BP refines its long-term vision

BP's closure of its Bulwer Island plant is the latest in a line of sub-scale refinery shutdowns in Australia, as an oversupply of product forces oil companies to rethink their corporate strategies.

First it was Caltex, then Shell. Now BP has also been forced by the economic realities of operating oil refineries in this market to reassess its operations and to conclude that it should shut down refining capacity.

BP’s announcement today that it would close its Bulwer Island refinery in Brisbane was almost a forgone conclusion given what has preceded it.

The same kinds of pressures that led to Caltex’s closure of its Kurnell refinery and Shell’s closure of its Clyde refinery (both in Sydney) and to Shell’s more recent decision to sell its Geelong refinery to energy trader Vitol for $2.9 billion (after packaging it with its retail network) were being exerted on BP.

As BP’s Andy Holmes said today, it has been the emergence of very large refineries in the Asia Pacific region, notably Singapore, India and the Middle East, that has structurally changed the fuel supply chain in Australia and exerted extreme pressure on Australia’s relatively small facilities.

The local refineries aren’t inefficient per se and have received considerable investment, but have been rendered uncompetitive by developments elsewhere.

There are refineries in the region that have as much capacity as the entire Australian industry and which produce petrol mainly as a by-product to diesel, their primary product.  There is consequently a significant over-supply of refined product in the region.

The closure of sub-scale refineries in Australia and their conversion to import terminals to capitalise on that over-supply in the region is a logical outcome of changes that were developing at least a decade and a half ago in the sector.

Like Caltex and Shell, BP’s closure of its Brisbane refinery (but not its West Australian complex at Kwinana, which is the only refinery in WA and has access to local crude) will give it access to cheaper product and enable it to exit a capital-intensive segment of its business. There is already a significant infrastructure for importing fuels in Australia, which will be expanded by the conversions of Shell and Caltex’s Sydney facilities.

BP has shored up its ability to continue to supply the Queensland market by signing an agreement with Caltex, which still has its Lytton refinery in Brisbane, under which Caltex will supply petrol and diesel to BP. BP is also still considering whether to convert the refinery to a multi-product import terminal of its own.

As with Shell’s decision to close Clyde and exit Geelong, and Caltex’s shift in strategic emphasis towards marketing and logistics, BP’s decision also fits within a larger corporate strategy.

The Deepwater Horizon oil spill in the Gulf of Mexico in 2010 was traumatic and very costly for BP. It shocked the global giant into a deep reappraisal of its business and strategies. Subsequently (and partly to pay for the continuing costs of the spill) it has divested about $US38bn of assets, with plans for at least another $US10bn of divestments by the end of next year.

About 38 per cent of its refining capacity worldwide and 13 refineries have disappeared from its portfolio since 2000 as part of a long-term shift in emphasis towards marketing. BP believes its strategy of running a refining deficit provides it with competitive advantage. The refineries that BP has retained are, on average, larger than those of its peers.

It’s not surprising post-Deepwater Horizon that BP’s longer term strategy, its near-term focus on improving returns and the structural changes to the regional refinery sector intersected. Bulwer Island was the casualty.