8.3.1 Ensuring that Australia is positioned to meet its liquid fuels needs
8.3.2 Improving our understanding of the liquid fuels sector
The most recent National Energy Security Assessment (NESA) found that overall the Australian liquid fuel market and systems are functioning efficiently and effectively and are well placed to meet Australia’s future liquid fuel needs.
Australia’s access to well-functioning markets for liquid fuels has helped create robust and flexible supply chains for crude oil and other refinery feedstock and refined petroleum products, and has encouraged a high diversity of supply (RET 2011b). In addition, the overall strength of the Australian economy and the rise in the Australian dollar have allowed increases in international oil prices over recent years to remain manageable within the broader economy.
However, maintaining this outlook means that a number of emerging challenges need to be addressed in coming years. Primarily, we need to ensure that Australia is positioned to meet its liquid fuels needs and to improve our understanding of the liquid fuels sector.
8.3.1 Ensuring that Australia is positioned to meet its liquid fuels needs
In the absence of major new discoveries, domestic crude and condensate production and export are projected to decline. We will continue rely on imports to supply our refineries (Figure 8.5).
Figure 8.5: Crude oil and condensate balance, 2010–11 to 2034–35 (PJ)
Note: Excludes stock changes. Excludes production from Icthys and Prelude projects.
Source: BREE, internal, 2012.
At the same time, the decline in our refinery capacity and continued growing demand for liquid fuels will lead to a greater share of refined petroleum products being sourced from imports (Figure 8.6).
Australia’s refining industry is undergoing structural change in response to strong competitive pressure from larger and newer Asian refineries, which continue to lower the break-even benchmark that our refineries compete against. The domestic pressure of high local costs, coupled with a high exchange rate, is expected to keep Australian refineries under pressure for some time.
Structural change in this highly capital and infrastructure-linked industry tends to follow a very orderly transition over a long timeframe, so that the market can respond accordingly to ensure that supply security is maintained and supplier market shares are preserved. In order to continue to meet market demand, refinery closures are very unlikely to occur until alternative supply capacity has been secured. This is the case with the recent announcements by Shell and Caltex.
Figure 8.6: Australia’s refined product balance, 2010-11 to 2034-35 (PJ)
Source: BREE, internal, 2012.
Australia is not unique in this experience: Europe and the United States are also undergoing similar structural adjustment. This may extend the transitional period globally as companies manage international refinery portfolios while seeking to maintain or extend market share.
The 2011 NESA found that a significant reduction in refining capacity is not expected to cause fuel security problems, given our access to well-functioning global markets that can provide adequate and reliable supplies (RET 2011a). Australia’s fuel security is assessed as part of the biennial NESA Findings on long-term fuel security and measures to respond to short-term shocks are outlined in Chapter 4: Energy security.
Asia is increasingly becoming the global refining and trade centre, with significant refining and storage capacity, highly complex and export-oriented refinery operations, and proximity to major trade routes. Significant net additions to Asia–Pacific export refining capacity are forecast to come online, including more refined fuels from India that meet Australian standards. This will maintain a surplus in regional refining capacity through to 2020.
A domestic refining presence provides Australia with a limited ability to process domestically produced crude in-country, and a degree of supply flexibility and reliability. 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 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.
The closure of existing Australian refineries is unlikely to have any major impact on consumer fuel prices, as import parity pricing is the basis for wholesale and retail fuel pricing in Australia.
Building infrastructure and import capacity
Rising imports will require timely investment in import infrastructure, even in the absence of further refinery rationalisation. Currently, the market is delivering adequate terminal and importing infrastructure to meet Australia’s liquid fuel needs, and investment in new import infrastructure and storage is keeping pace with increasing consumption (RET 2011a:13).
As demand increases, it will be important for the Australian and state and territory governments to maintain an attractive investment environment through efficient, timely and consistent national planning, approval and regulatory processes. This will support future investment in import fuel terminals, storage facilities and distribution infrastructure.
Australia’s refineries are in key geographical locations and have access to existing distribution infrastructure (pipelines or roads) to meet market demand. Therefore, any future refinery closure decisions are expected in most cases to be accompanied by decisions to convert the refineries to import terminals, maintaining these supply connections.
