BILLS DIGEST NO. 18, 2017–18              14 August 2017

Liquid Fuel Emergency Amendment Bill 2017

Sophie Power
Science, Technology, Environment and Resources Section 

Date introduced: 15 June 2017

House: House of Representatives

Portfolio: Environment and Energy

Commencement: 1 January 2018

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at August 2017.

Purpose of the Bill

The purpose of the Liquid Fuel Emergency Amendment Bill 2017 (the Bill) is to amend the Liquid Fuel Emergency Act 1984 (the Act) to enable the Australian Government to enter into commercial oil stock ticket contracts, in order to assist Australia return to compliance with its obligations as a member of the International Energy Agency to maintain a stockpile equivalent to 90 days’ worth of oil imports.

Note that a separate but related Bill, the Petroleum and Other Fuels Reporting Bill 2017, is also currently before Parliament. That Bill aims to improve the quality and completeness of information on Australia’s fuel holdings through mandatory reporting.[1]

Background

Australia is a member of the International Energy Agency (IEA), and a signatory to the Agreement on an International Energy Program (which created the IEA).[2] That agreement was concluded in response to the oil shock of 1973–4, in which the Organisation of Arab Petroleum Exporting Countries heavily restricted oil exports in response to geopolitical events, which had significant ramifications for the global economy.[3] The agreement (and the IEA) seeks to ameliorate the impacts of further interruptions to oil supply, and encourage members to work collectively to ensure security of energy supplies (particularly oil).[4]

A key requirement of IEA membership, and the Agreement on an International Energy Program, is that countries that are net importers of oil maintain a stockpile equivalent to 90 days’ worth of imports.[5] This obligation is designed to enable the IEA and its member countries to respond to a severe oil supply disruption in the global market through what is known as ‘collective action’, in which:

… the IEA may need to coordinate a specific drawdown of stock from the emergency reserves of its members. Demand restraint, fuel switching measures and use of spare production capacity may also be utilised. A release of oil in a collective action event aims to diminish any economic damage associated with a severe disruption of oil supply in the global market. There have only been three collective actions in the past 40 years. The most recent event involved a response to the disruption of oil being supplied from Libya in 2011. The other collective actions triggers were from the aftermath of Hurricanes Rita and Katrina in 2005, and prior to the Gulf War in 1991.[6]

Oil stocks

Oil stocks held by industry and government-owned stocks generally both count towards meeting a country’s IEA stockholding commitment. Many IEA member countries have opted to meet all or part of their oil stockholding obligation by placing a requirement on industry to hold a minimum number of days of stocks.[7]

The stockholding obligation can also be met in two ways: oil stocks can be held as physical stocks in storage facilities dedicated to holding emergency stocks. Alternatively, emergency stocks can be held through contracts referred to as ‘tickets’:

Tickets are stockholding arrangements under which the seller agrees to hold (or reserve) an amount of oil on behalf of the buyer, in return for an agreed fee. The buyer of the ticket (or reservation) effectively owns the option to take delivery of physical stocks in times of crisis, according to conditions specified in the contract.[8]

Tickets can be either domestic contracts or contracts between countries (under a bilateral government agreement).[9] Some IEA member countries, such as New Zealand, use stockholding tickets to help meet their 90-day oil stockholding obligation.[10]

Australia’s situation

In the time Australia has been an IEA member, particularly between 1985 and 2000, Australia’s oil production and consumption have been comparable. This meant Australia was essentially self-sufficient in oil, and exempt from the requirements to keep a 90-day reserve. However, Australia’s oil production peaked in 2000, and since then the widening gap between consumption and production has been met by imports (see graph 1).[11] Despite this increased reliance on imports, the Government admits that Australia has not maintained a 90-day stockpile and has been in breach of its obligations since March 2012.[12] As at April 2017, Australia had only 51 days’ worth of imports—the only IEA member country to be in breach of its obligations.[13]

Graph 1: Australian production and consumption of oil, 1965–2015

Source: British Petroleum (BP), BP statistical review of world energy June 2016, BP, London, 2016.

