Australia’s last two oil refineries just got 2.3 billion reasons to stay open
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The free market may not have been able to keep them open but taxpayers will pick up the bill to maintain the last remaining oil refineries in Australia.
On Monday, the Morrison government finalised a deal with Ampol and Viva Energy that will see a $2.3 billion transfer from the public purse to the private sector.
The handout will keep Ampol’s Lytton facility going for at least another six years at a cost to taxpayers of more than $100 million a year. Viva’s Geelong plant meanwhile could remain open up until 2030 as part of the agreement designed to maintain at least some refinement capacity in Australian hands.
Dwindling demand for transport during the middle of the pandemic drove the oil business into dire straits last year, with the oil price briefly going negative. Not long after, both BP and Exon closed up shop in Australia as their margins were squeezed beyond sustainable levels. Others like Caltex’s Sydney refinery have previously converted into import facilities instead.
“In financial year 2020, our Geelong operations had a cash-loss of over $200 million, and without the support of the Federal Government continued operations would have not been sustainable,” Viva Energy CEO and managing director, Scott Wyatt, said.
“This could have seen the loss of over 700 direct jobs, the loss of the last major manufacturing operations in Geelong, and a significant contributor to the Victorian economy.”
The deal, which was in negotiation since last year, marks a final ditch effort to avoid a situation in which Australia would have to import all of its fuel.
Prime Minister Scott Morrison said the agreement was the only avenue by which to save 1,250 jobs and avoid the price of petrol rising by 1 cent per litre.
The so-called Fuel Security Service Payment (FSSP) will chip in government support when margins made on fuel dip below key levels, incentivising the refineries to continue work. When barrels are going for more than $10.22 per barrel, no public money will be claimed by Viva for example. Effectively it raises the breakeven point of the refineries involved.
Ampol said the deal would give it “the opportunity to transition the strategically located site to alternative uses in the future”, with hundreds of millions of additional dollars available if refineries can meet higher environmental standards.
“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,” Morrison said, claiming it would also “bolster national security”.
Oil has previously reared its head as a challenge to Australian sovereignty. In 2019, strikes on Saudi Arabia and regional tensions with Iran raised concerns international supply would be disrupted. With just 28 days of emergency fuel supplies, a sixth of what Australia is supposed to hold, there was speculation an emergency deal would need to be struck with a Trump administration.
With an even smaller local refining footprint now, Australia remains vulnerable despite Monday’s deal.