A change in supply from refining to imports is expected to lead to changes in inventory levels. While overall stocks held are reduced when a refinery is converted into a terminal, the volume of readily usable finished products increases. The drop in overall inventories associated with a refinery closure will have little, if any, impact on Australia’s supply security.
Developing alternative fuels as part of our future fuel mix
While alternative transport fuels currently make up around 5% of Australia’s liquid fuel supply, over time it is expected that they will play a growing role in the market, complementing conventional supply. Some of these products are already cost-competitive in certain applications, but many others require further development to overcome technical and cost barriers.
Figure 8.7 shows a possible future mix of transport fuels in Australia based on scenario modelling (CSIRO 2011d). The modelling suggests that over the period to 2050:
- transport fuel demand will increase steadily, driven mainly by the freight task and air travel
- conventional fuels will continue to be the mainstay of the liquid fuel market
- the take-up of alternative transport fuels is likely to be limited over the rest of this decade (however, stronger growth is expected in alternative fuel consumption from 2020 onwards, driven by higher oil prices and declining production costs)
- there will be greater supply diversity in alternative fuels such as gas-to-liquids, coal-to-liquids and shale-to-liquids
- almost all of the alternative transport fuels considered in the modelling will be taken up in the road sector during the period to 2030
- the rail sector will adopt some diesel substitutes and increase electrification where feasible
- the aviation sector will have a greater focus on the development of bio-derived jet fuels to contribute a growing share of aviation fuel consumption as supply chains mature.
While modelling provides a useful tool to inform thinking on future trends, this by no means defines the set of possible market outcomes. For example, while not shown in Figure 8.7, LNG has some commercial applications in heavy vehicle transport. Similarly, CNG is currently used in some metropolitan buses and has commercial potential in purpose-built heavy vehicles. LPG is currently the only alternative transport fuel that has nationwide infrastructure.
While there has been a decline in consumption in recent years, the emergence of dedicated LPG vehicles may see renewed growth in this market. Hydrogen is projected to be taken up in small volumes in fuel cell vehicles towards 2050, but could take a larger share if the cost of fuel cell vehicles declines faster than assumed.
Figure 8.7: Modelled transport fuel mix to 2050, by fuel type (PJ)
GTL = gas-to-liquids; CTL = coal-to-liquids; STL = shale-to-liquids.
Source: CSIRO (2011c: Scenario 2).
As for many emerging technologies, the commercial development and adoption of alternative transport fuels in Australia is being influenced by such factors as:
- investment uncertainty
- technology constraints (including cost)
- policy, legislative and regulatory barriers
- performance risk
- infrastructure hurdles
- labour force skills constraints
- information barriers
- high adjustment costs.
The Australian Government, in consultation with industry, has developed the Strategic Framework for Alternative Transport Fuels to address barriers to the take-up of alternative fuels to allow them to enter the market when they are commercially viable. The framework outlines 20 actions for industry, government and other stakeholders to take in the period to 2030. The actions are grouped under the themes of leadership and certainty; research, development and demonstration; commercialisation; and information and verification. Their implementation is expected to lay the foundations for the market-led diversification of Australia’s transport fuel mix.
In addition, through the Australian Renewable Energy Agency, the government is providing support under the $15 million Advanced Biofuels Investment Readiness program to build the investment case for significant and scalable pre-commercial demonstration projects for the production of advanced high-energy, 'drop-in' biofuels in Australia. This builds on the achievements of the Second Generation Biofuels Research and Development Program.
The government also provides grants for the purchase new LPG vehicles and the conversion of existing vehicles to LPG under the LPG Scheme. As noted in Section 8.2.3, the Ethanol Production Grants program and Energy Grants (Cleaner Fuels) Scheme support ethanol, biodiesel and renewable diesel.
Developing a consistent long-term framework for liquid fuels
The current liquid fuel market regulatory environment reflects the government’s broader aim to improve environmental standards, reduce economy-wide emissions and promote alternative fuels.
Australia’s fuel quality standards have improved urban air quality, facilitated the introduction of new engines and fuel-efficient technologies, and reduced greenhouse gas emissions.
The government will continue to promote environmentally sustainable production, supply and use practices, including reducing the sector’s greenhouse gas emissions while maintaining industry competitiveness.
