Australia’s oil refinery about-face will need to overcome several hurdles

Australia’s proposal to build its first oil refinery in 60 years faces a crude supply ​issue, uncertain long-term fuel demand, and a builder with little experience in refining.

Prime Minister Anthony Albanese and Resources Minister Madeleine King announced on ‌Tuesday a A$4 million ($2.8 million) pre-feasibility study for a new oil refinery to be built by fertiliser and urea maker Perdaman.

The decision to potentially build a new oil processing plant reflects the government’s desire to cut its dependence on imported fuels in the aftermath of disruptions to the global energy market from the U.S.-Israeli war with Iran.

Australia built a number of refineries near its main cities ​during the 1950s and 1960s but as lower-cost fuel imports from larger and more complex Asian refineries made the domestic plants uneconomic most of them ​shut by 2021, leaving only plants near Melbourne and Brisbane.

Australia imports over 80% of its refined fuel and the two remaining ⁠plants rely on crude oil imports of over 80% of its feedstock. Building a new refinery would not change the equation on imports.

“It is hard to see ​how it improves Australia’s fuel security position. Australia will still be importing crude oil to process at any new refinery,” said Kevin Morrison, an analyst with the Institute ​for Energy Economics and Financial Analysis (IEEFA).

Albanese and King made the study announcement in Karratha, a mining and energy hub in the northern part of Western Australia where Perdaman is building a $4.5 billion urea plant expected to start up in 2027.

In a statement, Perdaman Chairman Vikas Rambal called the refinery a “game changer for Australian fuel security”.

But IEEFA’s Morrison expressed concern about Perdaman’s lack of experience ​in refinery construction.

Perdaman did not respond to a request for comment.

The high cost of a new refinery, often several billion dollars, could mean the government will need ​to provide some sort of financial support for a project.

“Given Australia’s construction costs and competition from much larger Asian refineries, I would expect some form of public support unless miners and ‌fuel marketers ⁠are prepared to sign long-term take-or-pay contracts,” said Krishan Pal Birda, Rystad Energy’s head of Australasia oil & gas research.

John Coyne, an analyst with the Australian Strategic Policy Institute (ASPI), agreed with the need for having the resilience of additional refineries but worried about pushback on paying for it.

“It comes down to a basic question of how much is resilience worth to the Australian people and to the Australian government,” he said.

Refinery location

Western Australia would make sense for a new refinery because of large fuel demand, ​especially for diesel, from the mining and ​agriculture sectors in the state and ⁠its only plant closed in 2021.

King said in an ABC Radio interview the study will look at multiple locations in the vast state including the north, the south, and the Mid West, which is home to a large wheat-producing area but lacks ​the necessary port.

Western Australia’s geography also makes building the plant there difficult, said Elizabeth Jackson, associate professor of supply chain ​management and logistics at ⁠Curtin University in Perth, the state capital.

“Western Australia’s two key strengths are agriculture and mining, but sadly they’re in two very diverse parts of the state.”

Mining is generally centred in the north of the state while agriculture occurs in the southern and central areas.

The mining industry is also working, albeit at a slower pace than first promised, towards electrification ⁠and decarbonisation. ​Miners like BHP (ASX: BHP) and Rio Tinto (ASX: RIO) also have the benefit of long-term oil contracts already, something ​the agriculture sector in the Midwest struggles with.

Australia’s overall electrification push could also hamper the feasibility of a new plant by reducing demand for diesel and gasoline cars. And analysts say electrification and low-carbon liquid ​fuels from vegetable oils and other sources could provide a greater degree of fuel security for the country in the future.

(Reporting by Helen Clark; Editing by Christian Schmollinger)