July 27, 2012:

Australia's peak motoring body fears Caltex's decision to shut its Kurnell site has left the country exposed to fuel supply risks and price volatility. Caltex will shed more than 330 jobs as the Kurnell site in Sydney is transformed into a simple fuel import facility over the next two years. The closure follows a recent decision by Shell to shut its refinery at Clyde. It will leave Sydney without an oil refinery. Serious questions are now being asked about the security of Australian fuel supplies and the potential flow-on effects at the bowser. Australian Automobile Association executive director Andrew McKellar says the closure could hit consumers hard. "We need to ensure that we have adequate reserves in place but also that we're encouraging and developing alternative sources of supply," he said.  "We need to ensure that there is adequate account taken of the impact that that sort of outcome can have on consumers and on the Australian economy."

Caltex currently supplies around 30 per cent of all transport fuels in Australia. To ensure an uninterrupted flow of petrol into Australia, Caltex has teamed up with Chevron. Under the agreement, Chevron will procure and supply to Caltex imported product from Singapore at market-based prices. Fat Prophets Resources analyst David Lennox says that is cold comfort for motorists now even more reliant on imported products to fuel their engines. "If there's a blockage in the supply chain somewhere outside of Australian shores then we would be impacted no matter what happens," he said. "Australia is not self-sufficient in crude supply, and while that is the case then we will always be susceptible to those types of blockages."

Fuel security

The NRMA agrees, with director of motoring and services Graham Blight saying Australia has not done enough to invest in alternative fuel sources like biofuels. "The real issue is about fuel security in Australia," he said. "We are not meeting evidently our international obligations on fuel reserves in Australia, so we're in a very vulnerable position and unfortunately there's 52 other countries in the world who are a block ahead of us." But the body that represents independent service stations says petrol prices and supply should not be affected. Colin Long, head of the Service Station Association, told the ABC the mega refineries in Singapore and India would easily be able to meet Australia's fuel supply needs. Mr Long says that in the short term motorists will not be affected. "Like Shell they will be bringing in the refined product all ready to go into Australia through their tanks and out to the distribution of service stations," he said. "So the public and the service stations will notice no difference, so there's no actual threat as to supply in that scenario."

Economic decision 

Caltex says its decision to close the Kurnell refinery is based purely on economics. "I'll just point out to you that last year we lost $208 million in our refining operations. That's a situation that cannot continue," said chief executive officer Julian Segal. "We believe this decision puts Caltex on a much more sustainable path going forward. We will continue to invest in our supply chain and marketing operations to further develop our proven growth platform. "Concurrently we will stem the losses at our refining operations by converting Kurnell to a major import terminal." The terminal will take in and distribute fuel to the Sydney metropolitan basin. That has been the role of the Kurnell refinery for the past 57 years, but Caltex says it was small in scale, producing only 100,000 barrels of petrol a day. It was competing with new facilities in Asia which pump out more than 1 million barrels a day.

Further redundancies

Caltex maintains its refinery at Lytton in Brisbane will continue to operate as normal. It is even getting a modest upgrade. But with refineries at Kurnell and Clyde gone, it leaves just six refineries remaining in Australia. The Federal Government has downplayed the impact, saying most of the oil refined at the Kurnell site was imported. "The independent national energy security assessment established excess refinery capacity in the Asia-Pacific region, and already 80 per cent of the crude oil refined at Kurnell is imported," said Resources Minister Martin Ferguson. "There are mature import channels and ample product available to meet our needs and I am confident there will be no problems, difficulties in terms of the supply of fuel to Sydney or any other place in Australia."  Caltex will now incur significant costs as it closes the Kurnell refinery totalling around $430 million. It will also pump $250 million into converting and expanding the current import facilities. The closure of the Kurnell site is expected to be completed in the second half of 2014. Unions, meanwhile, are calling on the Federal Government to lobby Caltex to prevent the closure. Australian Workers Union national secretary Paul Howes says both the State and Federal governments have neglected the Kurnell refinery. "Why aren't they stepping in here and saying, 'Chevron, if you want the right to exploit our natural resources in the form of the Gorgon project - a $48 billion natural gas project - then you have the obligation through your 50 per cent share holding of Caltex to ensure that just a little bit of the crude oil is value-added in Australia."

