nrma fuel security report

8/12/2019 NRMA Fuel Security Report

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Australias Liquid Fuel SecurityA Report for NRMA Motoring and Services

Prepared by John Blackburn AO

28 February 2013


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Executive Summary .................................... .......................................... .................. 3

Introduction .................................... .......................................... ................................ 4

Oil Dependence ..................................... .......................................... ......................... 6

Food supply dependencies ........................................ ....................................... 6

Pharmaceutical supply dependencies .......................................... ................. 7

Utilities dependencies .......................................... .......................................... ... 7

Business and personal transportation dependencies ................................ 7

The Liquid Fuel Supply Chain ............................................................................. ... 8

Liquid Fuel Stockholdings ......................................... .......................................... ... 9

Liquid Fuel Supply Risks ..................................... .......................................... .......... 1 1

Liquid Fuel Supply Emergency Responses ........................................................ 16Resilience ................................................................................................................... 17

Liquid Fuel Security in a Resilient Society ................... ...................................... 19

Conclusions ............................................................................................................... 21

Recommendations ................................................................................................... 22

Contents

About the author

Air Vice-Marshal John Blackburn AO (Retd)

John retired from the Royal Australian AirForce in 2008 as the Deputy Chief of theAir Force following a career as an F/A-18 fighterpilot, test pilot and strategic planner. He is nowa consultant in the fields of Defence andNational Security.

In 2012 he was the Chairman of the KokodaFoundation Board, the Deputy Chairman ofthe Williams Foundation Board and a directorof the Australian Strategic Policy Institute

Council. He holds a Masters of Arts and aMaster of Defence Studies. In February 2011the Kokoda Foundation published his reportOptimising Australias Response to the Cyber

Challenge which he co-authored withDr Gary Waters.


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3 Australias Liquid Fuel Security: A Report for NRMA Motoring and Services

Executive Summary

As the worlds ninth-largest energy producer,Australia has abundant renewable and non-renewable energy resources. Despite theseresources, we are heavily dependent onimports of refined petroleum products andcrude oil to meet our liquid fuel demand.This import dependency has increased inrecent years.

Our transport systems are wholly oil dependent.The reasons for this dependency may beeconomically sound due to the relative lower costof oil but the lack of fuel diversity significantlyimpacts our resilience if we experience supplyinterruptions or a reducing availability ofaffordable oil supplies in the future.

The very small consumption stockholdingsof oil and liquid fuels in Australia, combinedwith what appears to be a narrow assessmentof our fuel supply chain vulnerabilities,does not provide much confidence that the

strategic risks to our fuel supply chain arewell understood and mitigated by our nationsleaders, the business community or thepopulation at large.

In essence, we have adopted a shell beright approach to fuel security, relying on thehistorical performance of global oil and fuelmarkets to provide in all cases. Unfortunately,as a result of our limited and decreasingrefining capacity, small stockholdings and longsupply chains, our society is at significant riskif any of the assumptions contained in thevulnerability assessments made to dateprove false.

We would not be the first country to get ourassumptions wrong. In that respect, historycan be relied upon.

Left: Oil wells burn out of control outsideKuwait City, 1991. Oil supply interruptions inthe Middle East can be felt rapidly in importdependent countries such as Australia. Above:Widespread power outages in 2012 in the U SA,after Superstorm Sandy, caused long lines atservice stations with power, as residents filledjugs with fuel for their portable generators.

AP via AAP / Greg Gibson

AP via AAP / Peter Hermann


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As the worlds ninth-largest energy producer, Australiahas abundant renewable and non-renewable energy resources.Despite these resources, we are heavily dependent on importsof refined petroleum products and crude oil to meet our liquidfuel demand and our import dependency has increased overrecent years. Any major interruption to the supply chain wouldsignificantly impact our way of life.

Australias LiquidFuel Security


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200

400

600

800

1000

1200

Barrelsper

day(000s)

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

Annual productionforecasts at 90%, 50%and 10% likelihoods

The reason we are dependent on importedenergy, despite having an abundant energyresource base, is that the types and quantityof energy we currently consume in the form ofliquid fuels cannot be readily supplied from withinour own country. We are therefore dependenton global supply chains. As our energy needsincrease in the future, so will our dependenceon imported oil and in turn our financial burden.Figure 1 illustrates the supply challenge posed bya possible 50% increase in imported oil by 2015in the face of decreasing Australian production.

The Australian Government does not viewthis situation as an energy security threat;

the 2011 National Energy Security Assessmentfound that a significant reduction in refiningcapacity is not expected to cause fuel securityproblems, given our access to well-functioningglobal markets that can provide adequate andreliable supplies.2

This report seeks to contribute to the publicdebate by raising the question of whetherwe should be concerned about this increasingdependency and whether or not our nation isresilient enough to withstand interruptions tothe supply chain.

In order to explore the issue this report will:

Sketch an overview of our oil dependenceand the fuel supply chain;

Outline how we are critically dependenton an uninterrupted supply of liquid fuelsin the transport sector and;

Examine whether or not we are resilientenough to deal with future supplyinterruptions.

While the probability of supply interruptionsmay be low in the majority of cases, theconsequences of such interruptions may

be so severe as to warrant the samecontingency preparations we apply in otherareas. One example is Defence. We spendin excess of $25,000,000,000 per annumto build a Defence Force which is capableof addressing what are, in many cases,low probability but high consequence risks.

As this report will discuss, in the case of liquidfuels security we do not appear to be preparedto invest in our national resilience, preferringto leave market forces and global supply chainsto provide for us in the case of an emergencyarising or in circumstances where risk levelsbecome elevated above the historical norm.

Unfortunately, our unwillingness to assure ourliquid fuel supplies puts at risk many of thesocietal functions that we take for granted.For example, without an adequate supply ofliquid fuels we could not access health services;food production and distribution would be

severely curtailed; most businesses could notoperate; our personal and much of the publictransportation system could not function; andour Defence Forces could not operate.

