SUPPLY SECURITY

Liquid Fuel Supply Security and Reliability

The Australian liquid fuel supply chain has considerable span and diversity. It includes crude and petroleum product shipments into and around Australia, refinery throughput, bulk fuel storage tanks, extensive terminal and distribution networks, over 6000 retail outlets, and substantial fuel storage facilities of major fuel users.

Australia is well serviced by this reliable and diverse supply chain which delivers a high level of security and reliability by global standards due to:

• established and effective integration into the rapidly growing Asian fuels market
• diversity of supply sources for crude oil and petroleum products – from both domestic and imported sources
• robust, flexible and reliable supply chains – both internationally and domestically and with an increasing volume and frequency of ships coming to Australia
• a domestic refining capability – which provides supply diversity and flexibility and the ability to convert domestic and imported crude oil into useable products
• imported petroleum products – providing an increase in the diversity of sources of potential supply in the event of disruptions to domestic refinery production
• current and planned import, storage and distribution infrastructure which is able to meet growth in fuel demand
• efficient supply management by industry – including rapid and comprehensive commercial strategies in place to respond to supply disruptions
• robust emergency management and planning – in the event of a national or global liquid fuel emergency.

These important market features have been confirmed in successive government and independent reviews of liquid fuel supply security over many years. In particular, see the 'Energy White Paper', 'The Parliamentary Inquiry into the Oil Refining Industry', 'Liquid Fuel Vulnerability Assessments' and 'National Energy Security Assessments' below.

The fuels industry and Australian governments recognise the potential risks and impacts of a disruption to domestic liquid fuel supplies, and AIP and its member companies actively participate in a variety of government sponsored emergency management processes such as the National Oil Supplies Emergency Committee (NOSEC). While every effort is made by industry to ensure continuing reliable supply, NOSEC and IEA processes (see below) will help ensure a coordinated response in the event of any unforseen liquid fuel or oil supply emergencies at a national or international level.

These market facts and assessments are detailed in a new AIP publication – Maintaining Supply Security and Reliability for Liquid Fuels in Australia – which provides a factual overview of the liquid fuels market and supply chain in Australia.

A copy of the publication is available through the following link:

Maintaining Supply Security & Reliability for Liquid Fuels in Australia (2013)	Download PDF

AIP has also produced a Factsheet on the ‘Facts about the Australian Transport Fuels Market’ which provides a range of factual information on specific and topical aspects of the transport market and supply chain operation in Australia.

A copy of the Factsheet is available through the following link:

Facts about the Australian Transport Fuels Market (2015)	Download PDF

AIP has also produced a document on ‘Petroleum Ships on the Water’ which provides ‘real time’ snapshots (across March 2015) of the volume and diversity of vessels carrying petroleum products, crude oil, gas and petrochemicals.

This includes snapshots of vessels in Australian waters, the Asia-Pacific region, the Singapore trading hub and the Indian Ocean.

A copy of ‘Petroleum Ships on the Water’ is available through the following link:

Petroleum Ships on the Water (March 2015)	Download PDF

Energy White Paper 2012

On 8 November 2012, the Australian Government released the 'Energy White Paper - Australia's Energy Transformation'. The 2012 Energy White Paper sets out the Australian Government's strategic policy framework to guide Australia's energy transformation to a cleaner and more productive energy economy. The central objective of the Energy White Paper is to 'provide the settings to deliver secure, reliable, clean, competitively priced energy to consumers; while building our national wealth through the safe and sustainable development of our energy resources'. In seeking to meet this challenge, 'the Australian Government is committed to open and transparent markets that allow competitive pricing, efficient resource allocation and innovation that delivers benefits to consumers and the nation. It is also important that all (Australian) governments maintain an attractive investment environment through efficient, timely and consistent national planning, approval and regulatory processes.'

The Energy White Paper contains significant analysis, data and modelling in relation to energy security, including liquid fuels security, and also contains significant information on the structure and operation of the liquid fuels industry.

