After two consecutive loss-making quarters for the first time in over thirty years, ExxonMobil’s strategy of increasing oil output has been shredded by the world-wide slump in oil demand this year. For the first time, the corporation is now reviewing employment levels outside the US. It is seeking voluntary redundancies from its Australian operations as it looks for a buyer for its fifty per cent stake in the Bass Strait oil and gas venture and possibly for its Altona refinery in Melbourne, the oldest operational refinery in Australia. Exxon has this week reported that Altona is operating at a loss.
Three other refineries remain operational in Australia – but for how long? On 30 October, bp said it would convert its 146 k bpd Kwinana refinery in Western Australia into an import terminal. The largest refinery by output in Australia, operational for 65 years, has been declared uneconomic. The workforce will shrink from around 650 to around 60 people when the conversion completes in 2022. The site is also under consideration for conversion to a clean energy hub which could produce and store low-carbon fuels. Head of Country for bp, Frédéric Baudry, said that the decision ‘comes in response to the long-term structural changes to the regional fuel market.’ The company notes that not just Australian but Asian fuel markets have changed as more large-scale, export-oriented refineries render smaller plants uncompetitive.
Viva Energy Group, operator of the Geelong refinery which introduced marine VLSFO earlier this year and is the hub of its 20 Australian bunker stations, has also reported that it will review Geelong’s future at the end of 2020. ‘The company continues to incur unsustainable operating losses in this part of the business and is pursuing all available options to improve cash flow and near-term profitability’ it announced on 14 October. One option is to cease refining operations by the end of first quarter 20221.
The fourth extant Australian refinery, Ampol Ltd’ Lytton plant, is also under review due to being unprofitable, while its owner considers converting it into an import terminal. Ampol announced a loss of A$ 141 million on refining operations for the first nine months of 2020. Ampol CEO Matt Halliday told reporters last month that, ‘Demand destruction and the oversupply that we’ve seen… presents a very challenging outlook for margins…that’s on top of the pressures that we face in the international context. The refineries [in Australia] are relatively small and relatively old.’
The federal Australian government has offered incentives of up to A$ 1.6 billion to keep refineries going. The subsidy offers to fund 1.15 cents per litre of refined product retail prices to contribute to the cost of upgrading refineries to keep them going. The upgrade is a cut from 150 parts per million sulphur content to 10 parts per million, bringing Australia into line with Europe, the US and China in 2027. The government has also offered up to A$ 143 million to build 4.9 million barrels of diesel storage to contribute to its IEA strategic reserve commitment. However, all four refinery operators have cautioned that even with subsidies, their refineries face unbeatable competition from more modern, larger plants overseas.
Australia produces around 374 k bpd of oil, of which it exports around 215 k bpd. The nation consumes 1.14 million bpd. In 2019, imports of oil ran at around 300 k bpd. Without domestic refineries, and if petroleum products consumption returns to 2019 levels, Down Under will be importing 1 Mn bpd. That’s an increase from around three to around ten LR2 cargoes a day, probably coming from Singapore, China, South Korea and maybe even the Middle East and India.
That would be good news for LR2 operators.
But if the refiners thought demand would come back, maybe they would mothball or upgrade the refineries with government support. Their actions, repeated across the world, suggest that refiners know that consumer behaviour has changed inexorably. The number of annual miles driven per car peaked over a decade ago as shoppers went online rather than driving to the mall. A rise in home working and a fall in commuting may exaggerate that change, along with the rise of low emission zones in cities, a rise in car-sharing schemes and a rise in public transport all encouraging a change of consumer behaviour in younger people especially. It’s another hint that, if oil demand steps up if / when the world crawls out of the Covid-19 pandemic, it may not recover to pre-pandemic levels, and it may just continue falling as consumer behaviour and government policies change faster than the likes of ExxonMobil were expecting. A post-Covid tanker boom? Maybe, but it could be the oil tanker’s last hurrah.