Does Australian oil refining really
April 03, 2008
Desmond King, Managing Director & CEO
Institute of Chartered Accountants in Australia
This speech was adapted from the presentation made to AMCHAM on 8
Is it critical for Australia to retain its oil refining industry
because of the importance of petrol and diesel to the Australian
economy? Or is oil refining just another Australian manufacturing
industry that could exit Australia in the face of global
Introduction (Slide 1)
I thank the Institute of Chartered Accountants in Australia for the
opportunity to speak today and I thank all of you for taking time
to participate in this event.
Energy security and the environment are major long term issues. If
you are involved in business or government you will be affected to
a greater or lesser extent and you will certainly be affected as an
Petroleum products like petrol, diesel and jet fuel provide 35 per
cent of Australia's energy. They are vital to many industries like
transport, mining, agriculture, construction and tourism, and
everyday commerce. Without them, Australia would literally stop
Already, about a quarter of Australia's petroleum products are
imported, three quarters are manufactured in Australia. So I ask
• Is it critical for Australia to retain its oil refining
industry because of the importance of petrol, diesel and jet fuel
to the Australian economy?
• Or is oil refining just another Australian manufacturing
industry that could exit Australia in the face of global
Over the next decades the developing world will have a voracious
appetite for petroleum products - there will be fierce
international competition to secure those products. That fierce
competition has already begun. Without a viable refining industry
in Australia, our country will be exposed as the developing world
clamours for fuel. Australia has a great future, but only if it can
have a dependable fuel supply.
Outline of speech (Slide
To back up my thesis, I will very briefly take you through some of
the facts and figures:
• for the world: energy demand growth, oil demand and supply,
and refining capacity
• And for Australia: refining, demand growth for fuels, and
growing fuel imports.
demand (Slide 3)
Globally, there will be a massive increase in demand for energy and
all the services that energy provides - including heating and
cooling, cooking, mobility and ultimately employment. This
projection from the International Energy Agency shows a 50 per cent
increase in energy demand by 2030.
The big news is in share of demand. Developed countries,
particularly the United States and the countries of Europe, have
essentially flat energy growth. Their share of world energy demand
drops from 56 per cent to 40 per cent by 2030. The OECD countries
as a whole will, in effect, increase GDP without increasing their
China, India and many other developing countries are coming off a
lower energy base but growing much faster. Non-OECD countries will
increase their energy demand by over 200% by 2030 and their share
of world energy demand increases to 60 per cent by that date.
The growth in energy use in the non-OECD is truly daunting, but we
in the OECD cannot deny the developing world a better life - and
access to energy brings that better life - the life that we in the
OECD enjoy today.
energy supply (Slide 4)
Where will all this energy come from? The International Energy
Agency projects that oil dependence will fall, but oil will
continue to dominate energy supply, about one third of the total.
Gas and coal will continue to supply about one quarter of global
Why is this so? Coal is plentiful and provides electricity, the
backbone of industrial development. Oil is quite plentiful and
provides mobile energy which is essential throughout the economy.
Other energy sources can't be developed fast enough to replace oil
and gas by 2030.
Other sources will grow but still supply less than 20 per cent of
energy. It will be important to develop a range of new renewable
energy sources but these are generally seen as playing a minor role
over the next 20 to 30 years. The world desperately needs the
development of alternative energy - not to replace fossil fuels
over the next 20 to 30 years, but to actually meet the increased
overall demand for energy.
Longer term, major changes will be needed in the way energy is
produced and consumed. The problem is not really the endowment of
resources; it's developing the resources sustainably and delivering
them to markets. That is best achieved through competitive markets
for investment and trade in energy at the global, regional and
oil supply forecasts (Slide 5)
There is a wide range of forecasts for oil supply, as shown on this
chart. "Peak oil" forecasters see conventional oil production
declining within 10 to 15 years, oil companies are generally more
optimistic. Consensus seems unlikely. However, it is most likely
the trend will be tighter oil supply and increasing prices, with
periods of substantial price volatility.
Even if "peak oil" forecasters are correct, we would be producing
about as much oil in 2030 as we do today. Oil is not going away in
the next 20 to 30 years as many commentators would have us believe.
If peak oil theorists are correct, the challenge is what we need do
to supplement conventional oil supply to fill the supply gap.
