Tuesday, July 31, 2012

The Future of Altona Oil Refinery

Caltex recently announced its decision to close its 57-year-old Kurnell refinery on Port Botany, south of Sydney as it is no longer competitive. It will transform the facility into a fuel import terminal at a cost of $680 million by late 2014 (Ref 1, 2, 3). However, Caltex will keep its Lytton Refinery in Brisbane as its hardware is better suited to market demands. Caltex CEO Julian Segal said the closure of Kurnell would lead to improvements at the Lytton Refinery (Ref 4, 5).

The closure marks another chapter in the decline of Australia’s oil refining industry. Shell confirmed in July 2011 that it will shut down refining operations at Clyde and convert the Clyde Refinery and Gore Bay Terminal into a fuel import facility by mid-2013. ExxonMobil stopped the operations of its Port Stanvac refinery in 2003 and decided in 2009 to dismantle the refinery (Ref 6).

This article explains why the oil refineries in Australia are not able to compete with foreign refineries, particularly the large refineries from Asia. The reasons given include:
  • Refineries need a production capacity of at least 200,000 barrels per day (bpd) in order to reach the minimum efficiency scale. As seen from the table below, the refineries in Australia are of much smaller scale, producing way below the minimum efficiency level.
  • Higher capital costs, wages and energy costs in Australian refineries. 
  • Oversupply of refining capacity in Asia depressing profit margins in the industry.
  • Australia’s oil refineries are old, with the last refinery built in 1965. Consequently, they require large investment for upgrade in line with evolving environmental standards.
  • As Australia's refining operations are smaller and more costly, transporting crude oil via large tankers (VLCCs) to Australia become more expensive than transporting petroleum products in smaller ships. Consequently, importing refined fuel from Asian mega-refineries is more cost-effective for oil companies.

Refinery State Capacity
(bpd)
Area
(Ha)
Employ Built Close
Caltex Kurnell NSW 135,000 174 800 1956 Late 2014
Shell Clyde NSW 79,000 10 510 1928 30/09/2012
BP Bulwer Island QLD 101,000 120 340 1965
Caltex Lytton QLD 109,000 223 310 1965
Exxon-Mobil
Port Stanvac
SA 78,000 239 400 1963 Apr 2003
Exxon-Mobil Altona VIC 80,000 138 350 1949
Shell Geelong VIC 130,000 120 >470 1954
BP Kwinana WA 137,000 250 387 1955
Table: The 8 Oil Refineries in Australia (Ref a, b, c, d, e, f, g, h, i, j, k, l, m)

Of the remaining 6 refineries, ExxonMobil's Altona refinery is often touted by analysts as a candidate for divestment  (Ref 6, 7). This is probably due to its smaller scale of operations, as seen from its smaller production capacity (80,000 bpd), land area (138 hectares) and workforce (350). It is also the oldest refinery (built in 1949). In 2003, ExxonMobil mothballed its 78,000-bpd Port Stanvac refinery in Adelaide, leading to speculation of whether the US company would undertake the big capital expenditure at its Altona refinery for meeting the Federal Government's 2006 clean fuel standard (Ref 8). The Altona refinery survives to this day and Exxon-Mobil has continued investing in this plant, spending $250 million since 2008 to upgrade the refinery, including a temporary shutdown in 2011 to carry out long-term maintenance and to install new equipment for cutting emissions by 21,000 tonnes a year (Ref 10).

With the closure of Caltex's Kurnell refinery. attention is again drawn to the two Victorian refineries at Altona and Corio (Geelong). In February 2012, Shell spokesman Paul Zennaro said the company sees oil refining as ''challenging'' in the current climate. ''We're not going to speculate on the future of the [Corio] facility but we've invested heavily in its future, including a water treatment plant, new bitumen tanks and rather large maintenance activity,'' he said. Jessica Warne, the spokeswoman for the Altona refinery said that Mobil has no plans to review its future. ''Our focus continues to be on improving its performance and competitiveness,'' she said. (Ref 9).

In an interview with The Australian newspaper, ExxonMobil's Australian head Andrew Warrell said: "I don't think that's what my competitors are saying. So despite the very tough conditions, we're managing to make money (at Altona) and we have a very good improvement program at the site that makes me confident we can grow profitability." He confirmed Altona had also logged a 2011 loss because of poor margins and a big investment program and that profit margins this year were not large. He said the Altona refinery, through a mixture of luck and strategy, had built better add-ons or "pots and pans" than some other Australian refineries. For example, it had added a $250 million fluid catalytic cracker in 1997 that allows it to handle heavier crude oils. He said: "Some of my competitors have over-invested in some pots and pans that aren't giving them the value they'd hoped to get." The refinery has also focused on producing more higher-value fuels, like diesel and jet fuels, that attract a higher premium than petrol.

Victoria's Major Projects Minister Denis Napthine said that the closure of Caltex's Kurnell refinery in Sydney could provide opportunities for the Victorian petrochemical industry. He believed that Victoria has the capacity to increase production and that the state government would work with Mobil and Shell to maximize the benefits to Victoria (Ref 11).

Victoria's two oil refineries appear to be safe for the time being. However, analysts say that Caltex's Lytton plant and ExxonMobil's Altona refinery remain vulnerable to closure although both firms have repetitively said they will continue operating these plants (Ref 8).


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