Government response

In the 2013–14 Budget, the Gillard Government announced that it would provide the then-Department of Resources, Energy and Tourism (RET) with $5.1 million to study a return to compliance with Australia’s IEA obligations.[14] The Government then announced in the 2016–17 Budget that it would provide $23.8 million to the Department of Industry, Innovation and Science (then responsible for energy policy) over four years to work towards returning to compliance with the IEA requirements.[15] The Government also provided a plan to the IEA to return to compliance by 2026. Part of this plan was the purchase of 400 kilotonnes of oil tickets in 2018–19 and 2019–20 to enable Australia to contribute to an IEA collective action if needed.[16] As noted earlier, a related measure, mandatory reporting of petroleum statistics, is the subject of separate legislation, also currently before Parliament.[17]

In addition, the Senate Standing Committee on Rural and Regional Affairs and Transport (the Committee) conducted an inquiry in early 2015 into Australia’s Transport Energy Resilience and Sustainability, which examined Australia’s compliance with its IEA obligations.[18] That report recommended:

•       the Government conduct a comprehensive risk assessment of Australia’s fuel supply, availability and vulnerability

•       that monthly mandatory fuel reporting be introduced and

•       that the Government should develop a comprehensive Transport Energy Plan.[19]

The Government issued its response to the Committee’s report in November 2016, outlining relevant parts of the plan to return to compliance.[20] The response confirmed:

The Government has allocated $23.8 million to the first phase of returning to compliance. This funding is largely to be used to purchase 400 kilotonnes of oil ‘tickets’ … This will ensure that Australia can effectively contribute to a ‘collective action’, the IEA’s emergency response mechanism, as required while Australia implements longer-term measures. The framework to purchase tickets will be in place by 2018.[21]

Committee consideration

Senate Selection of Bills Committee

At its meeting on 21 June 2017, the Senate Selection of Bills Committee recommended that the Bill not be referred to any committee for inquiry and report.[22]

Senate Standing Committee for the Scrutiny of Bills

The Senate Scrutiny of Bills Committee had no comment on the Bill.[23]

Policy position of non-government parties/independents

At the time of writing, non-government parties and independents do not appear to have commented on the Bill.

Position of major interest groups

At the time of writing, no major interest groups appear to have publicly commented on this Bill.

However, some made relevant comments in submissions to the 2015 Senate Committee inquiry into Australia’s transport energy resilience and sustainability. For example, during the Senate inquiry, both the Australian Trucking Association and Australian Institute of Petroleum (AIP) argued that the IEA should review the 90-day stockholding requirement given that it was originally set in 1974, and the global oil markets have evolved significantly since that time.[24] The AIP also questioned the logic of investing in oil stockholdings, suggesting that ‘there is no evidence that the substantial cost of an emergency stockpile is justified on energy security grounds’, noting that Australian fuel supplies have not been disrupted even during global supply disruptions.[25]

Caltex similarly argued that increasing Australia’s stocks to 90 days of net imports would make ‘very little difference’ to Australia’s fuel security, and suggested that the high cost of investing in strategic reserve fuel stocks would need to be ‘met by either increased fuel prices or the diversion of public funds’.[26]

During the same inquiry, the National Roads and Motorists’ Association (NRMA) expressed concern that Australia is the ‘only oil/fuel importing developed country in the world that has no mandated industry stockholdings, no government owned stockholdings or Government control over any part of the oil / fuel infrastructure’.[27] However, the NRMA considered that ‘the issue of liquid fuel security is far more complex than increasing stockholding’ and that even if Australia met the IEA stockholding requirements, this would provide only a slight improvement in Australia’s fuel security.[28]

In a submission to a consultation process undertaken in 2016 by the Department of the Environment and Energy in relation to mandatory reporting of petroleum statistics,[29] the Australian Automobile Association (AAA) supported the Government’s efforts to ensure Australia meets its 90-day stockholding obligation. The AAA suggested that compliance ‘would ensure Australia has a buffer that would prevent sharp fuel price increases or rationing in response to short term liquid fuel supply disruptions’. However, the AAA considered that ‘any costs associated with complying with Australia’s international obligations should be funded by the Government, not by an increase in costs to motorists’.[30]

Financial implications

The Financial Impact Statement in the Explanatory Memorandum states:

The Australian Government has provided funding of $23.8 million over four years to support the International Energy Agency’s oil stockholding requirement measure, which includes the measures of establishing the Energy Security Office in the Department of the Environment and Energy, re-establishing an Energy Advisor posting in Paris, funding for the Collective Action Response Measures and implementing the mandatory reporting of petroleum statistics. A procurement process will be held to ensure value for money is achieved when acquiring ticketing contracts.[31]

