In brief 6 min read
The Federal Government recently announced it would expand Australia's domestic oil storage capacity to achieve compliance with oil self-sufficiency obligations at international law. On 15 June 2020, the Government invited industry participants to submit a Request for Information (RFI) for development of storage capacity addressing volume, location and capacity specifications.
We take a look at this opportunity to contribute to Australia's future domestic oil storage infrastructure and the key matters to address in an RFI submission.
- On 15 June 2020, the Government commenced an RFI process to seek information from new and existing market participants on opportunities that could support the construction of domestic liquid fuel storage in Australia. Submissions close on 10 July 2020 and next steps will be announced in late 2020.
- Australia has reportedly been non-compliant with its domestic fuel storage obligations under the Agreement on an International Energy Program (the AIEP) since March 2012. In particular, it has not maintained emergency reserves (ie held oil stocks) sufficient to sustain Australian consumption for at least 90 days with no net oil imports.
- In June 2020, the Government committed to comply with the 90-day requirement by 2026. This requires a significant increase to Australia's oil storage capacity.
- Part of this requirement will be satisfied through the A$94 million SPR Lease Agreement between Australia and the US, under which Australia has purchased oil and leased space to store Australian-owned oil in the US Strategic Petroleum Reserve.
Business development teams, senior management, legal counsel.
Background and non-compliance
On 27 May 1979, Australia entered into the AIEP, the purpose of which is establishing a common emergency self-sufficiency in oil supplies. Article 2 of the AIEP requires that Australia maintain emergency reserves sufficient to sustain consumption for at least 90 days with no net oil imports.
...there remains a real opportunity for independent companies experienced in providing storage facilities to contribute, particularly if the storage capacity is to be built in regional areas.
However, Australia has reportedly been non-compliant with this obligation since March 2012.
Australia's oil stockpile
In February 2020, Australia reportedly had 81 days' worth of oil supplies, with 56 days' supply stored domestically and 25 days' supply in transit to Australia or in overseas ports.1 In March 2020, the AFR reported this dropped to 75 days in reserve.
On or around 10 March 2020, Australia and the US signed a A$94 million 'SPR Lease Agreement,' whereby Australia purchased oil and leased space in the US Strategic Petroleum Reserve to store Australian-owned oil. Whilst it has not been revealed exactly how many barrels Australia purchased, it is estimated to be between two to five days' worth at the then-current price of A$22 per barrel. The SPR Lease Agreement has an initial lease period of 10 years and an authorised storage capacity of 714 million barrels. Stocks that are owned by Australia and stored in the SPR will be credited toward the emergency reserve commitment of Australia under the AIEP.2
Future domestic storage plans
Australia will need to significantly increase reserves to comply with its 90-day obligation.
In June 2020, Federal Energy Minister Angus Taylor announced he wants more of the storage to be local, and on 15 June 2020 he called for domestic storage proposals from Australia's fuel industry to boost reserves by 7 – 15 million barrels. The plan to boost onshore storage by up to 15 million barrels will add between 8 and 19 AIEP days to domestic storage, taking it to the requisite 90 days by 2026.
'The government wants to assess how we can best partner with the industry to increase our storage capacity to further enhance our onshore fuel security' -- Angus Taylor.
Whilst Minister Taylor is not putting a cost estimate on his plan at this stage, the Government wants proposals for 'cost-effective and strategically sound' storage opportunities. It's also estimated that construction of the necessary storage facilities would create 1600 to 3500 construction jobs, and up to 260 permanent operational jobs.
Australian oil storage market
The four major petroleum players in Australia (BP, Caltex, Chevron and Viva Energy) among few others, dominate the bulk fuel storage industry in Australia and have facilities scattered throughout the country. Nearly 70% of these are located in Queensland (Cairns and Mackay particularly), Western Australia and New South Wales (as at November 2019).3
The decline of petroleum refining in Australia (as ageing plants are replaced with more competitive refiners in Asia), combined with the Government's focus on development, will boost demand for storage facilities. Accordingly, there remains a real opportunity for independent companies experienced in providing storage facilities to contribute, particularly if the storage capacity is to be built in regional areas.
Some of the key considerations for Applications to keep in mind when preparing an RFI response include:
- Key dates: Reponses must be submitted by COB on 10 July 2020. The Government plans to consider next steps in September 2020 before an announcement on the way forward in late 2020.
- Physical storage details: Applicants must consider and provide details on:
- volume of storage infrastructure;
- type of tank: product or crude oil;
- location, including whether the storage infrastructure will be built on a greenfield or brownfield site;
- distance of storage infrastructure from existing fuel infrastructure;
- anticipated construction period (and if staged);
- whether infrastructure goes beyond current and forecasted commercial requirements (and if so, how); and
- the process to manage the proposed infrastructure.
- Partnerships: Applicants must provide details on their organisation where relevant (including any proposed partners), whether the project is likely to have state, territory or local government support, and information on current support and engagement with the local community.
- Project Financing: Applicants must provide information on the anticipated project cost, expected project financing, and whether government involvement will be required to support the project, such as through providing loans, entering into a PPP or providing other concessions.
- Anticipated impact on existing market: Applicants may consider and provide information on matters such as the number of jobs the project is expected to create, whether the project contributes to regional development, and if there is an increase in storage capacity in states with lower current storage capacity (such as Northern Territory and South Australia).
- Design of the storage infrastructure: Applicants must include any information they consider relevant to the design of the program, including fuel security considerations.4
- Proposed Structure: Government may look to progress development through a PPP or other innovative structure. Applicants should consider available options.
- FIRB: If a foreign corporation holds a substantial interest (at least 20%) in your company, you will be considered a foreign person for the purposes of Australian foreign investment laws. Recently, there have been significant changes to these laws, including:
- the monetary screening threshold for all foreign investments being reduced to $0.00, meaning that regardless of the value of investment or nature of foreign investors, the proposed foreign investment will require approval; and
- a proposed new national security test for investments that raise national security concerns, including a foreign person acquiring a direct interest in or carrying on a 'sensitive national security business.' The details of this test are not yet clear, and the Government has indicated it will release exposure draft legislation in July 2020 for consultation.
For further information on how this may affect your company, see our recent Insight on the changes to FIRB approvals.
In addition to ensuring compliance with its international obligations, we expect the Government will look to use the development of storage infrastructure as a means to boost economic recovery post COVID-19, including through job creation and regional development. Cost-competitive proposals will be important in the current economic environment.