Downstream Downsizing

espite there being an abundance of natural resources, especially hydrocarbons, in the Pacific region, the downstream facilities in the region far from match the potential and performance of the upstream sector. Following are descriptions of the three members of Oceania - Australia, New Zealand and Papua New Guinea- in terms of downstream capabilities.

Australia

Australia has considerable petroleum, natural gas and coal reserves and is one of the few countries belonging to the Organization for Economic Cooperation and Development (OECD) that is a significant net hydrocarbon exporter, exporting about two-thirds of its total energy production. Australia was the worlds largest coal exporter and, according to Cedigaz, the fourth largest exporter of liquefied natural gas (LNG) in 2010, after Qatar, Indonesia,

and Malaysia. Australia is a net importer of crude oil and refined petroleum products, but a net exporter of liquefied petroleum gas (LPG). Hydrocarbon exports accounted for 34 percent of total commodity export revenues in its fiscal year 2009-2010. Petroleum Refining in Australia There are four integrated refiner-marketers operating seven major refineries in Australia: BP Australia Pty Ltd, Caltex Australia Limited, Mobil Oil Australia Pty Ltd and the Shell Company of Australia. However, Shell announced in July 2011 that the company will cease refining operations at the Clyde refinery in Sydney and convert it and the Gore Bay terminal into a fuel import terminal before mid-2013. This will leave Australia with six major refineries. Australias refineries were mainly constructed in the 1950s and 1960s but have been extensively modified and upgraded to produce fuels that comply with Australias fuel standards. Australian refining capacity has declined over recent years due to a number of reasons. The closure of Mobils Port Stanvac refinery, announced in 2009, and the decision by Shell in 2011 to convert the Clyde refinery into an import terminal reflects poor refining margins and the difficulties faced by Australias refin-

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products produced at each refinery varies and depends on the refinerys configuration, the type of crude oil processed and the demand profile. In 2010-11, Australias refineries produced 38,395 megalitres (ML million litres) of refined products and 52,095 ML of products were sold in Australia. The Future The advent of Asian mega refineries has led to the possible demise of Australian refineries. Caltex, Australias biggest oil producer has stated that the high Aussie dollar and competition from major refineries overseas had forced a $1.5 billion writedown of the domestic refineries.The writedown cuts the value of the refineries to just $340 million. A company representative said it was difficult

eries in remaining competitive within the region, particularly in light of the need to invest to meet future fuel standards. Australias refineries are relatively small when compared to other large refineries in our region. For example, the Jamnagar refining complex in India has a capacity almost double that of the combined capacity all seven operating refineries in Australia. Despite declining Australian refining capacity in recent years, refining capacity in the Asian region has been increasing.

petroleum products including petrol, diesel, jet fuel, fuel oil, liquefied petroleum gas, lube oils, bitumen, heating oil and other products. The suite of

Australian Institute of Petroleum

In 2010, daily demand for all petroleum products in Australia was 941,000 barrels with domestic refiners capable of meeting approximately 73 per cent of this demand. Refineries produce a range of

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for the Australian refineries, which each produce 100,000 barrels a day, to compete with Asian refineries that could produce 1.2 million barrels a day. The looming closure of three Australian refineries will affect the security of liquid fuel supplies in Australia. This is particularly so if the government and the oil industry do not devise a joint strategy with which to respond to potential supply disruptions. Earlier, Caltex Australia had written down the value of its two oil refineries (Kurnell in NSW and Lytton in Queensland) by A$1.5 billion. Caltex announced that the results of an operational review due in six months could lead to refinery closures. The closure may mark another milestone in the decline of Australias refining sector. Shell confirmed in July 2011 that it will shut down refining operations at Clyde and convert the Clyde Refinery and Gore Bay Terminal into a fuel import facility by mid-2013. ExxonMobils Port Stanvac refinery near Adelaide was mothballed in 2003. In 2009, the decision was made to close down the refinery. If an ongoing Caltex review results in closure of the two refineries, the nation will be reduced to just four, half the number in 2003. Caltexs position also raises questions over the viability of the nations four other refineries. Analysts often tout