Resources of oil are extensive but the technological, financial and
political challenges of producing enough oil at an acceptable price
sources (Slide 6)
By 2030, more than half of oil production will have to come from
development of existing reserves - a massive capital requirement -
and growth in production will have to come from unconventional oil
resources and new discoveries.
Large conventional crude oil resources are located in areas that
are subject to substantial risk such as the Middle East, Russia,
the Caspian region, Venezuela and Nigeria. Other crude oil
resources are in difficult environments such as ultradeep
Unconventional oil resources are costly and technologically
challenging, such as Canadian tar sands, Venezuelan extra heavy oil
and US oil shale. Biofuels face major technological challenges to
make large scale production sustainable and cost-competitive.
The enormous challenges of finding and developing new supplies of
oil today has brought the twentieth century era of cheap oil to an
end. As we have seen in the early stages of the twenty first
century - the days of US$20 per barrel oil are long gone.
World carbon dioxide emissions
Supplying oil and other energy to a growing world is a huge
challenge - but an even larger challenge is climate change, which
requires action to greatly reduce greenhouse gas emissions.
In 1980, global emissions of carbon dioxide were less than 20
billion tonnes, with the developed countries of the OECD accounting
for more than half. By 2030, emissions will exceed 40 billion
tonnes, with most of the growth in developing countries. However,
developed countries will still have much higher emissions per head
The earth may not be able to sustain the increased carbon dioxide
emissions from burning fossil fuels - yet it will be reliant on
fossil fuels for many years.
That is why carbon capture and storage is so important to climate
change policy. While efficiency measures will reduce electricity
demand, there can't be a long term future for coal and gas unless
power station emissions of carbon dioxide are captured and
permanently disposed of.
For oil, action lies more on the demand side, to greatly improve
the fuel efficiency of vehicles. In the medium term, diesel engines
and petrol or diesel hybrids offer lower grams of carbon dioxide
emissions per kilometre. Longer term, low carbon technologies may
include plug-in hybrids, hydrogen internal combustion engines,
hydrogen fuel cells and pure electric vehicles. Renewable fuels
will help cut emissions from the supply side but are likely to play
a relatively small role.
While there is no agreed target for reduction in global emissions,
a reduction of 50% or more in global emissions by 2050 is commonly
suggested, with a greater reduction in developed countries. The
changes in energy supply and demand to meet such a target would be
- indeed will be - truly radical. We should not underestimate the
challenges that are ahead of us.
Global refining capacity to
remain tight (Slide 8)
As we have seen, world oil demand and supply will likely continue
to grow strongly, even with the challenge of climate change. That
means growing demand for refined petroleum products and the
refineries to produce them.
New refineries and capacity additions will be constrained by
increasing capital costs and tougher environmental requirements for
cleaner fuels. As a result, global refining capacity is expected to
remain tight. Despite this, there will be strong growth in capacity
in developing regions, including the Asia Pacific.
World overview (Slide
To summarise my remarks so far:
• Energy demand will be up 50 per cent by 2030, almost
entirely due to growth in non-OECD countries.
• Oil, coal and gas will remain dominant
• Alternatives to conventional crude oil will be required to
meet demand growth. Alternatives will not be a net substitute for
conventional energy - they will be a much needed addition to
• Oil refinery capacity will remain tight at least in the
Australian refining industry
I now want to turn from the world to Australia.
Petroleum products are pervasive throughout the Australian economy.
Caltex is in the business of refining crude oil into petroleum
products, then distributing and marketing those products at the
wholesale and retail levels. We don't explore for oil or gas and we
don't produce any. We are an Australian listed company with about
half our income coming from refining and half from wholesale and
In 2007 our profit was $444 million on a replacement cost basis. In
the case of petrol alone, Caltex's profit after tax was around 1.5
cents a litre compared to the Australian Government's tax at the
bowser of approximately 50 cents a litre. Overall, Caltex's has a
high volume, low margin business.
Australia's refineries (Slide
Australia has seven major refineries in operation, as shown on this
map. In recent times, ExxonMobil closed its refinery in Adelaide
and is now importing petrol and diesel mostly from its refinery in
Singapore. It also scaled back its refinery in Melbourne to cut the
cost of upgrading it to produce cleaner fuels. Caltex has two
refineries, one in Sydney and one in Brisbane.
Australian refineries produce about 590 thousand barrels per day of
petrol, diesel and jet fuel or about 34 thousand megalitres per
year. This is well below Australian demand for these petroleum
products, which is about 43 thousand megalitres per year.
