Chapter 4 Energy security
Energy security is a crucial element of Australia’s economic and social
wellbeing. In relation to liquid oil supplies, recent and planned closures of
domestic oil refineries will leave Australia with five refineries by mid-2014.
Concerns have been raised that further closures which reduce Australia’s
domestic refinery capacity could potentially impact on domestic energy security.
It has been suggested that greater reliance on imports may leave Australia
vulnerable to international supply disruptions.
Australia is not currently complying with its obligation, as an International
Energy Agency (IEA) member country and net oil importer, to maintain 90 days of
oil stockholdings. It has been argued that
non-compliance could affect Australia’s ability to access international
stockholdings in the event of a large-scale global supply disruption. The
Australian Government is currently considering options to address Australia’s
non-compliance with the 90 day stockholding obligation.
In its Energy White Paper 2012 (EWP), the Australian Government
concluded that Australia’s energy system is meeting national needs and ‘is
expected to do so into the future’. It is anticipated that
the current market arrangements, import supply diversity, and emergency
management strategies will serve to address Australia’s liquid fuel needs.
Energy White Paper
Australia’s energy security outlook has been described as ‘generally
positive’, with Australia’s energy system ‘meeting the economic and social
needs of Australians, and is expected to do so into the future’.
In the EWP, liquid fuel energy security is assessed as ‘high, trending
to moderate in the long-term, as Australia has continued access to adequate and
reliable supplies of liquid fuels at prices that are manageable within the
The Australian Government defines energy security as:
... the adequate, reliable and competitive supply of energy
and energy services to support the nation’s economic and social development,
- adequacy is the
provision of sufficient energy to support economic and social activity
- reliability is the
provision of energy with minimal disruptions to supply
- competitiveness is
the provision of energy at an affordable price that does not adversely affect
the competitiveness of the economy and that supports continued investment in
the energy sector (RET 2011a).
The EWP classified the levels of energy security as follows:
Australia’s economic and social needs;
- Moderate—needs are
being met but there could be a number of emerging issues that will need to be
addressed to maintain that security level; and
- Low—needs are not
being met, or might not be met.
In the EWP, the Australian Government argued that:
Australia’s abundant reserves of energy resources underpin
our energy security, but maintaining a high level of security also depends on
our integration into diversified supply chains, access to well-functioning
global energy markets and continued effective responses to market and
According to the EWP, a range of factors play a role in determining
short, medium and long-term energy security:
- the ability to bring
our energy resources to market efficiently and sustainably
- domestic and global
geopolitical and economic conditions that influence energy supply and demand,
as well as key inputs for system development such as investment capital
- the efficiency,
robustness and resilience of our energy infrastructure, markets, and market
- the degree of
integration with international energy markets and supply chains
- changes in domestic
and global energy prices.
The EWP outlined four issues warranting consideration in addressing
energy security policy challenges:
- managing risk and
- adjusting to changing
- managing our
international liquid fuels stockholding obligation; and
- providing a resilient
energy security response.
The EWP sets out a strategic policy framework to address Australia’s
immediate energy priorities and position Australia for longer-term change,
including managing the country’s energy security.
In addition to allowing market forces to operate effectively, a country
must have strategies in place to respond to emergency situations. In
particular, when reliant on imports, a country must have plans to address and
minimise the negative impacts of supply disruptions.
Governments have an important role to play in implementing strategies
for energy security. In particular, when seeking to address non-market threats
to energy security. The EWP outlined that the Australian Government’s energy
policy framework is designed to improve Australia’s energy security through:
- continuing supply-
and demand-side market reforms to maximise investment and improve the
flexibility and resilience of energy markets
- encouraging diversity
of supply and infrastructure reliability for supply chain resilience
- attracting the
necessary capital investment and skilled labour to meet future energy demand
- promoting long-term
investment certainty through carbon pricing.
The strategy for strengthening Australia’s energy policy framework will
include undertaking a two-yearly National Energy Security Assessment from 2014,
and reviewing the assessment framework to provide a more systemic assessment of
National Energy Security Assessment
The 2011 National Energy Security Assessment (NESA) contributed
to the development of the Australian Government’s EWP. The 2011 NESA considered
factors posing challenges to the adequate, reliable and competitive delivery of
energy in Australia’s liquid fuel, natural gas and electricity sectors. The
- Australia’s growing
reliance on oil importation;
- the gas sector’s
rapidly evolving unconventional gas resources and liquefied natural gas (LNG)
markets on the east coast; and
- the investment
environment in the electricity sector, particularly in the context of
low-carbon and renewable energy policies.
The 2011 NESA, an update of the 2009 assessment, made the following key
findings in relation to energy security:
- Australia’s overall
energy security situation is expected to remain adequate and reliable;
- Investment in energy
infrastructure in the coming decades will largely determine the level of future
energy security; and
- A number of other
emerging issues could also have implications for maintaining Australia’s medium
to long-term security, including the transition to reducing greenhouse gas
emissions, emerging gas market developments and energy price pressures.
