MESSAGE FROM THE AIP CHAIRMAN

Downstream Petroleum 2007 sets out key industry facts and the issues impacting on the downstream petroleum sector in Australia.

A reliable supply of high quality liquid fuels at reasonable prices is critical for almost all economic activity in Australia.

Petrol and diesel prices in Australia are consistently among the lowest in OECD countries. The ACCC has confirmed the high level of competitiveness in fuel retailing activities, and has established without doubt that there is a consistent relationship between Australian fuel prices and the internationally traded prices of fuels in Singapore.

Given the exacting challenges of maintaining continuous operations at Australia's refineries, there will be times when technical problems result in supply disruptions. The downstream petroleum industry in Australia has demonstrated a strong capability to manage local and international disruptions of fuel supplies. Overall, Australian fuel consumers enjoy a high level of fuel supply reliability compared to many other countries.

These benefits flow from the industry's investment of over $3 billion since 2004 in new and upgraded facilities at Australian refineries, in the supply distribution networks, and at service stations.

These investments have also delivered fuel quality in Australia similar to that in Europe and North America. The national Cleaner Fuels Program has significantly reduced benzene and sulfur levels in fuels, and together with improved vehicle technologies is dramatically improving air quality in our major cities and towns.

Over the past ten years, AIP member companies have invested $6.7 billion in Australia compared with industry profits over the same period of $6.5 billion. However, this level of investment is not guaranteed for the future. Competitive pressures in Australia and across the region will determine the level of investment in the unsubsidised Australian industry.

There are numerous factors which have the potential to undermine investment and the robust refiner margins of 2006 and 2007 and hence the ongoing viability of the Australian refining industry.

Growth in demand for fuels across the Asia–Pacific region remains strong, particularly in China and India. However, there is uncertainty about the extent to which the current regional supply shortfall will be offset by the construction of new refineries, particularly in China and India.

Australian government policies that raise uncertainty about future returns on investment will also impact on future refinery viability and investment.

One of Australia's biggest challenges in coming years will be the development of effective climate change policies that do not stifle Australia's economic growth potential. The downstream petroleum industry will play an important part in helping to meet this challenge. The introduction of greenhouse gas emissions trading and other complementary transport sector measures in Australia must be carefully considered to ensure that the trade exposed Australian refining industry remains viable. The impacts of these measures on fuel prices and the associated inflationary effects will be a significant community issue.

Biofuels and other alternative fuels such as GTL and CTL have a role to play in the Australian fuels mix, depending on their price competitiveness, supply reliability, and acceptability to consumers. In the short to medium term, the development of alternative fuels faces significant challenges in terms of project construction costs, energy consumption, and environmental concerns.

There is also a growing number of regulations impacting the downstream petroleum sector. It is essential for regulatory decisions relating to fuels and the fuels industry to be closely linked to business realities. Australia's small, integrated economy is best served by national approaches to regulation of the fuels industry. It is also critical that environmental, consumer affairs, economic and industry policy regulators work with the industry in a holistic way. Environmental regulation must be soundly based and affordable for industry and consumers, and the expectations of consumer affairs regulators must recognise the drivers and industry costs associated with improving our environment.

Russell Caplan
Chairman, AIP