The shortfall in refining capacity means imports make up about a
quarter of Australian demand for petrol, diesel and jet
. Diesel is the product in shortest supply, with
imports making up about one third of all diesel consumed in
Petroleum product demand and
imports (Slide 12)
Over the next decade, demand for petrol is projected to be fairly
flat but demand for diesel and jet fuel is projected to grow
strongly at 3 to 4 per cent per annum. Petrol demand growth is
reduced by increased fuel efficiency and penetration of biofuels.
Diesel demand is closely linked to economic growth and jet fuel to
tourism. In 2007, for example, diesel demand in Australia increased
by over 6 per cent due to strong growth in the industrial, mining
and transport sectors.
Strong growth in demand for diesel and jet fuels means that imports
will grow as no new refineries will be built in Australia and
capacity increases at existing refineries will be much less than
demand growth. One or two less efficient refineries may even close
over the next decade.
Imports in 2015 could equal 30 to 40 per cent of demand for petrol,
diesel and jet fuel. By 2030 imports could be 50 to 70 per cent of
Regional supply and demand
remains tight in medium term (Slide 13)
Economic growth, particularly in Asia, is driving global demand for
petroleum products, particularly diesel, and keeping prices for
diesel high. It wasn't always like this.
As you can see from the chart, there was excess capacity in Asia in
the late 1990s, particularly for petrol. Financial returns were
unsustainably low and oil refining in Australia was in dire
straits. Since about 2003, Asian demand has been very strong,
particularly in China, and refining capacity has been scrambling to
Despite this, business cycles have not been eliminated and demand
will not keep growing forever at a high rate. On the supply side,
the prospect of higher returns has induced new investment and by
about 2009 it is projected that enough refining capacity will have
been added in Asia to bring Asian supply and demand back into
Jamnagar refinery, India (Slide
The new Reliance Petroleum oil refinery at Jamnagar in north-west
India will be on stream in late 2008 making petrol, diesel and jet
fuel for the export market. Its capacity of about 600 thousand
barrels per day will be similar to the total capacity of
Australia's seven oil refineries. The new refinery will complement
the existing Reliance Industries refinery at Jamnagar, making a
total capacity of 1.2 million barrels per day.
Large modern Asian refineries have economies of scale that mean
lower unit costs than Australian refineries and higher energy
efficiency. Apart from India, there are large oil refineries in
Singapore and other refineries throughout Asia and in the Middle
East with products for export to Australia.
So how can refineries in Australia compete?
Refining location advantage US$2.88 barrel (Slide
The economics of refining are basically simple. Crude oil is
imported in large ships - up to 200,000 tonnes. Petroleum products
are imported in much smaller ships - up to 45,000 tonnes.
The key question for refinery viability is whether the landed cost
of crude oil in Australia plus refining costs is less than the
landed cost of petroleum products. The higher cost of freight for
product imports provides a location advantage for Australian
In 2007, the freight difference between small product ships and
large crude oil tankers was US$2.88 per barrel. A barrel is 159
litres. However, this natural protection is eroded by the higher
cost of refining in Australia which results from smaller scale,
higher capital costs, and better wages. So Australian refining is
vulnerable to additional costs not faced by our international
How do we stay competitive? Not through protection - Australian oil
refining has no tariff protection and we don't propose any. Not
through subsidies - unlike many industries we don't seek and don't
receive financial assistance. Not through regulation - we want a
level playing field, not regulatory distortions in our
Staying competitive requires strenuous efforts to improve
efficiency and cut costs. It also requires all governments to avoid
imposing costs that cumulatively could kill refining in
Let me give you some examples.
Australian greenhouse gas
emissions (Slide 16)
Firstly carbon cost. Total Australian greenhouse gas emissions in
2005 were 559 million tonnes of carbon dioxide equivalent. Of this
about 8 per cent was from use of petrol, 8 per cent from diesel and
4 per cent from jet fuel and other fuels. To manufacture these
fuels, oil refineries produced about 1 per cent of Australia's
Under the emission trading scheme proposed for Australia, permits
to emit greenhouse gases in a particular year will be auctioned,
with the revenue going to the government. Emitters must surrender
permits each year equal to their emissions.
However, companies that face import competition from countries that
do not impose carbon costs may be classified as "emissions
intensive trade exposed" and receive free permits. As Singapore and
Indian refineries will bear no carbon costs, Caltex should receive
a free allocation of permits for its refinery emissions.