In relation to Australia’s liquid fuel security, the 2011 NESA found:
Australia’s liquid fuels energy security is assessed as high
trending to moderate in the long term, as we have continued access to
highly adequate and reliable supplies of liquid fuels at price levels that are
manageable within the broader economy.
The moderate assessment rating in the long term recognises a
likely trend of high crude oil prices driven by increasing global demand and an
increased reliance on more expensive sources of supply; the significant global
investment challenge required to meet rising demand; and the continued risks of
geopolitical uncertainty in key oil-producing countries.
Table 4.1 2011 NESA summary of liquid fuel security
Government, National Energy Security Assessment, December 2011, Table 2.1, p.
The Department of Resources, Energy and Tourism (RET) also released two
NESA identified issues reports in November 2012. The National Energy
Security Assessment (NESA) Identified Issues: Competitive Pressures on Domestic
Refining report (NESA Competitive Pressures report) considered the energy
security implications of having less refineries operating in Australia. RET commissioned
the energy consulting company Hale and Twomey to assess the potential
implications of hypothetical closures of Clyde, Kurnell and Lytton refineries,
and then of all domestic refineries.
It was emphasised that the scenario depicting closures of all refineries
was hypothetical, and that the current closures do not mean all refiners will
make similar decisions.
The NESA Competitive Pressures report found in relation to supply security
that in the event of further refinery rationalisation in Australia:
Supply chain diversity and flexibility is retained which
provides continued security of supply. Only in the unlikely scenario of no
refining sector coupled with a failure of physical oil markets does Australia
lose the flexibility to redirect and refine some crude oil.
The NESA Identified Issues: Strait of Hormuz report is an
economic assessment of a disruption to shipping in the Strait of Hormuz on the
Australian economy. The Strait of Hormuz links the Persian Gulf with the
Arabian Sea and Indian Ocean.
RET explained that the report involved a scenario, and was not
commenting on ‘the probability or otherwise of those particular events
happening’, but to illustrate how supply chains might operate following a
supply disruption in the strait. The report concluded
… there would be no impact on supply to world refineries due
to three points: surge production from countries outside the Middle East, the
ability of the industry to initially draw on oil stocks built up in the period
prior to the event and stocks on water that would already be on water once the
event occurred, and stocks released under policy measures such as the IEA
collective action. The report, which was an economic focused report, found that
there would be an impact on Australian GDP of around $500 million. It found
that there would be some impacts on the price of oil as well. But, importantly,
it found that there would be no impact on the supply to oil refineries because
of those three factors.
Liquid fuels vulnerability assessment
The Australian Government undertakes periodic reviews of Australia’s
vulnerability to interruptions to oil supplies. The 2011 Liquid Fuels
Vulnerability Assessment (LFVA) is the most recent review. It concluded
that ‘despite growing dependence on imported sources of crude oil and refined
petroleum products, adequacy is likely to be maintained to 2020’, and
‘potentially to 2035 according to the latest IEA World Energy Outlook’.
Other key 2011 LFVA findings included:
- 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.
- 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.
Australia’s energy security outlook
RET noted that while Australia is a net energy exporter, in the area of
liquid fuels Australia is an importer.
The Australian Institute of Petroleum (AIP) publication Downstream
Petroleum 2011 described Australia as enjoying a ‘high level of liquid fuel
security’, which is ‘not expected to change in the coming years’.
It attributed the strength of Australia’s position to:
- a diversity of supply
sources for crude oil and petroleum products, including from both domestic and
- flexible, resilient
and reliable supply chains (including shipping lanes and infrastructure)
- an efficient domestic
refining capability providing multiple supply options and the ability to
convert domestic crude oil into useable products
- imported petroleum
products providing a diversity of potential supply sources in the event of
- supply and storage
infrastructure able to meet current and future growth in fuel demand
- a strong record of
efficient and reliable supply and supply chain management by industry. 
The AIP agreed with the EWP position that Australia’s energy security
outlook appears ‘positive and robust’. It also recognised that there are
challenges that the petroleum market and wider energy sector must face.
The AIP also agreed with the 2011 NESA findings about the security of
AIP concurs with the ‘highly secure’ rating for liquid fuels
and the industry expects this performance to continue for the foreseeable
- There has been no
change to the security rating for liquid fuels since the last NESA update in 2008,
despite the challenging international market conditions for crude oil and
petroleum products and other domestic market developments.
- The fuel security and
supply reliability provided by the downstream petroleum industry has also been
superior to other domestic energy sectors (eg. electricity and gas), reflecting
the diversity of alternative liquid fuel supply sources available to Australia
in the event of a supply disruption and the efficient integration of Australia
into the regional petroleum market and reliable international supply chains.
- The more moderate
security ratings across all energy sectors for the longer term to 2030, simply
reflects the normal market uncertainties and unknowns over such an extended
time period and the ongoing competitive pressures on the industry.
AIP also supports the main high level conclusions from the
- Australia has secure
liquid fuels supplies and diverse domestic and international supply sources and
this is expected to continue, particularly given the outlook for excess supply
capacity in the Asian region.
- Australia’s growing
dependency on crude oil and product imports will have limited affordability,
reliability and supply security implications for liquid fuels, and this
includes in the context of the Clyde refinery conversion in 2013.