The Explanatory Memorandum also indicates:

The Australian Government plans to purchase 400 kilotonnes of offshore tickets in the 2018-19 and 2019-20 financial years. This initial purchase of tickets is part of the first phase of Australia’s return to compliance with the IEA’s 90-day oil stockholding obligation. The ticketing contracts will be supported by government-to-government level arrangements or treaties with the host country, a requirement of the IEA.[32]

However, the Explanatory Memorandum does not state the actual likely cost of these specific planned purchases. Nor is there any indication as to how far the proposed purchases will go towards meeting the requirement for the 90-day stockholding requirement. This issue is discussed further in the ‘Key issues and provisions’ section of this Digest.

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[33]

Parliamentary Joint Committee on Human Rights

The Parliamentary Joint Committee on Human Rights had no comment on the Bill.[34]

Key issues and provisions

Legislative authority to spend funds on oil stockholding contracts

The key provision in the Bill is item 4, which inserts a new Part IVA into the Act, which will provide powers to reserve or purchase oil stocks. New section 40A (the only section in Part IVA) will provide that, for the purpose of giving effect to the International Energy Agreement, the Secretary may, on behalf of the Commonwealth, enter into a contract (including a ticketing contract) with an Australian or foreign entity for:

•       the reservation for the Commonwealth of oil stocks owned by the Australian or foreign entity or

•       the purchase of oil stocks by the Commonwealth from the Australian or foreign entity.

Proposed subsection 40A(2) provides that this does not impliedly limit the executive power of the Commonwealth to enter into agreements.

In short, this provision is designed to ensure that the requirements spelt out by the High Court in Williams v Commonwealth (No. 2) are met. In that decision, it was held that generally before the Commonwealth could spend appropriated money, specific legislation—other than an Appropriation Act—authorising such payments is required.[35] Item 4 aims to provide this legislative authority for the spending of funds on oil stockholding contracts.[36] However, there is little further detail as to the framework for purchasing oil tickets. As the Explanatory Memorandum notes ‘it is not the intention for subsection 40A(1) to regulate the terms of the commercial contracts’.[37]

The amendments proposed by the Bill do not require the Government to purchase any particular amount of oil stockholding contracts. However, as noted earlier in this Digest, the Explanatory Memorandum states that the Australian Government plans to purchase 400 kilotonnes of offshore tickets in the 2018–19 and 2019–20 financial years, as ‘part of the first phase of Australia’s return to compliance with the IEA’s 90-day oil stockholding obligation’.[38] However, there is no indication as to how far the purchase of 400 kilotonnes will go towards meeting the requirement for the 90-day stockholding requirement.

According to the Australian Petroleum Statistics for May 2017,[39] at the end of that month Australia held 4,897 kilotonnes of crude oil equivalent, representing 50 days of net imports coverage. This would suggest that 98 kilotonnes represents around one day of imports. In turn, the purchase of 400 kilotonnes would seem to represent an increase of four days to 54 days, leaving Australia still well short of the 90-day obligation. At the same time, the government is also making efforts to improve the quality and completeness of information on Australia’s fuel holdings through mandatory reporting under the Petroleum and Other Fuels Reporting Bill 2017, which may result in more accurate statistics on the status of Australia’s compliance with the IEA stockholding obligation.[40]

Nevertheless, as noted earlier in this Digest, there is no indication in the Explanatory Memorandum, nor the Minister’s second reading speech, as to the likely cost of these planned purchases, or how much it might cost to fully meet Australia’s obligation through the purchase of oil tickets. In 2015, the then Department of Industry and Science estimated that the cumulative cost of government purchase of oil tickets to cover the total compliance gap over the period to 2020 would be $2 billion.[41] Although prices may have changed since that time, this seems to be potentially a considerable expense for government, although the Minister did state in his second reading speech:

The Government is committed to ensuring it achieves value for money when it purchases tickets. Extensive engagement with the International Energy Agency and our international partners is underway to expand the ticket market to increase competitiveness.[42]

Other amendments

Extended exemption from civil proceedings

Section 46A of the Act currently provides an exemption from civil law proceedings for the Minister and his or her delegates in relation to the exercise of powers or functions under the Act (provided they are exercised reasonably and in good faith).

Items 5 and 6 of the Bill would amend section 46A to extend this exemption to the Departmental Secretary. It also extends the exemption to the Secretary’s delegate in relation to the use of powers under section 40A to enter into oil stockholding contracts.

