Download PDFTHE P A R LIA M E N T OF THE C O M M O N W EALTH OF AUSTRALIA
1975 — Parliamentary Paper No. 21
PROPOSALS FOR NEW REFINERIES IN NEW SOUTH WALES
ROYAL COMMISSION ON PETROLEUM
SECOND REPORT
Presented by Command and ordered to be printed 6 March 1975
THE GOVERNMENT PRINTER OF AUSTRALIA CANBERRA 1975 *
© Commonwealth of Australia 1975
Printed by W ym ond M orell (Printers) Pty. L td ., Î6 0 Parramatta Road, C am perdow n 2050
20 December 1974
Your Excellency,
In accordance with Letters Patent dated 12 September 1973, I have the honour to present to
you the Second Report of the Commission of Inquiry
into production, marketing and pricing of petroleum, diesel and other fuels.
Yours sincerely,
(W.H. COLLINS) Commissioner
His Excellency the Honourable Sir John Kerr, K.C.M.G., Q.C., K. St.J., Governor-General of Australia, Government House,
Yarralumla, CANBERRA, A.C.T. 2600
SUMMARY OF CHAPTER HEADINGS
Chapter Para
1.
2.
3.
3.1 3.2
4.
5.
6 .
6.1 6.2 6.3
6.4
7.
7.1 7.2 7.3
8 .
8.1 8.2
9.
10.
11.
12.
13.
13.1 13.2 13.3
14.
14.1 14.2
15.
15.1 15.2
16.
16.1 16.2 16.3
Topic Page
INTRODUCTION
SUBJECT M A TTE R 1
TERM S OF REFERENCE 1
G E N E R A L M ATTER S 2
Refineries 2
Divisions of Reports 2
GLOSSARY 3
PART I
CONSUMPTION OF PETROLEUM PRODUCTS IN A U S T R A L IA 5
FORECAST A U S T R A L IA N CONSUMPTION - FOUR FACTORS 5
Uncertainties in Future Crude Oil Pricing Effect of Price on Demand Substitute Energy Sources May Displace Demand
Environmental Restrictions on Consumption
FORECASTS Petroleum Branch O il Company Forecasts The Range of Forecasts
SUPPLY
Australian Refineries Sufficiency o f Australian Refining Capacity 11
CRUDE O IL FEEDSTOCK FOR A U S T R A LIA N R E FIN E R IE S 11
IN D IG EN O U S CRUDE O IL PRODUCTION 13
U T IL IZ A T IO N OF INDIGENOUS CRUDE 14
A U S T R A L IA 'S INCREASING DEPENDENCE ON IMPORTED CRUDE O IL FEEDSTOCK 14
PRICING A N D A LLO C A T IO N OF A U S T R A LIA N IN D IG E N O U S CRUDE 15
Pricing 15
A llocation 16
A fte r October 1973 18
TRANSPO RTATIO N OF CRUDE O IL 19
Pipeline and Tanker 19
Tanker Costs 19
D ISTR IBU TIO N OF PETROLEUM PRODUCTS 20
Refinery Exchange and B orrow and Loan 20
Transportation of Petroleum Products 21
G EN E R AL N ATURE OF REFINERIES 22
Configuration 22
Escalating Costs 22
Environmental Planning 23
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COCO CO CO -4 xJ x j O) 0 ) 0 )
Chapter Para Topic Page
17. NEW SOUTH WALES 24
17.1 Marketing Area 24
17.2 Tim ing o f New Capacity 24
17.3 Consumption o f Petroleum Products in New
South Wales 24
17.4 Forecast Consumption in New South Wales 25
17.5 New South Wales — R efinery Capacity 25
17.6 Current Plans fo r Existing New South Wales
Refineries 26
(a) Total, M atraville 26
(b) Shell, Clyde 26
(c) A.O .R., Kurnell 27
(d) Bases on Which Commission
Proceeds 28
18. SY D N EY - AS A LOCATION FOR A R E F IN E R Y 28
18.1 Population Trends 28
18.2 Port Facilities 28
18.3 Future Port Developments 29
18.4 Pivotal Position o f Botany Bay 30
18.5 Two-Port Discharging and Botany Bay 31
18.6 Scale o f Economies — Tw o-P ort Discharging 31
19. NEW CASTLE - AS A LO CATIO N FOR A R EFIN E R Y 32
19.1 Population Trends 32
19.2 Port Facilities 32
19.3 Future Port Developments 33
20. PIPELINES 33
20.1 Botany Bay/Clyde Pipelines . 33
20.2 The Aviation Turbine Fuel Piepline 34
20.3 The Crude Oil Pipeline 35
20.4 Public Concern over Clyde/ Botany Bay
Pipelines 35
20.5 Past Experience w ith Petroleum Pipelines 36
20.6 Evidence o f Interested Parties 38
21. SUPPLY OF PETROLEUM TO NEWCASTLE 39
21.1 Pipeline Feasibility Study 39
21.2 A dditional Advantages 39
21.3 Savings in Pipeline Construction 40
22. POSSIBLE R E F IN E R Y SITES 40
22.1 Kooragang Island 40
22.2 Lucas Heights and Kurnell 41
22.3 Inspection o f Sites by Commission 43
23. SUBMISSIONS ON SITES BY G O VE R N M E N TA L A N D
OTHER AU TH O R ITIE S 43
23.1 The New South Wales Planning and
Environment Commission (form erly the State Planning A u th o rity o f New South Wales) 43
(a) Lucas Heights 43
(b) Kurnell 44
23.2 Submission by the Department of Environment
and Conservation o f the Australian Government 46
23.3 Submission by the New South Wales State
P ollution Control Commission 47
23.4 Submission by New South Wales Government 47
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Chapter Para Topic Page
23.5 Submission o f the Sutherland Shire Council 48
23.6 Submission by Australian A tom ic Energy
Commission 49
PART II
24. THE R E F IN E R Y PROPOSALS 51
24.1 B.H.P./Sleigh Proposal 51
24.2 A m pol/Total Proposal 51
25. QUESTION OF URGENT H EARING 51
25.1 Sleigh 51
25.2 B.H.P. 51
25.3 Am pol 52
25.4 Total 52
25.5 The Australian Government 52
26. Τ ΠE P R IO R ITY HEARING 53
27. COMMISSION'S DECISION ON PR IO R ITY
APPLICATIO NS 53
28. THE PROCEEDINGS 54
29. THE APPLICANTS 54
29.1 Sleigh 54
29.2 B.H.P. 55
29.3 Am pol 56
29.4 Total 56
30. COMMON FEATURES OF PROPOSALS 57
30.1 Insufficiency o f Refining Capacity in New
South Wales 57
30.2 Commercial Needs 58
30.3 Three Possible Refinery Sites 58
30.4 Shared Cost o f New Refinery 58
31. THE B.H.P./SLEIGH PROPOSAL - M ATTER S IN
SUPPORT 60
31.1 M otivations 60
(a) Sleigh 60
(b) B.H.P. 61
31.2 Inception and Development o f Project 61
(a) Inception 61
(bl Agreement 62
(c) Feasibility Study 62
Id) Decision to Proceed 63
31.3 Fundamental Features 63
(a) Newcastle Location 63
(b) 100% Indigenous Crude
Feedstock 64
(c) A Hydroskimming Type Refinery 65
31.4 Economic Considerations 67
31.5 Transportation Economies — (The
Transportation Shield) 68
31.6 Australian Ownership 69
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Chapter Para Topic Page
32.
33.
34.
35.
36.
37.
THE A M P O L/T O T A L PROPOSAL - M ATTER S IN SUPPORT 69
32.1 M otivations 69
(a) Am pol 69
(b) Total 70
32.2 Inception and Development 71
(a) A m p o l/T o ta l Studies 71
(b) Options to Purchase Land fo r
Refinery 72
32.3 Essential Features o f Proposed Refinery 72
32.4 Site 72
32.5 Arrangement Between the Parties 73
32.6 A m pol/Total on Public Interest 73
AM PO L'S CASE FOR A NEW R E F IN E R Y IN SYDNEY R A TH E R TH A N EXPANSION IN Q UEENSLAN D 74
33.1 Queensland Consumption and Production 74
33.2 Queensland Population Trends 74
33.3 Comparison o f G row th Between Queensland
and Sydney South Area 75
33.4 Questions Raised Concerning Alleged
Imbalance 75
33.5 Alleged Deficiency in Queensland Market 76
REPORT ON PROPOSALS - G E N E R A L 76
34.1 Overall Australian Situation 76
34.2 Parties have Demonstrated Commercial Need 77
34.3 Im portation, or Expansion o f Existing
Refineries 77
34.4 Im ports not a Long Term Solution 78
34.5 Commission's Finding on the Need fo r a New'
Refinery in New South Wales 78
PROBLEMS IN H ER EN T IN THE PROPOSALS 78
35.1 The Applications Appear M utally Exclusive 78
35.2 The Shared Refinery 79
TH E TABS STUDY 79
36.1 Commission Investigates a Com bined Refinery 79
36.2 The Working Group 80
36.3 A Preliminary Feasibility Study Only 80
36.4 Computer Techniques 80
36.5 The Results o f the TABS Study 81
36.6 The A ttitu d e o f the Four Parties to the TABS
Study 82
36.7 Commission's Findings on the TABS Study 83
REPORT ON THE S Y D N EY M A R K E T A R E A AS COMPARED W ITH NEW CASTLE OR Q UEENSLAND 83
37.1 Where is the G row th Potential? 83
37.2 Botany Bay and Newcastle as Oil Ports 83
38. REPORT ON THE B.H.P./SLEIGH PROPOSAL
38.1 Use o f 100% Indigenous Crude Feedstock
38.2 Is there a M arket fo r the Refinery?
38.3 Is there a Transportation Shield?
38.4 The Inadequacy of Newcastle Harbour
38.5 Is a Hydroskimm ing Type Refinery in the
National Interest?
84 84 86
87 88
88
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Chapter Para Topic Page
38.6 Low Sulphur Fuel Oil 89
38.7 The Proposal was not "Ready to G o" 90
39. REPORT ON THE A M P O L /T O T A L PROPOSAL 90
39.1 Location in the Sydney Area 90
39.2 Refinery Site 91
39.3 The Kurnell Peninsula 92
39.4 Lucas Heights 97
39.5 Conclusions on Sites 97
40. SUM M ATION OF REPORT 97
AN N EXU R E " A " Relevant Parts of the Terms o f Reference 101
AN N EXU R E " B " Glossary 102
AN N EXU R E " C " Consumption o f Petroleum Products in Australia fo r the Year Ended 30th June, 1974 107
ANN EXUR E: " D·· Forecast Consumption o f Petroleum Products — Australia 108
ANNEXURE : ..Eâ Brief Description o f Refinery Process Units 109
A N N E X U R E "F " Crude Oil Transport Costs 112
Table 1 112
Table II 113
Table III 114
Table IV 115
A N N E X U R E " G " Jo in t Refinery Feasibility Studies — TABS 116
ROYAL COMMISSION ON PETROLEUM
SECOND REPORT
PROPOSALS FOR NEW REFINERIES IN NEW SOUTH WALES
SUMMARY
In 1971 the Broken Bill Proprietary Company Limited (B.H.P.) and H.C. Sleigh Limited (Sleigh) began to investigate the feasibility of joining together to construct a refinery at Newcastle. In 1972 Ampol Petroleum Limited (Ampol) and Total Australia Limited (Total) began to investigate the
feasibility of joining together to construct a refinery in the Sydney metropolitan area. The investigations by each group were well advanced in September, 1973 when the Commission was appointed and charged to inquire into various aspects o f the petroleum industry including production
by refining, with emphasis upon the need for additional refinery capacity in the Sydney metropolitan area. The Commission did not originally intend to examine the general refinery question at the start of its inquiry. It chose, as the first subject of
inquiry, marketing and pricing, and had commenced its investigations of this question. However, B.H.P./Sleigh urged that the Commission should consider their proposal as a matter of urgency. A t the same time, Ampol/Total urged that the Commission should consider their proposal as a matter of urgency.
Ultimately all four parties, with the support of the Australian Government, submitted that the whole refinery question referred to in the Terms of Reference should be dealt with as a matter of priority. Having considered the submissions and the material then before it, the Commission decided to do so.