- The industry’s
investment in infrastructure and stockholdings has kept pace with increasing
liquid fuels consumption since the last NESA update.
Some submitters expressed concern about Australia’s decreasing domestic
oil refinery capacity coupled with the increasing reliance on imports of
refined petroleum product and crude oil.
The Australian Manufacturing Workers’ Union (AMWU) outlined the
following ‘risks associated with greater dependence on imports’:
- the potential for upward
pressure on raw materials and suppliers resulting in higher prices flowing
through the supply chain;
- less interaction with
customers and feedback thus less capacity to adapt quickly to product
requirements – there remains a shortfall in Asia of refineries that meet
Australian specifications; and ...
- the concentration of
risk of supply disruption in regions subject to natural and geo-political
shocks and upheavals.
NRMA noted that Australia’s geography puts the country at the end of a
‘long supply chain’ that could be vulnerable to changes in the regional
security environment. The Australian Workers’
Union (AWU) raised concerns about relying on imports from areas of geopolitical
instability, such as the Middle East.
However, other submitters endorsed the NESA findings that Australia’s
liquid fuel security is assessed as ‘high trending to moderate’ in the longer-term.
Submitters, such as Caltex, argued that the trend towards greater reliance on
imports does not reduce Australia’s liquid fuel security.
To refine, Australia must import a significant proportion of its crude
oil. Caltex noted that Australia already imports over 80 per cent of crude
oil and other refinery feedstock. It argued that:
To suggest that recent refinery closures imperils our energy
security is to miss the point that most of the crude oil previously refined in
the domestic market already comes from overseas.
Caltex acknowledged that crude oil issues are affecting Australian
Crude oil is becoming more
expensive. Crude oil is our source of energy in refining, and our refineries
are relatively inefficient. So, from an energy perspective, the cost of running
our refineries is more expensive and we are having to source crude from further
and further away. More than 40 per cent of Caltex's crude came from West Africa
last year. That means we have got a lot more ships on the water and the funding
of that crude supply chain has become more difficult. So there are a range of
things on the crude side that are working against us.
The Business Council of Australia stated that:
... from an energy security perspective, we should be
indifferent between the source (whether domestic or international) of the
products, so long as our supply is secure and we have access to those products at
the most affordable prices.
In response to questioning from the committee on whether importing
refined oil posed a higher security risk than reliance on imported crude oil,
RET argued that substituting imports of crude oil for imports of refined oil ‘did
not impose a significant increased risk’.
Impact of refinery closures
While some submitters argued that a declining domestic refinery capacity
could compromise Australia’s liquid fuel supply security, key stakeholders and
energy security assessments found that these changes did not significantly
compromise Australia’s energy security.
RET maintained that the Australian Government does not see
rationalisation of the refining industry as an energy security issue.
Similarly, the 2011 LFVA concluded that:
Overall, on the basis of analysis conducted for the
preparation of this report, ACIL Tasman found that recent market developments
have not resulted in a significant change in Australia’s liquid fuels
vulnerability since the 2008 review, from the perspective of adequacy,
reliability or affordability. Adequacy in terms of suppliers being able to keep
up with demand has generally been maintained. This situation is likely to
continue to be the case, despite the planned closure of Shell's refinery at
Clyde in Sydney.
The EWP acknowledged that the closures of the Clyde and Kurnell
refineries would see a reduction in Australia’s domestic refinery capacity.
However, it concluded that this decline ‘is not considered to impair
Australia’s liquid fuel security’.
Similarly, RET stated:
The closures will occur over a phased period, and will be
complemented by an expansion of import terminal capacity to ensure that market
supply is maintained. Substituting imports of crude oil for imports of refined
fuel at this scale does not pose any additional risk to market security.
Mobil Oil supported the position in the EWP that ‘Australia does not
face an increased long-term energy supply security risk as a consequence of the
recent and planned domestic refinery closures’.
Mobil Oil contended:
The Australian petroleum industry has adequate fuel supply
infrastructure and robust supply chain processes in place to ensure that it can
continue to reliably meet local fuel demands, as it has done over many decades.
The closure of a further one or more local refineries should not, of itself,
pose a threat to reliable domestic fuel supply in the long-term.
Shell Australia countered the concern raised about increased reliance on
refined oil imports, asserting that:
Claims that a demise in local refining would lead to reduced
supply security ignores the reality that the majority of local refineries
already rely on a large percentage of imported crude oil and that Shell’s
interests as a key supplier of fuels in Australia, is to ensure supply for our
customers and as far as practicable to maximize income from our sales and
Shell Australia stressed that commercial considerations are key when
deciding to continue or cease refinery operations. It argued:
Keeping refineries open on the basis that they are perceived
to be providing a higher level of supply security is flawed in its logic as a
model of planned and structured importing can actually provide an equivalent or
higher level of supply security than an unreliable small-scale refinery.
Similarly, Mr Velins commented that it was ‘not evident that closure of
one more or one less refinery can have a material effect upon Australia’s
energy security, for market forces will determine that outcome’.
The EWP argued that Australia’s ‘liquid fuel security is expected to
remain high because of our access to reliable, mature and highly diversified
international liquid fuel supply chains’.
