Refinery poised on the brink as Shell heads upstream

Given the developing history of refinery closures in this market it was inevitable that Shell would finally get around to shedding its Geelong refinery in Victoria.

When Shell put its Clyde refinery in New South Wales under the microscope in 2011 – which led to the decision to decommission it and convert it into an import terminal last year – the fate of the Geelong complex was questioned.

Shell’s response at the time was that it was larger than Clyde and had been the recipient of heavy investment in recent years and was also capable of processing different varieties of crude and producing more niche products.

The same arguments that led to the closure of Clyde and Caltex’s Kurnell refinery in Sydney, however, made it near-inevitable that Geelong would eventually share their fate and provided the backdrop to today’s announcement that the refinery would either be sold or, as with the other complexes, converted into an import terminal.

The harsh reality is that there are a host of newer and far, far larger refineries in the region and their scale and efficiency make it cheaper, even with the shipping costs, to import refined product than it is to process crude here.

It isn’t that the domestic refineries were inefficient but rather that their small scale and the small size of the domestic market has rendered them uncompetitive with the mega-refineries offshore. The strength of the Australian dollar wouldn’t have helped the comparisons.

With a number of new refineries in Asia and the Middle East (some of which have more capacity than the entire Australian industry used to have) and petrol generally a byproduct of their primary product, diesel, there is likely to be significant over-capacity in the region in the second half of this decade, alleviating security of supply concerns.

Shell, which has its own refineries in the region (unlike Caltex, which had to negotiate a supply agreement with its major shareholder, Chevron of the US) doesn’t have to be as concerned about security of supply.

There is little doubt that Shell’s preference would be to sell the Geelong facility, and not just because of the impact on its workforce and the wider Geelong community.

Caltex estimated it would cost $430 million to dismantle its Kurnell refinery and a further $250 million to convert it to an import terminal – refineries are particularly ‘’dirty’’ facilities and the remediation costs are prohibitively high.

Shell has been operating the Geelong refinery – regarded as one of the largest and most complex of the local refineries – for more than half a century and it would probably be more costly to close and convert it than to pay someone to take it off its hands.

A sale might be unlikely but it can’t be ruled out, given that prospective buyers would get a relatively modern facility for probably a relatively small, if any, amount of capital and therefore the economics of the complex from its perspective would probably look quite different to Shell’s.

It is also worth noting that Shell globally has been rationalising its downstream portfolio in recent years to focus on a smaller number of larger markets while in Australia it has been investing massively in its upstream business as part of the global giant’s drive to significantly increase its gas production and reserves. In the context of that broader strategy the Geelong refinery is inconsequential and an obviously poor fit.