Security of Supply

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SECURITY OF SUPPLY

EXECUTIVE SUMMARY

The Importance of Liquid Petroleum Supplies

Liquid petroleum products are responsible for 52% of final energy consumption in Australia and fuel very nearly 100% of the transport market. Australia's eight refineries supply 95% of local demand for transport fuels and have a combined total capacity which substantially exceeds Australia's domestic fuel requirements of around 770,000 barrels per day.

Ability to Manage Supply Disruptions

The Australian refining industry has comprehensive supply/demand planning and risk management systems in place, and has a very good record in managing short term crude and product supply disruptions, eg the Longford crude oil disruption in 1998-1999, the six week Queensland refinery outage in 2000, and the Victorian diesel shortage in the summer of 2001-02.

The industry does understand that Government needs to be assured of the robustness of the supply situation in Australia and needs to be aware of when supplies are threatened. The industry proposes that there be regular industry/government consultation on the supply situation, on a regular basis, perhaps 6 monthly. A critical issue for discussion between Government and industry will be the trigger for informing Government of significant supply disruptions, and the trigger for Government intervention. The supply managers in the companies keep abreast of international crude oil supplies and likely threats to those supplies, and have in place contingency plans if supplies are interrupted. The industry is capable of coping with significant supply disruptions in nearly all circumstances.

The industry appreciates that, in certain exceptional circumstances, normal industry actions may not be capable of matching supply with demand and that, if it is considered that market forces are unlikely to produce the required outcome, Government intervention may be required. Government can assist in matching supply and demand by regulating customer priority so that essential services, for instance, always have access to fuel, and also by regulating demand through rationing procedures. Government can also assist in times of supply disruption by relaxing fuel specifications. Such a measure may allow increased yield of products from refineries and would also allow for a greater choice in selecting crude oils.

The industry view is that the most appropriate mechanism for Government intervention, if required, is demand constraint measures and not supply control or the development of strategic stockpiles. The industry already balances the cost of stockpiles and the likelihood of a disruption and it has a very good record of having got it right over a period of some 40 years of operating in Australia. Stockpiles are very expensive and can not meet significant demand for very long. Sufficient product inventory to cover a one third drop in crude oil supply for one month would currently cost just under $A500 million in purchase costs alone. This is a cost which would ultimately have to be met by consumers, either directly through higher prices for the products or through higher taxes if Government pays.

Substantial inventories of most products are routinely held in Singapore by both major oil companies and independent suppliers. Any strategic stockpile Australia might contemplate (or be prepared to pay for) would be insignificant in comparison.

For detailed information on possible oil supply disruptions and balancing mechanisms please see the full report below.

   Supply Security (261KB PDF Document)

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