BP agreed that reliable supply networks are at the core of supply
security, stating that:
Ultimately it is less relevant, in BP’s experience, whether
the imports are crude oil or refined products. Geopolitical concerns and
disruptions to shipping routes are raised from time to time and in around 100
years of peacetime importation of both crude and refined product into the
Australian market, BP has not experienced a significantly concerning supply
disruption that would warrant overt market intervention.
Shell Australia argued that converting facilities from refineries to
terminal mode will ‘provide an equivalent or better level of supply security
for the NSW marketplace as we will not be required to source products at late
notice during periods of unplanned refinery shutdowns’.
RET acknowledged that having a domestic capacity to refine domestic
crude could serve as ‘an option of last resort if a complete market failure
occurs from a severe global oil disruption’. However, RET also contended that
the probability of such an event was low, based on the experience of recent
While maintaining that the recent and planned closures would not have a
detrimental effect on Australia’s medium to long-term energy security, groups
recognised that there is still a need for domestic oil refining capacity in
Mobil Oil also argued that ‘some level of domestic refining capacity is
highly desirable to provide additional flexibility to cope with the short term
product supply interruptions or imbalances with can occur’.
It endorsed the LFVA’s findings that the continuing presence of domestic
refineries would contribute to Australia’s ongoing energy security by
increasing supply options.
The EWP supported continuing to have some domestic oil refining capacity
in Australia. It argued that:
While there is the prospect of some further reduction in
Australia’s refining capacity, the underlying competitiveness of most
Australian operations, along with the strategic advantages that some in-country
refining presence offers, suggests that the prospect of a severely reduced or
no refining capacity in Australia over the next decade is very remote.
However, the EWP qualified these comments and asserted that:
… the extent to which a domestic refining presence is
considered critical from a security perspective must also be considered in
conjunction with the cost of maintaining such capacity, supply flexibility, and
the security benefits of global trade. Global trade provides energy security
through the diversity of source countries, multiple import points and ample
terminal infrastructure at major demand centres.
At the roundtable hearing, RET commented that it was not aware that the
government had formed a view on what an optimum or minimum level of domestic
refining capacity might, or should, be.
The committee heard Australian refinery flexibility has contracted in
the last decade in relation to the range of crude oils that can be effectively
refined. The introduction of new product quality specifications has played a
large part in reducing domestic capabilities.
Shell contended that having domestic refining capacity did not mean that
these facilities are an effective match for Australia’s crude oil. It stated:
I think it is also worth knowing that there are lots of
practical issues associated with what crude oil goes into what refineries.
Whilst on paper you can say Australia has crude oil and we have refineries and
the two might match, they probably do not. Most of the crudes that get produced
from the North West Shelf are actually condensates; they are very light crude
oils and they do not suit the hardware that is in the refineries in Australia.
Certainly at an economic level they are better suited to going to Asia, which
is why the trade flows go that way. In the event that we would process them,
and only then, I doubt that we would meet consistently the Australian product
quality specifications, because the refineries simply were not designed for
those crude oils.
Similarly, the AIP noted the joint study by the National Oil Supplies
Emergency Committee and the Fuel Standards Consultative Committee, which found
that Australia’s crude oil was either too light or too heavy to be effectively
used in the Australian refining system. The study also found that diverting
domestic crude production into the Australian refining system only provided a
‘fairly marginal’ increase in production.
Transport fuel needs
RET noted that the transport sector is the ‘largest final consumer of
liquid fuels’, consuming about three-quarters of Australia’s fuel use.
Concerns were raised in relation to the transportation industry and the
security of transport fuels. The NRMA submitted that Australia has ‘three
weeks’ worth of transport fuels held by industry in refineries and within the
distribution network with a further two weeks on route by sea’.
It contended that the closures of the Clyde and Kurnell refineries would impact
on domestic refining capacity.
However, the AIP argued that ‘Australia’s longer-term liquid fuel supply security and
transport energy needs will best be met through the market and market measures’.
The AIP claimed that the necessary market conditions ‘largely exist now for the
liquid fuels market’.
One approach to address the issue of high liquid fuel demand is to
continue to develop alternative fuel sources. This is one of the key areas of
action identified in the EWP. The Australian Government is currently pursuing a
market-led approach to the development and deployment of alternative transport
Alternative fuels, primarily liquefied petroleum gas (LPG), currently
accounts for approximately five per cent of fuel use in the broader transport
sector. The EWP indicated that
while ‘oil will remain the main energy source for the transport sector to 2035,
there will be increasing take-up of alternative transport fuels’.
This will also be accompanied by technological developments, including more
energy efficient transportation.
The EWP anticipates that rising oil prices will spur developments in
indigenous alternative fuels and market opportunities will emerge for gaseous
transport fuels, such as LNG and compressed natural gas.
The EWP noted CSIRO predictions of a transformation of Australia’s transport
energy sector, which would see:
By 2050 there will be significant growth in transport fuels
and technologies that have little or no presence in the market today ...
