Daan Franken

The Fuel Security Bill 2021 (the Bill) and the associated Fuel Security (Consequential and Transitional Provisions) Bill 2021 were introduced into the House of Representatives on 26 May 2021. In short, the Bill aims to support Australia’s fuel security by:

• creating a minimum stock holding obligation whereby industry will be required to maintain a certain level of fuel stocks and
• creating a fuel security services payment to subsidise industry to continue refining activities until 30 June 2027.

Details of the fuel security payments will be outlined further in the Ministerial Rules which are yet to be published.

Background

Liquid fuels, particularly those derived from oil, are a key source of energy for Australia’s economy. In 2018-19, oil use accounted for 39 per cent of Australia’s primary energy use, the largest contribution by a single energy source (p. 2). The transport sector accounts for 69 per cent of Australia’s liquid fuel demand, although significant quantities are also used in the mining, manufacturing, and agriculture sectors (Regulation Impact Statement, p. 5).

Production, imports, and refining

Australia is dependent on oil and refined liquid fuel imports to meet its fuel needs—this is potentially a source of energy insecurity in the case of a major disruption to these supply chains (p. 11). Australia does produce oil, the majority of which is exported, but even if all the oil produced in Australia was refined domestically it would only meet 24% of Australia’s refined fuel demand (p. 20). Although Australia’s oil production increased by 18 per cent in 2018-19, this was the first increase in domestic production for a decade (p. 3).

Australian refineries process both domestically produced and imported crude oil and other feedstocks into a range of products including major fuels such as petrol, diesel, and jet fuel. Between 2010 and 2015, the number of oil refineries in Australia reduced from seven to four. Then in October 2020, BP Australia announced that it was converting its refinery in Kwinana, Western Australia to an import terminal. This was followed by the announcement in February 2021 that the ExxonMobil refinery in Altona, Victoria would also be converting to an import terminal—leaving two active refineries in Australia.

In December 2020, the Government announced, subject to conditions, it would be supporting the remaining refineries through the provision of a minimum one cent per litre production payment which would run from 1 January 2021 until 1 July 2021. The Bill will establish a longer-term arrangement for refinery support payments following the end of the interim arrangement on 1 July 2021. The expected cost of this interim production payment was $83.5 million.

Fuel reserves and fuel security

Australia is a member of the International Energy Agency and is a signatory to the International Energy Program treaty which requires member states to hold the equivalent of 90 days net imports of oil (Agreement on an International Energy Program, Article 2). Australia has not been compliant with the treaty since March 2012. In March 2021, Australian oil stocks amounted to 65 days of net imports (p. 71). In March 2021, relative to recent consumption rates, Australian stocks amount to 33 days of consumption cover for petrol, 62 days for jet fuel, and 21 days for diesel (p. 68). Further details on these issues can be found in the Parliamentary Library’s Liquid fuel security: a quick guide.

Previously, the Australian Government has been confident that access to a diversity of supply sources provided Australia with the necessary security to meet its liquid fuel demands. For example, in its 2015 Energy White Paper, the Australian Government considered that ‘supply reliability will be maintained because of the depth, liquidity and diversity of international crude and fuel markets’ (p. 26).

In recent years, however, the Government has placed more emphasis on increasing fuel security. In addition to this Bill and the interim processing payment, the Government has allocated $200 million for expanding Australia’s diesel storage capacity, and $302 million to support refineries to upgrade their facilities to enable Australian fuel quality to be improved from 2024.

Key provisions

The two main objectives of the Fuel Security Bill 2021 are to establish requirements for refineries and importers to maintain a stockpile of fuel (the minimum stockholding obligation or MSO) and to provide payments to fuel refineries during loss-making periods to enable them to remain economically viable (the Fuel Security Service Payment or FSSP). The Bill will initially cover gasoline (petrol), diesel, and kerosene (jet fuel), but there is provision for the inclusion of other liquid fuels through Rules made by the Minister (clause 84 allows the Minister to make Rules for the purposes of the Bill by legislative instrument).

Minimum stockholding obligation (MSO)

The MSO is intended to support fuel security by requiring refiners and fuel importers to hold a minimum stock of fuel in Australia on designated obligation days that will be prescribed by the Ministerial Rules (clauses 7). The Government notes that further consultation with industry will determine the appropriate period and frequency for an obligation day (p. 22). The volume of stocks (in megalitres) to be held will be set out in a notice given to the relevant entity by the Secretary of the Department of Industry, Science, Energy and Resources (clause 15).

