Ampol may shut Australian oil refinery as losses blow out

Oil refiner Ampol has warned it may shut one of Australia’s last remaining refineries for good as the pandemic-led collapse in fuel demand sends the plant’s losses spiralling to $141 million this year.

Ampol, formerly known as Caltex Australia, said it had launched a review of its Lytton refinery in Brisbane on Thursday examining options including permanently closing the plant, which employs 500 staff, and converting the site to a fuel import terminal.

Three Australian oil refineries have closed in the past decade. Now, COVID-19 is threatening the last four remaining.
Three Australian oil refineries have closed in the past decade. Now, COVID-19 is threatening the last four remaining.Credit:Rob Homer

The move comes less than a month after the Morrison government detailed a support package for the country’s four oil refineries, which process crude oil into refined fuels.

The launch of Ampol’s review on Thursday suggests the promise of the government lifeline may not be enough to prevent closures.

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“Global economic conditions triggered by COVID-19 have put significant pressure on refining, as evidenced by our performance in the first half and the significant losses announced today,” Ampol chief executive Matt Halliday said.

“This review will allow us to be proactive in determining the best course of action to protect our balance sheet, improve earnings certainty, and maximise shareholder value from our integrated supply chain.”

The nation’s four refineries in Brisbane, Geelong and Perth have been under unprecedented strain since travel restrictions and stay-at-home orders to arrest the coronavirus pandemic wiped out demand for petrol, diesel and jet fuel and sent refiners’ profit margins crashing.

Other operators BP, ExxonMobil and Ampol have all implemented measures including production cutbacks and extended maintenance closures. ASX-listed Viva Energy has also placed its 165-year-old refinery in Geelong under a review, which may result in closure.

In the past decade, three refineries have shut across Australia, increasing the nation’s reliance on imported fuels, as the local sector struggles to compete against the mega-refineries of south-east Asia with their vastly larger scale and lower operating costs.

Following months of industry consultation, the Morrison government last month revealed a series of measures to buffer against potential supply shocks caused by global events such as wars or pandemics, and to help keep refineries open “wherever commercially possible”. Under the plan, refiners would receive a direct payment of 1.15ยข a litre for locally made fuel.

Credit Suisse said the government’s proposed production payment could potentially add $60 million in earnings and free cash flow for Ampol’s Lytton refinery.

“Eligibility for the production subsidy is likely to require a commitment to continue operating in
Australia,” analysts said. “The specifics of any such commitment is unclear and is likely to be a material factor in assessing the financial risk of the ongoing operation, given uncertainty about a recovery in refining margins.”

Gordon Ramsay, an analyst with RBC Capital Markets, said Lytton’s third-quarter losses of $82 million were larger-than-expected, reflecting the plant’s high fixed cost base and the sustained weakness in regional refining margins.

“While we expect a recovery in the trajectory of margins over 2021, as incremental improvements in demand are realised, the pace of recovery has potential to be subdued,” he said.

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Source: Thanks smh.com