Some key highlights in the 2012 Energy White Paper in relation to Liquid Fuels include the following:

• 'Liquid fuel security is assessed as high trending to moderate over the longer term.'
• 'Australian liquid fuel markets are functioning efficiently and effectively and are well placed to meet future needs.'
• 'Projected reductions in our crude oil production and refining capacity will mean that demand will increasingly be met by imports of crude oil and refined product. This is not considered to affect our liquid fuel security because we have ready access to mature, diverse and reliable international supply chains and robust market governance and emergency response arrangements.'
• 'Announced refinery closures will occur on the basis of an orderly transition to increase import capacity to ensure continuity of supply.'

The Energy White Paper is available for download below.

2012 'Energy White Paper - Australia's Energy Transformation' (November 2012)	Download PDF

The Oil Refining Industry & Supply Security

On 5 February 2013 the House of Representatives Standing Committee on Economics tabled its Report on 'Australia's Oil Refinery Industry', following the Committee's inquiry in 2012. The Inquiry was conducted in relation to claims and concerns being raised about the viability of Australia's oil refinery industry, and the potential impacts of declining domestic refinery capacity on the economy, energy security and employment in the sector. The Report reconfirmed the findings and conclusions contained in the Government's 2012 Energy White Paper.

Some key highlights in the Committee's Report in relation to the oil refining industry include the following:

• The global oil refining industry is undergoing significant structural change.
• Larger, more efficient refineries are being established in the Asian region resulting in increased competitive pressures on refining operations in other regions.
• The expansion of refining capacity in Asia has led to the rationalisation of refining in established markets such as Europe and the United States of America. Australia's domestic refining industry is similarly facing competitive pressures.
• The domestic context of high operating costs, ageing facilities, increasing sea miles for the transport of crude to the refineries, shallow berths that are not suitable for large crude carriers, increasing technical complexity needed for refining of the broad range of crude oil and the high Australian dollar, put Australia at a competitive disadvantage, resulting in the closure of some domestic refineries that are no longer commercially competitive.
• While Australia's proximity to the Asian region does pose some challenges for domestic refineries, it also provides opportunities to take advantage of Asia's surplus refining capacity and to continue to strengthen supply chains in the region.
• The market for liquid fuels is robust and, from the available evidence, it is operating soundly. Australia is well serviced by reliable and diverse supply chains.
• The changes in domestic refining capacity to date will not impact on Australia meeting its liquid fuel requirements. There are reliable, mature and highly diversified international fuel supply chains, which provide Australia with economic security.
• The closure of the refineries will not lead to negative price outcomes for consumers. Australian fuel prices reflect an import parity price, which is the price in international markets. The Australian Competition and Consumer Commission was clear in its advice to the committee that as a result of import parity pricing, the retail price for petrol is not impacted by refinery closures.
• Australia can source its liquid fuel needs from a diversity of sources so that if one source becomes unavailable other sources can meet demand.
• Some domestic refining capacity is a worthwhile complement to imports as part of having reliable, mature and diverse supply chains for liquid fuels.

The Committee's Report is available for download below.

House of Representatives Inquiry Report into 'Australia's Oil Refinery Industry' (February 2013)	Download PDF

Liquid Fuel Vulnerability Assessment (LFVA)

In 2009 and 2011, ACIL Tasman was engaged by the Federal Department of Resources, Energy and Tourism (DRET) to examine Australia's current level of liquid fuel vulnerability and significant trends which may affect this over the short, medium and longer term.

The Liquid Fuel Vulnerability Assessments comprehensively explore issues like global and regional supply-demand of crude oil and petroleum products, supply security, and supply chain reliability and flexibility into and within Australia.