By ABC News

July 27, 2012:

SYDNEY -- Caltex Australia (ASX: CTX.AX) has announced it will close its Kurnell oil refinery and turn it into a major transport fuels (petrol, diesel, and jet fuel) import terminal. More than 330 employees will lose their jobs, while up to 300 contractors could face the cut. Caltex said the refinery was old and relatively small and couldn't compete against more modern, large-scale, and efficient Asian refineries. The refinery has been operating for 57 years, and Caltex said the Kurnell refinery was set up to process sweet crude oil but was increasingly handling heavier crude-oil imports, putting it at a competitive disadvantage.

Closure of the refinery will reduce the company's exposure to volatile refining earnings and cut capital expenditure, as Kurnell needed significant capex to be run safely and reliably. Caltex said Kurnell lost AU$208 million last year and another AU$60 million in the first three months of this year, which forced the company's hand. The company will spend AU$430 million to close the refinery and spend approximately AU$250 million to convert it to an import terminal, beginning in 2015, once refining is halted in the second half of 2014. Work is expected to take several years. To pay for the transformation, Caltex is reducing its dividend payout ratio from the current level of 40% to 60% of reported earnings down to between 20% and 40% while the conversion goes ahead, and it will revert to the normal dividend payout ratio in 2014, pending successful closure of the refinery.

Woolworths, which sells about a third of Kurnell's output, said the closure would not affect its retail operations. Last month, Shell closed its smaller Clyde refinery in western Sydney, also converting it to an import terminal, with the loss of more than 220 jobs. Together with Kurnell, the two refineries represented 27% of Australia's oil refining capacity.

More job cuts

Caltex is not the only company cutting staff. In tough times, companies look to reduce their costs as revenues fall, and the most obvious target is employee costs. Energy Resources of Australia (ASX: ERA.AX) has warned of job cuts at its Ranger uranium mine as the company suspends mining and begins underground exploration after posting a AU$60 million loss for the six months to June 2012. ERA has warned that the near-term market for uranium remains challenging, but the long-term outlook is encouraging, with China expected to build many more reactors. Rio Tinto (ASX: RIO.AX) owns 70% of ERA. Another 164 jobs will also go with the closure of a Victorian aircraft engine overhaul facility co-owned by Qantas (ASX: QAN.AX). The company has blamed a decline in demand for engine overhaul services for the closure.

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By Dailyfinance.com

July 26, 2012:

A power outage on Friday evening at Valero Energy Corp.’s Meraux refinery, and attempts Saturday to restart the units, likely led to the Sunday morning fire in the refinery’s crude oil unit and the foul odors and deep orange flames reported by neighboring residents, according to a Louisiana Department of Environmental Quality field interview form released to The Times-Picayune this afternoon and interviews with officials. Some initial flaring occurred after the 11:20 p.m. Friday power outage. The 2 a.m. Sunday crude oil fire caused the refinery to shut down again and triggered additional flaring, according to authorities and witnesses. The exact chemicals and the amount discharged likely will not be known until next week when DEQ receives the mandatory report from Valero. Valero must file a report postmarked at least seven days following any discharges larger than permitted amounts.

Suzanne Kneale, who is a member of a concerned citizens group consisting of residents near the refinery, filed a DEQ complaint on Sunday stating that Saturday morning both of the refinery’s flares were in use and “the south flare flame was deep orange with a sooty looking trail.” She stated that by Saturday evening, she had observed a large discharge that the wind was carrying north of Judge Perez Drive. Last fall, Murphy Oil USA sold the Meraux refinery, 2500 E. St. Bernard Hwy., to Valero for about $325 million plus the value of hydrocarbon inventory on hand, which was about $300 million. On Saturday evening, St. Bernard Parish residents also described a beeping alarm coming from refinery. That evening, hydrogen sulfide levels were measured as high as 78 part per billion by Valero’s ambient air monitor on Ventura Drive and Kneale said that the high readings occurred during the same time she observed flaring and a larger than usual discharge.

Residents of the Floral Estates neighborhood adjacent to the plant complained of odors. St. Bernard Parish fire department officials responded to the early Sunday morning fire but Fire Chief Thomas Stone has said that no one was in danger. Portions of Judge Perez Drive and St. Bernard Hwy. were briefly closed, as a precautionary measure, during the response effort.