B.H.P./Sleigh proposed to build a refinery with a capacity of 65,000 barrels per stream day on a site at Kooragang Island, on the Hunter River, at Newcastle. The three central features o f the proposal were:— 1. The refinery was to be supplied with a feedstock consisting entirely of
Australian indigenous crude oil. Australian crude oil is a low sulphur crude oil of high quality. It sells in Australia, currently, at about one quarter the price of imported crude oil. 2. The refinery was to be a simple refinery of the hydroskimming type.
It would not maximize the outturn of white products but would produce 70% white products and 30% fuel oil for use by B.H.P. in its steel making enterprise. 3. The refinery would supply white products to a comparatively small
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and slow growing market centred at Newcastle. The expected excess of white products from the refinery would be shipped out to Sydney and elsewhere. The fuel oil produced would be supplied to the B.H.P. steel works at Port Kembla (75%) and the B.H.P. steel works at
Newcastle (25%).
The proposed Am pol/Total refinery was to be built in the Sydney metropolitan area, with a capacity o f 70,000 barrels per stream day. No particular site had been determined. Two only were suggested to the Commission, one on the Kurnell Peninsula and the other on the Heathcote Road at Lucas Heights. This proposal had three essential features:—
1. The refinery was to be capable o f processing not only Australian but also high sulphur imported crude oils. 2. It was to be located so as to take advantage of the large scale
expansion planned for the port at Botany Bay. As part o f this plan, crude oil discharge facilities are to be constructed able to handle VLCCs, that is to say, crude oil carriers, of 200,000 tons. These ships will, in the future, provide the most economic way of carrying imported crude oil. 3. The refinery will be located close to the fastest growing market areas
in New South Wales, the areas of Sydney and Sydney South.
Each refinery is designed to meet the needs o f the group o f companies proposing to build it but neither is designed to meet the needs of all four companies. In its Second Report the Commission sets out the general factual background against which the two proposals must be considered. Perhaps the most important general matter is that while at the present time Australian crude provides nearly 70% o f the total crude oil intake of Australian
refineries, this percentage is falling and will, with growing demand, continue to fall. One other matter, amongst many, which the Commission has considered is the desirability of supplying Newcastle with petroleum products from Sydney by means of a pipeline.
The Commission concludes that there is a need for an additional refinery larger than either of the refineries proposed in the Sydney metropolitan area but this should be one jo in tly owned by all or any three of the four proponents. The Commission also concludes that: —
(a) No new refinery should be constructed at Newcastle; (b) No new refinery of the hydroskimming type should be
constructed in New South Wales; and (c) New and old refineries broadly speaking should have similar access to high and low cost crudes.
The summation of the Second Report is as follows: —
1. In a world which must increasingly adapt to the scarcity of petroleum products caused either by lack o f resources or by inability to pay for them, production patterns must emphasize the outturn of those
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products for which there is no practical alternative, at the expense of those products for which in part or whole alternatives do exist. 2. In Australia this means that production capacity must be designed to increase the outturn of motor spirit range products (white products)
for which there are no effective large scale substitutes at the expense of fuel oils (black products). Natural gas, coal and coke are available in part substitution for fuel oils.
3. It follows that new grass roots capacity must be designed with adequate secondary refining capacity to produce maximum amounts o f white products and to leave as little residual fuel oils as possible.
4. By reason of its composition and type, indigenous crude is particularly suitable as a feedstock to produce high proportions of motor spirit and similar range products (white products) (9.0). 5. Hydroskimming refineries such as proposed by B.H.P./Sleigh, with
little secondary capacity, and which emphasize the production o f fuel oil (30% of total) at the expense of white products, are therefore strongly contra-indicated and must be regarded as unsuitable in terms o f the national interest (38.5).
In particular, it is not appropriate to turn o ff as fuel oil, furnace oil and ships' bunkers approximately three tenths of the crude run when, by using secondary capacity, approximately 80% of that fraction can be refined into motor spirit and similar range products (38.5). 6. The B.H.P./Sleigh proposal involves the use of 100% indigenous crude
oil at $2.09 a barrel as feedstock (31.3, 38.1). This contrasts with the feedstock of other refiners who have to pay $8.50 a barrel for the approximate 30% of imported feedstock and $2.09 for the 70% indigenous crude oil balance. This cost difference in feedstock for a refinery of the size proposed is of the order o f $100,000 per stream day (38.1). 7. As indigenous crude supply is limited, such a supply of 100%
indigenous crude to B.H.P./Sleigh must result in the share of all other refiners being proportionately diminished. They would need to import more crude at $8.50 and would receive even less indigenous crude at $2.09. Therefore, B.H.P./Sleigh's 100% supply of $2.09 a barrel must
be at the direct expense of other refiners and would fundamentally distort the pattern of the refining industry in Australia (38.1). 8. Refiners, including new refiners, to the extent possible, should have available to them approximately the same access to cheaper and dearer
crudes (38.1). 9. Production from the Gippsland fields is already providing a declining proportion of Australian feedstocks and from about 1980 production will fall in absolute terms (10.0). The shortfall can only be filled from
imports on an increasing scale which are likely to prove very expensive. (12.0). Economies in the importing process are, therefore, essential. Large scale economies are achieved by the use of V.L.C.C.s
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but considerable capitalization is needed to provide port and tankage facilities.
10. The Maritime Services Board of New South Wales is currently developing Botany Bay as a bulk port capable o f receiving V.L.C.C.s of 200,000 dw t (18.3). In Australia, only Botany Bay w ill be capable of taking V.L.C.C.s fully laden and of giving other major ports the opportunity to receive the vessels part laden on the necessary return voyage. This "tw o-porting" pattern should achieve significant economies over alternative methods of importing directly using smaller and notably more expensive tankers (18.4 - 18.6 and Annexure "F ").
Botany Bay therefore becomes pivotal in the introduction of real economies o f scale in the importing process (18.4).
11. To increase the effective use o f the very large capital sum to be expended on Botany Bay's development, it is desirable that all new refinery capacity should relate to Botany Bay and use its facilities (37.2).
12. Despite great uncertainties attending the forecasting o f demand, (6.1-6.4, 7.1-7.3), it seems probable that New South Wales refining capacity w ill fall so significantly short of demand within at the most the next four years as to make advisable new refining capacity in New South Wales (17.3-17.5, 30.1,34.5). The need for this new refining capacity should be accepted now (34.4, 34.5). '
13. The only market of sufficient size available to a new refinery o f at least minimum economic size is in the Sydney and Sydney South region (33.3). There is no market of sufficient size in Newcastle and on population trends for both Newcastle and related areas such a market is unlikely to emerge for many years (19.1,38.2).
14. The port o f Newcastle is not and is not likely to become adequate as a major oil port, and no new refinery should be located there. (19.2, 19.3, 38.4).
15. Any new refinery should be located in the Sydney metropolitan area and should relate to Botany Bay and its facilities (37.2, 38.4).
16. The Ampol/Total proposal for a refinery is not sufficiently advanced to be satisfactorily assessed. There is no firm site (32.4). The proposal demonstrates the following characteristics: — (a) The refinery is of minimum economic size;
(b) It has adequate secondary processes; (c) It is capable of handling a wide range of crudes; (d) It does relate to Botany Bay and could share in the economies involved; (e) It is positioned to serve the principal available market.
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A ll these characteristics are consistent with the type of new refining capacity the Commission considers is required. 17. The Commission finds that all four companies have appropriate and proper commercial interest in proposals for a new refinery (30.2,
34.2).
18. The Commission finds that a new refinery, appropriately located, technologically adequate and in the context of the port of Botany Bay and the market of the Sydney and Sydney South region is in the public interest (37.2). 19. The Commission finds that it is a fundamental defect of each o f the
tw o proposals that they do not meet in any way the commercial problems of the other companies (35.1). 20. The Commission strongly commends the prospect o f co-operation of all or any three of these companies in a shared refinery and finds that
such a rationalization is in the public interest. (35.2, 36.1). 21. The Commission considers the TABS Refinery Study demonstrates that it is feasible for the joint needs o f the parties to be met by one refinery and that substantial advantages o f scale can be expected to
flow from such a refinery (36.3-36.7 and Annexure "G "). 22. The Commission has considered criticism o f the sites propounded. It notes that no alternatives to the sites have been suggested (39.3-39.5).
The Commission considers that any site should be subject to full engineering and environmental impact studies before final approval (39.2). Subject to this reservation the Commission considers Kurnell and
Lucas Heights in that order to be appropriate sites for a new refinery o f modern design (39.5). 23. The Commission considers that there is a strong prima facie case for supplying petroleum products by pipeline to Newcastle and that this
prospect should be kept under review (21.1,21.2). The Commission directs attention to the economies which may be available if the construction of such a pipeline could be coordinated with any supply of natural gas by pipeline to Newcastle. (21.3).
24. Having inquired the Commission reports: — (a) That there is a need for an additional refinery located in the Sydney metropolitan area; (b) The refinery should be o f modern design, of not less than
minimum economic size, located in proxim ity to the port facilities of Botany Bay with primary and secondary processing units capable of maximizing the production of white products from a wide range of indigenous and imported crudes. (c) That the refinery should be jointly owned by all or any three of
the four applicant companies. (d) That the supply of petroleum products to Newcastle by pipeline should be kept under review.
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ROYAL COMMISSION ON PETROLEUM
SECOND REPORT
PROPOSALS FOR NEW REFINERIES IN NEW SOUTH WALES
INTRODUCTION
1. SUBJECT MATTER
This Report concerns two proposals to construct refineries in New South Wales. One is a proposal made jointly by the Broken Hill Proprietary Company Limited, with its subsidiary Hematite Petroleum Limited, (B.H.P.) and H.C. Sleigh Limited (Sleigh) to construct a refinery at Newcastle, and
one a proposal made jointly by Ampol Petroleum Limited and associated companies (Ampol), and Total Australia Limited (Total) to construct a refinery in the Sydney metropolitan area.
2. TERMS OF REFERENCE
The proposals come within those Terms of Reference which require the Royal Commissioner, inter alia, to inquire into and report upon all aspects of the Australian oil refining industry. In particular they require the Commission to examine:
(i) the need, in the public interest, for any changes in the number, location, technology and type of Australian refineries; (ii) rationalization by joint operating or sharing of refineries; and (iii) the need for additional refinery capacity in Sydney. The relevant parts of the Terms of Reference are set out in Annexure " A " to this Report.
The Terms of Reference extend to aspects of refining beyond those involved in these tw o proposals, and indeed raise the question of a national refinery policy. The Commission has been conscious of the danger of inconsistency in dealing with these two proposals in isolation and separate from the general enquiry into refining. The Commission has therefore in its
investigations and enquiries gone beyond the limits of these two immediate proposals. The claim by various parties that immediate consideration be given to the proposals and the necessarily longer time required to undertake a general
inquiry into refining, have caused the Commission to hear evidence and issue this Second Report now.
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3. GENERAL MATTERS
3.1 Refineries
In order that the proposals can be properly understood and assessed, it is first necessary to present the general background against which the proposals must be examined. In an oil refinery, plant and equipment are organized into an integrated series of processes to manufacture products such as motor spirit, kerosene, lubricating oil and fuel oil from feedstock which is principally crude oil. The processes used are many and vary from refinery to refinery. They include physical separation processes, such as distillation; chemical conversion processes involving a change in the size and structure o f the hydrocarbon molecules, such as cracking and reforming; and treating processes such as desulphurization.
Oil refineries should be closely geared to market requirements. In deciding whether a refinery should be built it is necessary to analyze the market demand for products. Is the market growing and if so to what extent? Is the need for some products increasing more rapidly than the need for others? How is the market presently supplied? Will the new refinery be competitive?
A refinery processes crude oil. The characteristics of crude oil vary considerably. There is, for example, a marked difference between Australian indigenous crude and many types of crude oils imported from the Middle East. These differences affect the selection of processes and plant and the ultimate costs o f the products o f the refining process. '
Before coming to examine the particular proposals, the subject of this Report, the Commission describes Australian and New South Wales demand and supply and refinery capacity, the characteristics and availability of the likely future crude oil feedstock, the indigenous crude oil absorption policy, transportation, market areas (particularly those centred on Sydney and
Newcastle), Sydney and Newcastle as locations for a refinery, the use of pipelines and possible refinery sites.
3.2 Divisions of Report
The first part of this Report deals with the general matters just referred to. A good deal of what is said in this part of the Report is uncontroversial and taken from published material. The Report deals only incidentally with matters such as transportation and distribution, about which the Commission in due course will report further. The Commission has filled in the background with a broad brush to assist in viewing the immediate
proposals in proper context. The second part of the Report describes the proposals and states the Commission's conclusions with respect to them.
