations should together contribute $100 billion each year by 2020 in climate finance to poorer countries, many of which are grappling with rising seas, storms and droughts made worse by climate change. That target has yet to be met. Nonetheless the Italian presidency summary said the pledge "remains central", and there was "a commitment to increase contributions every year until 2025".

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