Measures to ensure liquid fuel security in Australia will need to be far more “systemic” than just a net oil stockholding obligation, as per the current IEA agreement, says Stuart Scott of Wood Mackenzie.
The 1979 agreement was formed at a time when Australia had ten oil refineries and less global competition. Today it only has four; and a glut in cost-competitive overseas supply.
“Traditional thinking has been that Australia needs to hold more strategic reserves of crude oil in order to maintain security of liquid fuel supply. This is all very well; but if our refining industry is now unable to meet domestic fuel requirements, then we need a different approach,” said Scott.
“New refineries in Asia and the Middle East have economies of scale, and are more efficient and cost competitive than our own. This is the main reason we have lost so many players from the Australian market in the last twenty years.
“Based on our projections, I only see this getting worse over time. It is highly unlikely Australian refinery infrastructure will expand. If anything, it is more likely to go the opposite way – given the surplus in global refining capacity; and lower refining margins in the short to medium term,” he said.
On top of this, Wood Mackenzie forecasts a continued rise in domestic demand for refined oil, from the aviation, road and mining sectors.
“Demand for refined oil imports in Australia is already strong and is likely to continue scaling as Australian industry grows,” he added.
As a result of these factors, Scott believes it is time we had a fresh look at existing policy.
Ahead of the Australian Liquid Fuel Security Conference – hosted by Informa Connect – he proposes five key considerations for policy makers and industry stakeholders, to ensure liquid fuel security.
#1 – Sources
Scott believes diversifying our import sources is one of the best ways to ensure long term, affordable supply. He says this doesn’t necessarily need to be physical purchases of oil or fuel. It could also be contractual options to buy from alternative sources, if and when required.
“As it stands, Australian industry relies heavily on liquid fuel imports from Asia; often with supplementary cargoes from the Middle East and Europe, bought when prices are favourable,” he said.
“In an oversupplied global market, over-reliance on a single region or country is not necessary, and could to lead to a monopolisation scenario.
“We are – and will likely remain for a long time – at the mercy of the policy, prices and supply behaviour of the rest of the world, particularly Asia and the Middle East. So, we need to be smarter about how and where we procure fuel for Australia.
“Until we see Electric Vehicles and alternative energy sources eating into the liquid fuels market, our hunger will remain for refined fuel from overseas sources.”
The short to medium term solution is diversification of sources within Asia, he says.
“We need to move away from a heavy reliance on Singapore towards other exporters, such as South Korea, India, Japan and China.
“Long-haul Middle East suppliers could also help with diversification if their imports remain competitive.”
#2 – Supply
A related consideration, is the marine and land-based supply chains connecting these channels.
“When we talk about fuel security, we need to understand exactly which fuels we mean; where they are coming from; and where, precisely, they need to go,” said Scott.
“Primarily in Australia we require three main liquid fuels: gasoline, jet fuel and diesel. Each of these markets has a different supply-demand balance around the world and throughout the country.
“In Australia, generally, we are short on all three. However, on a regional basis, there are different dynamics going on.
“It is important we understand these dynamics and optimise the land and sea supply chains accordingly.
“This means deeper thinking about the optionality, visibility, elasticity and responsiveness of crude oil and refined fuel shipping routes; road transport routes; and critically the port infrastructure required to make this happen.”
#3 – Stocks
Scott says that stocks and inventories will need to be held as a buffer or coverage for interruptions to sources or supply chains. However, he believes Australia’s approach to the IEA agreement is now outdated and needs to be refreshed.
“The focus for the IEA stockholding obligation for Australia needs to be more about holding stocks of refined fuel products, rather than crudes,” he said.
“The important consideration for Australia is which oil and fuel products to hold; where these stocks need to be held – in Australia or overseas – and when.
“Fuel and crude oil is like milk in your fridge at home and deteriorates with time if it sits in tanks for too long without being used.
“It also expensive for governments and private companies in terms of working capital costs to have millions of dollars’ worth of fuel stocks sitting around “just-in-case” – particularly if it’s the wrong fuel in the wrong place.”
#4 – Segments
Scott says segmenting Australia’s population and industry fuel demands – and working out which kinds of fuel they need – is key to ensuring adequate supply.
“Australian fuel customers consume many different fuel types, grades and volumes – based upon transport needs, power requirements, and varying industry types,” he said.
“For example, Australia’s iron ore mining and agricultural industries in north-western Australia require primarily diesel fuel; whereas domestic commuters in capital cities require gasoline.
“The Australian Defence Force as a segment, has very different requirements. They need specific military grade, aviation, maritime, and ground fuels, in remote places. Often, it’s needed most where it’s hardest to get.”
As one key example, to support the ADF’s search and rescue response to the disappearance of Malaysian Airlines MH17 in 2014, Australia needed to supply millions of litres of jet fuel to Learmonth in north-western Australia, by a constant stream of fuel trucks commuting from Darwin and Perth. This was a 3000 kilometer distance requirement for fuel supply security.
“Fuel customers and users need to be segmented to design specific value chains that meet their individual requirements into the future. Sometimes governments may also be required to step in and prioritise some important fuel users over others,” said Scott.
#5 – Signals
Scott says communication, transparency and visibility around the supply chain is probably the most critical consideration for Australia’s liquid fuel security.
This means being able to ‘see’ how much fuel we have in Australia’s fuel supply chains, where it is, and when it is required.
“Right now, only the fuel owners themselves really know the true amount of oil and fuel that we have in Australia,” he said.
“A key recommendation from the IEA’s 2018 review of Australia’s energy policies was to “improve energy data quality for analysis, policy development and the deployment of emergency measures.
“Australian policymakers have taken steps to improve this situation, implementing mandatory reporting by fuel companies. But we are far from having what Wood Mackenzie would deem an “acceptable” level of visibility of net oil stocks – on land and on the water – destined for Australia.
“Transparency of our liquid fuel supply requires input from all affected suppliers and users. This is an area where we believe that Australian policy makers and industry participants need to collaborate better.
“This kind of systemic measure is vital to ensure the appropriate inflow and outflow of liquid fuels and ultimately will optimise the market as a whole,” he concluded.
Stuart Scott is the Vice President of Performance Improvement Consulting at Wood Mackenzie. Join him for a broader discussion on this topic at the Australian Liquid Fuel Security Conference hosted by Informa Connect on 23-24 March 2020.
Learn more and register here.