The MSO is triggered for an entity when the amount of liquid fuel products cross a threshold set out in the Ministerial Rules (clause 10). The MSO obligation applies to stocks held in Australia, but the relevant entities do not necessarily need to have direct ownership or custody of these stocks (clauses 21-24).

Clause 14 requires the Minister to declare a national target number of days for the MSO. In determining the target number of days, the Minister is required to consider Australia’s fuel security objectives under the Bill, obligations under the International Energy Agreement, and other relevant matters (this might include for example national security considerations).

The target number of days will be declared by the Minister via a notifiable instrument. As such, the exact target for the national stock is uncertain. The Government however notes that it anticipates that the target days for importers of liquid fuel products will relate to the average daily imports of products and the target days for the refiners of these products will relate to average daily production (pp. 31-32).

The Government has said that the Ministerial Rules will convert this national target number of days for each liquid fuel product to the actual quantities of fuel that will need to be held (p. 31). Each entity’s share of the national target will be based on its historic volumes of oil imported or refined, with full details of how this will be calculated to be outlined in the Ministerial Rules (p. 33).

Fuel security service payment (FSSP)

The FSSP provides refiners with a payment to produce eligible fuels and is intended to commence on 1 July 2021, following the end of the current refinery support package (p. 57). The amount of the FSSP will be worked out on a quarterly basis by multiplying the number of litres of fuel with the number of cents per litre prescribed by the Ministerial Rules (clause 43). The maximum rate of the subsidy will be 1.8c/litre and can be 0c/litre (subclause 43(2)).

FSSP payment must be applied for and granted by the Minister (clauses 39-40). The FSSP will be payed quarterly (clause 42) and could change based on market conditions (pp. 59-60). The Bill appropriates $2.0 billion from the Consolidated Revenue Fund for the purpose of making these payments to June 2030 (clause 58).

Many of the details regarding how the payment will be calculated are not yet finalised, as they will be based on Ministerial Rules and Guidelines (clause 43—this is outlined in more detail in the Explanatory Memorandum pp. 56-63). The calculations, however, must have regard to the ‘margin determination’ and the principle that there should be a sufficient margin between input costs and sales revenue so that refineries do not make a loss (subclause 43(5)). The Minister can be guided by various matters when calculating these margins, including the fact that refineries have a range of costs, such as operational costs, that they need to cover in order to break even (subclause 46(7)).

The ‘margin determination’ is a Ministerial determination to be made within one month of the Act commencing—it represents the likely margin between input costs and sales revenue that Australian refineries need to break-even out to June 2027 (clause 44). The determination cannot be varied or revoked prior to 30 June 2030 (subclause 44(4)).

The margin determination is designed to provide refineries with a degree of certainty regarding their financial operating environment by providing a threshold where FSSP payments would no longer be provided (p. 63). Basing Government financial obligations on forecasts of the fuel markets out to 2030 entails a degree of risk, although this risk is arguably mitigated by the 1.8c/litre cap of the FSSP rate.

The Government has stated that at a margin of $7.30 or lower per barrel of oil, refineries will receive the capped rate of 1.8c/litre, while at a margin of $10.20 per barrel of oil they will receive 0c/litre.

If a refinery is unable to continue refining until the end of its commitment period (specified in a Ministerial notice, clause 5), it may be required to pay-back some of the FSSP it has received (Division 4 of Part 3).

Stakeholder reactions

The two remaining refiners welcomed the package and indicated they would continue refining at their sites. Viva Energy Australia, operators of the Geelong refinery, described the Bill as an important structural support for the refining industry and stated that reducing the down-side risk for refineries would allow it ‘to proceed with greater confidence, as we seek to invest in the future of the Geelong site’ (p. 1). Similarly, Ampol, which operates the Lytton refinery, stated that the proposed payment would allow it ‘to progress alternative future energy uses for this strategic site, preserving manufacturing skills that will be critical for success in the energy transition’.

The Australian Automobile Association (AAA) stated that it was unclear what impact the proposed FSSP would have and suggested that an ‘integrated approach to fuel production, storage, technology transition, energy diversification, and emissions reduction’ was needed to improve fuel security in Australia.

The Government’s Regulation Impact Statement provides a summary of the consultation undertaken in relation to the proposed scheme and the general views of different stakeholder groups (RIS, pp. 28-29).

The Bill has Opposition support and passed the House of Representatives without amendments on 16 June 2021.