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Ampol's sole remaining refinery looks slated for closure after a blowout in losses, signalling that the federal government's $2.5 billion fuel security package will fail to prevent a further shrinkage of domestic production of petrol and diesel.
The Lytton refinery in Brisbane, which lost $82 million in the September quarter alone, will be subjected to a comprehensive review by the June quarter, with permanent shutdown among the options, the former Caltex Australia said.
Viva Energy is already considering whether to shut its unprofitable Geelong refinery, with an update due this month, meaning the country's remaining refinery fleet is at serious risk of halving to two, despite the Morrison government's attempts to preserve critical manufacturing.
"We appreciate the intent of the proposed support package but we need to be realistic about the extreme structural challenges that are facing the asset up at Lytton," Ampol chief executive Matt Halliday told The Australian Financial Review.
"We need to take control of our own destiny and focus on how we are going to deliver value for our shareholders."
Asked whether the government was considering accelerating its proposed fuel security package or extra measures to head off closures, federal Energy Minister Angus Taylor said it is working closely with Ampol and the rest of the sector as it implements the package.
"Our budget backs local refineries and bolsters our domestic capabilities," the Minister said.
"Our plan will create 1000 new jobs and protect workers in the fuel sector and in fuel-dependent industries like our farmers, truckers, miners and tradies.
"It will also importantly protect Australian motorists from higher prices at the pump."
Queensland Energy Minister Anthony Lynham said the government recognises the substantial economic benefit the Lytton plant provides to Queensland and would work closely with Ampol.
"However, these are in the end commercial decisions publicly listed companies make in the interests of their shareholders," Dr Lynham added.
"In the event of any down-scaling or closure we would expect all workers to receive their full entitlements."
The review will consider the complete shutdown of Lytton and the conversion of the site into an import terminal among other options such as the closure of only some units, Mr Halliday said. The Lytton plant, which supports about 550 jobs, has now lost $141 million so far this year.
Dramatic market shift
But Australian Workers' Union Queensland branch secretary Steve Baker said it is "absolutely critical" that the plant stays open well into the future and called on government and business to work together to support local jobs and industry.
"Unfortunately, we know that the impact of any major changes could potentially be disastrous for the local Queensland economy," Mr Baker said.
"Not only would we put at risk thousands of skilled local jobs, we’d be jeopardising Australia’s fuel security and moving even closer to being entirely reliant on overseas imports."
While Mr Halliday said Ampol is very confident of maintaining reliable supply for customers, the news underscores the heavy hit from COVID-19 on the already struggling refining sector, through slumping demand for aviation fuel and depressed margins. In addition to Viva's review of Geelong, BP and ExxonMobil have reduced production at their plants and are working with the government to address the impacts.
Fitch Solutions on Thursday pointed to "highly negative and widespread" effects across the Asian fuel supply market from COVID-19 and described the recovery in demand as slow and gradual.
"COVID has dramatically shifted the international market for refined products, we’ve seen demand destruction globally," Mr Halliday said.
"When you look at the situation today and we look at the extent of demand destruction internationally ... the outlook is quite challenging."
The unexpectedly large loss at Lytton in the third quarter reflects weak refining margins combined with the plant's high fixed cost base, which hits the bottom line whether the plant is running or not, said RBC Capital Markets. Analyst Gordon Ramsay said he believed it was the fixed costs at Lytton that had predominantly facilitated the restart of production last month, "despite what we see as sub-break-even margins".
Shares in Ampol rose 1.2 per cent to $24.60, reversing earlier losses.
Three refineries in Australia have already closed in the past 10 years, increasing the country's reliance on imported petrol and diesel. The remaining four are staring at a combined bill of about $1 billion for upgrades to meet stricter standards for sulphur in petrol that are years overdue.
The government's proposed fuel security package includes subsidies for local production that would help prop up the industry and includes requirements on minimum fuel storage that would strengthen security of supply.
Refiners at the time welcomed the measures but would not give any guarantees they would be enough to prevent plant shutdowns.
About 300 permanent Ampol employees work at Lytton, and about 250 contractors during normal operations.
The closure of the plant would mean Ampol had no domestic manufacturing, using trading and imports to supply the country's largest petrol and convenience network.