Role of Government in fuel security
As stated previously, the 2011 NESA concluded that Australia's liquid
fuel security will deteriorate from 2016 in the absence of a comprehensive
liquid fuel security policy.
A number of submitters held the view that, to prevent any further
deterioration, Australia should develop a liquid fuel security policy which provides
for diverse and reliable transport energy sources and increases the uptake of
This chapter considers the role of government and the growing importance of
fuel diversity as well as diversity of fuel supply.
As previously noted, Australia does not have public stocks and does not
impose a minimum stockholding requirement on oil companies operating in the
country. As submitted by the department, Australia's demand for oil supply is
met through full integration into the global market.
At the first sign of an oil disruption, market price mechanisms are allowed to
operate in order to reduce demand. That is, to allow oil price increases to
flow through to consumers. Under such circumstances, the government monitors
the effect of price increases that flow from the supply disruption on patterns
of demand without intervening in the market.
The 2011 NESA recognised energy security as comprising three
interrelated and largely mutually reinforcing dimensions – adequacy (provision
of energy), reliability (minimal disruption), and competitiveness (including
affordability and ongoing competiveness of the economy). In terms of
Australia's future energy supplies, the NESA identified several watch-points,
Australia’s declining oil refining capacity;
uncertainties surrounding coal seam gas (CSG) developments;
liquefied natural gas (LNG) developments on the east coast
causing supply shortages;
energy price pressures; and
investment uncertainty, due to the carbon tax and related
However, the 2012 Energy White Paper, which draws on the 2011 NESA,
the decline in Australia's domestic refining capacity that will
follow the Clyde and Kurnell refinery closures will not impair Australia's
liquid fuel security; and
in particular, the substitution of imports of crude oil for
imports of refined fuel as a result of the Clyde and Kurnell refinery closures
does not pose any additional risk to market security.
Furthermore, in an December 2013 issues paper for the Energy White
Paper, it was noted that:
Liquid fuel imports are sourced from a diversity of suppliers
under stable market arrangements resulting in a high degree of confidence in
Australia’s liquid fuel security.
AIP argued that the government's position was supported by a series of
reviews including NESA, Liquid Fuel Vulnerability Assessments since 2008, the
2012 Energy White Paper and more recently the 2013 House of Representatives
Standing Committee on Economics Report on Australia's oil refinery industry.
It argued that such reviews confirmed that Australia's liquid fuel supply is
highly secure, competitively priced and reliable for reasons including a
flexible, resilient and dependable supply chain. This supply chain is diverse,
encompasses secure shipping routes, a significant volume of stock on the water
owned by local companies, and entails a domestic refining capability which
provides multiple supply options and the ability to convert domestic and
imported crude oil into useable products.
According to the AIP, these reviews have also found supply to be reliable for
established and effective integration of the supply chain into
the global crude oil and petroleum product market;
domestic fuel pricing that relates directly to the global market
expert and efficient management of the supply chain by industry;
ongoing, substantial investment in new/expanding petroleum
storage and handling facilities; and
robust risk and emergency management frameworks at industry and
AIP argued in favour of a market-based approach to liquid fuel supply
and domestic infrastructure development. It noted in this regard that:
Efficient market-based signals will be the drivers for new
infrastructure investment and the development of alternative liquid fuel
supplies, and for consumer choices about how liquid fuels are used,
particularly at lowest cost for consumers.
Support for government intervention
NRMA and others made the point that Australia is now increasingly
exposed to potential supply disruption under its market-reliant policy with
potentially serious consequences for the economy and national security.
In light of this (growing) dependence and the prospect of an interrupted fuel
supply, a number of submitters argued in favour of some form of market
intervention. In this regard, TIC made the point that, while markets and
industry can address many of the issues in the energy supply chain, the issue
of supply security is a government responsibility.
Gas Energy Australia saw a need to focus on the NESA's conclusion that
Australia's liquid fuel security will deteriorate from 2016 as a result of
continued rising oil prices as well as increased import reliance combined with
decreased non-OPEC and conventional oil supplies. Gas Energy Australia noted
that these factors were expected to lead to 'greater reliance on international
supply chains and geopolitically and geologically difficult locations'.