Biodiesel could contribute around 13% of total transport fuel consumption,
natural gas 12%, bio-derived jet fuel 8%, electricity for transport 5%, and
synthetic diesels 2%.
The Australian Government’s Strategic Framework for Alternative Fuels
establishes a long-term strategic policy approach for developing
alternative fuels in the context of maintaining transport fuel security and
achieving a lower carbon economy. This includes providing grants and reviewing
tax arrangements for gaseous fuels.
RET noted that the Australia Government provides tax concessions by
taxing gaseous fuels (LPG, CNG and LNG) on an energy content basis, and a 50
per cent discount, with rates to be phased in over the period to 1 July 2015.
Shell saw a role for government in maintaining energy security for
transport fuels, by providing a level playing field for competing transport
fuels, and ‘ensuring research and development settings are appropriate and
encourage the commercial development of transport fuels’.
However, RET emphasised that developments must be market-led, and noted
that the Australian Government does not support mandates for alternative fuels,
as ‘it may reduce energy security where there is lack of adequate supply
The EWP outlined how ‘well-functioning and competitive markets supported
by effective policy and regulation underpin our ongoing energy security’.
It identified occasions of oil disruptions, such as in 2011 with the Libyan oil
disruption and nuclear plant shutdown in Japan, where market forces played an
important role in addressing energy needs.
RET argued that market forces are crucial to ensuring Australia’s energy
security. It submitted that ‘efficient, transparent and open domestic, regional
and global markets that create clear incentives for timely investment and
efficient operation and end use are the best means for ensuring Australian’s
energy security at the least cost to consumers’.
While acknowledging the challenges the industry is facing, the AIP
agreed that ‘the market, and a market based policy framework by Government,
remains best placed to manage these challenges and future risks ‘.
The AIP maintained that:
Australia’s market based approach has delivered secure,
reliable and affordable fuel supplies which meet the operational requirements
of consumers and major fuel users and this position is not expected to change
in the coming years.
Regional surpluses, particularly in Asia, will play a role in Australia
being able to access supply of crude oil and petroleum products to meet
domestic energy needs.
RET noted that while the significant surplus in regional refining
capacity over the medium term places competitive pressure on Australia
refineries, it also provides ‘substantial supply alternatives for Australia, as
well as acting as a buffer against unexpected demand or supply shocks’.
RET also presented relevant findings of the June 2012 NESA Competitive
Pressures report that stated:
Refinery closures in Australia would have no significant
impact on the wider Asian system as higher demand in Australia and the region
for diesel and jet fuel in particular is easily absorbed within spare capacity.
While the petrol market is more fractured, the Asian system would adjust to
meet additional demand from an orderly refinery closure.
The NESA Competitive Pressures report suggested that market participants
are usually aware in advance of potential refinery closures, for example, with
the possible closure of Clyde foreshadowed for over a decade.
Disruptions in the supply chain
The 2011 NESA included modelling of supply chain disruptions, and was
designed to test Australia’s resilience to various hypothetical situations. Recognising
Australia’s reliance on liquid fuel imports, one of the scenarios involved a
disruption to the Singapore supply chain for refined petroleum products, the
main importing source for these products.
The modelling ‘demonstrated that the global market and international
supply chain could provide Australia with adequate and reliable supplies,
albeit at higher prices’. The 2011 NESA found
An immediate interruption to the Singaporean supply chain is
estimated to increase global product prices by around 18 per cent on average in
the first month, while prices decline somewhat from this spike in the second
and third months. The main impact on Australia’s energy security would be on
competitiveness. Adequacy and reliability would be maintained through
alternative supplies available due to excess regional and global refining
capacity, access to stocks in Australia and those already on water, and the
ability to acquire petroleum products from the Asia–Pacific that would normally
be sold to other regions.
Some groups expressed concern about the modelling used in the NESA and
LFVA assessments of the impact of a shutdown of Singapore’s major refinery.
The NRMA contended that the NESA ‘perhaps do not encompass the full range of
The Construction, Forestry, Mining and Energy Union saw the scenario
analyses as limited, and suggested that in dealing with risks, ‘we should make
sure that all bases are covered in all the different scenarios’.
However, a number of submitters endorsed the findings of the EWP, 2011
NESA and LFVA. The AIP asserted that its assessment is consistent with these analyses
of liquid fuel security, stating that:
NESA and its supporting analysis contained in the LFVA are
comprehensive and timely assessments, underpinned by detailed independent
analysis and modelling and drawing from authoritative sources.
When outlining the scope of the NESA and EWP, RET explained that the
policy principle in the EWP was:
… not about eliminating risk altogether through implementing
prescriptive and potentially costly policies. Rather, it is about a more
effective and less costly approach to ensure predictable, resilient policy
frameworks that can work with efficient markets and robust institutional arrangements.
So it is not about eliminating risk altogether; it is about providing resilient
The AIP concluded that:
… Australia has a robust ‘Emergency Response’ framework and
emergency management plans for liquid fuels which are consistent with
Australian market characteristics, utilise established and tested industry
commercial practices, and adopt those best practice IEA practices that will be
effective in our specific market circumstances.