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4. GLOSSARY
The Report is largely about technical matters. Moreover it is about an industry which over the years has developed its own lexicon. Words and expressions appear in the Report with which those outside the industry may not be familiar. Accordingly Annexure "B " is a Glossary.
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PART I
5. CONSUMPTION OF PETROLEUM PRODUCTS IN AUSTRALIA
On an average day Australian motorists use over 7,400,000 gallons o f motor spirit of which 85% is premium or super grade. Of all petroleum products consumed during the year ended 30th June, 1974
35% was Motor Spirit 23% was Fuel Oil 13% was Automotive Distillate 5% was Aviation Turbine Fuel
5% was Industrial Diesel Fuel
Bunker fuel for ships, (which may be fuel oil, automotive distillate or industrial diesel fuel) accounted for over 8% of all petroleum products. This percentage is included within the above percentage table. The largest percentage increase in the consumption of petroleum products over the last year has been in bunker fuels. Consumption of these has increased by 16%. Of petroleum products used in bunkers, the consumption of those sold as industrial diesel fuel has increased 29% and the consumption of those sold as fuel oil 14%. When the consumption o f these
products, together with aviation turbine fuel, is compared with the rates of increase in their consumption over the previous five years, the rate of increase in the last year of both bunker fuel and aviation turbine fuel is
disproportionately high. For the year ended 30th June, 1974, total consumption of petroleum products rose by 8.8% over the previous year. This stands in contrast to the 5.2% average annual increase over the five years ended 30th June, 1974. The total consumption o f petroleum products for year ended 30th June, 1974, was 222,599,000 barrels. Consumption of motor spirit for the year increased
by 6.6% over the previous year. The average annual increase of consumption of motor spirit over the five years ended 30th June, 1974 was 5.7%. In the year ended 30th June, 1974, 94% of all petroleum products consumed were petroleum fuels, amounting to 209,827,000 barrels. Eight
percent of all petroleum products consumed were used within refineries mostly for power. Annexure "C " to this Report is a Table showing the quantity of individual petroleum products consumed, the percentage increase over the previous year and the average annual increase over the five years ended 30th
June, 1974.
6. FORECAST AUSTRALIAN CONSUMPTION - FOUR FACTORS
A t the present time it is unusually difficult to predict with confidence future patterns of consumption of petroleum. While this has never been an easy task, four factors may be cited for the present difficulty.
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6.1 Uncertainties in Future Crude Oil Pricing
Since October, 1973, there has been an approximate fourfold increase in the cost of imported crude oil. The price of Australian crude has not increased but the overall price of the 70% indigenous and the 30% imported crude mix is likely to continue to increase because of:
(a) further increases in the effective cost o f imported crude oil (price rises, freight costs, devaluation, etc.); (b) the decreasing share of Australian crude oil in total Australian consumption; and (c) other cost pressures in an inflationary environment. Possibly Government policy may attempt to inhibit the present lavish use of petroleum products by increased prices designed to dampen consumption in some sectors and to encourage the use o f limited resources
in the highest form-value applications. Selective taxes or excise could be imposed on Australian crude and/or on products with wide implications for price and consumption. ·
6.2 Effect of Price on Demand
Forecasting future consumption patterns is beset with the problems not only of assessing the extent to which prices may increase but also the effect of price increases on the demand for petroleum products. In Australia the demand for motor spirit has historically been and will probably continue to be not highly responsive to price changes (price inelastic}. It has followed closely, and can be related to, such factors as average weekly earnings and population growth. A large price increase would probably be necessary to depress the per capita growth rate of consumption. In this respect Australian experience seems similar to that of the United States. By contrast the growth o f consumption in Eruope has at least temporarily contracted to nil with the impact of recent price increases. However, European patterns of consumption are very different to Australian patterns. In Australia motor spirit is more of a domestic staple item than in
Europe. The consumption of some other petroleum products, especially fuel oil, can be expected to exhibit more variation with price increases. The fuel oil market is expected to decline in percentage and perhaps in absolute terms.
6.3 Substitute Energy Sources May Displace Demand
The increases in world oil prices and concern about the future availability of oil have led to considerable interest in substitutes for petroleum products. Natural gas and coal are two readily available substitutes in Australia. These fuels may now become more economically attractive. Even before the October 1973 oil crisis, the August, 1973 Fuels Branch forecast predicted an annual growth rate of 18.9% in natural gas consumption over the period 1972-1985.
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Non-conventional substitutes include synthetic crude oils produced from shale or coal and methanol produced from natural gas. In addition solar energy may some day offer alternatives to conventional energy sources. However, in view of the current state of the development o f these technologies and the massive amounts of capital investment that would be
required for any commercial sized operation, it is highly unlikely that any such fuels could make a significant impact on energy supply before the late 1980's. One possible development is the increased use of Liquified Petroleum
Gas for motor fuel, either directly or through converting the LPG to conventional motor spirit blending components. The Commission intends to investigate this subject but it does not appear that at this time LPG as a substitute for motor spirit w ill have a significant impact on motor spirit
demand.
6.4 Environmental Restrictions on Consumption
Possible changes in product quality specification due to concern for protection of the environment also make consumption forecasting difficult. The most significant issue in this regard is the amount of lead in motor spirit. This is used as an additive to increase the octane rating of motor spirit. It is argued that emissions of lead to the atmosphere are dangerous. The present
lim it of lead used by the industry in motor spirit is 0.84 grams per litre. Proposed regulations pursuant to the New South Wales Clean A ir A ct 1961, will lim it this to 0.64 grams per litre in 1975 and a further limitation to 0.4 grams per litre is planned for 1980. Evidence has been presented that a
limitation of lead w ill increase the volume of motor spirit due to loss of efficiency for the same energy output and that further controls in relation to motor vehicles to reduce emissions of hydrocarbons, carbon monoxide and nitrogen oxide w ill similarly decrease performance and increase consumption
of motor spirit.
7. FORECASTS
7.1 Petroleum Branch
In August 1973 the Fuels Branch (now the Petroleum Branch) of the Department of Minerals and Energy published a forecast consumption of primary fuels for the period 1972 to 1985. The objectives of this forecast included studying and identifying
demand for primary fuel by category of end use and deriving growth factors relating to the demand, by fuel type, fuel use, location and end use category. Certain premises were adopted as basic assumptions:--(a) With the exception of natural gas, there would be unrestricted
availability of all fuels. Natural gas would become available to all potential market areas in New South Wales and Western Australia in quantities adequate to meet demand, at periods which were specified.
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(b) Nuclear energy development in Australia would not result in any major displacement of fuels. (c) The current long term economic trends would continue without significant change. (Im plicit in this assumption was the
corollary assumption that the then current trends in fuel prices would continue without significant change.) (d) Unforeseen technological changes would not have a major influence on fuel demands. The methodology of the forecast was based on a twofold approach, using either a statistical or a building block technique, or a combination of the two, as circumstances required.
The forecast made by the Fuels Branch in August 1973 for the consumption of petroleum products in Australia, excluding refinery loss, and the equivalent crude oil required to meet the local consumption was:—
Barrels of Barrels Per Day
Product Crude Requirement
1974/75 241,680,000 660,000
1975/76 253,490,000 690,000
1976/77 263,850,000 720,000
1977/78 286,250,000 780,000
1978/79 304,190,000 830,000
1979/80 302,870,000 830,000
1980/81 313,650,000 860,000
1981/82 331,060,000 ' 910,000
1982/83 349,250,000 960,000
1983/84 368,800,000 1,010,000
1984/85 394,200,000 1,080,000
Throughout the period stated in this table, the consumption of motor spirit, avtur, heating oil and automotive diesel was expected to increase steadily. The consumption of fuel oil was expected to increase until 1978/79 when it was expected to decrease almost to the 1973/74 consumption level. This coincided with an expected increase in natural gas availability and consumption. From 1980 the consumption of fuel oil was expected to increase but at a rate much slower than previously.
A comparison o f previous forecasts published by the Fuels Branch with actual consumption figures for the periods in question shows a high degree of reliability. Examination of the five forecasts published between 1967 and 1972 shows that for total petroleum fuels in Australia all forecasts were within 10% o f actual consumption and 83% were within 5% of actual. All forecasts o f motor spirit were within 5% of actual. The largest variation occurred in the forecast of furnace oil consumption where 11% of the forecast was some 20% above the actual consumption.
The crises of October 1973 including the fourfold increase in the price of imported crude and all its con sequences must cast doubt over any forecast
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based on pre-October 1973 assessments. Accordingly, during the hearing the Commission indicated to the parties that it would not necessarily accept the pre-October 1973 forecast in its assessment of future patterns of consumption. The Petroleum Branch has commenced work which w ill result
in the publication of a revised forecast. This is not expected to be completed before March 1975.
7.2 Oil Company Forecasts
In the meantime, the Commission has obtained forecasts from a number of oil companies which supplied material on a confidential basis. These forecasts have taken into account the assessment by each company of the effects of the events of October 1973 and later. The Commission w ill not publish this material but has prepared from it an estimate of future demands
for petroleum fuels not directly dependent on the Fuels Branch forecast. This estimate together with the Fuels Branch forecast broken into fuels and non-fuel demands, is given in Annexure "D " to this Report. It gives a high and low forecast each based on averaging some of the material provided to the Commission and demonstrates the uncertainty about future consumption patterns. In this regard whilst increased prices are considered
likely to dampen demand in some areas, it is noted that the consumption figures for the year ended 30th June, 1974 showed unprecedented percentage increases in consumption in some products.
7.3 The Range of Forecasts
The Commission believes that a range of demand forecasts must be considered in order to take account of the uncertainty. The Fuels Branch pre-October 1973 forecast and the high industry forecast fo r petroleum fuels based on data submitted to the Commission by
various oil companies are very similar and form the upper lim it of the range of demand forecasts. The low industry forecast also based on oil company data may be considered to represent the bottom of the range of demand forecasts.
Broadly stated, and using motor spirit as a category, between 1974/75 and 1979/80 demand is expected to rise in terms of the "high" forecast at an average rate of 5.6% per year and in terms of the "lo w " forecast at an average rate of 1.7% per year.
8. SUPPLY
The Commission turns now to consider the available and anticipated refinery capacity to meet future Australian demand.
8.1 Australian Refineries
Australian refineries supply most of Australia's product demand. Some finished products are imported. In the year ended 30th June, 1974, the
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outturn of refined products by Australian refineries from the input of crude oil and other refinery feedstock was 193,973,000 barrels, excluding refinery fuel and loss. In the same year 25,436,000 barrels of finished products were imported. Exports of crude oil, feedstock and finished products out of Australia for the year were 28,126,000 barrels. These exports were primarily to Japan, New Zealand and the Pacific Islands.
There are ten oil refineries in operation in Australia and three lubricating oil plants. The oil refineries are situated in each State except Tasmania at or near the capital city.
State Location Companies
Queensland Bulwer Island Amoco Australia Pty.
Limited (Amoco)
Queensland Lytton Ampol
New South Wales Kurnell Australian Oil Refining Pty.
Limited (A.O.R.) an associate company of Caltex Oil (Australia) Pty. Limited(Caltex)
New South Wales Clyde Shell Australia Limited and
associated companies (Shell)
New South Wales Matraville Total
Victoria Crib Point B.P. Australia Limited and
associated companies (B.P.)
Victoria Altona Petroleum Refineries
Australia Pty. Limited (P.R.A.) a company owned by Mobil Oil Australia Limited and associated companies (Mobil) and Esso Australia Limited and associated companies (Esso)
Victoria Geelong Shell
South Australia Port Stanvac P.R.A.
Western Australia Kwinana B.P.
The three lubricating oil plants are situated at Kurnell, Kwinana and Geelong and a fourth is under construction at Adelaide. The ten Australian oil refineries have a total crude distillation capacity of approximately 730,000 barrels per stream day. In 1975 after the closure of the major part o f the Total refinery at Matraville and the expansion of the P.R.A. refinery at Port Stanvac this capacity will increase to approximately 740,000 barrels per stream day. After allowing for maintenance and other service which is assumed to reduce plant availability to 92% and for losses
and fuels used in the refineries which is assumed to account for 8.3% of the
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crude intake, the capacity of the refineries for all marketable products will be approximately 624,000 barrels per calendar day or 228,000,000 barrels per year. The three lubricating oil plants have a total capacity of 414,000 tons per year. When the Adelaide plant is completed in 1975 this will
increase to 568,000 tons per year.
