Liquid Fuels Stockholdings in Australia and the IEA Obligation

Australia’s import, terminal and storage capacity for transport fuel has increased over time to meet growth in fuel demand

• There has been significant investment in new and expanded storage and terminal facilities over recent years to meet demand growth in key regional centres, as evidenced in government and ACCC audits of import/terminal facilities.
  • For example, the ACCC conducts annual monitoring of the petroleum industry and has reported increased storage/terminal capacity in Australia each year.
• There has also been a significant increase in stock on the water held by Australian companies as a critical part of their supply chain operations (see below).
• Commercial storage capacity in the domestic supply chain (e.g. for petrol, diesel, jet fuel) has actually increased in response to demand growth and increasing product imports following refinery closures.

The decline in Australia’s 90 Day IEA stockholding position largely reflects declining crude oil and condensate production

• A decline in domestic crude oil and condensate production and increased demand largely accounts for the decline in Australia’s IEA compliance position.
  • For example, according to BREE, in 2013–14 exports of crude oil and feedstock totalled 14.8 gigalitres, down 6% from the previous year and the decline reflects lower output from mature fields located off the NW Coast of Australia which supply the majority of Australia’s exports.
• However, the decline in the compliance position is also due to the fact that the IEA does not allow ‘stock on water’ to be counted towards our stockholding obligation. This is despite this growing form of stockholdings being integral to supply operations in Australia and in the Asian Region, representing more than a quarter of total stockholdings directly owned/controlled by Australian companies.
  • There has been a growing volume and frequency of petroleum products imported and Australia now has a significant proportion of petroleum stock on the water from various sources.
  • About 2–3 weeks of Australian supply is typically on the water at any time, with a large proportion in Australian waters.
  • This stock is securely intended only for the Australian market and a redirection to another overseas port once a ship with an Australian cargo leaves an Asian port is very rare.
  • Such changes are constrained by expensive increases in freight rates for ship redirections to another country, different product specifications across the region, limited opportunities for short term or spot market trading in the regional market, and commercial contract restrictions.
  • The significant volume and wide distribution of cargoes of crude oil and petroleum products on the water serves as floating storage which provides a diverse and highly flexible supply source.
    • This efficient and cost effective logistical and storage solution is now fundamental to managing ongoing reliable supply of liquid fuels to Australian markets and customers.
  • The highest level of fuel supply flexibility and reliability is achieved when stock on water can be readily diverted between Australian locations on an as needs basis.
• Consequently, the decline in Australia’s 90 day stockholding compliance position raises no heightened supply risk for the domestic fuels market or for fuel users.

The IEA does not require its member countries to hold 90 days stock cover for EACH fuel

• IEA member countries are required to hold stocks (crude oil and petroleum products) equivalent to at least 90 days in total of net imports and, in the event of a global oil supply disruption, to release stocks to the market or reduce demand.
• The IEA’s 90 day stockholding obligation is calculated using a complex methodology developed in 1974 prior to the significant globalisation of the oil market and trade activity.
• As a result, this IEA methodology is not reflective of the way the Asia–Pacific market works.
• For example, the IEA rules and methodology:
  • does not allow ‘stock on water’ to be counted towards a stockholding obligation (see above)
  • does not allow for IEA country stocks to be held in Singapore (the regional trading centre);
  • includes petroleum products which are not relevant to the Australian market and managing supply issues (eg. naphtha, fuel oil).

Emergency stockholdings held for IEA purposes are not solely for Australian use in the event of a global disruption

• Stocks held for IEA compliance reasons are not explicitly for Australia to use.
• The significant cost ($6.8 billion) of an Australian stockholding to comply with the IEA rules would simply add to global stockholdings for the global market and other countries to draw from in the event of a global emergency.
• Emergency stocks held for IEA compliance reasons, by definition/rule, are unlikely to contribute to Australia's fuel needs in a global or local emergency situation.
• This is because the IEA stipulates that emergency stocks must be held in locations with ready access and release to the global market (not the more remote segments of the global market like Australia) to help balance 'global supply'.
• Thus, the focus and mandate of the IEA is balancing 'global supply', not specific supply imbalances or disruptions within individual countries.
• In addition, a crude oil stock release from within Australia to the international market would make an insignificant contribution to IEA collective action.

IEA emergency fuel stockholdings are not required energy security

• Since joining the IEA, Australia has relied on commercial industry stocks coupled with significant domestic production of crude oil to meet its stockholding obligations, and on market based mechanisms and demand restraint to respond to emergencies.
• In depth Government security reviews have confirmed that Australia's current approach to stockholdings remains appropriate, efficient and cost effective in the context of Australia's:
  • open market operation and market realities applying to Australia and our region
  • high level of liquid fuels security and reliability
  • proven commercial stockholdings and management
  • market and commercial approaches which have delivered supply reliability at a competitive cost to consumers and end-users, with no widespread customer shortages being experienced
  • robust emergency response framework at government and industry levels to handle extreme circumstances.
• Given these market facts and realities, any level of emergency stockholdings for Australia over and above normal commercial requirements cannot be justified on energy security grounds.
• A requirement for industry to hold additional stockholdings to meet Australia's international compliance obligations would impose further (unjustified) cost on industry and lead to higher fuel prices for consumers and major fuel using industries.
• The decision of individual countries to hold emergency stockpiles reflects a range of market, supply chain and other considerations relevant to each country. Many such decisions were taken by nations decades ago when global and regional oil markets operated very differently. As a result, many European nations have publicly owned stockpiles of crude/product which have declined in value and may not assist the operation of their national fuels market in an emergency situation.