Unless this occurs, up to $1 per barrel of the $2.88 per barrel
freight advantage could be eroded. This level of carbon cost would
probably make all of Australia's refineries uneconomic and shift
production to Singapore, India and other countries that will not
bear any carbon costs.
Also under emission trading, the government proposes that Caltex
should be responsible not only for our own emissions but also our
customers' emissions. At a carbon cost of A$40 per tonne of carbon
dioxide, Caltex would have to purchase $1.4 billion in permits
annually - then have to increase fuel prices by about 10 cents per
litre to try and recover the money. This system would impose a huge
financial risk on Caltex far out of proportion to our earnings and
Other regulatory issues (Slide
Biofuels. Caltex supports the development of biofuels like ethanol
and biodiesel as they may play a significant role in future fuel
supply and energy security if costs can be reduced and
sustainability issues can be overcome. However, we are concerned at
government policies and legislation to mandate the supply and use
Biofuels need R&D for new feedstocks and advanced technology
and may warrant some additional transitional financial assistance.
However, a sustainable biofuels industry can't be built behind
Environmental requirements. Air pollution is still a major issue
and Caltex has invested $500 million to produce cleaner fuels to
cut air pollution. Over the period 2007 to 2009 we will spend about
$1 billion on various capital projects to improve safety,
reliability and production capability and to maintain our
refineries. We support expenditure to reduce the impact of our
refineries on the air, water and land but such expenditure has to
be realistic and spread over a reasonable period - we just can't
afford to do everything over a short timeframe.
Fuel price regulation. From time to time, various politicians,
organisations and media engage in oil company bashing as a cheap
way of gaining public support. Such attacks and proposals for
regulation undermine confidence in the industry and ultimately call
into question the desirability of investment. Price regulation is
also bad for consumers. False perceptions of excessive profits and
market power can also constrain political and regulatory ability to
rationalise the industry or impose unreasonable conditions on such
Does oil refining really matter?
Let me wrap up.
• Energy security is an emerging strategic issue for all
Australian industry. The energy outlook we face should be a source
of concern to everyone. It is essential to Australia's productivity
and competitiveness that we build and maintain our energy supply
capability all the way along the supply chain from source to end
user. Retaining a substantial oil refining capability is essential
to Australia's energy security.
• Petroleum product imports are increasing - what level is the
"tipping point" for insecurity - 30 per cent, 50 per cent, 70 per
cent? Oil will play a critical role in Australia's energy mix for
many years. Oil refining is a crucial link in the supply chain and
relying on overseas refineries for our petroleum products would
expose all industries and private consumers to unnecessary risk.
There is a strong case that oil refining in Australia does matter
and policies and attitudes need to recognise its vital strategic
role in the Australian economy.
• Liquid fuel security can be achieved - but we have to
recognise the problem and take it into account when decisions are
made on many different regulatory issues. Oil refining is a tough,
competitive business and so are distribution, wholesaling and
retailing. Shareholders will only continue to support companies
that have good short and longer term prospects. These prospects
depend at least in part on whether governments and the community at
large recognise the importance of the Australian refining industry
to our economy.
As I said at the beginning, over the next decades the developing
world will have a voracious appetite for petroleum products - there
will be fierce international competition to secure those products.
That fierce competition has already begun. Without a viable
refining industry in Australia, our country will be exposed as the
developing world clamours for fuel.
Australia has a great future, but only if it can have a dependable
fuel supply to fuel our economy. I believe that if Australian
governments ensure that there is a level playing field for
Australian refineries to compete against their overseas
competition, Australia can achieve a satisfactory level of liquid
fuel energy security for the long term. Given a level playing
field, Australian refining can play a vital role in fuelling
Australia's economy for many years to come.
Oil refining in Australia truly does matter.
Thank you. I would be pleased to take questions.
Click here for
12006-7 demand of petrol, diesel
and jet fuels equals total of sales of 42091 ML plus exports of
1169 ML. Imports of 9565 ML were 22 per cent of demand. Refinery
production of petrol, diesel and jet fuel was 34120 ML.
2Demand growth is extrapolated at 0.2%, 4% and 3.5% pa
for petrol, diesel and jet fuel. The higher numbers assume one
notional refinery closure by 2015 and 2 refinery closures by 2030.
These are scenarios, not predictions.