A Summary of the Key Findings from the latest 2011 LFVA include:

1. There has been no significant change in Australia's liquid fuels vulnerability since the 2008 review. Adequacy in terms of suppliers being able to keep up with demand has been maintained. This is likely to continue, over the medium term and potentially to 2035 according to the latest IEA World Energy Outlook.
2. The need to develop more remote oil resources or unconventional sources of oil is likely to place upward pressure on prices over the longer term.
3. Australia's growing dependency on oil and petroleum product imports will have limited affordability, reliability and security implications for liquid fuels supply.
4. The market would respond and readjust the supply lines to replace supplies lost in the event of a disruption. Prices would rise and there would be a cost to the economy. However, the impact could be reduced in size and duration in the event of a coordinated response by IEA members designed to increase available supply.
5. Ongoing investment in adequate importing capacity and storage will continue to be important in the future. However, there is sufficient clear evidence of significant recent and planned investments in import capacity to provide confidence that Australia will continue to be able to meet its growing domestic demand for liquid fuels.
6. There are also measures which could which could improve the monitoring and decision-making surrounding liquid fuels supply, and also and also contribute to meeting Australia's international stock obligations (see recommendations on Page xxvi).

Copies of the Liquid Fuel Vulnerability Assessments, which were released on 27 March 2009 and 13 December 2011, are available through the following links:

2011 Liquid Fuel Vulnerability Assessment (LFVA)	Download PDF
2009 Liquid Fuel Vulnerability Assessment (LFVA)	Download PDF

National Energy Security Assessment (NESA)

The NESA identifies the current strategic energy security issues in the liquid fuels, natural gas and electricity sectors, and those posing a potential risk in short term, medium term and longer term. The Government has indicated that the NESA will provide a key input into the development of future energy policy including the Energy White Paper which is also currently being prepared by the Government. The 2009 NESA was released by the Federal Government on 27 March 2009 and the 2011 NESA was released on 13 December 2011.

The key conclusion from these reports is that Australia currently enjoys a high level of liquid fuel security and this position is not expected to change in the coming years. The reports clearly demonstrate that Australia's market based approach, ready access to the global and regional markets for crude oil and petroleum products, and efficient supply management by industry, has delivered secure, reliable and adequate liquid fuel supplies which meet the operational requirements of consumers and major fuel users at internationally competitive prices.

Copies of the 2009 and 2011 NESAs are available through the following links:

2011 National Energy Security Assessment (NESA)	Download PDF
2009 National Energy Security Assessment (NESA)	Download PDF

Australia's Maritime Petroleum Supply Chain

In 2013, Hale and Twomey was engaged by the Federal Department of Resources, Energy and Tourism (DRET) to examine and report on the maritime supply chain and the key role it plays in Australia's petroleum supply chain.

The report considers how the maritime supply chain operates for Australia and provides a high level summary of all the components in the shipping task from point of loading to discharge (the maritime supply chain). It describes features of the petroleum market where that interacts with the shipping task. The report is intended to inform those interested in understanding the maritime supply chain influences on the security of petroleum supply to Australia.

Some of the key security findings include:

• Australia's supply routes are diverse and are likely to remain that way, even with refinery closures, as more product imports will come from locations other than Singapore.
• Due to the time it takes a ship to travel around Australia, import ships spend a considerable part of their voyage in Australia's EEZ. This results in a large number of tankers close to or within Australia's EEZ and territorial waters at any time.
• While Australia has a lot of import ports, they are typically quite isolated from each other and this makes it difficult to provide land transport back-up from other ports; using shipping to distribute product between ports is a major means of managing local disruption.
• The number of product tankers servicing Australia will increase, even with tankers increasing in size and refineries converted to import terminals receiving larger tankers.
• The import tankers can provide flexibility to respond to domestic supply disruption.
• For the majority of Australia's petroleum imports, the Australian company is likely to own the oil from when it loads (FOB, CFR or CIF purchase). Shipping may still be contracted by the companies' international trading arm or a third party but the cargo owner will hold a documented property interest in the cargo.
• Two scenarios were developed to consider how the shipping market would respond in a supply chain disruption. In reality it is difficult to envisage a scenario in which shipping is not available and historically we cannot point to an event which saw the collapse of the petroleum tanker market.

