Back in 2016 tensions in the South China Sea have forced a re-think of where Australia gets its fuel.
Unerring drive for market efficiency had led to four of the country’s seven oil refineries closing down in three years.
Distribution of food, water and medicine ‘would stop within days’
Engineers Australia (EA) told a 2015 Senate inquiry into the country’s transport energy resilience and sustainability that Australia’s total stockholding of oil and liquid fuel comprised two weeks of supply at sea, five to 12 days’ supply at refineries, 10 days of refined stock at terminals and three days at service stations.
Australian fuel stockholding capability
Chilled and frozen goods delivery – 7 days
Dry goods – 9 days
Retail pharmacy supplies – 7 days
Hospital pharmacy supplies – 3 days
Petrol stations – 3 days
National Roads and Motorists Association
The NRMA said Australia only retained enough fuel in stockholdings to continue delivery of chilled and frozen goods for seven days, dry goods for nine days, hospital pharmacy supplies for three days, retail pharmacy for seven days, and petrol stations for three days.
This left Australia well short of its requirement as a member of the International Energy Agency (IEA) to maintain 90 days of fuel in reserve.
“We’re heading towards 100 per cent import dependency,” Ret. Air Vice Marshall Blackburn said.
“But when the British were passing 40 per cent import dependency, they said they had a national security concern.”
University of New South Wales Professor of International Security Alan Dupont agreed that Australia’s growing dependency on imported fuel was “obviously a vulnerability”.
“We don’t have much in the way of refinery capacity in Australia right now and we don’t have much in the way of strategic stock piles,” he said.
“I think that dependency is only going to increase.”
The South China Sea is a shipping route through which a large proportion of Australia’s refined fuel is imported, including diesel, unleaded and jet fuel.
It is also emerging as a hot zone for potential conflict as China, the United States, Vietnam, Taiwan and the Philippines become increasingly invested in territorial disputes over islands in international waters.
Mr Blackburn said a scenario of conflict in the region and how it would affect Australia’s fuel security was not considered in the Government’s National Security assessment, “upon which the Energy White Paper (EWP) bases its assessment,” Mr Blackburn said.
“The fundamental assumption they’ve made is because we haven’t had a problem in 30 years, we’re not going to have a problem.”
With last year’s EWP offering only brief discussion of the reliability of fuel imports, Mr Blackburn said he expected the Defence White Paper to look more “closely” at the issue.
Mr Blackburn said a significant disruption to refined fuel imports, “the vast majority of which comes from south-eastern Asia”, would start to bring the country to its knees “within a week”.
“What’s important is what type of fuel you’ve got and where, because we can’t move fuel around Australia readily,” he said.
“We can’t move by rail anymore because we don’t have the rolling stock. We don’t own ships anymore. And the trucks that move fuel are designed for ‘just in time’ normal commercial deliveries.”
The Australian Institute of Petroleum (AIP) said on its website that Australia sourced 85 per cent of its refined fuel from across Asia and 58 per cent of its crude oil and feedstock from the Asia Pacific.
Some 21 per cent of crude oil came from Africa and 13 per cent from the United Arab Emirates in the Middle East.
Petrol, diesel and aviation were the dominant transport fuels used in Australia and in 2012-13 accounted for 90 per cent of its transport energy use.
AIP maintains that with refined fuel coming from 20 different countries and crude oil from 17, Australia’s supply is diverse and flexible enough to respond to any emergency in supply and had done for decades.
The Australian Government last year agreed “in-principle” to return the country to compliance with the IEA 90-day holding requirement.
Its plan to add 40 days worth of fuel reserves, expected to cost several billion dollars over 10 years, is promised later this year.
But Mr Blackburn, who retired as deputy chief of the Air Force in 2008, said escalating tensions in the South China Sea meant a significant supply disruption could be closer to reality than people think.
Conflict to affect fuel imports regardless of Australia’s involvement
China is building artificial islands in the South China Sea and asserting 12-mile nautical limits around the islands, located in one of the world’s busiest shipping lanes where an estimated $US5 trillion trade passes through each year.
Before and after: South China Sea
See how China is converting reefs to military facilities by building artificial islands in the South China Sea.
The action has incurred provocation by the United States military with ships and aircraft dispatched to test China’s resolve and maintain navigational freedom through the waters in an ongoing campaign.
Vietnam and the Philippines have also built up features in the region, and join Malaysia, Brunei and Taiwan in rivalling China’s claims to sections of the region.