Essentially, our society as we know it wouldcease to function.

Supply shortfall an increasing financial burden

Figure 1: Australias imported oil dependence 1

Australia must have a maturedebate about our energy sector andimplications of different decisions.This means there must be a deepercommunity engagement in energypolicy issues and outcomes.

Draft Energy White Paper, 20 11 3

1Peak oil & the advent of demand destruction,Zeibots & Bell, Australian Planner, December 2010.

2http://www.ret.gov.au/energy/Documents/ewp/2012/Energy_%20White_Paper_2012.pdf, p 126.

3http://www.ret.gov.au/energy/facts/white_paper/draft-ewp-2011/Pages/draft-ewp.aspx, page xii.

40%

Australianconsumption

Australian production

ACTUAL FORECASTConsumption atcurrent growth trends

50%

10%

90%

60%


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Figure 2 is the International Energy Agency(IEA) breakdown of Australian oil consumptionby sector, comparing the 1973 and 2009statistics. Energy diversification has takenplace in the industry and other sectorsover time; however, in the case of the transportsector, it is evident that diversification hasnot occurred.

The dependence of our society on oil, andin particular transport fuels, cannot be overemphasised as the delivery of essential goodsand services cannot occur without reliablefuel supplies.

Food supply dependencies

Australia is a net exporter of food but we arenot self-sufficient in the domestic food supplychain. Global supply networks are increasinglyimportant in the Australian food sector, andmany types of foods, or inputs to food, are

imported. While domestic manufacturing could,over time, be re-tooled to replace such imports,in a sudden crisis we need mechanisms to dealwith immediate shortages.5There are twoways disruption of oil supplies might impactfood supplies: the supply of imported foodsand the distribution of those and nationallyproduced food.

The question for Australians to consider is:how resilient is our food chain in the face ofdisruption? It is reasonably resilient when anatural disaster strikes but highly vulnerableto the combined effects of more than onedisaster. In the event of a major disruptive

event, the risk that Australians in affectedregions would go hungry is growing, especiallyif separate events in eastern states wereto coincide.6

Our food supply chain is potentially vulnerableto large-scale events such as a national fuel

Breakdown of Australian sectoral final consumption by source*

Our transport systems are wholly oil dependent. While thereasons for this may be economically sound due to the relativelower cost of oil, the lack of diversity significantly impactsour resilience in the face of a supply interruption or a futureresource limitation.

Figure 2: Australias oil dependence4

4 http://www.iea.org/stats/pdf_graphs/AUBSFC.pdf5Resilience in the Australian food supply chain, February

2012, Department of Agriculture, Fisheries and Forestry.6ibid, page vi.

30

0

5

10

15

20

25

Mtoe

Other

Biofuels & wasteElectricityNatural gasCoal/peatOil

Industry

1973 2009

Transport

1 973 2009

*Includes non-energy use.Includes direct use of geothermal/solar thermal and heat produced in CHP/heat plants.Includes residential, commercial and public services, agriculture/forestry, fishing and non-specified.

Oil Dependence

Other sectors1973 2009


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Chilled/frozen goods

Limited retail stockholdings wouldimpact all Australians: at anindividual level, in our businessesand in Government services suchas our Defence Forces. No one

would be immune from the impactof fuel shortages.

Dry goods

Hospital pharmacy supplies

Retail pharmacy supplies

Petrol stations

shortage; for example, a shortage of dieselfuel for food distribution in the case of anational fuel emergency.7The huge scale ofour food distribution system is surprising tomost people. In NSW alone, food distributioncomprises 14 million cases a week through25,000 truck trips from retail distributioncentres and direct suppliers to retail outlets.8

The average stockholdings of food insupermarkets is estimated to be seven daysin the case of refrigerated/frozen foods andabout nine to 10 days in the case of packagedfoods, as illustrated in Figure 3. Householdshave between two and four days in stocks.

Supply chain efficiencies are likely to reduce thelevel of stockholdings even further in the future.

Pharmaceutical supply dependencies

Pharmaceuticals are primarily an importedproduct and are distributed through a

small number of centralised warehouses.Chemists hold approximately seven days ofpharmaceutical supplies in stock at normalusage rates. Hospitals hold about two to threedays worth of stock to minimise inventorycosts and waste. Any interruption to thepharmaceutical logistics chain could provedisastrous for many people. As with foodsupplies, the pharmaceutical distributionsystem is wholly dependent on the transportinfrastructure and the continuity of fuel supplies.

Utilities dependencies

The analysis of supply chain vulnerabilities in

the case of natural disasters has highlightedthe dependence of utilities on the transportinfrastructure and in turn the fuel supply chain.For example, the supply of drinking water iscritically dependent on transport to providechemicals for purification and to maintainwater distribution systems.

Business and personal transportationdependencies

NSW Government travel statistics for Sydneyshow the apportionment between public andprivate transportation in 2012.9In Sydney,67.9 per cent of all resident travel was by car,with only 11.1 per cent by bus or train. However,train usage during peak hours is very high,with passenger loads in the order of 120 percent to 150 per cent of seating capacity.Any interruption to fuel supplies, or even anysignificant increase in the cost of fuel, wouldhave a dramatic effect on the functioningof Sydney. The public transportation system

would not be able to cope with the largeincrease in demand. The impact on workers,businesses and services would be significant.

7ibid, pages viiiix.8ibid, page 6.

9NSW Bureau of Transport Statistics NSW and SydneyTransport Facts April 2012.

Figure 3: Australias estimated stockholdings at point of sale

1DAYS SUPPLY 2 3 4 5 6 7 8 9


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Liquid fuels are a significant componentof Australias energy system, representing48 per cent of final energy consumed.Transport alone consumes approximately35 per cent of Australias energy use andsome 70 per cent of all liquid fuel supplies.