By Nola.com

July 26, 2012:

CALGARY — Imperial Oil, one of Canada’s largest producer oil and gas producers and refiners, reported a 13 per cent drop in second quarter income on planned and unplanned outages and weak commodity prices. The Calgary-based company said Thursday higher costs and lower upstream revenues offset strong refining margins during the quarter, pulling net profits to $635 million, down from $726 million a year prior. On a per share basis, profits fell a dime to 75 cents per share from 85 cents per share during the same quarter in 2012. Net income from Imperial’s refining operations jumped to $232 million during the quarter from $64 million a year prior, despite maintenance costs, said chief executive Bruce March.

“Our downstream business continued to contribute solid earnings despite significant refinery maintenance activities, which affected our second quarter results by $120 million,” March said in a statement. “Substantial planned maintenance at our Strathcona and Nanticoke refineries along with unplanned downtime at Sarnia reduced our ability to fully capitalize on strong mid-continent refining margins.” Imperial said production during the quarter averaged 269,000 barrels of oil equivalent per day, down from 292,000 boe per day a year prior. The drop in production was attributed to planned maintenance at Syncrude and Cold Lake, as well as reduced volumes as a result of natural gas asset sales in 2011. Weak commodity pricing trimmed $345 million off profits during the quarter while refinery and Syncrude outages cost $230 million between them, March said.

Cash from operations during the quarter rose to $1.32 billion from $656 million a year prior, due to working capital effects, Imperial said. The company’s ability to post strong results from its refining operations despite lower production highlighted the benefits of integrated operations in a poor pricing environment, said Andrew Potter, analyst with CIBC World Markets. “While these are strong results, they are down significantly from the $455 million record established in (the first quarter),” said Potter, in a morning note. “However, we note that reported earnings were adversely affected by planned maintenance at Imperial’s Strathcona, and Nanticoke facilities, in addition to unplanned downtime at the Sarnia facility.” Refinery throughput fell by 3.3 per cent during the quarter to 384,000 bpd, the company said. Imperial, 69.6 per cent owned by Exxon Mobil Corp, is known for its national chain of Esso brand gas stations and is one of the largest investors in Alberta’s oilsands. Along with a stake in the Syncrude Canada Ltd oils sands operation, the company operates the 155,000 barrel per day Cold Lake oilsands project and will open the first 110,000 bpd phase of its Kearl oilsands mine by year-end.

Production at Cold Lake and Syncrude fell 14 per cent and four per cent, or to 60,000 bpd and 152,000 bpd respectively during the quarter on maintenance activities. Conventional crude production rose 25 per cent to 20,000 bpd during the quarter from the year prior when a pipeline outage forced a production slow down at the Norman Wells field in Northwest Territories. During the second quarter bitumen prices fell by 17 per cent from the year prior to $56.90 per barrel, with synthetic crude prices decreasing 19 per cent to $90.11 per barrel over the same period. Conventional oil fell 22 per cent to $76.77 per barrel year-over-year for the quarter. Natural gas production fell to 24 per cent to 195 million cubic feet per day on divested producing properties. Prices for the resources dropped by 51 per cent from the prior year, to $1.80 per mmcf per day. Imperial’s second quarter revenue slid to $7.51 billion from $7.77 billion for the same quarter in 2011. Imperial gained 36 Canadian cents to $42.77 per share Thursday on the Toronto Stock Exchange.

By Calgary Herald

July 26, 2012:

Australia is set to become Asia's biggest importer of fuels, opening up trading opportunities in one of the world's most profitable energy markets, as ageing Caltex and Shell oil refineries near Sydney shut and other plants look vulnerable. The trend will reverberate across energy markets since Australia burns top-quality fuels and a rise in imports means more competition for Europe -- Asia's top buyer of such grades. That means Western buyers and other Asian users of diesel and gasoline could see higher pump prices, as Australia snaps up cargoes, while refiners making the fuel rake in fatter profits. Rising imports may allow trading houses such as Vitol and Glencore, and refiners in South Korea, Japan and Taiwan, to tap a fuel market that was until now supplied by major oil firms which dominate Australia's refining business. "Australia is a big fish and it is getting bigger," said Chris Gascoyne, managing director of consultancy FACTS Global Energy in Singapore.

"It is one of the few countries where the price of gasoline, jet fuel and diesel is determined by the cost of import rather than the cost of production. It's a market that you would love to sell in," he added. Australia is already Asia's top importer of diesel, while combined with rises in jet fuel and gasoline imports in the next five years it is on track to surpass Indonesia as the biggest fuel importer, consultancies FACTS and JBC Energy say. Diesel demand in Australia is expected to rise at a steady pace of about 2 percent up to 2015, boosted by a once-in-a-century resources boom that needs fuel for excavators to dig up minerals and trucks to ferry iron ore, coal and equipment. At the same time, ageing Australian refineries are being closed as their owners grapple with higher global oil prices, a drop in Australian crude output, as well as rising labor and financing costs due to a strong local dollar.