As a first step towards addressing this problem, Gas Energy Australia suggested
that the Australian Government seek to prevent any more oil refinery closures
through industry assistance.
A number of submitters argued that a comprehensive risk assessment
should be undertaken in the first instance to inform any possible government
intervention or national policy development. Many argued that a risk assessment
should be the basis on which to develop a national transport energy plan.
AAA argued that such a review should consider the risks and implications
of current industry trends in the first instance, including Australia's growing
dependence on oil imports, on the security and diversity of Australia's fuel
mix, economic productivity and environmental outcomes.
As part of considering current trends, the review should analyse the country's
refining capacity in order to understand the implications of ongoing refinery
closures, and the loss of local capacity, on both near-term and longer-term
resilience and security.
UQ made the point that any such assessment should consider supply
disruption scenarios along the supply chain and not limit itself to the Middle
East. It suggested that the review should also examine the impact of system
interruptions in Singapore as well as at Australian ports and import terminals.
Submitters further recommended that such a review should explore options
and the feasibility of a range of risk mitigation strategies. The risk
assessment should also consider therefore:
the cost of import fuel-interruption scenarios to inform the
value of any intervention to improve supply resistance and sustainability;
the costs, benefits and timelines for the redirection of
currently exported Australian cruel oil to be refined domestically in periods
acceptable levels of emergency self-sufficiency in oil supplies
in the context of an international agreement to maintain supplies of at least
90 days and implement the most effective ways to achieve these levels;
incentives such as a transport energy security levy to maintain a
'minimum strategic' Australian refinery capacity or ramp-up capacity;
methods to ensure the sustainability of the domestic refining,
storage and distribution industry so that it can supply essential civil and
military needs in the event of a crisis.
Transport energy plan
The Queensland Government argued that, in terms of government
intervention, a national approach was required with the Australian Government
'well positioned to undertake specific actions to increase Australia's
transport energy security and diversity into the future'.
NRMA, Gas Energy Australia, AAA and others supported the development of
a comprehensive transport energy plan for Australia which would include a
strategy to improve Australia's liquid fuel security.
Submitters in favour of a national transport energy plan argued that it
should include the following:
mitigation strategies which provide for the retention of
emergency stock and an emergency fuel distribution system for periods of
methods to encourage diversification of import sources;
increased strategic reserve/stocking requirements of refined
products and the security, spread and diversity of storage sites;
strategies to provide for a secure and affordable fuel supply to
the agricultural sector to ensure Australia's food supply;
alternative transport fuels as a means of mitigating exposure to imported
fuel supply disruptions.
A number of submitters emphasised the importance of focusing on
alternative transport fuels. APA Group argued for a transport energy roadmap
which included a national approach to fuel excise across alternative fuel
classes including that of LNG, LPG, compressed natural gas (CNG) and biomass.
Towards a comprehensive policy, AGL supported a review of the barriers, along
the supply chain, to the development of alternative transport fuel projects in
The NRMA's Jamison report of 2010 revealed that, at that time, more than
30 per cent of domestic transport energy demand could be met by secure supplies
– secure from source through to delivery – through the use of biofuels, gas,
electricity and more efficient vehicles as well as domestic oil production.
It noted that the application of such technologies could reduce the country's
dependence on imported fuels by at least 30 per cent.
It suggested that with 30 per cent of transport supply secured, basic services
would be able to function in Australia in the event of a major or sustained
liquid fuel supply disruption.
Three years later, the NRMA noted that the absence of adequate policy or
incentives in this area did not bode well for fuel demand diversity.
Diverse energy sources and energy supply
According to Gas Energy Australia, when Australia joined the IEA in
1974, there were no widely available alternatives to oil-based fuels. However,
it argued that the current situation is different. It drew on the findings of the
Australian Government's 2011 Strategic Framework for Alternative Transport
Fuels which acknowledged that the emergence of a more diverse and layered
transport fuels market may improve resilience in Australia's transport sector.
