Shell's Latest Move Highlights Challenges Facing Australian Refiners

Royal Dutch Shell (NYSE: RDS-A  ) recently said that it's looking to offload its last remaining refinery in Australia, as the oil and gas company reconsiders its operations in the country. Shell is currently searching for a buyer for its 120,000-barrel a day Geelong refinery in southeastern Australia, as it refocuses its investment toward large-scale facilities in the Asia-Pacific region, such as its Pulau Bukom refinery in Singapore.  

The Geelong refinery, which has been operating for more than five decades, produces a diverse array of products, including ultralow-sulfur diesel. According to statistics from the Oil & Gas Journal, Geelong has a capacity of 113,500 barrels per calendar day, or b/cd, for hydrotreating, 40,000 b/cd for catalytic cracking, 20,000 b/cd for cyclic catalytic reforming, and 11,000 b/cd for semiregenerative catalytic reforming.

Andrew Smith, vice president at Shell Refining Australia, said he hopes to finish up the sale process by the end of 2014. If the company fails to receive an attractive offer, it has the option of converting the plant into an import terminal, a process currently under way at Shell's former Clyde refinery in Sydney.

In a separate decision, Caltex Australia, which is partially owned by Chevron (NYSE: CVX  ) , recently said it will also be converting its Kurnell refinery -- also in Sydney -- to an import terminal.  

Australia to become major oil importer
Since Shell and Caltex Australia announced the closure of two ageing refineries near Sydney last year, Australia's refining capacity has been reduced by almost a third. Growing competition from Asia and weak margins are the two major factors behind the country's spate of recent refinery closures. In addition, Australia-based refineries are struggling with high global crude prices and a strong Australian dollar, which has led to higher labor and financing costs.

That's worrying, because fuel demand in the country is growing rapidly. In fact, Australia is expected to become the Asia-Pacific region's largest importer of refined products, as domestic fuel demand continues to rise and as smaller, older refining plants are closed down. According to estimates by the nation's Bureau of Resources and Energy Economics, Australia is expected to import nearly half the fuel its economy consumes this year.

Potential risks
The changing dynamics of Australia's energy market have drawn the attention of several large commodities trading houses, including Trafigura, that are seeking to capitalize on the country's rising fuel imports. However, some commentators have voiced their skepticism about the expected rise in Australia's oil imports, citing a potential downturn in the nation's resource boom as a major risk.

Australia was one of the few countries that emerged relatively unscathed from the global financial crisis and has enjoyed robust economic growth over the past few years, led by a surge in foreign investment into its resource sector. But the country's resource boom is inextricably tied to China's economy and its demand for coal, iron ore, and aluminum. That leaves it especially vulnerable to a downturn in Chinese economic growth.

How do you see things playing out here? Leave your comments below.

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  • Report this Comment On April 07, 2013, at 9:02 PM, jvibora wrote:

    Labor costs and labor rules in Australia are a major underlying factor here. Refining capacity in Asia will be built elsewhere. There will be other victims of Australia's current resource boom.

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