ExxonMobils Altona refinery in Melbourne as a candidate for divestment. All of the recent refinery closures have been attributed to the rise of huge refineries in the Asian region, where a surge of new capacity has depressed profit margins in the industry. The closures were not carbon tax related. Australias refineries have experienced declining gross margins for several years, mainly due to competition from foreign refineries, an oversupply of refining capacity in Asia, and the high cost of transporting crude oil to Australia. Crude oil is transported in large tankers (VLCCs) up to 200,000 tonnes. Petroleum products are transported in much smaller ships up to 45,000 tonnes. The freight (per barrel) is cheaper for crude oil via VLCCs. However, this is eroded by the higher cost of refining in Australia which results from smaller scale, higher capital costs, and higher wages and energy costs. Thus, the key problem for Australian refiners is that the landed cost of crude oil in Australia plus refining costs and a profit margin is higher than the landed cost of petroleum products. Refineries need a production capacity of at least 200,000 barrels per day (bpd) in order to reach the minimum efficient scale. Australian refineries are small in capacity (see Table 1) compared with new refineries in Asia. For exam-

ple, the worlds largest refinery (Jamnagar in India with the production capacity of 1,240,000 bpd, owned by Reliance Industries) could supply more than Australias entire yearly fuel demand. As well as being comparatively small, Australias oil refineries are old, with the last refinery built in 1965. Consequently, they require large investment for upgrade in line with evolving environmental standards. The prospects for Australian refineries depend on competitive conditions set by global refinery circumstances. The Australian refining industry operates in an internationally competitive market, with large refinery capacity existing in Asia capable of exporting substantial volumes of fuel to Australia. In this context, importing refined fuel from Asian mega-refineries, such as Reliance Industrys Jamnagar, ExxonMobils Singapore refinery or Shells Singapore refinery is more cost-effective for oil companies. Australias LNG Plants Currently, there are three operating LNG processing plants in Australia, the North West Shelf (NWS) LNG Project in Western Australia, the Darwin LNG plant and recently the Pluto project. The NWS Project has five LNG production trains with a total production capacity of 16.3 million tonnes per annum (mtpa). The Darwin

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LNG plants single production train has a capacity of 3.6 mtpa, and the Pluto project has a single production train with a capacity of 4.3 mtpa. There are several other Australian conventional LNG projects at various stages of development with the massive Gorgon Project (initial 3-train, 15 mtpa production capacity) under construction and due for startup in 2014-2015. More recently, final investment decisions have been taken for the Wheatstone project (2-train, 8.9 mtpa production capacity), due to be operational in 2016 and the Ichthys project (2-train, production capacity 8.4 mtpa), due to be operational in 2017. The Prelude project (production capacity 3.5 mtpa), which will use Floating LNG technology, has obtained a final investment decision and is to be operational by 2016-2017. This technology involves the production of LNG via a large, bargelike floating LNG production facility and is suitable for smaller offshore gas fields that are distant from either land or existing infrastructure. Other potential LNG projects that are yet to receive a final investment decision are the Browse LNG project, Equus LNG, Pluto trains two and three, Sunrise LNG, Bonaparte LNG, Scarborough, and Cash-Maple Floating LNG. As yet, there are no operational CSG-LNG projects in the world. However, the Queensland Curtis LNG, Gladstone

LNG and Australia-Pacific LNG projects are currently under construction in Gladstone, Queensland. There are also several other proposals for CSGLNG plants under consideration for Gladstone. Exports Australia has sales contracts in place to supply LNG to Japan, China, and South Korea, and has made spot market sales to numerous other countries. During 2010, the vast majority (69%) of Australias LNG exports were to Japan as shown in Table 1.

into New Zealand by the oil companies. However in 1956, a review of oil prices saw the Government investigate the viability of a New Zealand refinery. Marsden Point was chosen as the site for the refinery because of its convenient deepwater harbour close to the main North Island markets, low earthquake risk and the availability of considerable land adjacent to the site. Building began in 1962 and the refinery was officially opened on 30 May 1964 by the Prime Minister, Keith Holyoake. A

New Zealand
Marsden Point Oil Refinery is a 96,000 BPD refinery located at Marsden Point, Whangarei, Northland, New Zealand. It is the only oil refinery in New Zealand, and is operated by Refining NZ. The New Zealand Refining Company is the countrys only oil refinery and the leading supplier of refined petroleum products to the New Zealand market, including petrol, diesel, aviation fuel and other products. Due to the comparatively small size of the NZ oil market, fuels were originally imported

consortium of the New Zealand Government contributed the initial NZ10 million budget of the refinery. The first export cargo of refined product left the refinery on June 1 followed by the first domestic cargo on June 12. In 1973, the government approved a NZ$160 million expansion of the refinery, involving the addition of a fluid catalytic cracker. Later that year, the first global oil shock, sparked by the Yom Kippur War, raised crude oil prices from US$3 to around US$20 a barrel - however, New Zealand retained