8.2 Sufficiency of Australian Refining Capacity
In terms of installed capacity there is in Australia sufficient refining capacity to satisfy the total Australian demand. There is, however, a significant gap between capacity installed and capacity utilized. To point to one example — in the past four years industrial disputes have when aggregated withdrawn a substantial percentage of installed capacity from production. Therefore,
Australia is not self-sufficient in terms of balanced output nor w ill the shape of future market growth, as presently anticipated, permit the refineries a balanced growth without substantial changes in existing processing schemes. Non-availability of certain crudes to refineries also reduces utilized capacity. Temporary shutdown of the Gippsland field during industrial disputes can have a marked effect on utilized capacity at a number of
refineries. Similarly, non-availability of Middle East or Indonesian crudes can reduce utilized capacity in a way which cannot be planned for. Therefore, while Australia appears to be self-sufficient in refining capacity, in practice for several reasons there can be periods when total operating refining capacity is insufficient to meet demand. In addition, once capacity is lost in a given part of the year, it is extremely difficult to recover
in a subsequent portion of the year. In its First Report, presented on the 15th October, 1974, the Commission reported upon shortages of petroleum products, occurring during 1974 to varying extents in both country and metropolitan areas throughout Australia. The Commission found that the causes of these shortages included extensive industrial disputation which affected
production o f crude, refining and land and sea transportation often in a cumulative fashion, plant shutdowns for essential maintenance and an insufficiency of available coastal shipping to transport substantially increased
volumes required to replenish stocks. The Commission also found that the severe shortages were not due to want of standing refining capacity.
9. CRUDE OIL FEEDSTOCK FOR AUSTRALIAN REFINERIES
In the year ended 30th June, 1974, Australian refineries processed approximately 210,105,000 barrels of crude oil and other feedstock, of which approximately 143,900,000 barrels was indigenous crude oil. During the same period approximately 65,851,000 barrels of crude oil and other
refinery feedstock was imported, almost all from the Middle East. The resulting "m ix " approximates to 70% indigenous and 30% imported crude. Gippsland crude, which formed the greatest part of the indigenous
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crude oil used, is a low sulphur, high American Petroleum Institute (API) gravity crude oil, with characteristics which the Commission has been told make it an ideal feedstock for a refinery seeking to produce the maximum amount o f white end products. There is no asphalt in indigenous crude oil.
Middle East crude oils are typically higher in sulphur and produce more fuel oil, than Gippsland crude oils. Heavy fuel oil and bitumen must be made from imported crudes. The expense of removing sulphur and converting Middle East crude oils to the maximum production of white end products, is generally recognized as greater than utilizing a complete Gippsland crude oil feedstock to produce the same pattern of product outturn. There is, however, no standard production pattern in any o f the Australian refineries.
Most refinery distillation units are designed to handle one or more specific crude types. Units originally designed to handle heavier Middle East crudes could, if not modified, be constrained by limited light end handling capacity in their ability to process Gippsland crude which has a higher percentage of light end fractions. In a unit designed primarily for indigenous crude, a change in feedstock to an average Middle East crude could effectively increase the crude capacity o f the distillation unit if the unit were designed with adequate capacity to handle the higher percentage of residual fuel (bottoms) fraction in the average Middle East crude. This variation in capacity is indicated in the range of capacities given for the various Australian refineries. For example, the Shell refinery at Clyde has a capacity for 70,000 barrels per day of Gippsland crude whereas for Kuwait crude, the capacity is 81,000 barrels per day. Similarly the capacity of'th e A.O.R. refinery at Kurnell ranges between 126,000 to 136,000 barrels per day.
A comparison made of Middle East and Gippsland crudes produced the following ranges of composition: — Middle East Bass Strait
(Basrah, Kuwait, Qatar, (Kingfish and Aramco, Iranian) Halibut)
Gasoline fractions (C5-375°F) 23% - 34% 33% - 40%
Kerosenes & Gas Oil fractions 20% - 25% 26% - 27%
(375°F — 600°F) Heavy Distillate fraction 27% - 33% 29% - 34%
(600°F - 1000°F) Residue 10% -2 1 % 2% - 3%
(1000°F + ) Sulphur 1% - 2.5% 0.1%
The effect of the higher sulphur content of most imported crude necessitates the use of special steels, particularly in the crude units. With indigenous and other low sulphur crudes, a cheaper carbon steel can be used. The use of such steel precludes a change to high sulphur crude processing.
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The Ampol refinery in Brisbane which was originally designed for low sulphur Indonesian crude cannot process high sulphur crude. Most Australian refineries were designed to process Middle East crudes (before the discovery of crude oil in the Gippsland Basin). To process
Gippsland crude oil many of the refineries embarked on extensive re-design. With changes of this nature most refineries are now sufficiently flexible to handle substantial portions of Middle East crude oils in conjunction with Gippsland crude oil.
Effectively, there is now a "national feedstock" comprising 70% indigenous and 30% imported crudes which most Australian refineries are now equipped to process.
10. INDIGENOUS CRUDE OIL PRODUCTION
Almost 90% o f the crude oil produced in Australia in 1973/74 came from the Gippsland Basin in Victoria. The remainder came from Barrow Island in Western Australia and from the almost depleted Moonie fields in Queensland which produced less than 1%.
The Barrow Island oil field production is declining and this field is not expected to be a large contributor to Australia's petroleum requirements in the future. Planned production from the Gippsland field indicates that the field
will reach a peak production of 390,000 barrels per day in 1976, continuing until 1980 when the production w ill begin to decline, until it reaches approximately 145,000 barrels per day in 1990. Actual and forecast daily production from Bass Strait is:—
1970 130,000 barrels per day
1971 260,000 barrels per day
1972 280,000 barrels per day
1973 350,000 barrels per day
1974 360,000 barrels per day
1975 370,000 barrels per day
1976 390,000 barrels per day
1977 390,000 barrels per day
1978 390,000 barrels per day
1979 390,000 barrels per day
1980 390,000 barrels per day
1981 370,000 barrels per day
1982 350,000 barrels per day
1983 340,000 barrels per day
1984 310,000 barrels per day
1985 275,000 barrels per day
In addition, LPG is produced from both natural gas and crude oil. However, almost all LPG is currently exported to Japan. In the year ended 30th June, 1974, total exports amounted to 12,476,000 barrels. The local
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demand of 4,455,000 barrels was met almost entirely from refinery production. Condensates and crude oil from the Cooper Basin in South Australia and from the North West Shelf o f Western Australia could make some contribution to petroleum requirements in Australia over the next decade.
11. UTILIZATION OF INDIGENOUS CRUDE
In 1973 indigenous crude oil was allocated as follows: —
Allied Petrochemicals Pty. Limited 0.11
Amoco Australia Pty. Limited 4.39
Ampol Petroleum Limited 9.86
B.P. Australia Limited 17.24
Caltex Oil (Australia) Pty. Limited 12.65
Esso Australia Limited 8.07
I.O.C. Australia Pty. Limited 0.35
Mobil Oil Australia Limited 14.34
The Shell Company of Australia Limited 23.83 H.C. Sleigh Limited 6.82
Total Australia Limited 2.34
100.00
The distribution of crude by the companies to which it is allocated and which have more than one refinery is largely dictated by the economics of crude transportation and refinery optimization considerations. Thus for the year 1972/73, B.P., at its Kwinana refinery used mostly Middle East crude, some Barrow Island, but no Gippsland crude, whereas at its Westernport refinery 90% of the crude oil feedstock consisted o f Gippsland crude. In 1973, P.R.A. refined only 20% indigenous crude at Port Stanvac, most of that Barrow Island crude, but over 80% Gippsland crude at Altona. The Ampol refinery near Brisbane is designed to handle only low sulphur crude, originally Minas. For this reason Ampol at the present time is compelled to obtain a 100% indigenous crude feedstock.
12. AUSTRALIA'S INCREASING DEPENDENCE ON IMPORTED CRUDE OIL FEEDSTOCK
In the year 1969/70 indigenous crude provided the feedstock for the production of 16% of petroleum products consumed in Australia. This percentage of indigenous crude feedstock has increased until in the year ended 30th June, 1974, it reached 65%. Thereafter, there will be a reversal of the trend and with the increased consumption of petroleum products forecast, Australia will become more and more dependent on imported crude oil. Based on the high and low forecast given in Annexure " D " to this
Report, by 1980 the percentage o f indigenous crude feedstock will have
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dropped between 50% and 60% and by 1985 to between 25% and 35%. Australian refiners w ill, therefore, over the next decade, at least, be increasingly dependent on high sulphur heavy imported crude oils. This will require a greater use of secondary refining capacity, such as catalytic cracking and desulphurization facilities. This need for catalytic cracking
facilities w ill be further aggravated by the fact that white products are expected to form an increasing proportion o f future petroleum product demand.
13. PRICING AND ALLOCATION OF AUSTRALIAN INDIGENOUS CRUDE
The Australian Government's pricing formula and allocation policy for indigenous crude oil has been an important feature of refining in Australia.
13.1 Pricing
The original formula for the pricing o f indigenous crude oil was based on recommendations from the Tariff Board in its 1965 Report to the Government on crude oil. The price determined by the Government was the sum of:—
(i) the weighted average f.o.b. prices of crude oils imported into Australia during 1964, (ii) the freight cost in transporting the crudes to Australian
refineries, and (iii) wharfage and other landing charges. A margin was added to this for the quality of the local crude as compared to imported crudes. A further margin of 67 cents Australian was also added as
an incentive payment to encourage exploration for oil in Australia. The application of this formula to production from the Moonie Field (the only producing field at the time) resulted in a price of $3.14 per barrel. The producer was required for this price to deliver the crude to the nearest Customs refinery port which, in the case of Moonie, was Brisbane.
By applying the same formula the price for Barrow Island crude was fixed at $3.24 per barrel f.o.b. Kwinana. The additional value resulted from the extra "q u a lity" of this crude compared to Moonie crude. The prices for both Moonie and Barrow Island crude were effective
until September, 1970. On 10th October, 1968, prior to commencement of production of crude oil from the very extensive Gippsland fields, the then Prime Minister, Rt. Hon. J.G. Gorton, made a Ministerial Statement on "O il Pricing Policy".
In this statement he —
Reaffirmed the Government's policy that for a period of ten years beginning on 18th September, 1970, refineries in Australia are to be required to process Australian crude oil in order to provide the full requirements of the Australian market
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for petroleum products. Outlined the pricing policy to apply to indigenous crude oil for a period o f five years after 17th September, 1970, and Announced as a result o f negotiations with the Gippsland producers, a reduction in the price o f Gippsland crude oil in the period up to September, 1970.
If the 1965 pricing formula had been applied to Gippsland crude the price would have been $3.19 per barrel f.o.b. Westernport, Victoria. However, as a result o f negotiations with Government the producers of the Gippsland fields, B.H.P. and Esso, decided to accept until 1970, 72 cents less than the $3.19. The selling price ranged between $2.47 per barrel and $2.42 per barrel, depending on the quality o f the crude.
The 1965 pricing formula was revised by the Government in 1969 in accordance with the Prime Minister's statement and a new formula introduced. Prices determined by this new formula were to apply to production from all fields for the five year period September, 1970 to September, 1975.
The prices are based on the average price of crudes imported into Australia during 1967/1968 at October 1968 freight and wharfage rates, plus a margin for the quality of each particular type of local crude. The crudes were still valued at the nearest Customs refinery port. Coastal freight to further refineries was to be paid by the buyer.
In the case of Gippsland crude, a deduction was made from the price of $2.15 for the average cost o f coastal freights, excluding wharfage, involved in the transportation o f this crude to refineries around the Australian coast by the most economical means possible. This deduction amounts to 9 cents per barrel.
Present prices using the 1970-75 formula are:- ·
It was provided that during the five year period ending September, 1975, the price of indigenous crude from the three above-mentioned fields would be varied only if changes in the composition of the crude stream affected the quality differential component of the price.
13.2 Allocation
During the period from 1965 to 1973 the price of Australian indigenous crude was relatively higher than the price of imported crudes. Thus, an allocation system in some form was necessary to ensure that indigenous crude was utilized by Australian refineries.