In the discussion on managing risk factors, the EWP argued:
While one approach to managing risk is to ‘design for the
worst’, experience in energy markets over the past 50 years suggests that this
would be very costly and largely unnecessary.
Most energy security events, if they emerge at all, are
likely to develop over time. Rather than implementing prescriptive and
potentially costly policies in an attempt to eliminate risk, a more effective
and less costly approach is to ensure predictable, resilient policy frameworks,
efficient markets and robust institutional arrangements that allow us to look
ahead and to respond quickly if we need to. Apart from the highly
exceptional circumstances that could arise from major unforeseen national,
regional or global security events, the Australian Government believes that the
practical set of energy security developments considered possible in the
foreseeable future can be managed effectively using existing energy security
mechanisms and market responses.
A recurring theme in evidence to the committee was that self-sufficiency
does not necessarily equate to energy security, and may not be an appropriate
or practical goal in the Australian context. The 2011 NESA acknowledged that:
Australia’s lack of self-sufficiency in liquid fuels means
that Australia, like many other advanced and developing countries, is
intrinsically linked to the global market. Australia’s liquid fuel security is,
therefore, substantially dependent on global market outcomes and the global oil
However, the 2011 NESA concluded that ‘this lack of self-sufficiency and
reliance on global markets do not necessarily mean that Australia has an energy
security problem’. The 2011 NESA stated:
Global markets have both positive and negative impacts on
liquid fuel security. A major benefit comes from the increased diversity of
supply for both crude oil and refined petroleum products, with international
sources supplementing Australia’s domestic production.
When considering the issue of self-sufficiency in the EWP, the
Australian Government stated:
Self-sufficiency as an energy policy goal is costly and
likely to be misplaced, given the proven ability of international markets to
respond to changing circumstances.
The EWP also commented that energy security ‘does not equate to energy independence
or self-sufficiency in any particular energy source’.
The Australian Government highlighted that:
The findings of the Australian Government’s 2011 National
Energy Security Assessment show that energy security does not depend on energy
independence or the ability to be self-sufficient. Instead, the growing
interconnectedness of the global energy trade provides Australia with
flexibility and energy security benefits, as we are both a buyer and seller of
liquid fuel and other energy commodities in global markets. The international
trade in energy resources is like the trade in other commodities: the benefits
unambiguously increase national development options and boost national and
Further, the EWP argued that pursuing self-sufficiency may have negative
consumer impacts, such as imposing higher costs, without necessarily providing
any economic benefits.
The Australasian Convenience and Petroleum Marketers Association (ACPMA)
argued that countries that plan for growth ‘cannot just rely on what is
produced within their borders’. The ACPMA stated:
Our position is that that really means we should be looking
for interdependence when it comes to supply of refined product in the country
and not independence, because we do not have it now. We really do need to look
at our mutual relationships with countries with regard to supply.
Role for government
It is generally accepted that government has a role to play in ensuring
Australia’s energy security. All governments must strike an appropriate balance
between allowing market forces to operate, and addressing economic,
environmental and community needs, including energy security.
The EWP acknowledged that Australian governments ‘must collectively
undertake further market, regulatory and institutional reforms to ensure the
efficient supply of energy and responsiveness of demand’.
BP similarly acknowledged the role of government and emphasised that:
There can be no economic security for Australia without
energy security, and energy security requires stable investment frameworks in
order to attract and facilitate investment in operational energy systems.
BP contended that ideally, government policy that ‘provides stable
regulation, removes barriers to investment, improves access to resources and
modernises tax structures will encourage the necessary investment in energy
security’. It commented that:
Fortunately Australia has benefitted from industry
deregulation over recent decades, as the level of state control has been gradually
unwound by governments acknowledging the role a more dynamic and market driven
industry plays in sustaining a competitive, secure and growing economy.
Mobil Oil asserted that with all Australian refineries facing ‘serious
commercial challenges’, governments at the state and national level, should
ensure that ‘policy settings impacting this industry strike the right balance
in addressing environmental and community needs, without adding unnecessary
costs that threaten the long-term viability of the industry’.
Mobil Oil argued that maintaining a viable petroleum refining industry
in Australia will require the government to ‘seek to ease the increasing cost
and regulatory burden on domestic refiners, especially where similar costs are
not faced by overseas competitors’.
More broadly than fuel supply security, Mobil Oil also suggested that:
… the Government needs to consider the strategic implications
of having (or potentially not having) domestic refining capacity and factor
that fully into its broad industry policies.
Dealing with emergency situations
In relation to liquid fuel supplies, in the event of circumstances that
cannot be addressed through market forces, the government may need to step in
to help minimise the negative economic and social impacts. However, the
Australian Government’s position is that this should only be as a last resort.
The EWP argued that:
Diversity of supply prevents over-reliance on any single
supply source and helps mitigate risks from potential supply disruptions.
Australian governments at all levels will not allow energy security to be
compromised and will intervene to maintain supply if necessary. However,
government intervention should always be a last resort ...
