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SUPPLY RELIABILITY

AIP has produced a background paper outlining the fuel supply chain in Australia and how supply reliability continues to be maintained at high levels by industry. The background paper covers:

• Supply and demand facts
• The supply chain and stockholdings
• Industry actions to maintain supply reliability
• Supply disruptions and industry management
• Government responses to a liquid fuel emergency (LFE)

A copy of the paper is available through the following link:

AIP Paper – Maintaining Supply Reliability in Australia

Download

KEY FACTS & CONCLUSIONS

Overall

• Fuel supply reliability remains a high priority for AIP member companies.
• Reliable supplies of high quality fuel are considered essential to maintain customer loyalty to brand, as well as to maximise business commercial viability.
• By global standards Australia has a good level of fuel supply reliability.
• This record is despite the unique and significant challenges in distributing fuel in a country as geographically dispersed as Australia.

Supply & Demand Facts

• Australia consumes a very small proportion of global crude oil production.
• Around 70% of crude oil used in Australian refineries is imported (30% is from Australian oilfields).
• In 2006-07, these imported crudes were sourced from over 16 countries mainly from:
• Asia-Pacific - around 80% of imports (or 55% of crude oil requirements)
• Middle East - around 20% of imports (or 15% of crude oil requirements).
• This means that any supply disruption risks are spread between domestic and imported crudes, and crude oils from a variety of different sources.
• Reliable access to crude oil supplies suitable for Australian needs has not been a problem, even during periods of rapidly rising oil prices. Australia will continue to be able to access supply to meet its fuel requirements as long as we pay the international market price.
• Australia has seven operational refineries - generally constructed in the 1950s and 1960s, but extensively modified since then - particularly in 2005 and 2006.
• Australian refineries are small by regional standards (eg. the Reliance Industries refinery in Jamnagar, India, has nearly twice Australia's total refining capacity).
• In 2006-07, Australian refineries supplied around 75% of total Australian demand for petroleum products. That is, around 25% of demand was met by imports.
• The bulk of imported petroleum products was from Singapore (around 64%); the proportion of diesel imports was similar (63%), while the proportion of petrol imports was much higher (90%).
• Since 2000, demand for total petroleum products in Australia has grown by 2% per annum, with varying growth rates for different fuels (eg. around 5% per annum for diesel).

The Impact of Structural Imports & Cleaner Fuel Standards

• Since 2003, a growing proportion of Australia's liquid fuel needs have been imported.
• This situation is expected to continue in the foreseeable future.
• This outcome is helping to widen sources of supply and increase the options available to acquire (in the market) and bring spot cargoes of fuel to Australia in response to an emergency.
• The increasing frequency of ships bringing fuel to Australia has also increased industry flexibility in responding to unplanned supply disruptions at particular locations.
• With growing demand for fuel produced to Australian standards, Asian refineries are producing more regular batches of Australian quality fuel.
• Availability of this fuel should continue to improve as other countries move to fuel standards which are more closely aligned to Euro standards (as Australian standards are) over the next few years.

The Supply Chain & Industry Actions to Maintain Reliable Supply

• The Australian liquid fuel supply chain has considerable span and diversity – from crude and product shipments, refinery throughput, storage facilities, extensive terminal and distribution networks, and around 6000 retail outlets.
• AIP member companies have undertaken extensive reviews of their supply chain operations and commercial levels of stocks to improve efficiency.
• The current levels of commercial stockholdings reflect a considered assessment of the operating conditions throughout the supply chain and the risks more likely to be encountered by refiners and others in operating the supply chain.
• Improved information flows have been set up to better manage peak demands for products in various regions (eg. For example, better forecasting systems have been developed for diesel demand during harvest periods, and enhanced systems are in place to manage jet fuel supplies).
• AIP member companies also have well developed and workable allocation procedures for the equitable distribution of available supplies over the duration of a disruption.

Supply Disruptions

• Each supply disruption involves a series of events which develops in its own way.
• The actions to address the situation will also unfold in a dynamic manner with different impacts at different points in the supply chain.
• Typical events with the potential to impact on supply reliability include:
• Refinery production disruptions
• Delay in supply of product from another location (eg. from intrastate, interstate or overseas)
• Actual demand exceeding identified supply requirements
• Stocks insufficient to meet short-term supply/demand shortfall.

Management of Supply Disruptions

• Australian refineries are complex operations which for commercial reasons must operate at very high utilisation rates.
• Maintenance cycles are carefully planned to optimize the efficiency of the refinery.
• When maintenance is planned, actions are taken to minimise any potential impacts on supply reliability during the maintenance period as well as during the subsequent re-start period.
• Following on from the major investment in the Cleaner Fuels Program and in general refinery upgrades in recent years, Australian refineries have had an extended period of good reliability.
• Nevertheless there have been (and will continue to be) unplanned events which impact on refinery operations and create fuel supply challenges at short notice.
• Individual refiner responses to these disruptions illustrate the rapid and comprehensive strategies in place to respond to supply disruptions, including:
• in-refinery options
• sourcing supplies from other refiners
• sourcing supplies internationally
• carefully allocating bulk fuel supplies to customers.
• While there may be stock-outs for some products at some retail sites as a result of short term supply disruptions, motorists have had alternative supply options at all times, and there has been no significant across the board panic buying.
• Federal and relevant state Ministers and departmental officials are kept fully informed of developments when there are supply disruptions.

Management of a Liquid Fuel Emergency (LFE)

• Major amendments to the liquid fuel emergency (LFE) legislation were passed by Parliament in 2007 with the support of AIP member companies.
• The industry is now working with the Federal and State governments (through NOSEC) to implement key regulations (Guidelines and Directions) under the Act.
• The broad strategic approach to responding to a national LFE is established through the legislation, the national plan and the intergovernmental agreement between Federal and State governments.
• The regulations will provide the detailed actions to be undertaken by industry and government, and are critical to shaping the way industry and government will work together to prepare and plan for responding to a fuel supply emergency, as well as the responsibilities of all parties during an LFE.
• AIP member companies support a strong market based approach to responding to any fuel supply emergency, and that maximum use is made of existing business practices along the supply chain.
• AIP member companies are keen to ensure that any areas where there is potential for government intervention in the market or the supply chain, these are very clearly defined and that the bases for intervention are well documented and understood by all parties in advance of any emergency.
• A key issue moving forward is establishing robust arrangements between industry and the ACCC to enable effective consultation on supply planning in the period immediately prior to a LFE.