BUILT IN THE 1920s

Reflecting these pressures, Royal Dutch Shell (RDSa.L) will close its 79,000 barrels-per-day Clyde Refinery near Sydney in September -- built in the early 1920s and the oldest in Australia. Caltex Australia (CTX.AX) also confirmed this week the closure in 2014 of its 57-year-old Kurnell refinery, which has a capacity of 124,500 bpd. Both refineries will be converted to import terminals. CEO Julian Segal said the loss-making Caltex plant lacked the scale to compete with modern refineries in Asia, while Australia faced a "challenging business environment". Analysts say the 108,600-bpd Lytton plant, also operated by Caltex, and Exxon Mobil's (XOM.N) 80,000-bpd Altona refinery remain vulnerable to closure although both firms have said they will continue operating these plants. Australia's total refining capacity will fall by 25.5 percent to 593,000 bpd by 2015 after the announced closures and could decline by another 30 percent if Altona and Lytton shut. The shutdown of Clyde alone will raise Australia's fuel imports by 26 percent to about 340,000 bpd, according to FACTS.

The closure of one more refinery like Kurnell will boost imports to 420,000-450,000 bpd, surpassing Indonesia, the consultancy said. Indonesia now imports about 397,000 bpd of gasoline, jet fuel and gasoil.

INCREASED OPPORTUNITIES

As well as being Asia's top diesel importer, Australia is the second-biggest jet fuel buyer and shares third position with Vietnam for gasoline, according to FACTS. Existing suppliers may not give up their market share easily. Caltex, which provides about a third of all transport fuels in Australia, has said it remains committed to supplying the market despite the move to close Kurnell. Australia's diesel imports have already been rising ahead of the closures. Exports from Singapore jumped more than 50 percent in June to over 450,000 metric tons (496,040 tons), or 3.4 million barrels, from May, data from the city-state showed. "This will provide increased opportunities for traders, refiners, terminal operators and shippers," Gascoyne said. Shell, Exxon and Chevron have largely secured diesel and gasoline barrels from their Singapore refineries, with BP (BP.L) buying their requirements from both Singapore and North Asia. The purchases have tightened supply and increased premiums for diesel to a 15-month high in July. "Diesel will remain the tightest, with Australia expected to continue ranking number one among importers in Asia Pacific ahead of Indonesia till 2017 at least," said David Wech, managing director at JBC Energy.

Cash premiums for diesel with 10 parts per million (ppm) sulphur, a grade used by Australia, have more than doubled to above $4 a barrel to Singapore quotes this month compared with $1.80-$2.40 a year ago, boosting refinery margins.  Australia will need to import about 5.4-6.6 million barrels a month of diesel just with the Clyde Refinery shutting. That's almost equal to Europe's average monthly imports last year, said Suresh Sivanandam, an analyst at Wood Mackenzie. Refiners in Singapore, Japan, South Korea and Taiwan are Asia's top producers of cleaner-burning fuels and will be the main suppliers to Australia. India's Essar Oil (ESRO.NS) may be another supplier, Sivanandam said.

Yet, upward pressure on fuel prices may be limited as the Middle East and Asia build more refiners and churn out surplus oil products, analysts say. According to FACTS, the Asia-Pacific region exported around 170,000 bpd of gasoline in 2011 and 600,000 bpd of gasoil. Australian fuel prices have always been higher than the regional trading hub Singapore to discourage local refiners from exporting. The retail price of diesel is a sum of Singapore price, plus shipping cost and taxes and administrative costs.

MORE CLOSURES

Australia's refining outlook is unlikely to improve soon as a new carbon tax raises operating costs for refineries further. "Australia is now a significantly more costly place to operate a refinery in than what it was a few years ago," FACTS' Gascoyne said. Strict environmental laws have also prevented refiners from upgrading their facilities to process cheaper high sulphur crude, Wood Mackenzie's Sivanandam said. "There is only one refinery in the West Coast (Kwinana) that will definitely run as it's the only refinery in Western Australia and it's very close to the region where all the mining activities are taking place," Sivanandam said.

By Reuters