Australian refineries currently produce around75 per cent of Australias petroleum needs.However, domestic refining capacity willreduce by around 10 per cent in 2013 with theclosure of the Clyde refinery in Sydney and afurther 18 per cent when the Kurnell refineryin Sydney closes. These closures will result ingreater reliance on imports for refined product.

Recent comments made by a Shell spokesmansuggest their Geelong refinery may also notbe financially viable.10The loss of this refinerywould leave only four in Australia.

Beyond 2014 it is likely that increasingdomestic production costs and the cost of

upgrading ageing refinery infrastructure willfurther reduce Australian refining capacity,especially given the option of lower costrefined product imports.

Figure 4 illustrates the impending changesin Australias balance of imported and locallyrefined fuels as a result of the closure of28 per cent of Australias oil refinery capacityby 2014.

The loss of refining capacity will probablychange the sources of Australias petrol anddiesel fuel supplies, as illustrated in Figure 5.

The majority of Australias crude oil production is exportedbecause the qualities and characteristics of the oil are moresuited to export markets than the Australian refinery market.Australian refineries currently source around 80 per cent oftheir crude oil needs from overseas.

Figure 5: Impending changes in the sources of Australias petrol and diesel fuel suppliesFigure 4: Impending changes in Australias balance of imported and locally refined fuels

The Liquid Fuel Supply Chain

43%REFINED IMPORTS

57%REFINED INAUSTRALIA

15%OF TOTAL FROM

AUSTRALIANCRUDE OIL

2014CLYDE & KURNELL REFINERIES CLOSED

2012

25%REFINED IMPORTS

75%REFINED INAUSTRALIA

15%OF TOTAL FROM

AUSTRALIANCRUDE OIL

10 http://www.heraldsun.com.au/business/companies/future-of-shell-geelong-refinery-borderline/story-

fndgp8b1-1226476443125, 18 December 2012.

2012

2014 Petrol

Diesel

Petrol

Diesel

LOCALLY REFINED SUPPLY

55%45%

35%65%

38%62%

90%10%

IMPORTED


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TURKEY 100

FRANCE 10132 69

SPAIN 10864 44

GREECE 114

SWEDEN 116

BELGIUM 13865 73

SLOVAK REPUB 14560 85

GERMANY 14337 106

UNITED STATES 98 76 174

JAPAN 17178 93

Do we know what stocks exist and wherethey are? Perhaps not. The 2011 Liquid FuelsVulnerability Assessment produced for theDepartment of Resources Energy andTourism highlighted gaps and discrepanciesin the reporting of stocks in AustralianPetroleum Statistics.12

In addition to stocks for our own use, Australiais obliged to hold oil reserves that can beused to respond to some form of global oilsupply emergency. In 1979 Australia became amember country of the International EnergyAgency (IEA). Before becoming a member acandidate country must be part of the OECD.

It must also demonstrate (amongst otherconditions) that it has, as a net oil importer,reserves of crude oil and/or product equivalentto 90 days of the prior years average netoil imports that the government couldimmediately access in a national emergency.

Figure 6 summarises the stockholding levelsof IEA member countries as of October 2012.13Australia, with only 71 days holdings was theonly country out of 28 member countriesthat failed to meet its 90-day net oil importstockholding levels. So the worlds ninth-largestenergy producer is the lowest and only non-compliant stockholder in the IEA.

Australias level of IEA reportable stockholdingshas been decreasing over time; according to anAustralian National Audit Office report, our netimport stockholding in 2002 was 310 days.By 2008 it had dropped to 101 days. Projectionsin the 2011 Liquid Fuels Vulnerability Assessment

conclude that, with growing net imports, theratio of stocks to net imports is likely to decline.In other words, our ability to meet our IEAobligations will likely decline even further.

The question is whether or not this is significant.While the failure to meet IEA obligations is

Liquid Fuel StockholdingsGiven our critical dependence on oil for the effective

functioning of our society, it would seem reasonable to have agood understanding of how much oil and petroleum productsare in the supply chain and where they are located. It wouldalso be reasonable to assume we would have some stocks inreserve in case of an interruption to the supply or shipping ofoil and/or petroleum products, to the production of products inAustralian refineries or in the fuels distribution system. This isnot necessarily the case.

INDUSTRY

PUBLIC

UK

KOREA

AUSTRALIA

222

268

113 109

HUNGARY 50 108 158

SWITZERLAND 157

ITALY 124

POLAND 101 15 116

AUSTRIA 96

LUXEMBOURG 94

71

FINLAND 13983 56

NETHERLANDS 13880 58

CZECH REPUB 12735 92

NEW ZEALAND 9583 12

PORTUGAL 10769 38

IRELAND 9728 69

Figure 6:IEA net oil stockholding levelsin days, October 2012 11

13 http://www.iea.org/netimports.asp11Net exporting members of IEA not included in Figure 6. 12ACIL Tasman Liquid Fuels Vulnerability AssessmentReport dated October 2011, page xiii.


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Figure 7: Estimated oil and liquid fuel stockholdings in Australia (Australian Institute of Petroleum, 2008)14

5 DAYS (average)

10 DAYS (max.)

2 WEEKS

(average)

2 DAYS

(average)

10 DAYS

(average)

3 DAYS

(average)

3 DAYS

(average)

CRUDE TANKS

AT REFINERIES

REFINERY PRODUCT STOCKS

AT TERMINALS

SERVICE STATION

STOCKS

STOCKS AT SEA MOTORISTS

certainly serious, the underlying lack ofstockholdings is perhaps of greater concern.Simply meeting the IEA obligations will notaddress our supply chain vulnerabilities.

The 71 days of industry stockholdings shownin Figure 6 is not 71 days of actual consumptionin Australia. It is based on a net importscalculation.15The 71 days that we report asAustralias stockholdings to the IEA is roughlyequivalent to 23 days of actual consumptionof liquid fuels.

