Lifeline secures future of refineries

AUSTRALIA’S two remaining oil refineries will remain open for at least six more years after the federal government’s $2.35bn taxpayer rescue deal, with a rerating of Ampol and Viva Energy’s shares expected from the move.

Ampol’s Lytton refinery in Brisbane and Viva’s Geelong refinery in Victoria were both under threat from the COVID crisis, after ExxonMobil’s announcement in February that it would close its Altona refinery and BP’s decision last year to cease production at Kwinana in Perth.

Ampol will receive $108m a year for Lytton during periods of low refining margins and a $135m funding grant to undertake upgrades. Lytton will remain open until mid-2027, with Ampol holding an option to extend the support for a further three years.

The package provides earnings certainty after huge volatility for Lytton over the past few years, which has seen the plant run at a loss.

“Volatility in our earnings became such a big overhang for our business. To eliminate that downside exposure should open up a seriously improved equity rating for our business, not just for the refining earnings. Clearly it enables a lot more capacity on our balance sheet with that underwrite,” Ampol chief executive Matt Halliday said on Monday.

The deal also ensures the future of Viva’s Geelong refinery, which suffered a loss of more than $200m in the 2020 financial year.

Viva said the fuel package was not designed to underpin or support Geelong’s profits, but to mitigate the downside risk of low refining margin cycles that has roiled Australian refineries in recent years.

“The sector has faced several structural headwinds in recent years from challenged trading conditions globally, increased competition from Asian refinery imports, and the significant impacts of demand destruction from the COVID-19 pandemic in 2020,” Viva chief executive Scott Wyatt said. “This has seen the number of refineries in Australia reduce from six in 2011, to only two.”