The Report is available for download below.

Report into Australia's Maritime Petroleum Supply Chain (June 2013)	Download PDF

Oil Supply Emergencies & the IEA Response System

The International Energy Agency (IEA) is the energy forum for 28 industrialised countries, founded in 1974 (see www.aip.com.au/pricing/iea.htm). IEA member country governments are committed to taking joint measures to meet oil supply emergencies. They also have agreed to share energy information, co-ordinate their energy policies and cooperate in the development of rational energy programmes. In Australia, the National Oil Supplies Emergency Committee (see below) fulfils the role of National Emergency Sharing Organisation, which is an ongoing requirement of Australia's membership of the International Energy Agency.

Emergency response to oil supply disruptions has remained a core mission of the IEA. The IEA emergency response mechanisms were set up under the 1974 Agreement on an International Energy Program (IEP Agreement). The IEP Agreement requires IEA member countries to hold oil stocks equivalent to at least 90 days of net oil imports and – in the event of a major oil supply disruption – to release stocks, restrain demand, switch to other fuels, increase domestic production or share available oil, if necessary. IEA collective response actions are designed to mitigate the negative impacts of sudden oil supply shortages by making additional oil available to the global market through a combination of emergency response measures, which include both increasing supply and reducing demand. Although supply shortages may bring about rising prices, prices are not a trigger for a collective response action, as these can be caused by other factors and the goal of the response action is to offset an actual physical shortage, not react to price movements.

For more information on the IEA decision-making process leading to an IEA collective action, the measures available, how this is implemented, and the historical background of major oil supply disruptions and the IEA response to them, see the following IEA report:

IEA Response System for Oil Supply Emergencies (2008)	Download PDF

National Oil Supplies Emergency Committee (NOSEC)

The NOSEC is a committee of the Ministerial Council on Energy (MCE) and provides the main executive channel through which Commonwealth and State Governments formulate their overall management response to a national liquid fuel emergency.

The task of the NOSEC is to ensure that the Federal Minister for Resources, Energy & Tourism and the MCE receives relevant advice and information on issues confronting national supply of crude oil and petroleum products.

NOSEC manages the National Liquid Fuel Emergency Response Plan (NLFERP) which details how Australian governments would respond to a fuel disruption with national implications.

NOSEC also fulfils the role of National Emergency Sharing Organisation, which is an ongoing requirement of Australia's membership of the International Energy Agency (IEA).

NOSEC comprises representatives from the Commonwealth (chair), the states/territories and the downstream petroleum industry – including AIP, Shell, ExxonMobil, Caltex, BP and Woolworths.

AIP and its member companies are active participants in NOSEC and in all NOSEC discussions support a strong market based approach to responding to any fuel supply emergency, and that maximum use is made of existing commercial and business practices along the supply chain.

Liquid Fuel Emergency Simulation Exercises

In 2008, the Department of Resources, Energy and Tourism (DRET), on behalf of NOSEC, undertook a Liquid Fuel Emergency Simulation Exercise – 'Catalyst 2008'. The aim of 'Catalyst 2008' was to test the emergency preparedness of the Commonwealth State and Territory Governments and industry to manage a national liquid fuel emergency. In particular, it tested arrangements for identifying and rationing fuels to essential users and bulk allocation arrangements, as well as communication strategies and mechanisms. Representatives from industry and State and Federal governments participated in 'Catalyst 2008' and the exercise built on the outcomes of the Federal Government's last simulation exercise – 'Exercise Tanker 2003'.

According to DRET, "Catalyst 2008 will be part of a more regular series of testing Australia's emergency preparedness".

A copy of the 'Catalyst 2008' factsheet is available through the following link:

Factsheet: 'Catalyst 2008' Simulation Exercise	Download PDF