The 2014 Energy Green Paper acknowledged that increasing cost
competitive domestic production of alternative fuels could diversify the
country's liquid fuel supply and strengthen fuel security.
It noted that alternative transport fuels are niche products in Australia which
supply approximately five per cent of demand.
These views were supported by a number of submitters to the inquiry, who
highlighted the increasing importance of energy diversity and energy supply
diversity for reasons including the need to reduce demand for and reliance on
imported oil, energy security and reduced risks of supply disruptions,
productivity gains for businesses and the wider economy, as well as improved
Engineers Australia highlighted that energy security required a link to
be forged between new opportunities, innovation, employment, and the
engineering profession with that of diverse fuel supplies.
As Mr Greet from Engineers Australia, explained:
You must support all types of energy and the way they are
used not only across the transport sector but in the way we generate
electricity. Once you get the diversity of fuels and energy techniques and
types, you can keep different parts of the country working. You can keep
regional Australia going through renewables and different types of energy. You
can have jobs created and Australians actually being smart in what they do,
taking advantage of a lot of these great technology advancements that are
happening in the country. The secret is diversity.
As a response to concerns regarding domestic production and Australia's
liquid fuel security, the 2014 Green Paper stated that:
Increased domestic production of cost-competitive alternative
transport fuels could strengthen Australia’s liquid fuel security by
diversifying supply. The Government considers such strengthening will only come
from alternative transport fuels that successfully integrate into the broader
transport fuel market by being secure and reliable in supply, meet requisite
fuel standards, and deliver on consumer needs.
According to evidence before the committee, Australian-produced gaseous
fuels offer the best prospect of improving Australia's liquid fuel security. A
recent BREE study concluded that gaseous fuels offer the lowest production
costs now and into the future, remain cost competitive and have lower cost
renewable technologies out to 2050.
BREE's Energy in Australia 2014 report stated that renewable energy consumption
rose by 12 per cent in 2012–13, with growth in all renewable energy sources
except for biogas and biofuels.
Coal-to-liquids (CTL) technology was also highlighted as a viable
prospect as it can convert the low-grade portion of Australia's coal reserves.
According to the Australian Coal to Liquids Association:
The CTL solution can fill all of the gap from our
conventional oil production, is not constrained by biological inputs, can
produce the entire range of fuels and chemicals needed with supply security
enhanced by plans distributed around the country. It will back out
approximately $40 billion of annual fuel imports.
Mobile LNG made the point that there is an opportunity to improve the
energy resilience and security of Australia by using domestic LNG for domestic
Furthermore, Qantas argued that the commercialisation of a financially and
environmentally sustainable advanced aviation biofuel would make an important
contribution to the long-term sustainability of Australia's aviation industry.
It noted in this regard that:
The development of an aviation biofuel industry would go some
way toward reversing the decline in Australian refining capacity, maintain
highly skilled jobs and support energy security by creating diversity of supply
in reducing reliance on imported crude oil and finished product.
Energy Supply Association of Australia (ESSA) argued that while
Australia's heavy reliance on liquid fuelled internal combustion engines is
likely to continue in the short to medium term, over the longer term, a shift
to electric vehicles (EV) or natural gas vehicles (NGV) could reduce reliance
on imported fuels and thereby improve Australia's fuel security. It noted in
this regard that:
Significant advances in technology have created a new
generation of EVs and NGVs that have the potential to surpass traditional
petrol and diesel engine vehicles on performance, safety, design and running
The main alternatives to petrol and diesel for motor vehicles in
Australia are LPG and biofuels (ethanol and biodiesel).
Unlike petrol and diesel which are made from non-renewable resources like crude
oil, biofuels are derived from renewable materials such as vegetable and animal
products. The main types of biofuels used as transport fuels in Australia are
ethanol and biodiesel.