Even Australia has weighed into the dispute, with the Royal Australian Air Force embarking on a “freedom of navigation” flight over the region last year and incurring a thinly veiled warning in an editorial from the Chinese language edition of The Global Times.
“Everyone has always been careful, but it would be a shame if one day a plane fell from the sky and it happened to be Australian,” the editorial said.
Defence Minister Marise Payne has so far resisted US requests for Australia to send a warship to the region, but in October warned China it would continue to cooperate with the US on maritime security.
“Australia has a legitimate interest in the maintenance of peace and stability, respect for international law, unimpeded trade and freedom of navigation and over flight in the South China Sea,” she said.
Mr Blackburn said it did not matter if Australia was directly involved in a potential conflict or not because in the event of a major standoff, involved countries in the region were unlikely to send their fuel products offshore to countries like Australia for trade.
He said they were more likely to hold onto fuel stocks for the sake of national security because in a heightened defence force scenario, fuel consumption became “phenomenal”.
He said Australia’s own Defence Force would be affected negatively by stalled imports as well.
“If you had a major interruption of fuel input, defence would grind to a halt very quickly because you can’t do anything,” he said.
“The investment in ships, planes and the army is very necessary but it has to be balanced. If you can’t get the fuel to any of those elements … then you’ve wasted about $30 billion a year.”
A spokesperson for the Department of Defence said the upcoming DWP would address fuel security “in the context of ensuring that the Australian Defence Force has the capabilities it needed to achieve its mission, today and over the coming decades”.
“Defence has considerable operational fuel holdings across multiple sites compared to most commercial organisations,” he said.
“This network of supply affords considerable agility and flexibility to defence in support of operations.
“Beyond its own holdings, defence also has contracts for the commercial supply of fuel, including higher rates of supply for longer term contingencies.”
Industry accepts risks of supply disruption
A spokesperson for one of Australia’s major fuel suppliers, who did not want to be identified, said he understood the “geopolitical” concern in the South China Sea and accepted escalating tensions could affect supplies through the sea.
“In no way, shape or form, do we want to say, as an industry, we think it’s all good and she’ll be right,” he said.
“But equally so, there are sources of both crude and refined product from the other side, through India, through the Middle East and that particular part of the world.
“Where we’ve got choice and flexibility, and we do, we’re able to effectively have ships sail different ways and be able to source products from different parts of the world.”
He said there was capacity to “take up the slack” in refined fuel if South China Sea routes were disrupted and pointed out that Reliance Industries in India operated a 1.2 million barrel-per-day refinery.
“To put that in context, our biggest refinery is operated by BP in Perth at about 145,000 barrels per day. What we’re seeing over time and time again, is the world’s energy system’s ability to adapt to changing circumstance and I think it’s a very well-functioning fluid market.”
Mr Blackburn said a key issue would be what route alternative supplies had to transit. In Australia’s case it was difficult because the majority of its refined fuel came from the South China Sea region.
“The other thing is, because we have no Australian flag ships, [in the event of conflict, an aggressor] doesn’t have to do much more than threaten the crews of those foreign ships to make sure something happens to the tanker supply,” Mr Blackburn said.
“If you’re applying enough pressure to a shipping country, why would they continue to ship and have the risk of losing their tanker heading down there?”
Al Qaeda turns cross-hairs onto Australian fuel imports
In late 2014, Al Qaeda reportedly published a map of critical petroleum shipping routes for the West, including routes between the Persian Gulf, Singapore and Australia.
It prompted warnings from the NRMA and the likes of Senator John Madigan, all of who have been critical of the steady decline in Australia’s oil refining capacity.
The Australian Automobile Association told the Senate inquiry a major disruption to transport fuel supplies would be felt “across society and in every sector of the economy”.
The NRMA and Fusion Australia suggested that even a 20 to 40 per cent cut in the fuel supply, “brought about by factors such as conflict, would quickly lead to a situation whereby the country would start running out of food and medicines, while the economy would start to shut down”.
The Senate inquiry concluded there was no capacity for emergency reserves in the form of government-held or compulsory industry stocks of Australian fuel because its storage capacity was held within the supply chain.
It reported there was no mandate for industry to report fuel stock holding levels because their focus was entirely on a “just-in-time” security of supply to keep costs down.
It recommended a “whole-of-government risk assessment”, which would consider vulnerabilities due to military actions, acts of terrorism, natural disasters and industrial accidents.