Delegation powers

Section 49 of the Act currently provides the Minister with the power to delegate certain powers or functions under the Act to ‘a person’.

Item 7 of the Bill amends section 49 to insert a new subsection 49(6) which would enable the Secretary to delegate, in writing, the powers under proposed subsection 40A to enter into oil stockholding contracts to a Senior Executive Service (SES) employee, or acting SES employee, in the Department of the Environment and Energy. Under proposed subsection 49(7), the delegate must comply with any directions of the Secretary in exercising any powers under that delegation.

Definitions

Items 2 and 3 of the Bill amend section 3 of the Act, which contains various definitions relevant to the Act. Item 2 replaces the existing definition of ‘Agreement’ (that is, the Agreement on an International Energy Program) to add a reference to the Agreement ‘as in force from time to time’, instead of the Agreement ‘that was signed’ in 1974. The proposed definition will encompass any amendments to the treaty text, eliminating the need to amend the Act if the treaty changes. Item 2 also adds a reference the Australian Treaty Library on the AustLII website, consistent with current legislative drafting practices where legislation involves international conventions.

Item 3 inserts two new definitions, both of which refer to definitions in the Agreement. A new definition of ‘oil stocks’ will be defined to mean oil stocks under Article 1 of the Annex to the Agreement which can be credited towards Australia’s emergency reserve commitment in accordance with the Agreement. Article 1 of the Annex, provides for ‘crude oil, major products and unfinished oils’ to be counted. The Explanatory Memorandum suggests that, by referring to the definition of oil stocks in the Agreement, ‘oil stocks can be interpreted to include new types of fuels that are recognised by the IEA’, such as biofuels and hydrogen.[43]

A new definition of ‘emergency reserve commitment’ is also inserted by item 3 and is defined to have the meaning given by Article 2 of the Agreement (that is, the 90-day oil stockholding obligation).

Concluding comments

This Bill aims to give the Australian Government legislative authority to purchase oil stock and oil stock ticket contracts, in order to assist Australia to return to compliance with its IEA obligations to maintain a stockpile equivalent to 90 days’ worth of oil imports.

The Australian Government has stated that it plans an initial purchase 400 kilotonnes of offshore tickets. However, little indication has been given as to how far that purchase will go towards meeting Australia’s oil stockholding obligation, nor the likely cost of purchasing oil tickets in order to meet that obligation.

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[1].              Parliament of Australia, ‘Petroleum and Other Fuels Reporting Bill 2017 homepage’, Parliament of Australia website; and Parliament of Australia, ‘Petroleum and Other Fuels Reporting (Consequential Amendments and Transitional Provisions) Bill 2017 homepage’, Parliament of Australia website. For further information on these Bills, see A St John and S Power, Petroleum and Other Fuels Reporting Bill 2017 [and] Petroleum and Other Fuels Reporting (Consequential Amendments and Transitional Provisions) Bill 2017, Bills digest, 118, 2016–17, Parliamentary Library, Canberra, 2017.

[2].              Agreement on an International Energy Program, done in Paris on 18 November 1974, [1979] ATS 7 (entered into force for Australia on 27 May 1979).

[3].              AF Alhajji, ‘The 1973 oil embargo: its history, motives and consequences’, Oil and Gas Journal, 103(17), 2 May 2005, p. 24, ProQuest database.

[4].              International Energy Agency (IEA), ‘History’, IEA website.

[5].              Agreement on an International Energy Program, op. cit., Article 2.

[6].              Explanatory Memorandum, Liquid Fuel Emergency Amendment Bill 2017, p. 7. For further information on ‘collective action’, see the IEA, ‘How does the IEA respond to energy security emergencies?’, IEA website.

[7].              See further IEA, ‘Stockholding structure’, IEA website.

[8].              IEA, ‘Explanation of stockholding tickets’, IEA website; see also Hale & Twomey, National Energy Security Assessment (NESA) identified issues: Australia's international energy oil obligation, report prepared for the Department of Resources, Energy and Tourism (RET), Canberra, 30 July 2012, p. i.

[9].              IEA, ‘Explanation of stockholding tickets’, op. cit.; see also Explanatory Memorandum, op. cit., pp 6–7.