The Australian Institute of Petroleum 2008Report Maintaining Supply Reliability

in Australia16

supports this rough estimate.It estimates there are about 10 days ofcrude oil stocks at refineries, 10 days ofpetroleum products in the distributionchain and perhaps three days in the handsof consumers, as illustrated in Figure 7.The 14 days of estimated stocks at sea are

not included in IEA estimates as they are notyet delivered to Australian territory.

The Australian Institute of Petroleum reportalso notes there is little or no surplus tankagefor crude oil at refineries and that the crudetanks operate between full and relatively lowinventory in line with the shipping pattern. Itis difficult to understand how Australia couldever meet its obligations to the IEA from crudeoil and petroleum stockholdings that appearto average 23 days of actual consumptionand which are held by private companies whoutilise those stocks for just in time delivery.

If the supply chain is broken down furtherinto specific fuel types then the supply risksbecome more apparent. For example, Australiacurrently imports 38 per cent of diesel as arefined product. The remaining 62 per cent isproduced domestically and depends largelyon imported oil; only 12 per cent of diesel

is sourced from Australian oil processedin Australian refineries. By 2014, domesticproduction of diesel could reduce to only45 per cent of domestic demand.

If the Government decided that increasedstockholdings were in our national interest,then such stockholdings would need to be incrude oil in order to avoid issues related to thecost and shelf life of refined fuels. However, adomestic refining capability would be essentialto turn those stocks into the required fuelswhen needed.

It is clear that Australia does not have a policy

or plan related to the level of refining capacitythat should be maintained in Australia.

It is difficult then to understandhow Australia could ever meet itsobligations to the IEA from crude oiland petroleum stockholdings thatappear to average 23 days of actualconsumption and which are held byprivate companies who utilise thosestocks for just in time delivery.

14 http://www.aip.com.au/pdf/AIP%20Paper%20-%20Maintaining%20Supply%20Reliability.pdf 15 The 71 days

is calculated by dividing the amount of commercial fueland oil stocks in the country by the average daily amount

of imports minus the average daily rate of oil exports (evenif they cannot be used by our refineries as they are currently

configured.) 16http://www.aip.com.au/pdf/AIP%20Paper%20-%20Maintaining%20Supply%20Reliability.pdf


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As at 2011, Singapore provided51% of Australias imports ofpetroleum products.

ACIL Tasman Fuel Vulnerability Assessment

The convenience of our modern lifestyles, particularly in largecities, leads us to expect the supermarkets and chemists willbe stocked and there will be fuel at service stations when weneed it. While city living has significant benefits, our modernlifestyles have, unfortunately, made us complacent.

We view fuel largely as a commodity suppliedby the market in response to consumerdemand and not as a fundamental enabler ofcapabilities that are essential to the effectivefunctioning of our society. This way of thinkingleads to a majority of consumers, includingmany in Government, assuming that fuelsupplies will be provided by the market in allsituations. We should be asking what measuresare being taken to assure a minimum essentiallevel of supply in the event of an interruptionto the fuel supply chain.

The fuel supply chain is comprised of multipleelements, each with the potential to impact

the delivery of fuel to the end customer.These elements include: oil sources, tradingsystems, shipping, ports, refineries, transport,distribution/storage, point of supply andconsumers, as illustrated in Figure 7.

The 2012 Energy White Paper17and its supportinganalysis primarily addresses two stages of thefuel supply chains near term risks.

The first is the potential for interruption to theoil supply, as has historically occurred duringpast Middle East conflicts. The 2012 EnergyWhite Paper and the associated 2011 LiquidFuels Vulnerability Assessment rightly pointout that in each case, oil markets have adjustedto address these challenges. While the cost ofoil may rise during such events, the nature ofthe global markets is such that supply can bemaintained. In this case, historical precedentdetermines that the risk of supply interruption

would be low.

A second scenario, explored at some depth inthe 2011 Liquid Fuels Vulnerability Assessment,is that of a 30-day interruption to supply fromSingapore, a scenario type also specified bythe Department of Resources, Energy and

Liquid Fuel Supply Risks

17The 2012 Energy White Paper sets the AustralianGovernments strategic policy framework to address

energy sector challenges and future directions in the wayenergy is produced and used.


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Tourism in their assessment. The broadconclusion by the Department of Resources,Energy and Tourism was that oil markets wouldrespond adequately to such an event and theimpact on Australian consumers would becontained. The assessment concludes that oiland fuel supplies would continue but that theprice of the oil or petroleum products wouldrise during the supply disruption. The impact ofprice rises on our economy and the affordabilityof transport for the average consumer wouldbe highly dependent on the level of price riseand the exchange rate at the time.

Fuel price impacts

As Figure 8 illustrates, there is a clearrelationship between major global events andpump prices. These global events as displayedon the graph relate to spikes in crude oil priceswhich manifest themselves into pump pricemovements.

The history of petrol price movements inAustralia since the 1970s shows that crude oilprice spikes are translated into higher pricesat the pump within 7 to 10 working days. Theprice rises are passed on through the entiretransport logistics chain, resulting in higherprices for all goods and services. These fuelprice spikes have tended to reverse themselvesonce the upward pressures associated with theoil price spike have abated.

However, the 1978 to 1982 oil crisis, whichwas associated with the Iranian Revolutionand the subsequent Iran-Iraq War, showedhuge price spikes that have not been reversed.

The average price of petrol in Australia rosefrom 19.7 cents per litre in 1978 to 39 cents perlitre in 1982. This doubling was not reversed.Average prices have trended upwards eversince, apart from during the 2008 GlobalFinancial Crisis.