State and territory governments have constitutional responsibility for
planning and coordinating emergency responses within their jurisdictions. At
the national level, the Liquid Fuel Emergency Act 1984 (LFE Act) provides
the Australian Government with the authority to prepare for, and manage, a
national liquid fuel emergency. The majority of provisions in the LFE Act will
only apply in extreme cases, when a national liquid fuels emergency has been
The LFE Act also provides the Minister for Energy and Resources some
contingency powers prior to the declaration of a national emergency, to direct
fuel industry corporations to maintain particular levels of reserves, develop
bulk allocation procedures and to maintain statistical information. This
legislation is supported by the Liquid Fuel Emergency Guidelines to assist the
Minister in making decisions under the Act.
Australian governments cooperate with the petroleum industry on the
National Oil Supplies Emergency Committee (NOSEC) to formulate responses to a
widespread fuel shortage.
However, Australia ‘does not hold government-controlled or regulated
industry stocks for drawdown in an emergency, and our capacity for short-term
surge production and fuel-switching is limited’. 
Australia relies on commercial stockholding practices of industry and market
forces to deal with short-term supply global and domestic supply disruptions.
As member of the IEA, Australia is a part of the Co-ordinated Emergency
Response Measures (CERM). However, the EWP outlined that:
To manage deeper disruptions without activating the Liquid
Fuel Emergency Act 1984 (which provides wide-ranging rationing powers to
the Commonwealth Minister for Resources and Energy ...), we can only
participate in an IEA-coordinated emergency response, or collective action,
through a combination of market and industry mechanisms and voluntary demand
In the event of a fuel shortage with national implications or
the need for Australia to meet its commitments to the IEA under treaty
obligations, the Australian Government can activate the Liquid Fuel Emergency
Act, which then provides the Minister for Resources and Energy with
wide-ranging powers to control the drawdown, transfer and sale of industry
stocks of crude oil and liquid fuels, to control the range of products produced
by Australian refineries and to direct bulk and retail sales of fuel across
IEA 90 day oil stockholdings
As an IEA member country since 1979, and now a net oil importer,
Australia is obligated to maintain reserves of crude oil and/or product
equivalent to 90 days of the prior year’s average net oil imports. It is intended
that governments should have direct access to these stocks, even if they are
not government owned, so they can be utilised as part of the Co-ordinated Emergency
Member countries holding these reserves agree to cooperate and ‘provide
a rapid and flexible system of response to actual or imminent oil supply
Since joining the IEA, Australia has relied solely on commercial
industry stocks to meet its stockholding obligations.
However, due to increasing net imports, Australia is no longer meeting its oil
stockholding obligations as an IEA member.
The 2011 LFVA noted that an ACIL Tasman review found that the 2011
stocks would only reach 86 days of net oil imports.
The EWP acknowledged that:
The projected long-term decline in Australian domestic oil
production, combined with growing liquid fuel demand, suggests that Australia’s
IEA stockholding gap will continue to increase in the absence of action.
At the roundtable hearing RET advised that the last publically released
figure was that Australia had 74 days of oil stocks. RET stated:
Our understanding is that the level of stocks has not
declined or, if it has declined, it has not declined significantly. The issue
is that our level of imports has increased quite significantly. That is why we
are no longer meeting 90-day compliance.
In considering Australia’s non-compliance, the 2011 NESA ‘did not find
any evidence that breaches of Australia’s IEA stockholding obligation were an
indication of a decline in domestic energy security’.
The NESA Competitive Pressures report found that future domestic
refinery closures would affect product inventories, with each refinery closure
increasing ‘Australia’s current deficit against the IEA target’ by 105 000
tonnes (about 1.6 days of net imports). It noted that a physical emergency
product stock may be needed to offset these losses.
However, it qualified that ‘in practice much of the stock held in a
refinery is required for operation and therefore not readily useable in an
emergency’. It estimated that usable stock would only reduce by around 60
million litres for a refinery closure, equating to about one third of a day’s
Part of Australia’s emergency response plan for addressing a supply
shortage is to draw on IEA’s emergency stockholdings. The LFVA 2011 found that
IEA action can assist in supply disruptions, such as supply disruptions arising
from Hurricane Katrina in 2005.
However, it has been suggested that Australia’s non-compliance with the
90 day stockholding obligation may hinder Australia’s ability to access
international stockholdings in the event of an oil supply emergency.
The NRMA called for the Government to take action to consider the implications
of not meeting the 90 day stockholding obligation.
Mr Velins agreed that the issue needs consideration by government, and suggested
that it would ‘not be reasonable to expect any IEA member to come to
Australia’s assistance if Australia itself has decided that it does not need to
comply with the requirements of membership’.
However, the AIP argued that ‘any emergency stockholdings for Australia
over and above normal commercial requirements is not justified on energy
security grounds’. The AIP argued against
increasing stockpiles just for ‘international compliance reasons’ if there is
not a sound commercial basis for that decision. It stated:
It is AIP’s view that any consideration of emergency
stockholdings requires very careful examination of the costs of stockpiling
against the risK-Weighted
benefits of such action and how Australian emergency stockholdings will
contribute to an IEA collective action in the event of a global supply
Gas Energy Australia noted that ‘maintaining a national strategic
petroleum reserve is not cheap’, and argued that ‘while releases from a
stockpile can ameliorate temporary supply disruptions, they cannot offset
long-term market disruptions’.
