Kwinana closure fuels security fears

The recent announcement of plans by BP Australia to close its Kwinana oil refinery was unwelcome news for Western Australia.

Not only will the closure reduce Australia’s ability to produce its own transport fuels by a third, the shutdown of Australia’s largest oil refinery will have a negative effect on the state’s emergency fuel stocks.

WA’s emergency fuel reserves were in a dire situation before the BP announcement, however. A Royal Australian Navy Sea Power Centre report in 2015 put BP Kwinana’s fuel storage capacity at just 2.7 million barrels. 

The state also has 17 petroleum import terminals along the coast at places including Albany, Geraldton, Port Hedland, and Broome with a combined storage capacity of 3.2 million barrels. 

This storage provides WA with enough fuel to keep its industry running for about 31 days, while the rest of the country has 55 days of fuel in storage. This total remains short of the federal government’s International Energy Agency commitment to hold 90 days of emergency fuel stocks. 

Australia consumes around 370 million barrels of transport fuels annually, 90 per cent of which is imported either as crude oil for domestic refinery feedstock or as diesel, petrol, or aviation fuel. 

The requirement for increased imports of refined fuels has grown of late, given the closure of half the country’s crude oil refinery capacity during the past 20 years. 

In 2000, Australia had eight operational crude oil refineries, which provided 95 per cent of the nation’s transport fuels. It now has three left on the east coast and, until it ceases operation in six months’ time, BP Kwinana in WA. Together, they produce 45 per cent of Australia’s transport fuels, primarily using imported crude oil from the Middle East as a feedstock.

The closure of BP Kwinana means crude oil, used to produce transport fuels, will no longer be stored in WA. Crude oil is a material that can be held in storage for long periods and used by a refinery on an as-required basis. 

The storage of large volumes of crude oil (accessible by a refinery) is the foundation of fuel security. With the closure of the Kwinana refinery, this foundation will no longer be available to WA.

Unlike crude oil, refined fuels such as diesel can only be held in storage for between six and 12 months before they begin to deteriorate. 

As the holding of massive volumes of refined fuel is not economically practical due to this deterioration, the loss of crude oil storage on the west coast will adversely affect WA’s already low levels of emergency fuel stocks. Even a minor disruption to WA’s fuel supplies could lead to an economic shutdown after a couple of weeks. 

Given the national outlook, the federal government recently undertook a couple of actions to improve fuel security.

In April, it paid $94 million for 3 million barrels of crude oil, which it has temporarily stored at the US Strategic Petroleum Reserve in the Gulf of Mexico. At some point, the Commonwealth will need to build a major crude oil storage capability so it can repatriate the oil stored in the US. With the closure of BP Kwinana, that storage will be built near the remaining east coast refineries.

On September 14, the government announced a fuel security plan to improve Australia’s long-term fuel supply. 

Under one initiative, the Commonwealth will invest $200 million in a competitive grants program to build an additional 5 million barrels of onshore diesel storage, which will provide an additional five days to the nation’s overall strategic reserves. 

In all likelihood, much of this new storage will be placed on the east coast near a working refinery.

Clearly, therefore, the nation’s refineries were considered as critical infrastructure required for national security just a few months ago.

So it came as a surprise that BP announced the closure of Kwinana while the federal government was developing legislation to provide Australia’s refineries with a production payment, estimated to be in the billions, to ensure they remain operational. 

The Morrison government has made clear it is totally committed to a sovereign onshore refinery capacity, so those taxpayer billions will now flow only to the remaining east coast refineries.  

If there were any lingering doubts that national security diminishes in importance the further you are from Canberra, they were finally put to rest when the Commonwealth did not even challenge a multinational company’s decision to unilaterally close Australia’s only strategic refinery asset not located on the east coast.

David Kobelke spent 15 years managing CCIWA’s Australian industry participation unit