The initial price surge of the 1978-1982 oil crisiswas driven by disruptions to oil supply associatedwith the Iran Revolution. However, the secondand third spikes in this period were attributedto a resurgence of global economic activity(in Europe and the United States) combinedwith speculative demand driven by fearsof military conflict in the Persian Gulf andconsequential oil supply interruptions. This wasin the context of high oil production capacityutilisation rates in OPEC countries and worldwide.

A period of continued supply interruptionsand production cuts throughout 1980 and 1981resulted in increasingly higher fuel prices for

Australian motorists.

This period demonstrates that ongoing tensionsassociated with initial supply disruptions canlead to significant price increases that havenot been reversed. The liquid fuel vulnerabilityissue becomes a chain of events that can

result in a doubling of average fuel prices formotorists. Fuel vulnerability in the currentglobal environment could be easily heightenedby a similar chain of events.

It is worthwhile considering what other risksshould be included in an analysis of the fuelsupply chain that are outside the terms ofreference of the 2011 Liquid Fuels VulnerabilityAssessment. The Vulnerability Assessmentaddresses the global market and wider supplychain perspectives but not the vulnerability ofAustralias specific supply chain in any detail.

Some potential near to mid term risks are not

addressed in depth in the 2012 Energy WhitePaper. These include the consideration of liquidfuels needs during times of conflict. There islittle comfort in an energy security assessmentthat is only valid during times of peace andregional stability. Figure 9 provides an overviewof some of the supply chain vulnerabilities.

Figure 8: Global instability causes unpredictable price spikes (United States Energy Information Administration)18

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Jan-Feb2012

$5.00

$4.00

$3.00

$2.00

$1.00

0Quarterlyretailpricepergallonofregulargradegas($US)

Iran/Iraq War

Operation Desert StormSeptember 11, 2001

OPEC cuts output

HurricanesKatrina and Rita

Global Financial Crisis

Arab SpringUprisings

Price adjustedfor 2012 dollars

Price at the pumpat the time of sale

18United States Energy Information Administration,sourced from http://www.whitehouse.gov/energy/gasprices


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BRISBANE

CANBERRA

SYDNEY

MELBOURNE

ADELAIDE

PERTH

DARWIN

AUSTRALIAS CRUDE OIL SUPPLIES

85% IMPORTED

15% AUSTRALIAN

SINGAPORE

40% OF

SINGAPORES

OIL COMES FROM

THE MIDDLE EAST

CONFLICT IN THE

SOUTH CHINA SEA

WOULD IMPACT

TRADE & SHIPPING

CONFLICT OR

PIRACY COULD

IMPACT REGIONAL

TRADE & SHIPPING

CONFLICT IN THE

MIDDLE EAST COULDIMPACT EUROPEAN

FINANCIAL STABILITY

JAPAN

51% OF AUSTRALIAS

IMPORTED PETROLEUM

PRODUCTS COME

FROM SINGAPORE

FINANCIAL & TRADE

SYSTEMS UNDERPIN ALL

FUEL SUPPLY CHAINS

Figure 9: Fuel supply chainelements and vulnerabilities

Remaining refinery locations in Australia(post Clyde and Kurnell closures)


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20Defence Ministers speech to the Lowy Institute,9 August 2012.

21 http://www.aip.com.au/pdf/AIP%20Paper%20-%20Maintaining%20Supply%20Reliability.pdf page 16.

Trading systems

While the oil trading market is well establishedand apparently robust, the purchase andshipment of oil requires trusted trading andcredit systems. The viability of some shippingcompanies in times of significant economicturbulence should be considered. Ongoingdebate regarding the risk to the globaleconomic system is resulting in agencies, suchas the United States Department of HomelandSecurity, conducting studies into the impactsof supply chain failures. Global supply chainsare dependent on monetary confidenceand bank intermediation. Growing and

unsustainable debt levels, as evidenced inEurope and many other developed nations,put at risk the solvency of significant partsof the banking system. Their failure could leadto a corresponding collapse in segments ofworld trade.

Shipping

In times of significant economic turbulence,the security of shipping lanes is also an issuefor consideration. Piracy, accidents, naturaldisasters, threats from state or non-stateactors and closure of shipping lanes in timesof tension or conflict they all have thepotential to impact the free flow of shippingand the timely delivery of oil supplies toAustralia.19Defence planning has for decadesincluded scenarios of defending the sea-air gapto the north of Australia. In such contingencyoperations, imported oil and petroleum suppliescould be adversely impacted. In particular,

Defence operations in the north of Australiawould rely on the shipment of processed fuelsinto ports across the north of the countryas there is not sufficient transport capacityin-country to transport the required amountsof fuels by land. The shipping lanes to these

ports would run through the potential areaof operations and would therefore be at risk.It is concerning to note the Defence Ministersrecent speech to the Lowy Foundation:Fuel supply is a critical factor in sustainability While the fuel supply chain can meet currentrequirements, its resilience under the stressof major operations is much less certain. 20

Ports

In States with no refineries (South Australia,Northern Territory, Tasmania and NSW [by2014]) all liquid fuels must be imported.Ports can be subject to disruption from a range

of incidents including accidents, equipmentfailures, industrial action, natural disastersand terrorist attacks. For example, the primaryfuel port in South Australia is at Port Adelaide;a single, narrow, shipping channel services theport. A blockage of that channel as the resultof a shipping accident/incident, could result

in significant and prolonged disruption to fuelsupplies for Adelaide and a large part of thestate. Such a disruption would be beyond theability of market forces to respond, given theinability to transport sufficient fuel stocksoverland to South Australia. Similarly, theDarwin Port Facilities could be a limiting factoras they would be the single point of entryfor fuels to support domestic demands andpotentially a significantly higher demand forDefence operations in times of contingencyoperations. The Australian Institute ofPetroleum has also raised concerns aboutthe adequacy of ports infrastructure to meet

increased demand in the future.21

Refineries

There is little to no surplus tankage for crudeoil at refineries so a delay in arrival of oilshipments could interrupt fuel production.As with ports, refineries can be subject to

academia.edu/PeterJohnston/Papers/840169/Energy_Security_Threats)

19For a discussion of such threats see TTCP Report,Energy Security Threats, June 2011 (http://drdc-rddc-gc.