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reasonable security of supply . A second global oil shock in 1979, this time due to the Iranian revolution, greatly increased the price of oil again. This proved to be a catalyst for further expansion of the Refinery, under the Muldoon National Governments Think Big energy projects. The estimated cost of expansion was $320 million, with a hydrocracker now considered rather than the planned catalytic cracker. In 1981, the expansion began and the government approving a 170km pipeline to Wiri, south Auckland. This pipeline is called the RAP (Refinery to Auckland Pipeline). A workforce of 5,000 worked on the expansion, which was by now expected to cost $1.55 billion. Strikes during the project led to the introduction of the Refinery Expansion Projects Dispute Act by the Muldoon government. An inquiry into the strikes and the governments reactions to them followed. In 1985 the refinery shut down for five months for maintenance work on the old refinery. The project was completed in 1986, two years behind schedule and at a final cost of $1.84 billion. Following the election of the reformist Fourth Labour Government in 1984, the Petroleum Sector Reform Act was introduced. This Act deregulated the petroleum industry, with 1,500 workers expected to lose their jobs. The Refinery assets were transferred by the Government to the New Zealand Refining

Company Limited, a consortium of the five major petrol retailers. The Government injected $80 million to enable the company to adapt to the new environment. A major efficiency drive was launched to cut operating costs. In 1999 the company established New Zealands largest fuel testing laboratory, the Independent Petroleum Laboratory Ltd, of which they own 75 percent. This business has been set up to cater not only for the refinerys increasing needs, but also for a wide range of local and international customers and government agencies.

Now, with our $180 million Future Fuels upgrade, we are able to remove sulphur from diesel and benzene from petrol, delivering significantly cleaner fuels to New Zealand consumers for generations to come.

Papua New Guinea

Papua New Guinea is richly endowed with gold, copper, oil, natural gas, and other minerals. In 2006 minerals and oil export receipts accounted for 82% of GDP and continue to account for over 60% of GDP. Government revenues and foreign exchange earnings depend heavily on mineral and oil exports. In-

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digenous landowners in areas affected by minerals projects also receive royalties from those operations. Copper and gold mines are currently in production at Porgera, Ok Tedi, Lihir, Hidden Valley, Sinivit, and Simberi. A consortium led by ExxonMobil signed a final investment decision in December 2009 to begin the commercialization of the countrys estimated 22.5 trillion cubic feet of natural gas reserves through the construction of a liquefied natural gas (LNG) production facility. Interoil, an American-owned firm, opened Papua New Guineas first oil refinery in 2004 and is also building a second liquefied natural gas production facility which it aims to complete by 2012 with production capacity of 32,500 barrels of product per day. With the 2003 withdrawal of Chevron/Texaco, Australian companies are the most active in developing Papua New Guineas mining and petroleum sectors. ExxonMobil retains a major share of natural gas reserves and is constructing a liquefied natural gas processing facility. Interoil, backed by an Overseas Private Investment Corporation (OPIC) loan, operates an oil refinery in Port Moresby and in September 2010 signed an agreement with Energy World Corporation (EWC) to complete front-end engineering and design and a final investment decision to establish the second LNG project in the country. Our refinery is located across the harbor from Port Moresby,

the capital city of Papua New Guinea. Our refinery is currently the sole refiner of hydrocarbons located in Papua New Guinea and can process up to 36,000bpd. Under our 30 year agreement with the State which expires in 2035, the State has undertaken to ensure that domestic distributors purchase their refined petroleum product needs from the refinery, or any refinery which is constructed in Papua New Guinea, at an IPP. Our refinery.s production capacity is more than sufficient to meet all of the domestic demand for the refined products we produce in Papua New Guinea. Jet fuel, diesel and gasoline are the primary products that we produce for the domestic market. The refining process also results in the production of naphtha and low sulfur waxy residue. To the extent that we do not convert naphtha to gasoline, we export

it to the Asian markets in two grades, light naphtha and m ixed naphtha, which are predominately used as petrochemical feedstock. Low sulfur waxy residue can be and is being sold as fuel and is valued by more complex refineries as cracker feedstock. Refining InterOil was formed in 1997 with its principal intention being to build and develop an vertically integrated oil and gas company in Papua New Guinea. The recently constructed InterOil refinery is the only petroleum refining facility in Papua New Guinea and produces a range of products that are used to supply the entire domestic refined product needs in Papua New Guinea. All products surplus to Papua New Guineas domestic needs are exported. Prior to the construction of our refinery, Papua New