In 1965 a need was seen to support the indigenous crude oil industry. The Australian based refineries and the Moonie producers had been unable to agree on terms and conditions for the absorption of Moonie production
Moonie Barrow Is. Gippsland
$2.15 per barrel f.o.b. Brisbane $2.23 per barrel f.o.b. Kwinana $2.09 per barrel f.o.b. Westernport
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which amounted to 2% of Australia's then requirements. The matter was referred to the Tariff Board which in its report on crude oil dated 23rd July, 1965, recommended to Government that: . Crude oil of Australian origin be allocated to companies
supplying or marketing refined products on the basis o f their imports of refinery feedstock and/or refined products. . To ensure that Australian crude oil was utilized in Australian refineries, additional duties be payable on imports o f certain
petroleum products by those importers who failed to take up their allocations of Australian crude oil.
These recommendations were accepted by the Government and applied to the production of crude oil from the Moonie Field and extended to cover the production from Barrow Island when that commenced in 1967. Thus for the period 1965 to 1969 the allocation system was based on
imports of crude oil and refined products. Although at the most only 10% of the crude feedstocks used by Australian refineries consisted of indigenous crudes, the local crude was very expensive by comparison with imported crudes. Oil companies which imported additional crude for processing through their Australian refineries to satisfy their export market were
required to take additional allocations of indigenous crude. This penalty was incurred by the major international oil companies which were the only exporters at that time. During this period the industry as a whole regarded
the requirement to take an allocation of indigenous crude oil as a penalty rather than an advantage. As the result of the discoveries of the Gippsland Fields, indigenous crude oil production increased enormously and imports of crude oil and
refined products no longer accurately reflected companies' share of the Australian market. Conferences took place between the Government and industry and early in 1969 the allocation policy was changed to take account
of the increased availability of indigenous crude oil. The allocation formula was changed from an import to a sales basis with effect from January, 1970. Indigenous crude oil continued to be allocated pro rata from all fields to all refiner/marketers but in proportion to their sales of certain refined products instead of their imports of crude and
refined products. -
The products included in the new formula were those petroleum products readily obtained from the processing of indigenous crude oil. The products included in the allocation formula became known as Category Î '. The Category Î ' products were: —
(i) Aviation Gasoline (including international aviation bunkers); (ii) Motor Spirit; (iii) Power Kerosene; (iv) Aviation Turbine Fuel (including international aviation
bunkers);
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(v) Lighting Kerosene; (vi) Heating Oils; (vii) Automotive Distillate; (viii) Industrial Diesel Fuel (including marine diesel for local and
international bunkers).
The oil industry was unable to reach an agreement as to whether fuel oil should be included in the allocation formula. After discussions with the industry the Government decided in late 1970 that since some fuel oil was being produced from indigenous crude it was appropriate that some o f the fuel oil sales should be included in the allocation formula. From January,
1971 inland sales o f fuel oil were added to Category Î ' sales for the purpose of determining the allocation formula. "Inland fuel o il" was that part of the fuel oil market apart from bulk contract c.i.f. sales and ships bunkers. Sales of products in Category Î ' made from imported crude oil qualify for an allocation o f indigenous crude in the same way as product sales made from the refining of indigenous crude.
13.3 After October 1973
The rapidly increasing prices o f imported crude oils especially since October, 1973, have resulted in indigenous crude oil being priced considerably below imported crudes. Thus, the price of indigenous crude, together with its quality, make indigenous crude oil highly attractive to Australian refiners. The allocation formula continues in force. Contrary to the previous situation, both refiners/marketers and consumers have a great incentive to obtain as much indigenous crude through the formula as possible. Reference has already been made to the significant and discontinuous increase in international jet fuel sales in Australia as well as the great increase in distillate bunker sales, both in local and international bunkers. As sales of these products attract an indigenous crude allocation, marketers have an
incentive to increase these sales as much as possible. Marketers also have an incentive to make fuel oil sales not as fuel oil but as "inland fuel o il" in order to qualify for a crude allocation. Consumers o f fuel oil have exactly the opposite motivation. Whereas previously they had an incentive to purchase fuel oil on a c.i.f. basis and thereby avoid purchasing product which was higher priced because it attracted a crude oil allocation, consumers find it more attractive to purchase "inland fuel o il" because it attracts a crude oil allocation. Of course this product is now priced below c.i.f. fuel oil, the price of which reflects
imported crude oil prices. The mechanism for switching fuel oil purchases from c.i.f. to inland sales or vice versa involves method of delivery and ownership of storage tanks. In addition, where possible, some fuel oil consumers may have switched to diesel oil purchases thereby attracting an allocation of indigenous crude.
Another method in which the allocation system may be used for advantage has been through the export of partly refined crude oil for further
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refining. In some cases the crude oil has come from the Gippsland crude for which a fixed price of $2.09 per barrel is paid. The latest export statistics show that in the year 1973/74, 1,114,814 barrels were exported to Japan from Victoria at an average f.o.b. price of $5.25 per barrel. Total exports to
all countries in the same period were 1,781,263 barrels of partly refined crude with an average f.o.b. price of $4.73 per barrel. If there is a considerable disparity between indigenous and international crude oil prices, an allocation system is essential to ensure an
equitable absorption of indigenous crude. However, such systems often have unintended consequences which lead to a misallocation of resources. A t a later date, the Commission proposes to investigate more thoroughly the impact o f the crude oil allocation system on the marketing and pricing of petroleum products.
14. TRANSPORTATION OF CRUDE OIL
14.1 Pipeline and Tanker
Gippsland crude oil is delivered by pipeline from the Esso B.H.P. installation at Long Island Point to the three Victorian refineries at Westernport, Altona and Geelong (the WAG pipeline). Delivery to other Australian refineries is made by sea-going tankers.
Sea-going tankers delivering indigenous crude on the Australian coast are normally Australian flag vessels. A t the present time four tankers are dedicated to the crude trade. They range from 58,200 dwt ("Howard Smith") to 71,270 dwt ("Solen"). There are seven tankers ranging from
19,480 dwt to 25,565 dwt which carry both clean (refined white) products and dirty (crude and fuel oil) products. These include the "Cellana" (24,772 dwt). The larger tankers are used in distributing Australian crude from Westernport and Barrow Island to refineries in all mainland State capitals.
Two tankers each of 62,000 dwt are on order for Australian flag coastal trading. These will be used predominantly in the crude trade.
14.2 Tanker Costs
Investigations conducted by the Commission suggest that current average transportation costs including wharfage are in the order of .27 to .45 cents per ton mile depending on the age and size of the vessel as well as its trading patterns. A breakdown of typical 1974 operating costs for an Australian crude carrier have been compared with a comparable non-Australian flag vessel hypothetically operating continuously between Australian ports and
paying Australian fuel price, operating charges and wharfage. The breakdown shows that the foreign flag vessel's operating costs are approximately 77% of the operating costs o f the Australian flag tanker. Further analyzed, in the case of the Australian flag tankers, 26% of
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the transportation costs are fuel costs and 19% manning costs, whereas in the case of foreign flag tankers, 34% are fuel costs and 8% manning costs. Thus manning was the fifth highest item o f costs for a foreign flag vessel (after fuel, wharfage, capital charges, repairs and maintenance) but the second item of cost for the Australian flag tanker.
15. DISTRIBUTION OF PETROLEUM PRODUCTS
15.1 Refinery Exchange and Borrow and Loan
The ten Australian refineries are operated by six different companies, each of which is related to one or two of the major petroleum marketers. Shell, B.P. and P.R.A. (Mobil Esso), each operate two refineries and A.O.R. (Caltex), Ampol, Total and Amoco each operate one refinery. Each major petroleum marketing company has a different share o f the market in different States. Each has a market share in States where it has no refinery. As a matter of corporate priority each oil company attempts to supply its share of the market through its own facilities with its own products. The necessity to operate at minimum cost, by avoiding unnecessary product transportation, causes companies in certain areas to prefer negotiated supply arrangements from other companies to direct supply through their own facilities. The companies, therefore, enter into what are known in the industry as product exchanges and borrow and loan arrangements. While these arrangements are many and varied and are often particularly complicated, essentially they involve a company trading o ff its surplus of product in one area to a company with a deficiency in the same area, in return for a reciprocal trade o ff elsewhere where the surplus-deficiency situation is reversed.
The arrangements are designed to reduce the cost o f distribution and the cross hauling of products where this is possible. To take an example, Company W produces motor spirit at its refinery ih Western Australia in excess of its Western Australian market needs. It has a market requirement for motor spirit in New South Wales but no refinery. Conversely, Company Î ' produces motor spirit in its New South Wales refinery in excess of its New South Wales market needs. Company 'B' has a market requirement in Western Australia but no refinery in that State.
Instead of Company Î ' moving its motor spirit to New South Wales from Western Australia and Company 'B' its motor spirit to Western Australia from New South Wales, Company Î ' and Company Î ' enter into an exchange agreement, whereby one provides motor spirit for the other in Western Australia and the other provides it in New South Wales. Transportation costs saved are divided by agreement.
Exchange arrangements are conducted between several parties each negotiating bi laterally at the one time in respect of three or four different locations. Exchanges can take into account special product qualities such as additives. They can be undertaken with dissimilar products and at different
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times for different periods. Accounting is arranged at the end of the agreed period so that both parties are in balance with respect to quantities or equivalents of material exchanged and transportation and other services involved.
Because of the number of companies involved, the number of locations in respect of which the arrangements apply, and the number of matters taken into account in negotiating, the overall pattern is complex. Borrow and loan arrangements are designed to avoid unnecessary
redundancy and spot or long term product shortages. The forms of these arrangements are various. For instance Company Î ' wishing to have available motor spirit at a particular place borrows it from Company 'B's stock at that place. For this Company Î ' is debited with a charge and
undertakes to replace the material borrowed with material meeting the lender's specifications. Both shortterm and longterm arrangements exist. In some cases stock is borrowed and repaid at the same port. Borrow and loan arrangements can take place in the same city but at different terminals.
Many arrangements based on the borrow and loan principle exist. These arrangements would lead one to expect a relatively low level of product movement between refinery centres. This is not the case, and there may be room for further rationalisation of product movements. When the Commission comes to deal with marketing and distribution, refinery exchange and borrow and loan arrangements such as those described above
will be examined more closely and reported on in more detail. A t this stage the Commission does no more than describe in broad terms the nature of these arrangements, since the existence of them is relevant to a consideration
of the tw o refinery proposals.
15.2 Transportation of Petroleum Products
A t present most refined products are distributed from refineries and installations by road tanker and by coastal tankers. There are existing and proposed product pipelines which will be discussed later in this Report. General purpose seagoing tankers operating in the trade· distribute petroleum products around the Australian coast. Investigations by the Commission indicate a transportation cost including wharfage of between
.42 and 1.2 cents per ton mile. The lower range of cost is achieved· by tankers carrying product to ports along the north west coast of Western Australia and back hauling crude oil from Barrow Island, thereby achieving a level of utilisation above the average.
The investigations suggest that Australian manning costs are very much higher than the costs of manning a comparable international trading vessel and that consequently Australian flag product tankers are more costly to operate than the equivalent foreign flag tanker.
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16. GENERAL NATURE OF REFINERIES
16.1 Configuration
The nature and configuration of refineries varies with the type of product demand to be satisfied. In the United States and in Australia as a result of the high proportion of white products and the low proportion of fuel oils required to be produced refining installations are similar. These refineries are often referred to in a generic sense as being high conversion type installations. In Japan, refineries customarily follow a design configuration which yields a high proportion of fuel oil and a low proportion o f white products; generically these can be classified as fuel oil or hydroskimming type refineries.
Both the construction and operating costs o f a refinery are sensitive to the crude oil feedstock available and to the amount of white products as against black products that it is required to produce. The characteristics of crude oil play an important role in determining the investment needed. Comparing one refinery with another is often misleading; the dissimilarities can be far greater than the similarities.
Except in two cases Australian refineries are conversion type installations, and all but one can handle substantial portions o f high sulphur crudes. In the future the typical Australian refinery will be a conversion type installation using the following principal processes; crude oil atmospheric distillation, vacuum distillation, naphtha reforming, catalytic cracking, alkylation, de-asphalting and hydrodesulphurization. In addition, some installations will find hydrocracking an attractive process and sorhe potential for isomerization and coking may develop. An expanded description of these processes is to be found in Annexure "E " to this Report.