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22ACCC Report Monitoring of the AustralianPetroleum Industry, Dec 2009, page 34.

23 http://www.aip.com.au/pdf/AIP%20Paper%20-%20Maintaining%20Supply%20Reliability.pdf, page 8.

24Ibid, 10.

disruption by a range of incidents includingaccidents, catastrophic equipment failures,industrial action, natural disasters andterrorist attacks. According to the AustralianCompetition and Consumer Commission,in 20082009 almost every Australianrefinery had major production outages,both planned and unplanned.22

Transport

The distribution of oil and fuel within Australiais dependent on road transport (with theexception of limited rail transport capacityin North Western Australia for the mining

sector). The number of road tankers availablewould limit interstate transportation of fuels.Fuel shortages would be compounded by ashortage of fuel to transport the fuel itselfto the end-consumers.

Depots and points of supply

An issue of some concern is the decreasingstorage capacity across the supply chain as aresult of improved roads and delivery trucks.Approximately 80 per cent of petroleumproduct is delivered directly from the refineryor import terminal to service stations or otherend-consumers. 23As a result, there is lessstorage capacity along the supply chain anda resulting decline in the amount of product inthe supply chain ex-refinery. Whilst this maymake economic sense, the reduction in productlevels in the supply chain makes the supplychain less resilient. Large and unanticipated

surges in demand will always present asupply challenge because of the commercialimperative not to hold excess stocks in any partof the supply chain, and physical limitations inthe supply chain.24


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The IEA publishes the Emergency Responsereports for Oil and Gas Security of 20 of the28 IEA member countries. It is worthwhilecomparing the approach of differentgovernments to the stockholding issue.

The IEA report for the United Kingdom (UK)notes that the current reliance on imports isonly marginal and that the country has wellbeyond the 90-day IEA stockholding levels(268 days as of October 2012). The UKplaces stockholding obligations on industry.The UKs projected import dependency willincrease to 44 per cent of the consumptionof oil by 2020. That level of imports has been

assessed as having a significant impact on theUKs oil security.25The UKs concern at havinga 44 per cent import dependency contrastswith Australias complacency at having an85 per cent import dependency.

The IEA report for Norway notes that asa net exporter of oil, Norway does not havean obligation to hold IEA stockholdings.However, Norway requires its industries tohold 20 days of stocks for sales/imports inthe domestic market. Release of company-heldstocks is the preferred course of action inthe event of collective IEA action.26

So what would happen in Australia in thecase of a disruption of supply? Currentlythere are no public oil stockholdings and theAustralian Government does not mandatestock levels in industry. The stock levels heldin industry are poorly reported and, based on

earlier conclusions in this report, impracticalor difficult to access given the just in timenature of oil deliveries and refining. TheAustralian Government does not considerthe 85 per cent level of oil and petroleumimports as a risk to our liquid fuels security.

Liquid Fuel SupplyEmergency Responses

In the event of a supply interruption, theLiquid Fuels Emergency Act of 1984 andassociated amendments passed in 2007,provide the Commonwealth Government withthe authority to prepare for and manage anational liquid fuel emergency. However, thedetail of how fuel rationing or control measureswould be implemented is not publicly visibleand little is known of how the contingencymeasures would be put in place. There arealso differences in how states and territorieswould respond to such a crisis, with a lack ofa common framework to address, for example,the fuel needs for critical infrastructure.

The very small consumption stockholdingsin this country, combined with what appearsto be a narrow assessment of our liquid fuelssupply chain vulnerabilities, does not providemuch confidence that the strategic risks to ourliquid fuels supply chain are well understood.

Recent calls to legislate mandatory compliancewith the IEA 90 day stockholding levels willnot address the wider range of supply chainvulnerabilities.

Our liquid fuels supply resilience in the face ofa potential range of supply shocks is fragile.

26 http://www.iea.org/publications/freepublications/publication/norway_2011.pdf

25 http://www.iea.org/publications/freepublications/publication/uk_2010-1.pdf page 7

The National Oil Supplies EmergencyCommittee, which provides thechannel through which Common-wealth and State Governments createtheir overall management responseto a national liquid fuel emergency,is comprised of representatives ofthe Commonwealth (the chair),

the states and territories and theoil industry. There does not appearto be any representation of theend users. It would seem logical toinclude some consumer representa-tion, perhaps through the AustralianAutomobile Association, whichrepresents the interests of 7 millionmembers across Australia.


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A comprehensive resilience model to copewith natural disasters in Australia has beenbuilt up over the past decade as a result ofour experience with cyclones, floods andfires. With natural disasters, assistance canbe sought from outside the disaster area.With a fuel supply crisis, assistance may notbe available from outside the Australiandisaster area as the crisis may be global.Australia needs a national resilience modelthat enables the country to cope with sucha crisis using the resources at hand.

The Attorney-Generals Departments TrustedInformation Sharing Network for Critical

Infrastructure Protection discusses resilienceat length.27It states that resilience is aboutbeing better able to adapt to change, havingreduced exposure to risk, and being betterable to bounce back from any type of hazardincluding natural disasters, pandemics,

accidents, negligence, criminal activity andterrorist attack An important part of creatinga more resilient Australia is creating moreresilient critical infrastructure.

So what would a national resiliency modellook like? The Trusted Information SharingNetwork resilience guide describes a resilientorganisation as having the right combinationof culture and attitude, process and framework.It also anticipates emerging threats andunderstands the systems dependencies thatsupport and underpin the organisations(or in this case Australias) strategic direction.The question is whether we should accept the

2012 Energy White Paper assessment regardingthe low risk to our liquid fuel supplies giventhat it appears to be based on only a limitedrange of scenarios in the supporting analysis,as discussed on page 11 of this report.