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Guinea was one of a few oleiferous countries that did not have its own refinery and relied entirely on imported petroleum refined products from Singapore and Australia, a distance of 1,375 - 4,375 miles. InterOils Project Agreement with the State of Papua New Guinea enables the refinery to market its domestic sales at the Import Parity Pricing structure which allows us to capture most of the freight costs and refinery margins, which were previously paid to international shipping and oil companies. InterOil has a Project Agreement and Extension Deed with the State of Papua New Guinea which ensures that the domestic distributors purchase all of their petroleum products from the refinery at the Import Parity Price. No dumping of cheaper products is permitted. The Import Parity Price is the price set by the Price Controller on a monthly basis. This calculation is virtually identical to the landed Cost Review that previously applied to the local distributors prior to the construction of the InterOil refinery. The Import Parity Pricing format was implemented in September 2004. The InterOil refinery project is the single largest industrial investment project undertaken in PNG. InterOil The InterOil core project team consists of a highly experienced group of individuals each with

extensive experience in their chosen fields and wide ranging contacts within the oil industry. Due to the high level of confidence vested in the Directors and Management, InterOil has developed strong relationships with oil majors, Shell and BP. An amount of US$214 million was committed to the Refinery Project which includes a loan amount of US$85 million from the US Government Agency (OPIC) with which to complete the project. To date InterOil continues to deliver on its promise to the Government of PNG and the shareholders of InterOil. The Refinery Description The refinery can process 36,000 bpd, sized to meet the current and predicted demand for the whole of the PNG market. The configuration that has been chosen takes advantage of the light sweet crude and so avoids the need for hydrotreating or complex and expensive heavy oil processing such as catalytic cracking and coking. The refinery thus consists of only atmospheric distillation plus a modest catalytic reformer for production of gasoline blendstock i.e. an ultra-simple hydroskimming complex. The refinery site is situated in an area surrounded by hills, which shield the view from the city of Port Moresby, across the harbor. Several measures have been taken to minimize visual impact Great attention has been paid to environmental matters and InterOil has

committed itself to meet or exceed the recommendations of the World Bank for new refinery installation. Port Moresby has the only sheltered, deep-water harbor in the region. In fact, the harbor draft exceeds that of both Sydney and Brisbane. The refinery jetty design and deep draft of the harbor allows easy access to vessels of all sizes up 110,000dwt. Smaller vessels can also unload crude oil from the PNG river systems and unload at the refinery. The refinery includes a jetty with two berths for loading and off-loading ships and a road tanker loading system. The larger berth has deep water access of 56 feet (17 metres) and has been designed to accommodate 12,000 to 130,000 dwt crude and product tankers. The smaller berth can accommodate ships with a capacity of up to 22,000 dwt. The tank farm has the ability to store approximately 750,000 barrels of crude feedstock and approximately 1.1 million barrels of refined products. InterOil have a reverse osmosis desalination unit that produces all of the water used by the refinery, power generation facilities that meet all of our electricity needs, and other site infrastructure and support facilities, including a laboratory, a waste water treatment plant, staff accommodation and a fire station. The refinerys on-site laboratory is staffed and operated by an independent company, SGS Australia Pty

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Limited, which is an ISO 9000 quality management system accredited company. The laboratory received Australian National Association of Testing Authorities (NATA) accreditation in 2006. All crude imports and finished products are tested and certified on-site to contractual specifications. SGS also provides independent certification of quantities loaded and discharged at the refinery. Crude Supply and Throughput In December 2001, InterOil

entered into an agreement with BP Singapore Pte Limited for the supply of crude feedstock to our refinery. This agreement continues until June 2009. BP is the largest marketer of crude oil in the Asia Pacific region. This contract provides a reliable source of supply and provides access to the majority of the regional crudes suitable for our refinery. InterOils supply agreement with BP provides BP with financial incentives to secure the most economically attractive crude feedstock for our

refinery. Officials are currently reviewing these arrangements and other options for sources of supply after expiration of this contract.

References
EIA CNN NBC Australian Government, Department of Resources, Energy and Tourism InterOil Refining NZ IEA HA

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