All refinery installations need ancillary facilities such as crude oil desalting, sour water stripping, waste water treatment, solid waste disposal, gas treating facilities, sulphur recovery, sulphur plant tail gas treatment, hydrogen manufacturing, boiler (steam and power generation) facilities, lead blending, crude oil tankage, product tankage, intermediate storage, truck and rail product shipping, receiving and barge loading facilities and various administrative and employee facilities. The processing units bear a cost relationship of approximately one to one with the ancillary or so called offsite facilities. The investment associated with environmental controls using United States practices as a standard, can amount to 20% o f the total investment.
16.2 Escalating Costs
Generally, it is far less costly to expand an existing refinery than it is to build a new refinery. It is also less costly to add conversion units to an existing refinery. The capital cost problem is magnified by strong inflationary pressures that currently exist in most parts o f the world. Inflation has affected every type of cost associated with refineries.
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New plant is therefore much more expensive and is at a cost disadvantage when competing with existing installations constructed during an era o f lower cost. Large refineries enjoy economies of scale over smaller refineries o f the same complexity. For this reason a prospective refiner seeks to construct the
largest refinery possible commensurate w ith his market.
16.3 Environmental Planning
Environmental objectives are a major planning, design and operating consideration in any new refinery as well as in existing refineries. For new installations, environmental planning proceeds parallel with process planning and equipment and mechanical design. Modern procedures are available
which make it possible for new facilities to conform with stringent environmental regulations provided the refinery's site is not in an already strained location. For existing facilities the problem is more difficult in that adapting old equipment frequently entails complicated and major
renovations. The environmental consequences associated with a refinery are related to gaseous emissions to the ambient air, waste water effluents to receiving waters, solid waste disposal (frequently through burning), noise, light, odour, changed land usage, socio-economic effects and aesthetics.
No new refinery has been built in Australia since 1965 and consequently the so called "post pollution" refinery evolved in the United States and elsewhere is not within the Australian experience. Criticism o f the siting o f proposed refineries therefore tends to be based on criteria and
experience which time and technology have passed by. Evidence concerning new developments in refinery design and consequential changes in environmental impact was given by Dr. Douglas R. LongwelI formerly of the United States Environmental Protection Agency and now employed as an Environmental Specialist by the Bechtel
Corporation. Dr. Longwel I used as a vehicle to illustrate his thesis the new Exxon refinery located near the city of Benicia on San Francisco Bay. The topographical and meteorological features of the site compare very well with
a site such as Kurnell. The nearness of residential areas required the most careful environmental considerations to be incorporated with the design and construction of the refinery, particularly as regards aesthetic impact, noise and odour control as well as the customary air quality standards and
emission limits. Dr. Longwel I has been retained to advise Ampol upon the environmental aspects of their new refinery. The Commission is impressed with progress that has been made in this field. The evidence goes a long way to suggest that experience in Australia of older refineries may be quite misleading if applied to new refineries of appropriate standards.
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17. NEW SOUTH WALES
Having looked at matters of general background significance throughout Australia, the Report now turns to matters relevant to the New South Wales situation.
17.1 Marketing Area
The New South Wales petroleum products marketing area is not the same as the political entity, nor is it defined by rigid boundaries. Part o f northern New South Wales is normally supplied from Queensland, part of southern New South Wales from Victoria and part of western New South Wales from South Australia. Some distribution points within the State may be supplied
by one company from Queensland and by another company from New South Wales. The source of supply may vary from time to time, particularly in Emergency situations such as the 1974 supply crisis. â An oil company can get out of balance with its refinery exchange arrangements. As a result it may be compelled to import product from another State into the central marketing area. These and other factors lead to both the import of product into New South Wales and the export of product out o f New South Wales. Thus New South Wales consumption and supply relationships are affected by the consumption and supply situation elsewhere in Australia.
Companies look at the market from a corporate point of view, seeking perhaps to balance a shortage of capacity or expensive capacity in New South Wales with excess or cheaper capacity in another State or on occasions outside Australia. New South Wales is not necessarily regarded as a market area which must be supplied from a New South Wales refinery.
In fact, what would be Victorian excess refinery capacity is presently utilized to supply New South Wales even where New South Wales secondary refinery capacity may be idle.
47.2 Timing of New Capacity
The answer to a short term deficiency may be to import from other States which have over capacity, or to import product from overseas, or to extend or revamp old plant to secure a marginal increase in production. But where refinery capacity falls chronically short either an old
refinery has to be substantially extended or a new grass roots refinery built. Either way the increase in capacity may be "lu m py" creating temporarily an excess of capacity where the new capacity has been installed. Therefore the timing of the introduction of new capacity involves the careful balancing of a number of factors.
17.3 Consumption of Petroleum Products in New South Wales
The Petroleum Branch calculates the total consumption of petroleum fuels in the New South Wales marketing area for the year ended 30th June, 1974
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at 70,196,000 barrels. Of this total 26,645,000 barrels consisted o f motor spirit and 15,268,000 barrels of fuel oil. For this purpose the New South Wales marketing area includes the political area and the Australian Capital Territory less the Murwillumbah,
Broken Hill-Wilcannia and Riverina Districts. This annual consumption represented an increase of 8.9% over the previous year. The average annual increase for the five year period ended 30th June, 1974, was 5.3%. ·
17.4 Forecast Consumption in New South Wales
Forecasting consumption in New South Wales presents the problems already discussed in forecasting for Australia. Once again the Commission prepared the following table based upon information furnished to it after the events of October 1973.
RANGE OF FORECASTS
CONSUMPTION OF PETROLEUM FUELS
Fuels Branch Industry
High
Industry
Low
Î00 bbls Î00 bbls '000 bbls
1 9 7 4 /7 5 7 5 ,1 2 0 7 4 ,1 6 5 7 2 ,8 4 0
1 9 7 5 /7 6 7 6 ,5 9 0 7 6 ,0 0 4 7 3 ,2 3 8
1 9 7 6 /7 7 7 5 ,6 0 0 7 7 ,8 1 6 7 4 ,7 5 8
1 9 7 7 /7 8 7 8 ,7 8 0 8 2 ,5 1 9 7 8 ,5 9 7
1 9 7 8 /7 9 8 2 ,6 0 0 8 3 ,4 8 0 7 8 ,0 2 7
1 9 7 9 /8 0 8 7 ,1 8 0 8 6 ,6 2 7 79,761
1980/81 9 1 ,5 7 0 9 1 ,8 9 8 81,521
1 9 8 1 /8 2 * 9 6 ,8 0 0 9 3 ,3 2 6 8 3 ,4 6 8
1 9 8 2 /8 3 102 ,3 4 0 9 6 ,9 2 9 8 5 ,6 1 9
1 9 8 3 /8 4 108,2 2 0 100,704 8 7 ,9 6 4
1 9 8 4 /8 5 114,7 3 0 104,667 9 0 ,5 0 9
17.5 New South Wales Refinery Capacity
The present design capacity as given by the companies in terms of primary processing units, of refineries currently operating in New South Wales, is:- A.O.R. Kurnell 126,000 — 136,000 barrels per stream day Shell, Clyde 60,000 — 81,000 barrels per stream day
Total, Matraville 19,000 barrels per stream day The type of crude input affects the capacity o f the primary processing units so that a range has been given in the cases of the Kurnell and Clyde refineries. As previously stated, at Clyde with an input consisting entirely of Gippsland crude, the capacity is 70,000 barrels per stream day, whereas with an input consisting entirely of Kuwait crude, the capacity is 81,000 barrels per day.
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It is an over-simplified approach to categorize refinery capacity merely in terms of primary distillation capacity. A partially refined feedstock which may not go through a distillation unit may be imported from another State and contributes to the volume of refined products outturn.
Over the last three years partially refined feedstock formed the following percentages of total feedstock intake at the refineries at Clyde and Kurnell: —
Shell, Clyde A.O.R. Kurnell
1971 4% 16%
1972 7% 16%
1973 7% 10%
1st 1/4 1974 Nil 14%
Therefore refinery capacity, measured by outturn, exceeded the ranges of primary process capacity given.
17.6 Current Plans for Existing New South Wales R e f in e r ie s
(a ) Total, Matraville
As from the end of 1974, the production of the Matraville refinery will be limited to bitumen and other products o f the bitumen making process, including some avtur, high sulphur distillate, vacuum distillate and naphtha. One plant will be closed, leaving only plant necessary to supply Total's bitumen market. This plant will operate on a continuous basis at 7,000 barrels per stream day, supplying approximately 60% of New South Wales bitumen requirements.
(b) Shell, Clyde
A t an early stage of the present inquiry. Shell informed the Commission that it planned to build in 1979/1980 a second crude distillation unit at Clyde, which would take that refinery's crude processing capacity to between 125,000 and 150,000 barrels per stream day. It was said that circumstances might alter and render it desirable to advance or retard the date of construction or increase or decrease the projected capacity. According to evidence led by Shell during the hearing, Shell's latest estimate of market demand shows that high oil prices are expected to dampen market growth. Furthermore, the fuel oil market is expected to decline not only in percentage but in absolute terms. Accordingly, the construction of the proposed distillation units in 1979/1980 would lead to production of unmanageable fuel oil surpluses.
Shell has also considered the consequences of the decline in crude production from Gippsland. The economics of the
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rationalization of the two refineries suggest that more and more of Shell's entitlement to Gippsland crude should be fed to the Geelong refinery which is connected to the field by pipeline rather than to its Clyde refinery which receives its crude by
tanker. Shell thus sees that Clyde will be processing largely Middle East crude by the early 1980's, Shell expects the Clyde refinery to supply an increased proportion of the New South Wales demand for motor spirit, kerosene and distillate in 1980.
In the light of the above situation Shell has decided to revamp its Geelong catalytic cracker and modify its plan for Clyde, where it proposes:
(i) To build a 13,500 barrels per day butane de-asphalting unit expected to be on stream in 1977, and designed to extract catalytic cracker feedstock from Middle East vacuum residue, thereby increasing Clyde's white product
capacity at the expense of black. (ii) To build a hydrotreater expected to be on stream in 1979 to render deep de-asphalted oil from the butane
de-asphalting unit suitable for catalytic cracker feed. (iii) To revamp the catalytic cracking unit to a capacity of 36,000 barrels per day which might be required as a result of the extra volume of catalytic cracker feed
available. This will probably occur in 1980.
These steps would not notably increase the total outturn of the refinery but would alter the balance of the outturn in favour of increased white products and decreased black products.
(c) A.O.R. Kurnell
In their first written submission, Caltex said that an expansion of the refinery at Kurnell has recently been completed and no alterations to the present operations were planned. In a later submission the company reaffirmed its original submission but
added that it was consistent with its policy to expand
production and capacity as necessary to meet Caltex's market requirements in Australia and that with current indications of market growth, Caltex expects further to expand its refinery for operation in 1980. It was said that little detailed consideration had been given to the nature of the process units which might be required, though with Australian crude oils forming a continually diminishing part of refinery feedstock, it was likely that modifications to process increasing volumes of sour crude
and extensive desulphurizing equipment would be required. Caltex wished to defer decision on expansion as long as practicable, because of the rapidly changing conditions in the oil industry.
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(d) In this Report the Commission proceeds on the bases that: —
(i) The Total refinery at Matraville will be partly closed. (ii) Shell w ill modify its refinery at Clyde in the manner
described in evidence before the Commission and which the Commission considers appropriate. (iii) Caltex has at present no concrete plans for the
modification or expansion of its refinery at Kurnell and no alterations to the current operations are presently planned.
18. SYDNEY - AS A LOCATION FOR A REFINERY
18.1 Population Trends
Sydney is the centre of the New South Wales market area and the location for the State's three refineries. Within New South Wales in terms of absolute population growth the Sydney and Sydney-south region are bigger and faster growing than any other areas.
Information collected from material published by the Bureau of Census and Statistics and the New South Wales Planning Authority indicates that the New South Wales population will grow by 470,000 people in the period from 1976-1980. Of this increase 65% (301,800 people) will occur in the Sydney region and 11.9% (55,000 people) in the south eastern region which includes the Australian Capital Territory. This latter region is expected to be the second highest New South Wales regional growth area.
