Australian oil refining industry needs debate, not neglect

That Australia's oil refining industry is uncompetitive in the face of the new, complex plants in Asia is obvious. What isn't so obvious is what should be done about this.
So far two solutions have presented themselves.
The more common one is that the oil majors running Australia's ageing and relatively unsophisticated refineries shut them down and convert the facilities to import terminals for refined fuels, sourced mainly from Asia.
BP became the latest in this trend, announcing on Wednesday that it was closing its 102,000 barrels per day (bpd) plant in Brisbane by 2015, and possibly converting it to an import terminal.
It joins Royal Dutch Shell, Chevron unit Caltex Australia and Exxon Mobil in closing refineries in Australia.
However, Shell has also shown that a second path is possible.
While the Anglo-Dutch major closed its Clyde refinery in Sydney, which was the nation's oldest, it found a buyer for its plant at Geelong, outside Melbourne.
Swiss-based commodities trader Vitol SA agreed in February to buy the 120,000 bpd refinery, associated fuel terminals and 870 service stations for about $2.6 billion.
This came after Shell had flagged it would close the Geelong facility by next year if it was unable to find a buyer.
While Vitol has said it intends to keep operating, and invest in improving, the Geelong refinery, it's believed that the real prize for the trader was the import, storage and distribution network that came with the deal.
This will allow Vitol to gain a foothold in a growing market, one that was previously dominated by the international oil majors.
BP's statement on closing its Brisbane refinery made no mention of whether any attempt was made to find a buyer for the facility, rather simply stating that it was a commercial decision that will improve the company's position.
The idling of BP's Brisbane plant means only four refineries will be left in Australia, BP's other unit at Kwinana in Western Australia, Caltex's Lytton plant in Brisbane, Exxon Mobil's Altona facility in Melbourne and Vitol's Geelong facility.
These have a combined capacity of around 448,500 bpd, while BP's Statistical Review of World Energy pegged Australia's oil consumption at about 1.02 million bpd in 2012.
This means that more than half of the country's fuel needs will have to be sourced from overseas, a figure that's likely to rise as the remaining refineries have to be seen as under threat of closure as well.
The youngest of Australia's refineries are the two in Brisbane, and both are coming up for the 50th birthdays.
While the nation's plants have been upgraded over time, they are still too small and unable to match the new, mega-refineries springing up across Asia and the Middle East, many of which are focused on exports.
Up to now, the focus in discussing refining in Australia has been more about the political impact of job losses, especially when seen against the broader backdrop of mounting manufacturing closures, most notably the motor vehicle industry, which will cease building cars locally by 2018.
Concerns over the security of fuel supply are generally dismissed by pointing to the surplus of refining capacity in the region and the competitive nature of the market.
This is all very well in times of peace, but it's not inconceivable to imagine a scenario where fuel shipments to Australia could be threatened.
Conflict between China and Southeast Asian nations over territory in the South China Sea, a political showdown with Indonesia over any one of a myriad of issues, a terrorist attack in the Straits of Malacca are all possibilities that could endanger the movement of fuels by tanker.
At such a time, Australia would have limited options and could easily run short of fuel if a crisis was sustained for any longer than a few days.
Neither the previous Labour Party government, or the Liberal Party which replaced it after last September's election, appear to have any cohesive policy toward energy security, or refining.
The Labour government probably hastened the demise of Australian refining with its carbon tax, which added to the cost of doing business.
The Liberal government wishes to repeal that tax, but there is much more it could do to ensure the future of refining, with measures that wouldn't add to the pressures on an already stretched federal budget.
These include carrots, such as offering tax breaks for upgrading refineries or imposing a tariff on imported fuels. A stick approach could be to tighten environmental regulations for any company closing a facility, thereby raising the cost of mothballing a refinery.
But the future of refining isn't as yet a priority issue for the government, which makes it all the more likely that Australia's plants will be allowed to drift into oblivion.
Meanwhile, Indonesia's ban on exporting unprocessed nickel and bauxite has been in force for more than two months, but the impact has yet to fully show up in Chinese imports.China's trade data for February shows nickel ore imports from Indonesia were about 3.1 million tonnes, down only 2.5 per cent from the same month a year earlier.
Indonesia's ban on exporting unprocessed minerals took effect on Jan. 12, and while there have been some moves to relax restrictions on copper and other ores, the total ban on nickel and bauxite remains.Nonetheless, Indonesia's share of China's total nickel imports in February was 87 percent, showing the world's biggest buyer of commodities hasn't made a marked shift as yet to alternative suppliers.
In the first two months of the year China imported 9.2 million tonnes of nickel ore from Indonesia, a 29.1 per cent jump over the same period in 2013.The strength in January can be explained by Chinese buying ahead of the export ban starting, and the resilience in February is most likely down to cargoes that left Indonesia in early January only being booked as February arrivals due to the Lunar New Year holiday in late January and early February. With bauxite, used as a the raw material for making alumina, which in turn is used to produce aluminium, there was a reduction in China's February imports. China imported a total of 3.2 million tonnes in February, of which 2.13 million came from Indonesia.
Imports from Indonesia were 22.2 per cent lower than for February 2013, but a bumper January means that imports for the first two months were 44 per cent higher at 8.3 million tonnes. Before the ban on unprocessed exports, Indonesia was the world's top nickel ore exporter and the largest bauxite supplier to China, accounting for around 12 per cent of the global market in both cases, with the trade worth about $3.0 billion a year.
Indonesia has yet to release February trade data, but the January numbers showed shipments of ore fell by 70.1 per cent in January from December, enough to tip the trade balance into deficit after three months of surplus.
In theory, the Chinese trade data for March should show zero imports of nickel ore and bauxite from Indonesia, as it's extremely unlikely that any cargoes would have been on the water for six weeks.Assuming that imports from Indonesia do drop to close to zero, the question becomes what happens next?
CHINESE STOCKPILES WON'T LAST: Chinese buyers are believed to have stockpiled close to 18 months worth of consumption, which is consistent with the massive 79 per cent leap in imports last year.
Eventually, this bauxite stockpile will run low, and while there may be limited alterative suppliers, the Chinese may simply move up the value chain and increase imports of alumina.
Given that global alumina and aluminium markets remain hugely in surplus, it will take time for the absence of Indonesian bauxite to be felt. It may also never be felt if alumina smelters are built in Indonesia, which after all is the political aim behind the ban. It will shift some of the dynamics of where alumina and aluminium are produced, but Indonesia's ban on bauxite is at best a slow-burn issue for the markets.
A drop in nickel ore may be harder for China to manage, as it's believed stockpiles are not as extensive as for bauxite and are held mainly by larger producers. The bulk of Indonesian nickel ore is used by Chinese companies to produce nickel pig iron, and it's likely that smaller producers will soon feel the impact of the Indonesian ban, and are also unlikely to be able to make up the shortfall by using alternative suppliers, such as the Philippines.
This should result in lower supplies of nickel pig iron in China, meaning imports of refined nickel are likely to increase. This does provide justification for the 12.5 per cent rally so far this year in London three-month nickel, but the next few months will show whether Chinese nickel imports will actually rise, or whether the market may have got ahead of itself.The other factor is that stainless steel, the main use for refined nickel, remains a market experiencing slow demand growth in China, and this may limit the need for nickel imports in the next few months.