The issues already outlined suggest that it is worth consideringthe issue of resilience. The predominant mindset is that fuel isa commodity that will be supplied by the market rather than anessential capability enabler. This mindset significantly impactsthe resilience of our society.

The recent findings of a JapaneseGovernment panel reviewing theFukishima nuclear disaster, whichfollowed the devastating tsunamithat struck Japan in 2011, areworth reflecting on: The utilityand regulatory bodies were overlyconfident that events beyond the

scope of their assumptions wouldnot occur and were not awarethat measures to avoid the worstsituation were actually full of holes.

Resilience

27 http://www.tisn.gov.au/Pages/default.aspx


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An importantpart of creatinga more resilientAustralia iscreating moreresilient criticalinfrastructure.

The 2012 Energy White Paper states that:

Our lack of oil self-sufficiency and theprospect of further refinery rationalisationdoes not in itself compromise or reduce ourenergy security ... Our liquid fuel security isexpected to remain high because of our accessto reliable, mature and highly diversifiedinternational liquid fuel supply chains.28

It also says: Pursuing self-sufficiency inenergy resources such as liquid fuels wouldimpose higher costs on Australian consumerswithout necessarily providing a materialeconomic benefit. Maintaining diversity of

supply (with alternative source countries,import points, and commercially viable fuelsand technologies) is prudent, but does notjustify the pursuit of self-sufficiency as a goalin itself. For a major energy trading nation likeAustralia, pursuing a goal of national energyself-sufficiency would make little sense.29

While complete self-sufficiency may not makesense, neither does the possibility of completedependence on foreign owned suppliers inthe future.

The 2012 Energy White Paper also notesthat the NESA [National Energy SecurityAssessment] also modelled a limited set ofhypothetical physical infrastructure supplychain shocks in the liquid fuel, natural gasand electricity sectors to test the resilience ofthe energy system (RET 2011a). The modellinghighlighted the continuing importance ofresilient infrastructure and the diversificationof supply arrangements and transmission

infrastructure to avoid or respond toeconomically damaging supply disruptions.30

This is at odds with the papers contentionthat The decline in Australias domesticrefining capacity ... is not considered to impairAustralias liquid fuel security ... Substituting

imports of crude oil for imports of refined fuelat this scale does not pose any additional riskto market security.31

Given the lack of any policy regarding minimumlevels of refining capacity in Australia,the 2012 Energy White Paper statement isnot reassuring. Neither is it in accord withthe National Energy Security Assessmentmodelling, which highlighted the continuingimportance of resilient infrastructure.

The 2012 Energy White Paper states that theGovernment will continue to assess Australiasliquid fuel vulnerabilities regularly as part of the

biennial National Energy Security Assessmentprocess covering the liquid fuel supply chain,including import and refining infrastructure.32

The scope of the next assessment must includea larger set of scenarios if Australia is to proveresilient to a range of future supply threats.

282012 Energy White Paper, page 53.289ibid, page 54.

30ibid, page 51. 31ibid, page 50.32ibid, page 129.


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If fuel security resilience is to be achieved,strategic level visibility of the supply chainwill be essential, along with a commitmentto invest in and assure diversity of supply andof demand. Such investment will not be theresponsibility of industry alone; Governmentswill need appropriate policies and to beprepared to invest in resilience, even whenit does not make near term commercial senseto do so.

On the supply side, our dependence on theimportation of oil and petroleum products isa reality. The emerging trend to reduce ournational refining capacity may make business

sense to the companies that own the refineriesbut it does not make common sense in terms ofour national security and resiliency. The recentGovernment response to the announcementof the planned closure of the Kurnell refineryappeared somewhat glib: The closure will

not jeopardise Australias energy security asAustralia already imports large amounts ofcrude oil and finished petroleum products 33

In something of a contradiction, the 2011Liquid Fuels Vulnerability Assessment noted: the continued operation of some Australianrefineries will still provide a diversity of supplywhich is important to reducing the risksassociated with a disruption in the globalsupply chain.34

The challenge is to define what level of refiningcapacity is necessary to provide resilience inthe face of possible supply disruptions and

what actions the Government can and shouldtake to achieve that capacity. Unfortunately,the Government does not appear to havedefined a minimum level of refining capacitythat should be maintained in Australia. Relyingon market mechanisms to meet Australias fuelsecurity needs could prove foolhardy.

There are solutions on offer to address the risks identifiedin this report. The issue is not the lack of ideas and options,but the willingness to address and invest in the issue andto take the necessary steps to build resilience ahead of apotential crisis.

Liquid Fuel Securityin a Resilient Society

33 http://www.news.com.au/business/companies/caltex-to-cut-330-jobs-shut-kurnell-refinery/story-fnda1bsz-

1226435364736#ixzz2250PaV0034 ACIL Tasman, op cit, para 7.7.3


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Supply side vulnerabilities shipping, ports,refineries and domestic distribution warrantserious consideration and an appropriatelevel of contingency planning. The issue ofappropriate stockholding is an importantaspect of supply side resiliency; however,defining required stockholding levels is acomplex task. It is vital that the level ofstockholdings be determined by a broadanalysis of supply chain vulnerabilities andthat the specific storage requirements forAustralia and each of the states and territoriesare analytically derived. The IEA stockholdinglevels are not the result of an analysis ofAustralias specific needs and should notbe seen as the panacea to our potentialsupply risks.

On the demand side, the effective lack ofenergy diversity in the transport sector inparticular makes our society highly vulnerable

to supply shocks and to future growth in oilcosts when growth of supply does not keeppace with growth in demand, as illustrated inFigure 10.

The supply side of the equation is illustrated inFigure 11. The significant proportion of crudeoil yet to be found and/or developed gives riseto concern for longer term resource availabilityand security.