Mr Adam Pegg, Head of Environmental Development at APA Group informed the
committee that natural gas in transport was a mature technology. He continued:
It has many applications—road, rail and sea, and mining
applications as well. It has long-term potential cost and environmental
benefits. We have a very large gas resource. We have a very sophisticated
pipeline and gas network through the country that can form the basis for
infrastructure to support natural gas vehicles. And under the right market
conditions there is an appetite for the private sector to invest in this area.
So, in closing, we think gas in transportation should compete on a level
playing field. We think that there are potential government incentives for
market failure, such as security of supply.
Liquefied Petroleum Gas
Liquefied petroleum gas (LPG) is a by-product of natural gas and crude
oil refining. It is the most widely used alternative transport fuel in
LPG enjoys approximately three per cent market share of transport energy
use, mainly in light vehicles.
It fuels almost 500,000 mostly privately owned vehicles and is the predominant
fuel used by the taxi industry, fleet as well as trade vehicles.
Australia is not only completely self-sufficient in LPG but is also a
net exporter of it with net exports equating to around 41 per cent of total
production in 2010–11.
In 2013, Australia produced 2,317 kilotonnes of LPG, satisfying a local demand
of 1,539 kilotonnes while exporting 815 kilotonnes.
While it was acknowledged that self-sufficiency or adequacy alone does
not guarantee energy security, Gas Energy Australia emphasised the extent of
Australia's LPG industry. It includes seven natural gas processing plants, nine
coastal terminals, 170 regional depots, 1000 local small business distributors.
Of the approximate 6400 service stations across Australia, 4300 sell at least
one alternative transport fuel with LPG the largest network with over 3700
Autogas refuelling stations across the country.
The 2012 Energy White Paper estimated that Australia's vast natural gas
reserves were equivalent to 184 years of supply at current production rates.
Currently, 81 per cent of LPG produced in Australia is derived from processing
natural gas from these reserves.
Gas Energy Australia concluded that substituting just 30 per cent of
Australia's near total dependency on imported fuel would not only deliver
improved fuel security but also retain local engineering skills and reduce
carbon and other emissions. Moreover, it estimated that every 10 per cent
substitution of imported diesel by Australian gaseous fuels saves $870 million in
Compressed Natural Gas and
Liquefied Natural Gas
Natural gas can be used as a fuel for vehicles when liquefied (LNG) or
compressed (CNG). According to the APA Group, when used as a substitute for
diesel fuel in transport applications, natural gas produces approximately 30
per cent less full lifecycle emissions and can be up to 50 per cent cheaper
than imported diesel fuel on an equivalent per litre basis.
In terms of costs, according to Gas Energy Australia, every 10 per cent of
imported diesel substituted by natural gas fuels and LPG would save import
costs of approximately $80 million per year.
Mr Michael Carmody, CEO of Gas Energy Australia continued:
Greater use of gas-powered vehicles is a low-cost way to
improve Australia's fuel security, and there is both plentiful supply and, at
least in regard to LPG, substantial infrastructure in place.
According to Mobile LNG, LNG offers a fuel alternative to diesel which
has shown to provide fuel cost savings, improved operational efficiencies and
to deliver significant environmental benefits.
It argued that the wider use of Australia's own LNG within its own economy
would put the country on the same path as the advances being made by leading
international economies including that of China and the United States. It
Each of these nations has implemented natural gas/LNG fuel
use policy to displace diesel fuels towards an improved socio-economic outlook
that is delivered with the associated benefits of significant environmental
Mobile LNG suggested that the correct policy settings would remedy
current supply issues and provide a catalyst for greater use of Australia's own
abundant supply of natural gas and LNG through the economy.
Instead, Australia continues to import expensive diesel/petroleum products
while maintaining policies for a diesel/petroleum dependent economy and
exporting the economic advantages of its own natural gas away in LNG form to the
benefit of other countries.
Mobile LNG argued that, by using Australia's own resources and technology, the
development of LNG facilities would provide for energy security by improving
energy self-sufficiency for the country with local low-priced fuel supplies.
