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Australia debates oil-import reliance options

Rising geopolitical tensions in maritime zones heighten its energy-security risk

With a high dependence on imported oil and products, diminished refining capacity, low oil stockholdings and a geographically-disparate refuelling network, Australia could quickly face gasoline, diesel and jet fuel shortages if inbound shipping or Asian refining capacity is ever disrupted.

In its latest country review on Australia, the International Energy Agency again highlighted the nation's position as the sole net oil importer among its 30 member countries.

For several years, Australia has been the only IEA member country lacking public stockholdings of oil. It also relies solely on the commercial stockholdings of its energy industry to meet its obligation under the Agency's International Energy Program. Furthermore, it doesn't place a minimum stockholding obligation on its domestic oil industry, a situation which makes it particularly vulnerable to supply shortages.

"Australia neither complies with the oil stockholding obligation of 90 days of net imports, nor does it have the capacity to contribute to an IEA collective action," the Agency noted, adding that Australia's 2017 oil stocks of 49 days "are at an all-time low since 2000".

Compliance plan

In recognition of its exposure to the international oil and petroleum-products markets, the Australian government took steps in 2016 to shore up import dependence through the introduction of a two-phased compliance plan.

Under the first phase, the government has started purchasing 'ticket' contracts with international oil stockholders and has introduced mandatory petroleum and other fuel data reporting. This provides a clear picture of the import position at any one time. The second phase, from 2020-26, will see Australia build up as-yet-unspecified volumes of oil stocks based on an implementation of a government plan to be announced by 2020.

To help meet its obligations as an IEA member, the Australian government has also agreed to purchase 400,000 tonnes of oil tickets in 2018-19 and 2019-20 to enable it to contribute to an IEA collective action if required.

263,000b/d—Australia's oil production

Within Australia, there are concerns that the government's compliance plan fails to address the nation's tight supply chain. Also there's the fact that distances between petrol stations are long, meaning that considerable effort—and cost—would be needed to respond to unpredicted fluctuations in demand.

For its part, the Australian Institute of Petroleum (AIP) believes there's no cause for alarm. It cites the compliance plan, along with established and diversified supply routes for oil and petroleum-product imports, plus ongoing monitoring of supply/demand balance by the Federal government. More specifically, it says, there's no need to build up additional oil stockholdings within Australia.

In addition, the AIP has argued that the IEA's 90-day stockholding rule is more suited to European nations and that Australia's situation is different and doesn't warrant such a weighty reserve.

In its 2017 Downstream Petroleum report, the AIP points out that "the reliability of the fuel supply chain is robust given the unique logistic and geographic challenges in Australia".

Maritime tensions

While the rise of Asian mega-refineries and the changing nature of the internationally traded crude and oil-products market has led many countries to reduce their refining capacity base, Australia appears still to be particularly exposed to a market where geopolitics—and therefore supply—are far from stable.

Risks to international shipping have been highlighted of late by ongoing diplomatic tussles between the US and North Korea, as well as rising tensions between China and the nations which fringe the South China Sea. This latter issue recently led Andrew Hastie, chairman of Australia's parliamentary joint committee on intelligence and security, to warn that low emergency oil reserves and dependence on liquid fuel imports posed a significant threat to national security.

The importance of maritime security for Australia's wider energy security—both for imports and exports of liquefied natural gas—was also highlighted in the Australian government's Foreign Policy White Paper published in late-2017. This identified the South China Sea as "a major fault line in the regional order [and] we have a substantial interest in the stability of this crucial international waterway, and in the norms and laws that govern it".

"Given the volume of trade passing through the South China Sea, any impediment to this from increased tension or conflict would have an impact on the global economy. Around 70% of Australia's exports and 40% of our imports, passed through the South China Sea in 2016," Australia's Department of Foreign Affairs and Trade said.

The Australian government and the AIP have long been keen to stress the need for stable and open trade routes between Australia and its Asian neighbours. But this assumes stable, open and friendly relations between Asian neighbours or those further afield, something that's not guaranteed and is out of Australia's control.

Australia today imports crude and oil products from a range of sources. Crude is imported mainly from Asia and Africa, while oil products are shipped from South Korea, Japan, China, Singapore and India. This diversified range of trade routes helps minimise dependence on any one of them, spreading the risk of supply disruptions. However, it doesn't take into account disruption to more distant maritime trade routes such as the Strait of Hormuz—one of the world's most strategically-important choke points. China imports oil transported through the strait for refining into oil-based fuels sold to Australia and others.

Disruption to shipping through one or more maritime trade route, combined with Australia's low emergency stockholding, would rapidly impact the supply of gasoline, diesel and jet fuel.

Such a scenario was looked at by Acil Tasman, a consultancy, in October 2011 on behalf of Australia's then Department of Resources Energy and Tourism. It noted that "a major disruption to global oil supplies could negatively impact" liquid fuel security.

However, Acil Tasman also concluded that Australia's growing net import reliance isn't considered to be a supply-security concern in the short term. "This is because of the nature of the petroleum market globally and in the Asia-Pacific region, where supply security depends on being able to source petroleum products from a diverse range of refineries that can meet Australian specifications," the consultant said.

At the retail end, Australian consumers are already susceptible to price fluctuations in the international oil and refining market. Car drivers experience swift, daily changes in pump prices for unleaded and diesel fuel in all major cities. It wouldn't take much negative action along a maritime trade route to see prices spike significantly, with or without supply disruptions.

Looking ahead

Aside from disruptions to imports and declining domestic oil production and refining capacity, in the long term there's a chance that Australia's vulnerability could become a redundant issue.

In the short term, the refining industry is facing what the AIP calls "a complex and expensive investment to produce 10ppm sulphur diesel which has the potential to threaten the viability of the industry".

"While the refining industry recognises the government imperatives, it is absolutely critical that sufficient time is provided to make these investments and that government consider positive incentives," the AIP said. "To this end, the industry has proposed 1 July 2027 as an appropriate start date for compliance with this new fuel standard."

Over the longer term, the adoption of electric vehicles backed by renewable power generation and battery storage technologies could carve significant inroads into the use of petroleum products, as the world and Australia transition to a low carbon future.

 

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