And then there were three – Australia’s dwindling oil exports

28/01/2021

With a growing dependence on imports, Australia will become more vulnerable to disruptions to supply. It will not be easy to quantify the disadvantages. And it will be extremely difficult for governments to decide what level of insurance against disruption would be appropriate.

Credit – Unsplash

Australia’s largest oil refinery, BPs Kwinana Refinery in Western Australia, is closing. This will leave Australia with just three oil refineries, down from seven in 2010. According to Angus Taylor, the Minister for Energy, ‘the closure will not impact upon Australian fuel supplies.’

Should we be concerned? From an economic rationalist perspective, you could argue that there is no need for concern. Australia is a net oil importer; we are already highly dependent and increasingly so on imported oil whether as crude oil or refined product.

Australia already exports most of its domestic crude oil and Australian refineries are largely dependent (approximately 80%) upon imported crude oil as a feedstock. The Kwinana site is not closing but is rather being transformed into an oil import facility. Oil is a highly fungible commodity traded globally in a mature market; a major reason the Australian Government has never needed to declare a national liquid fuels emergency. Given these factors, it could be argued that the closure will not affect Australia’s fuel supplies.

The largest-ever fall in global demand for oil as a result of COVID-19 has however been tough on oil refiners. Nearly two per cent of global oil refinery capacity was mothballed in 2020. It is predicted that a similar level of capacity will be closed in 2021.

Most of the refineries that have been closed are old, relatively small and inefficient compared to their modern equivalents. These refineries are being replaced by large mega-refineries in the Middle East, India and China. China is on track to become the largest refiner of oil in the next year or two, eclipsing the US and producing about one-fifth of the world’s petrol, diesel, jet fuel and petrochemicals.

More than half of our crude oil and refined product imports come from just four countries; Malaysia (21%), China (15%), Singapore (12%) and South Korea (10%). Nearly a quarter of our refined product comes from just one country – China. This percentage is likely to increase as China’s new refineries come online and refineries in Singapore, Europe, the US and here in Australia close.

Despite the Minister’s statement, the implications of Australia’s increasing import dependence and where these imports come from are, to put it mildly, significant. While liquid fuel supply risks have always existed, as we enter the second half of the oil age there are many reasons to suggest that the likelihood of a liquid fuel emergency has and will continue to increase. These include:

  • Australia’s already high dependence on liquid fuels could reach 100 per cent in the years ahead. A 2014 NRMA Report predicted that by 2030 all of Australia’s oil refineries would be closed. Even with the Government’s recently implemented Fuel Security Package, given the dynamics of the global oil refinery industry, this prediction looks remarkably prescient.
  • The volume of oil imports originating from China is increasing, which is problematic given our deteriorating relationship.
  • The majority of our imports (either directly or indirectly) pass through sea lanes that are at risk in the event of military conflicts, such as between the US and China or the US and Iran.
  • The number of oil-exporting nations continues to fall as oil production declines and/or domestic consumption increases. Only 19 countries export more than 500,000 barrels of oil per day. None of these countries is near to Australia, some are potentially unstable (Saudi Arabia), many are located in unstable regions (the Middle East) and Australia has poor relationships with some (Russia, Iran).
  • Of the oil available for export, increasing amounts will be unavailable on the market as oil-importing countries establish long-term contracts with oil exporters. China, for example, has established large long-term contracts with several countries including Iran and Iraq to secure future oil imports.
  • Options for diversifying imports are limited as the refinery industry consolidates globally. Diversification also implies an increased length of Australia’s oil supply chain.
  • Oil infrastructure has proven vulnerable to attack or disruption.

All of these factors are taking place in the context of a global oil industry that will increasingly struggle to maintain existing levels of production. Recent research indicates that global conventional oil production has been on a resource-constrained plateau since 2005 and will soon decline without major rises in the price of oil.

Another study concluded that oil production will soon decline because the price required for producers to remain economically viable is much higher than the oil price the economy can afford. An increasing number of forecasters are expecting an oil shortage as soon as 2022/2023 as demand recovers post-COVID.

The quote at the top of this article is from the 1986 Energy 2000 Policy Review. Despite the long-recognised implications of Australia’s vulnerability to oil supply disruptions, identified in numerous reports over the years, the approach of Australian governments over decades to providing a ‘level of insurance’ could be described as doing the bare minimum and relying upon market mechanisms to resolve a potential liquid fuel emergency. The rising probability of a liquid fuel emergency indicates that this approach is no longer tenable.

Australia has mechanisms in place to manage a liquid fuel emergency. The limited publicly available information on the National Liquid Fuel Emergency Response Plan indicates that a limited range of ‘essential users,’ predominantly emergency services and public transport, would be excluded from rationing.

Retail consumers would be rationed by a maximum limit per vehicle per day. Price would be dictated by market forces. For a relatively minor emergency, this plan may be effective. It is far from clear that this would be the case for a longer-term or more severe disruption, where it would become very clear quite quickly that large swathes of the economy are essential if the basic functioning of society is to continue.

While it is a small step in the right direction, the Government’s recent fuel security initiatives fall far short of what is necessary to mitigate the foreseeable liquid fuel security risk. Under these initiatives, it won’t be until 2026 that Australia meets its International Energy Agency obligation to hold 90 days of fuel stocks. There does not appear to have been a liquid fuel emergency simulation since 2008, the last liquid fuel vulnerability assessment was completed in 2011 and we are still awaiting the latest National Energy Security Assessment (NESA) which was due in 2019.

While tackling these shortfalls is important, other actions should be considered. The Government has recommended that users have a liquid fuel Business Continuity Plan; a survey of major liquid fuel users to assess the level of preparedness would provide useful insight and an informed starting point for an updated liquid fuel vulnerability assessment. An updated assessment should be based upon a liquid fuel emergency of greater magnitude and duration than the 30-day disruption to exports from Singapore in the 2011 assessment.

A more insightful scenario could be based upon a conflict between the US and China which, according to a RAND report, could last for years and threaten a large proportion of Australia’s imports. Based on recent COVID-19 experiences with supply chain fragility, the modelling should be based upon a network approach rather than the simplistic economic modelling used in the 2011 assessment. This would be extremely useful in identifying critical thresholds and interdependencies as well as the most vulnerable regions and sectors of the economy. Such a robust approach would greatly assist governments at all levels and businesses on the ‘level of insurance’ that is required, a stark comparison to the current approach.

Ultimately, however, the most appropriate, and inevitable, response is to wean our economy off oil. This would simultaneously address the risks of declining oil production, heightened likelihood of liquid fuel emergencies as well as the climate imperative. While alternatives fuels and propulsion systems will replace oil to an extent, redesigning our society and economy to require far less oil-derived products, i.e. conservation, will have to be a significant, if not the major, part of this transition.

print

Share and Enjoy !

Please keep your comments short and sharp and avoid entering links. For questions regarding our comment system please click here.
(Please note that we are unable to post comments on your behalf.)

Contributions to Pearls and Irritations

Your contribution will fund quality independent comment and analysis in Pearls and Irritations

Contribute

Subscribe to John Menadue’s Newsletter

Top 5 most read

SUBSCRIBE TO OUR NEWSLETTER
SUBSCRIBE TO OUR NEWSLETTER

Receive articles straight to your Inbox

How often?

Thank you for subscribing!