18.2 Port Facilities
The port facilities existing and proposed in Sydney Harbour and Botany Bay are an important feature of the market area. Both ports are administered by the Maritime Services Board of New South Wales. The proposed development of Botany Bay as a major oil port and the
only port on the east coast of Australia capable of handling V.L.C.C.'s (200,000 — 250,000 dwt) is a key factor in determining the shape of the refining industry for the 1980's in New South Wales. For the first time large scale economies in importing costs should be available to refiners and no
refinery is likely to be truly competitive unless if can avail itself of these cost savings. Botany Bay is presently used extensively as an oil port. There is a single buoy mooring located approximately 750 metres (2,500 ft.) south-west of Yarra Point on the northern side of the Bay. This combined mooring and discharge terminal facility was installed by the Maritime Services Board of New South Wales and is operated for the Board by Total. Pipelines laid on the bed of the Bay between the buoy and Yarra Point connect to the Total refinery at Matraville. Connections are also available to areas in the Board's reclamation area and to other storage and distribution
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areas on the northern foreshore of the Bay. The mooring is designed to accommodate vessels of up to 80,000 dwt. A t present the maximum draught of vessels using the facility is 12.8 metres. On the south side of Botany Bay in close proxim ity to the possible
site for the proposed Ampol/Total refinery at Kurnell stands the A.O.R. refinery. The company has constructed two berths near its refinery. These births have depths of 10.7 metres (35 ft.) and 11.6 metres (38 ft.) respectively. A multi-buoy mooring with a depth of 13.1 metres (43 ft.) is
located approximately 600 metres (2,000 ft.) north of the end of the jetty. Tankers of up to 238 metres (780 ft.) overall length and 11.6 metres (38 ft.) draught use the multi-buoy mooring. These restrictions lim it the size of fully laden tankers which can use the facility to approximately 50,000 dwt. In conjunction with the construction of the Kurnell refinery, Caltex established
a distribution terminal on the northern side of the Bay at Banksmeadow on partly reclaimed land which is now owned by the company. A number of submarine pipelines which are licensed by the Board cross the bed of the Bay and connect the refinery with the distribution terminal. Refined products
from the refinery are pumped through these lines and are distributed by road and rail from the terminal. There is also an LPG mooring owned by Total which consists of a multi-buoy mooring located between the single buoy mooring and
Bumborah Point on the northern side of the Bay. Submarine pipelines connect the terminal with the Total refinery at Matraville. The terminal is used by small tankers of up to 5.5 metres (18 ft.) draught discharging LPG. A t the present time Shell imports crude oil to a terminal at Gore Bay
in Sydney Harbour. This terminal can handle vessels up to approximately 80,000 dwt. The crude oil is carried from Gore Bay by pipeline to the Shell refinery at Clyde. Some product is brought from Clyde down the Parramatta River by barge to the Gore Bay terminal and thence shipped out by sea
tanker.
18.3 Future Port Developments
In its submission to the Commission the Maritime Services Board of New South Wales outlined plans to develop Botany Bay as a major oil port serving the entire Eastern seaboard "The Board is at present engaged in the construction of the
initial stage of a major port development on the northern foreshore of Botany Bay. This development involves the dredging of channels to possible future depths of up to 21.3M (70 ft.) ... The development was primarily designed for the
provision of facilities for the liquid and dry bulk trades. The rapid increase in size (both in length and draught) of the vessels engaged in the trades and the need for extensive areas adjacent to wharfage for the transit storage of such products has made the provision o f suitable facilities in Sydney Harbour for these
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trades particularly d iffic u lt... The Botany Bay development has been designed so as to be capable of accommodating major bulk vessels of up to 200,000 — 250,000 dwt. Such vessels are larger than the maximum size which can at present be accommodated at any Australian port and are two to three times the size o f the largest vessels which can at present enter any of the refinery ports in Australia. The decision to make provision for such vessels was based on the Board's aim that a new port should be capable of meeting possible future needs for the remainder of this century."
18.4 Pivotal Position of Botany Bay
As discussed elsewhere a declining output o f indigenous crude can be expected after 1980. Since new discoveries of indigenous crude oil or the production of synthetic crude from coal are unlikely to contribute to the crude supply during the next ten years the shortfall can only be made up by imports of crude. These imports are likely to prove very costly and any possible large scale economies in the import process must be pursued. The planned development at Botany Bay of receiving facilities for very large crude carriers (V.L.C.C.'s) will permit economies of scale to be enjoyed on the transportation of crude oil imported from overseas to Botany Bay.
The scale of these economies stemming from the use of larger crude oil tankers is illustrated in the B.H.P./Sleigh submission. B.H.P. calculated that their proposed Newcastle refinery served by a crude oil tanker in medium range class (25,000 — 45,000 dwt) would, on the' freight rate applicable in December, 1973, pay about 40% more freight on a barrel of imported crude than an Australian refinery served by a crude tanker in the
LR1 class (45,000 - 80,000 dwt). The Maritime Services Board in its submission notes (and the Commission agrees), that a port facility for V.L.C.C.'s of 200,000 dwt or more "would no doubt have a profound effect on the petroleum industry in New South Wales and indeed the whole of Eastern Australia ...."
One "profound effect" will be upon the potential o f other Australian refinery ports to be supplied with imported crude oil on a two-port discharge basis from V.L.C.C.'s which the port could not receive fully laden. A V.L.C.C., after partly unloading in the proposed V.L.C.C. berth in Botany Bay, could in a partly laden condition and in the course of a necessary return voyage, unload the remainder of its crude in another port. This two-port discharge may be more economic than direct importation of crude oil for single port discharge into these ports in 100,000 dwt tankers, the maximum sized tanker which could be received by any other Australian refinery port facilities on a fully loaded basis. In this sense the proposed oil port facility in
Botany Bay is pivotal in that it provides the only prospect of
accommodating vessels of truly economic size in the supply of imported crude to other States.
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18.5 Two-Port Discharging and Botany Bay
The Commission has investigated the potential economies that might be realised by two-port discharging o f imported crude oil from V.L.C.C.'s. Westernport and Port Stanvac are considered to have good potential for receiving V.L.C.C.'s on a two-port discharge basis. The average draught of 220,000 dw t V.L.C.C. is about 65 ft. when fully laden but only 40 ft. when carrying 100,000 tons of cargo as well as bunkers. Sufficient depth of water exists both in the approaches and at the existing oil jetties, which are currently capable o f handling 100,000 dwt tankers, both in Westernport and
Port Stanvac. The tanker could safely operate between Botany Bay and Westernport or Port Stanvac w ithout ballasting and with a cargo of 100,000 tons, hence avoiding the problem of deballasting in Australian waters before entering a second discharge port. A tanker discharging a partial cargo would
have to take on ballast simultaneously but this is not expected to be a constraint. The potential economic advantages of two-port discharging in Botany Bay and Kwinana are not significant and the investment necessary to provide sufficient depth of water and jetty facilities to receive partially loaded
V.L.C.C.'s in Kwinana would be much greater than that necessary at either Westernport or Port Stanvac.
18.6 Scale of Economies — Two-Port Discharging
In order to estimate the potential advantages of two-port discharging from V.L.C.C.'s, the cost of delivering crude oil to Westernport and Port Stanvac in V.L.C.C.'s (220,000 dwt) and in 100,000 dwt tankers has been explored. Ras Tanura in the Persian G ulf was selected as the typical loading port for
imported crude oil. It is very d ifficult to forecast future crude oil freight rates. They depend on the interaction of the supply/demand relationship for various types of ship, the costs of operation and other factors. However, in the long term it is generally accepted that freight rates w ill approach the economic
cost of operating a tanker including a reasonable return on the owner's investment, and, where applicable, a profit to the operator. (An owner-operator would normally look for a rate of return of about 15%). Freight cost estimates have been developed on the basis of forecast costs for operating new vessels in 1980 and are based on ships to be delivered
in 1980. High and low cost estimates have been made. The high cost estimate is based on the full economic cost of operating the new vessel including a reasonable return on the capital invested in the ship. Generally speaking, an older ship of the same size would have cost less to build and hence have
lower capital charges, but the fixed operating costs would not be significantly different and the voyage costs (fuel and port charges) of the old and new ships would be practically the same. The low cost estimate is based on the "marginal" operating costs of a new tanker, defined as the total of
the fixed running costs and voyage costs (but with no return on the
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owner/operator's investment). These high and low cost estimates are assumed to define the range o f average freight rates in 1980, but not to encompass the possible range of spot rates which generally show considerable variation over time.
The results of the economic analysis are shown in Table I of Annexure "F ". They indicate a potential economic advantage for the delivery of imported crude oil to Westernport and Port Stanvac from a V.L.C.C. of 220.000 dwt after partial discharge in Botany Bay over direct delivery of imported crude oil to these ports in 100,000 dwt tankers. The potential savings range from $0.16 to $0.26 per barrel of crude oil delivered at Port Stanvac and $0.23 to $0.42 per barrel at Westernport.
Table II o f Annexure " F " shows the details of the Ras Tanura to Botany Bay costs for 220,000 dwt tankers. Ras Tanura is in the
Persian Gulf. Table III shows the details o f the Ras Tanura to Botany Bay then to Westernport and Port Stanvac costs for two-port discharging from 220.000 dwt tankers. Table IV shows the details of the Ras Tanura to Westernport and Port Stanvac costs for direct delivery by 100,000 dwt tankers. An exchange rate o f US$1.30 to A$1 was assumed for all calculations.
The freight advantages o f two-port discharging demonstrated in this analysis take no account o f the investment required to strengthen the jetties to accommodate a partially loaded 220,000 dwt tanker or any extra tankage that may be required. Thus, they are potential savings only. However, the magnitude of the potential savings indicates that the investment required to receive V.L.C.C.'s in Westernport and Port Stanvac may be attractive.
19. NEWCASTLE - AS A LOCATION FOR A REFINERY
19.1 Population Trends
The location, population, market potential, port facilities and environment of Newcastle have all been discussed before the Commission. The population of the City of Newcastle in 1971 was approximately 146.000 people, an increase from approximately 143,000 in 1966. The population of the Newcastle region, which embraces the city itself, the Shire o f Lake Macquarie, the cities of Cessnock and Maitland and the Shire of Port Stephens, is approximately 352,000 people. Petroleum products are brought into Newcastle by sea tanker, almost entirely from Sydney refineries, and distributed from Newcastle to an area which centres around the city and extends to the north and west so as to include Tamworth,
Narrabri and Walgett, but not Bourke, Coonamble or Coonabarabran. The population of the area supplied from Newcastle is about 730,000 people.
19.2 Port Facilities
The maximum size o f vessels which can use the port of Newcastle is limited by the 11 metre (36 ft.) depth of water over the rock bed at the entrance to
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the port. Newcastle is an important port for bulk products, such as iron ore and coal, in large vessels, and there has been considerable discussion concerning the deepening of Newcastle port and the development of alternative ports.
19.3 Future Port Developments
In a news release of 2nd October, 1974, the New South Wales Minister for Public Works, Mr. Leon Punch, spoke of deepening the port to 50 ft. at a cost o f $65,000,000 or to 43 ft. at a cost of $34,000,000. This statement supercedes earlier evidence on the subject matter which was more speculative.
Mr. Punch rejected proposals for an off-shore single point mooring in Stockton at an estimated cost o f $107,000,000 and postponed consideration of a new deep water port at Williamstown at an estimated cost of $115,000,000. Proposals for the development of Port Stephens as a deep water port have been considered but rejected on economic and environmental grounds.
Mr. Punch noted that financial arrangements concerning the deepening of the port had yet to be made but that discussions were continuing. In view of the fact that the Williamstown proposal could not be placed in service before 1984 and the need for harbour facilities of greater depth to
be achieved much earlier than this, a Department of Public Works and the Maritime Services Board Report has recommended, and the New South Wales Government favours, the deepening of the Newcastle Harbour as the first priority.
All this discussion has been in terms of the deepening of the port for bulk products. Newcastle's future as an oil port is quite uncertain but it is unlikely ever to take V.L.C.C.'s even in a partly laden condition and may well be further restricted.
20. PIPELINES
The Commission will later report fully upon pipelines as well as other means of transportation of crude oil and petroleum products. However, the use of pipelines has come before the Commission in its present inquiry in two ways. Firstly, a product pipeline has been proposed from the Clyde refinery to
Kingsford-Smith airport as well as a crude oil pipeline following the same route from Botany Bay to Clyde and designed to utilize the planned Botany Bay port facilities. Secondly, a study has been made of pipelines as an alternative means of moving petroleum products to Newcastle.