Alternate fuels, particularly those in plentifulsupply in Australia, are the obvious optionto improving our fuel resilience from boththe supply and demand side. The potential

of increased gas to liquid fuel processingbears serious investigation. The NRMAsJamison Group Report (February 2010)proposes alternative fuels and technologiesfor passenger vehicles37and provides soundrecommendations regarding the use ofalternative fuels to reduce the dependence

on oil in the transport sector. However, theabsence of adequate policy or incentivesin this area does not bode well for fueldemand diversity.

35 http://www.exxonmobil.com/Corporate/files/news_pub_eo.pdf, page 19

36World Energy Outlook 2011 OECD/IEA 2011,figure 3.16, page 123.

37Fuelling Future Passenger Vehicle Use in Australia,Jamison Group, February 2010, http://www.mynrma.com.

Figure 11: Projected oil production by type (IEA World Energy Outlook 2011)36

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/d

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Figure 10: World transportation fuel demand (Exxon Mobils 2012 The Outlook for Energy: A View to 2040)35

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au/images/About-PDF/Jamison-Group-Fuelling-Future-Passenger-Vehicle-Use-in-Australia-February2010.pdf


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Our Government seems to have made adecision to leave market forces and globalsupply chains to provide for us in supplyemergency. Whether this has been a wellinformed and holistic decision is the subjectof debate. Our oil and fuel stockholdings arebelow the levels we are obliged to maintainas a member country of the IEA. We do nothave stockholding policies or requirementsthat specify minimum levels of privatestockholdings, as is the case in other countries,and we do not have any public stockholdings.

The Government has responded to recentlyannounced reductions in Australias oil refining

capability in a blas fashion and has notdefined any minimum level of refining capacityfor Australia. While the probability of supplyinterruptions may be low, the consequencesof such interruptions are severe enough towarrant contingency preparations.

However, such contingency measures donot appear to have been developed and fuelemergency management processes under theNational Oil Supplies Emergency Committeesystem are somewhat opaque.

Our Government appears unlikely to act on theloss of Australian oil refining capacity and iscontent to rely on market forces to assure ourfuel security. This situation will only change ifwe, the Australian public, say that this approachis not acceptable. If we are to improve the fuelsecurity and national resilience for ourselvesand future generations of Australians, we needto invest in building a greater level of energy

resilience in this country.

In essence, we have adopted a shell beright approach to fuel security, relying on thehistorical performance of global oil and fuel

This report provides a broadoverview of our oil dependenceand the associated fuelsupply chain. We are criticallydependent on an uninterruptedsupply of liquid fuels in orderfor our society to function;however, our ability to dealwith a broad range of potential

supply chain interruptionsdoes not appear to have beenanalysed in sufficient depth.

While the probability of supplyinterruptions may be low, theconsequences of such interruptionsare severe enough to warrantcontingency preparations.

Conclusions

markets to provide in all cases. Unfortunately,as a result of our limited and decreasingrefining capacity, our small stockholdings andlong supply chains, our society is at significantrisk if any of the assumptions contained inthe vulnerability assessments made to dateprove false.

We would not be the first country to get ourassumptions wrong. In that respect, history canbe relied upon.


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1. Australias liquid fuel security should beaddressed as a component of a nationalresilience model.

2.Our Federal and State Governments shoulddevelop appropriate policies and be preparedto invest in and assure diversity of supply andof demand even when it does not make nearterm commercial sense to do so.

3. As our dependence on the importationof oil and petroleum products is a reality,Government should define what level ofrefining capacity is necessary to provideresilience in the face of possible supply

disruptions and what actions the Governmentcan take to achieve that capacity.

4.Government should analyse supply sidevulnerabilities with respect to shipping, ports,refineries and domestic distribution and,where warranted, conduct an appropriatelevel of contingency planning.

5.Government should ensure the level ofoil and petroleum stockholdings for Australiaand each of the states and territories areanalytically derived and that they aredetermined by Australias specific needsas well as the IEA obligations, which wecurrently fail to meet.

6.Government should determine policies

and incentives to improve demand sideresilience through the increased use ofalternate transport fuels.

7. Government should improve preparationsfor and management of a national liquidfuel emergency by developing a commonframework to include, for example, thefuel needs for elements of the criticalinfrastructure in the operations of the NationalOil Supplies Emergency Committee and shouldalso review our membership of the NationalOil Supplies Emergency Committee to includerepresentation of end users.

8.Government should advance the planned2014 assessment of Australias liquid fuelvulnerabilities. It should ensure the assessmentaddresses the complete liquid fuel supply chain

and a broader range of scenarios to includethreats such as regional conflict, economicsystems failures, accidents, catastrophicequipment failures, industrial action, naturaldisasters and terrorist attacks.

Recommendations

In order to improve ourfuel security and our nationalresilience we should insiston the following actions.


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Disclaimer

The views expressed in this report are solely thoseof the John Blackburn Consulting Pty Ltd and not theviews of organisations with which the individuals areassociated. John Blackburn Consulting Pty Ltd is anindependent entity to NRMA Motoring and Services.The views expressed in this report are not necessarilythose of NRMA Motoring and Services. Any referenceto NRMA is a reference to the National Roads andMotorists Association Limited, trading as NRMAMotoring and Services.

The information contained in this report is insummary and provided for discussion purposesonly. John Blackburn Consulting Pty Ltd and NRMAMotoring and Services do not accept any liability for

any damage or loss suffered as a result of any actiontaken or omitted on the basis of, or in reliance on,this publication. It is the individuals responsibilityto ensure that professional advice is sought beforerelying on any information in this report.

This report is printed on100% recycled paper stock

which is FSC Certified, madecarbon neutral and has highwhiteness due to specialprocessing of recycled fibrewithout chlorine bleach.


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