Any changes to fuel specification standards will need to consider Australia’s circumstances and be subject to rigorous economic analysis of the costs and benefits to industry, consumers, and society more broadly, including consideration of domestic refining impacts and environmental and public health outcomes.
Our current fuel excise arrangements are a reflection of various excise and excise-equivalent customs duties and support measures, which have been developed and implemented over time in response to prevailing circumstances. This has resulted in some distortion in the market, with different treatments for different fuels.
For example, the New South Wales Independent Pricing and Regulatory Tribunal’s review of ethanol supply and demand found that the market supply for ethanol is illiquid, primarily because ethanol production grants effectively exempt domestic producers from excise duty (in contrast to importers) and effectively remove import competition. This can undermine supply reliability where domestic production is insufficient or interrupted (IPART 2012b). This risk is compounded where ethanol mandates are used. This was demonstrated in 2011 when ethanol supply was disrupted by flooding and the lack of adequate, established and economically viable imports inhibited supply.
In this context, the government has announced that the Productivity Commission will review fuel excise arrangements, including by examining the merits of a regime that is based explicitly and precisely on the carbon and energy content of fuels. The review will be an important step in improving market regulation, and will be completed in time to allow any changes to be implemented by 2015–16.
There is a further need for governments to take into account the range of regulations applying to the liquid fuels industry, and to ensure that those regulations are appropriate and minimise the regulatory burden on industry while maintaining environmental standards (this is discussed further in Chapter 12: Sustainability, workforce and Indigenous opportunities).
8.3.2 Improving our understanding of the liquid fuels sector
With the expected changes and the diversification of our liquid fuels market, the government must continue to improve its understanding of the market, including through assessments of trends, developments and potential vulnerabilities; improved data collection; and assessments of new and emerging fuels and technologies.
The Australian Government regularly monitors and assesses the state of the liquid fuel market through the NESA, analyses of International Energy Agency research, and analyses of the Australian Petroleum Statistics collection.
These assessments alert the government to potential emerging risks and challenges, and the government and markets are well positioned to respond appropriately if necessary.
As described in Chapter 4: Energy security, most risks will be managed through normal market and policy processes. However, the government will continue to assess Australia’s liquid fuel vulnerabilities regularly as part of the biennial NESA process covering the liquid fuel supply chain, including import and refining infrastructure, and will identify any critical supply linkages to downstream industries, such as plastics and chemical manufacturers.
Australian Petroleum Statistics
As part of this monitoring and assessment process, there is a need to improve the quality and coverage of the collection and publication of monthly national and state petroleum data through the Australian Petroleum Statistics.
The Australian Petroleum Statistics provide data on the production, sale and trade of petroleum products across the supply chain. The data is collected on a voluntary basis, and requires review to improve its completeness, consistency and accuracy and to inform assessments of liquid fuel vulnerability. This will also improve the analytical capability of government and assist in reporting to the International Energy Agency.
The industry has acknowledged the importance of this data for security assessments, and indicated support for all major fuel suppliers and importers supplying data to the Australian Petroleum Statistics. It has indicated support for the mandated data provision requirement under the Liquid Fuel Emergency Act (Australian Institute of Petroleum 2012).
The Australian Government is considering mandatory stock reporting in the context of its consideration of aspects of our international stockholding obligations (see Chapter 4: Energy security).
Australian Transport Fuel Technology Assessment
The Australian Government recognises that new fuels and technologies are in development, and that over time there will be changes in:
- the cost-competitiveness of different transport fuel technologies
- the timing of fuel technologies’ commercialisation and market entry
- the timing and costs of production methods (such as processing technologies for advanced biofuels and lower-emissions technologies for synthetic fuels)
- vehicle engine technology, in conventional internal combustion engines, hybrids, plug-in hybrids and pure electric vehicles
- costs and timeframes for distribution and refuelling technology for transport fuels, including electric vehicle recharging and rail energy use improvements.
In this rapidly changing field, there is a need for a regular stocktake and consolidation of information on fuel production and vehicle technology developments. This will be addressed through a regular assessment of fuel technologies as part of the Australian Liquid Fuel Technology Assessment, which will encompass all major technology options for conventional and alternative transport fuels in the Australian transport fuel market.