The Australian Government has already acknowledged that this is an issue
that needs to be addressed, and is currently considering options to respond to
Australia’s non-compliance with the 90 day oil stockholding obligation.
Energy security is fundamental to Australia’s prosperity. It helps to
deliver the economic and social outcomes we expect. The government has a
rolling two year review of our energy security through the National Energy
Security Assessment (NESA). The first assessment was conducted in 2009 with a
follow-up review in 2011. NESA provides a review of our energy security needs
relating to liquid fuels, natural gas and electricity. The 2011 review found
that our energy security needs remain broadly consistent with the 2009 review,
which found that Australia’s energy security situation is meeting Australia’s
economic and social needs, albeit with some emerging market policy
uncertainties that could have implications for managing our current level of
Our liquid fuel energy security remains largely unchanged from 2009 and
is assessed as high trending to moderate in the long term. High energy security
is when the economic and social needs of Australia are being met. The key to
our high energy security is our access to well-functioning markets for liquid
fuels and supply chains with a high degree of resilience. This means that
Australia can source its liquid fuel needs from a diversity of sources so that
if one source becomes unavailable other sources can meet demand.
Australia has its own crude oil reserves and some refining capacity. It
should be noted that our own refineries are not well equipped to refine crude
oil from our own reserves. Australian refineries import over 80 per cent of
crude oil and other refinery feedstock. The bulk of Australia’s crude is
exported. Our ability to access reliable supply chains for both refined fuel
and crude provides us with more energy security than having our own crude oil
reserves and some refining capacity.
The closure of the Clyde and Kurnell refineries have resulted in a
reduction in our refining capacity, but the Energy White Paper concludes that
this decline ‘is not considered to impair Australia’s liquid fuel security’.
Shell noted that converting facilities from refineries to terminal mode will
‘provide an equivalent or better level of supply security for the NSW
marketplace as we will not be required to source products at late notice during
periods of unplanned refinery shutdowns’.
It should be noted that in recent decades, a lack of supply in the
Australian market has only been due to our own refinery shutdowns, not lack of
international supply of crude or refined fuel. For example, the recent
temporary shutdown of both refineries in Victoria in December 2012 resulted in
disruptions to fuel supplies in the state and to South Australian customers.
Once operations resumed domestic production levels increased and were
supplemented by imported product to help address the backlog due to the
shortages during the shutdowns.
The long term assessment made by NESA is out to 2035, and makes
assessments about adequacy, reliability and competitiveness. It rates our fuel
security as high in the short and medium term, but trending to moderate in the
long term. Long term trends reflect uncertainty in predicting that far ahead,
but also reflect the likelihood that crude will have to be sourced from
countries that are not geopolitically stable, and from non-conventional sources,
which will be more expensive to extract.
One can understand that closure of refineries poses little threat in a
market of rapid expansion in Asia leading to an oversupply that is likely to
last for some time. It is less easy to predict whether maintaining a strong
ability to refine crude, including our own, will be a necessary part of the
energy security mix 20 years from now and, if so, whether Australia’s aging
refineries will be suitable and for how long and at what cost.
The committee supports the Government Biennial review of energy security
needs. It is particularly important that Australia’s response to medium to long
term changes in global supply and demand is managed in an ordered way.
We do know that Australia is blessed with energy options and that energy
security is enhanced by diversifying options, as long as the market is able to
supply those options in an affordable and reliable way.
NESA noted that alternative fuels are another potential source of future
liquid fuel supply although this is not expected to be significant over the
medium term. However, NESA commented that over the long term ‘advanced
alternative fuel and technology options, including electric vehicles, are
emerging and are likely to have an increasing role’. NESA noted that in the
medium term, there could be increased demand for biofuels as a result of state
For this reason, the committee supports the Government position to
encourage market driven investment in new energy sources. The EWP notes that
there is likely to be scope for biodiesel to become a mainstream fuel (or fuel
blend) in the heavy-duty vehicle sector, with a forecast use rate of 76 per
cent by 2050.
NESA provides a positive assessment about Australia’s energy security
needs. In addition, there is an emergency response capacity to deal with the
impact of a sudden oil supply shortage. The EWP noted that ‘Australian
governments at all levels will intervene to maintain supply if necessary’. At
the national level, the Liquid Fuel Emergency Act 1984 provides the
Australian Government with the authority to prepare for, and manage, a national
liquid fuel emergency. In addition, Australia is a member of the International
Energy Association (IEA) which can provide coordinated measures by IEA member
countries to increase supply and reduce demand.
As a net oil importer, Australia is obligated to maintain reserves of
crude oil and/or product equivalent to 90 days of the prior year’s average net
oil imports. Currently, Australia is not meeting this obligation. The committee
notes that the Australian Government has acknowledged this issue and is already
investigating options to address Australia’s non-compliance.
In conclusion, Australia is well served by a rolling strategy to review
our energy security through NESA and to pursue a market based approach to the
development of new fuels. Our energy security is high trending to medium over
the long term. The key feature of our liquid energy security is our access to
reliable, mature and diverse supply chains.