[10].              Department of the Environment and Energy (DEE), ‘IEA international energy program treaty’, DEE website; IEA, ‘Oil stocks: New Zealand’, IEA website.

[11].              Data source: British Petroleum (BP), BP statistical review of world energy June 2016, BP, London, June 2016.

[12].              DEE, ‘IEA international energy program treaty’, op. cit.

[13].              IEA, ‘Closing oil stock levels in days of net imports’, IEA website, 13 July 2017.

[14].              A St John, ‘Mining and resources changes’, Budget review 2013–14, Research paper series, 2012–13, Parliamentary Library, Canberra, 2013.

[15].              Australian Government, ‘Part 2: expense measures’, Budget measures: budget paper no. 2: 2016–17, p. 128.

[16].              DEE, ‘IEA international energy program treaty’, op. cit.

[17].              Parliament of Australia, ‘Petroleum and Other Fuels Reporting Bill 2017 homepage’, op. cit.; and Parliament of Australia, ‘Petroleum and Other Fuels Reporting (Consequential Amendments and Transitional Provisions) Bill 2017’, op. cit. For further information on these Bills, see St John and Power, op. cit.

[18].              Senate Standing Committee on Rural and Regional Affairs and Transport, Australia's transport energy resilience and sustainability, The Senate, Canberra, June 2015.

[19].              Ibid., pp. 62–63.

[20].              Australian Government, Australian Government response to the Senate Rural and Regional Affairs and Transport References Committee report: Australia’s transport energy resilience and sustainability, Australian Government, Canberra, November 2016.

[21].              Ibid., p. 4.

[22].              Selection of Bills Committee, Report, 7, 2017, The Senate, 22 June 2017.

[23].              Senate Scrutiny of Bills Committee, Scrutiny digest, 7, 2017, The Senate, 21 June 2017, p. 28.

[24].              Australian Trucking Association (ATA), Submission to the Senate Standing Committee on Rural and Regional Affairs and Transport, Inquiry into Australia’s transport energy resilience and sustainability, 10 November 2014, pp. 3 and 5; Australian Institute of Petroleum (AIP), Submission to the Senate Standing Committee on Rural and Regional Affairs and Transport, Inquiry into Australia’s transport energy resilience and sustainability, November 2014, p. 18.

[25].              AIP, op. cit., p. 12.

[26].              Caltex, Submission to the Senate Standing Committee on Rural and Regional Affairs and Transport, Inquiry into Australia’s transport energy resilience and sustainability, November 2014, p. 2.

[27].              NRMA, Submission to the Senate Standing Committee on Rural and Regional Affairs and Transport, Inquiry into Australia’s transport energy resilience and sustainability, 10 November 2014, p. 8.

[28].              Ibid.

[29].              DEE, ‘Mandatory reporting of petroleum statistics: public consultation’, DEE website, 28 October 2016. For further information on mandatory reporting, see St John and Power, Petroleum and Other Fuels Reporting Bill 2017, op. cit.

[30].              AAA, Submission to the DEE, Public consultation into the mandatory reporting of petroleum statistics, 28 October 2016.

[31].              Explanatory Memorandum, op. cit., p. 2.

[32].              Ibid.

[33].              The Statement of Compatibility with Human Rights can be found at pages 3–4 of the Explanatory Memorandum to the Bill.

[34].              Parliamentary Joint Committee on Human Rights, Report, 6, 2017, 20 June 2017, p. 26.

[35].              Williams v Commonwealth [No. 2] (2014) 252 CLR 416, [2014] HCA 23; see also Williams v Commonwealth [No. 1] (2012) 248 CLR 156, [2012] HCA 23.

[36].              Explanatory Memorandum, op. cit., p. 2.

[37].              Ibid., p. 7.

[38].              Ibid., p. 2.

[39].              DEE, Australian petroleum statistics, iss. 250, DEE, Canberra, May 2017, pp. 34–35.

[40].              See further St John and Power, Petroleum and Other Fuels Reporting Bill 2017, op. cit.

[41].              Department of Industry and Science, Submission to Senate Standing Committee on Rural and Regional Affairs and Transport, Inquiry into Australia’s transport energy resilience and sustainability, April 2015, p. 9.

[42].              J Frydenberg, ‘Second reading speech: Liquid Fuel Emergency Amendment Bill 2017’, House of Representatives, Debates, 15 June 2017, p. 6602.

[43].              Explanatory Memorandum, op. cit., p. 6.