Challenges and targets
Australia has rich resources available for the production of
conventional and advanced biofuels and the biofuel industry is one of the
fastest growing globally, predicted to move towards eight per cent of the
global transport requirement. However, according to BAA, the lack of a clear
policy framework to encourage its development has stifled the industry.
As a case in point, NRMA stated that over 62 countries have mandated biofuel
use as part of their energy security policy while in Australia, only NSW has a
mandate but said that it is 'weak and constantly undermined'.
Various submitters saw the challenges to the industry as including lack
of investor confidence and lack of incentives to help create demand for
alternative fuels, difficulties associated with breaking into an entrenched
fuel market, regulatory and taxation issues coupled with the absence of a
strong and consistent market signal from government.
As a case in point, the absence of regulatory harmonisation across states and
territories has made the prospect of driving an LPG truck from one end of the
country to another extremely difficult.
ESAA made the point that better utilisation of existing gas and electricity
infrastructure through alternative-fuel vehicles such as plug-in electric and
natural gas powered vehicles was required.
BAA informed the committee that six (federal and state) policy changes
over the past five years, reductions in industry support including the removal
of the Ethanol Producers Grant and Cleaner Fuels Scheme and plans to impose
excise on biodiesel from 2016 have contributed to destabilising investor
confidence. It suggested that policy changes appeared to work against the
stated aims of the government to increase the diversity and security of fuels
on offer in Australia.
BAA argued that the industry needed strong signals from government to
demonstrate its commitment to growing renewable fuels in Australia. To this
end, it suggested that the government set a target that two billion litres of
liquid transport fuels be produced from renewable sources by 2025.
This target would represent about five per cent of the total volume of liquid
fuels used for transport in today's terms.
A similar proposition from NRMA that the government set a target for
alternative sources was supported by Gas Energy Australia.
NRMA recommended that the Australian Government work towards securing 30 per
cent of Australia's transport energy from alternative sources by 2030.
Mobile LNG argued that the greater use of LNG could be expedited by
government if it were to offer to industry an accelerated depreciation schedule
or similar taxation concession or inducement, on the new capital expenditure
investments and on the new training costs that would be needed to make for the
transition from diesel use to Australia's own LNG.
However, in direct contrast, while AIP acknowledged that alternative
fuels can play a role in a diversified transport fuels mix, it suggested that
competitive market behaviour should determine that role – whereby the market
will transition to other fuel types when they are economic.
Similarly, while BP Australia supported the market-led development of
alternative fuels, it favoured an approach whereby any government assistance to
these fuels would be transitional and gradually phased in so as to encourage
their commercialisation and competitiveness. It noted in this regard that:
Any national intervention to mandate biofuels under the guise
of 'energy security' is misplaced and should be rejected.
Viva Energy Australia suggested that any decision to promote alternative
liquid fuels should be based on sound science and be subjected to rigorous cost
benefit analysis. It further noted that alternative fuels can have the
unintended consequence of adding complexity and cost to the supply chain,
thereby reducing supply security.
Air Vice Marshal Blackburn (Retired) argued that disruptions and related
incidents highlighted the fact that fuel companies have no responsibility to
meet any nominated storage level as their focus is on just-in-time, minimum
cost fuel delivery rather than fuel security in the broader sense.
That secure system is a government job. So in Australia where
the government does not mandate any minimum level of stock, unlike so many
other regional and global countries, the fuel companies do what makes sense –
just in time, keep the cost down...The issue is that we are the only fuel
exporting developed country in the world that does not mandate something.
Mr John Ryan, Associate Secretary of the department, clarified that it
was the role of government to assess, from a national viewpoint, what risks may
occur and how they can be mitigated.
The department further noted that such assessments have 'consistently shown
that global markets would continue to supply Australia's requirement during
supply disruptions albeit at higher prices'.
However, fuel shortages such as that referred to in Perth and at Melbourne
Airport indicate possible failings in achieving this objective.
As AIP noted, the goal and core business of each fuel company is to 'safely
and reliably supply high-quality fuel to users who want it when they need it'.
It is not, therefore, the role of these commercial companies to ensure that
Australia has adequate reserves. That is a matter for government.
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