20.1 Botany Bay/Clyde Pipelines
Applications for permits under Section 6(2) of the Pipelines Act 1967 of New South Wales to survey a pipeline route have been submitted to the Minister for Mines by John Holland (Constructions) Pty. Ltd. acting on
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behalf of Shell, Caltex and Mobil. The applications are for the construction of three pipelines: —
(a) a 21.7 kilometre 203 millimetre diameter pipeline for aviation fuel between the Shell refinery at Clyde and Kingsford-Smith Airport: (b) a 32.2 kilometre 457 millimetre diameter pipeline to deliver
crude oil to the Shell refinery at Clyde from a tanker terminal to be constructed at Botany Bay; (c) a 32.2 kilometre 305 millimetre diameter pipeline to deliver refined products from Banksmeadow to a distribution depot
proposed in the Rosehill area.
20.2 The Aviation Turbine Fuel Pipeline
A permit to survey the proposed route of the aviation turbine fuel pipeline has been obtained and the survey is nearly complete. Shell intends to lodge an application before the end o f 1974 for a licence to construct and operate this pipeline and to proceed with construction as soon as the licence has
been granted. The pipeline will follow a route which for some 13 kilometres is in open spaces or around the perimeters of established parklands. The balance generally will be along an existing expressway easement and through Commonwealth land or along the shoulders of established secondary roadways. The pipeline will be buried along the whole of the route and will be constructed and operated in accordance with the provisions o f the Pipelines Act 1967 and the Regulations thereunder. It will conform in all respects with the requirements of the New South Wales Department of Mines. In addition, the pipeline will meet international standards of pipeline construction and operation, in particular, the American National Standards
Institute, Standard B31.4, which has been in existence since the 1950'sand which has been subject to continual review and updating in the light of experience gained since its inception. The transfer of aviation turbine fuel from Clyde to the airport is currently performed by road tankers o f up to 35 tonnes fully laden weight. The 61 kilometres round trip including filling and unloading, takes approximately three hours. It is forecast that the present level of activity, i.e.
18 return trips per day, would increase to 62 by 1990 should the present method of supply continue. The proposed pipeline would eliminate road tanker movements of aviation turbine fuel between the refinery and Sydney airport, provide a safer method of transportation, offer environmental advantages and provide a more efficient and economical method of transporting aviation turbine fuel to the airport.
On the basis of July 1974 costs, the cost of the pipeline is estimated at $2,700,000. It will be so designed that, if required at a later date, it will be capable of extension to Botany Bay to transfer white products from the Clyde refinery to Botany Bay.
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20.3 The Crude Oil Pipeline
In the light of the proposal to develop Botany Bay so as to be capable of accommodating V.L.C.C.'s, Shell has given consideration to a crude oil pipeline to enable it to take advantage of such developments. This pipeline follows the same route as the aviation turbine fuel pipeline as extended to
Botany Bay and accordingly steps have been taken to obtain a permit to survey the crude line between Botany Bay and the Clyde refinery at the same time. It is Shell's intention, when the survey has been completed, to apply for a licence to construct and operate the crude line, and then to seek
permission to defer construction until the development of Botany Bay justifies actual construction. Implementation of the Maritime Services Board plans and construction of the crude oil line between Botany Bay and Clyde would significantly reduce sea going oil tanker traffic in the Sydney area and
considerably reduce the freight cost of imported crude oil. The cost of the crude oil pipeline on a July 1974 cost basis is estimated at approximately $4,000,000. A draft environmental impact study prepared in November 1973 with
respect to the proposal to construct and operate oil pipelines between the Clyde refinery and the Botany Bay area of Sydney has been placed before the Commission. The New South Wales Minister for Mines has requested the Minister
for Planning and Environment to direct, pursuant to Section 23 of the State Pollution Control Commission Act 1970, the conduct of an environmental inquiry o f the proposal.
20.4 Public Concern Over Clyde/Botany Bay pipelines
Public concern about the proposed pipelines came to the attention of the Commission through the press. In view of this concern, the Commission advertised in various local newspapers circulating in the areas through which the pipeline, as proposed, would pass. The advertisement invited any person
interested in being heard or making written or oral submissions with respect to the proposed pipelines, to contact the Secretary of the Commission. A t the same time letters were sent to various municipal councils within whose
areas the proposed pipelines would run inviting submissions from them. The advertisements brought forth a response from councils and other persons demonstrating both support for and opposition to the proposed pipelines. In view of the inquiry which has been directed by the Minister for Planning and
Environment, the Commission does not, at this stage, propose to report on the suitability of the proposed pipelines. However, the Commission desires to refer to some of the uncontradicted evidence. Based on ton miles of transport service provided, studies by American
Petroleum Institute, an Authority recognized worldwide, show that pipeline carriers had a death frequency rate per billion ton miles of only 0.007, as compared with 3.47 for railways, 9.90 for road hauliers and 0.9 for barge and tankers. Stated another way, pipelines are 1400 times safer than motor
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transport, 500 times safer than rail and 130 times safer than water transport. Similarly, a 15 year detailed investigation indicates that the number of related pipeline accidents has during the succeeding years, been consistently lowered. The safety record o f the pipeline industries far exceeds that of any other mode of transportation. (Presentation to the Australian Pipeline Contrators Association Annual Convention, October 1973, by R.R. Meyer at p.2).
As a general rule of thumb a properly designed and located pipeline will furnish transportation at a cost equal to approximately 1/3 that of road, 1/2 that of rail and about the same as barge transportation. Of all the transportation modes, pipelines are least affected by inflation. In the United States for example, since 1940, the average pipeline ta riff has declined approximately 40%. Investment per unit of transportation has been held constant despite a 115% increase in construction cost indices. In addition, operating expenses have actually declined 32% despite a sixfold increase in the rate of hourly workers, (ibid pp 3-5).
While the structure of the rail and road system remains visible and often contributes to pollution, the pipeline is buried, so allowing the natural environment to regenerate and eliminates construction and operating scars.
20.5 Past Experience with Petroleum Pipelines
There is evidence before the Commission of experience to date in New South Wales with petroleum product pipelines. The Council of the Municipality of Botany made a submission in which it set out the extent o f the pipe network used for transporting petroleum products which are in or come into this area as listed: -
PETROLEUM PRODUCTS PIPELINES IN BOTANY
Company Location (Roads) Length
Australian Oil Refining P/L Botany/Beauchamp 2,450'
Australian Oil Refining P/L Botany 86'
Amoco (Australia) P/L Botany/Beauchamp/McPherson 3,175' Amoco (Australia) P/L Botany/Beauchamp/McPherson 3,175' Caltex Oil P/L Nant/McPherson 1,200'
Shell Refining Australia P/L From Clyde to approx.
Banksmeadow 20,000'
Total Australia Ltd. Corish/Denison 4,580'
Total Australia Ltd. Botany 333'
Total Australia Ltd. Botany/Beauchamp 2,376'
Total Refineries Australia Ltd. Beauchamp/Denison/Corish 4,430' Total Refineries Australia Ltd. Botany/Beauchamp 2,406'
Total Refineries Australia Ltd. Denison 6,420'
Total length 50,631'
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The above total which equals approximately 9.59 miles, does not include the pipelines laid across Botany Bay between the A.O.R. refinery at Kurnell and Caltex's Banksmeadow terminal. It is stated on behalf of the Council that none of the pipelines has caused Council or its residents any inconvenience by their operation. It is
pointed out that the construction of pipelines which traversed Council roads created dust and noise problems for adjoining residents, interfered with vehicular access and restricted the width of road available to through traffic
where the pipelines were laid within the carriage-way. It is usual for such pipelines to be laid in the carriage-way because the footway space is fully allocated for public u tility services such as water, town gas and sewerage.
The nuisance however, usually abates once the pipelines are laid and no nuisance occurs afterwards because frequent openings are not needed to inspect or maintain the pipe. The life of the Council's roads is marginally reduced necessitating earlier resurfacing than would have otherwise been required but then the pavement usually suffers no further disadvantage from the presence of the pipeline.
Not all the pipelines were laid within the road reserve. Some were laid in reserves and these pipelines have caused little or no trouble. Such a pipeline is Shell's ethylene pipeline from Clyde to Imperial Chemical Industries Australia Limited at Banksmeadow. The inconvenience to residents and the public in general can be reduced considerably if the pipelines are not placed in roads but are routed through parklands and
reservations. The work can usually proceed more quickly. The rehabilitation of the area, that is the restoration of grass cover and vegetation, can be carried out effectively as the work proceeds and large trees can be avoided. Once the tu rf is relaid and the smaller vegetation replaced, there is little
evidence of the existence of a pipeline. A depression may develop over the trench with time due to its settlement but this can be taken out in
subsequent top dressing or by re-laying the turf. Botany Council considers that not only reserves for public recreation should be utilized for the purpose of pipelines but also railway and other reservations. The Council's view is that easements should not be granted but that pipelines should be laid under licence, thereby preserving Council's
rights to its parks and reserves for the future. The Council also suggested that subject if necessary, to arbitration, it have the right to require the lowering or relocation of the pipelines and the right to levy an annual charge in respect of the use of its properties for such pipelines.
The Shell ethylene pipeline from Clyde to I.C.I. at Banksmeadow was opened in 1962. It is a 6 " pipeline, 17 miles in length, with a design annual capacity of 35,000 tons. The only experience of leakage in operation was in 1968 a very small leak from a 1/2" hole said to have been caused by
external corrosion due to interference by a third party. Shell also operates a crude oil pipeline from Gore Bay to its Clyde refinery. This pipeline is 12" in diameter, 10 miles in length, and was
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brought into use in 1962. Its design annual capacity is 5 million tons. The experience of leakage is limited to a very small leak discovered in 1967 and said to have been caused by an excavator, operated by a third party, puncturing the line.
Shell has also produced statistics with respect to shorter lines associated with Clyde refinery which indicate that the incidence and quantity of pipeline leakage is minimal.
20.6 Evidence of Interested Parties
There was a good deal of opposition expressed before the Commission concerning the proposed pipelines. Some o f this reflected the concern of members of the public about large quantities of highly inflammable material passing at high pressure through pipelines under streets and near houses.
Reference was made in one submission to reports of pipeline accidents such as one said to have taken place in a 14" natural gas pipeline, 3Î miles north of Houston, Texas, on 9th September, 1969. It is perfectly understandable that members of the public should be concerned about the proposed pipelines in the light of experience revealed by this sort of material. However, on the evidence before it, which was necessarily limited, the Commission concludes that the safety experience of pipelines counts heavily in favour of their use for the transportation of crude oil and petroleum products. If this is so, it is essential that members of the public have the characteristics of pipelines and their operations brought to their attention so that their apprehensions may be allayed.
Evidence was also put before the Commission as to the effect of the construction, operation and maintenance o f the proposed pipelines on parks, reserves and areas of scenic beauty and historic significance. While regrettably a good deal o f this material lost force by being expressed in unnecessarily extravagant language, it indicates a public awareness and desire to ensure that the effects of laying such pipelines through such areas are thoroughly examined and assessed and, so far as reasonably possible, detriment avoided.
The Commission also received evidence, including "before-after" type photographs of the progress of pipelines through reserves, parklands and streets which demonstrated that restoration of the environment after laying could be for any practical purpose, complete.
If there was available evidence rebutting the safety and economic statistics of pipelines referred to above it was not before the Commission. There can be no doubt, based on very extensive worldwide experience, that in proper context pipelines provide substantial economies, increased safety and greater protection for the environment than other methods of transporting large volumes. The Commission proceeds in this Report on the
basis that pipelines can and will be constructed and installed only after thorough inquiry into environmental and engineering aspects have been made by the appropriate State Authorities.
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21. SUPPLY OF PETROLEUM TO NEWCASTLE
21.1 Pipeline Feasibility Study
Newcastle is presently supplied predominantly by coastal product tankers from Sydney and Botany Bay. The only practical alternative to this mode of supply is by products pipeline from the Sydney refineries to Newcastle. In August, 1969 Caltex Oil (Australia) Pty. Limited, The Shell
Company of Australia Limited and H.C. Sleigh received a feasibility study for a petroleum products transport system, Sydney-Newcastle undertaken by John Holland & Co. Pty. Ltd., Gulf Interstate Engineering Co. and McDonald Wagner & Priddle.
The Commission is not fully informed as to why the proposal was not taken further but limited information suggests that some oil companies differed on ta riff questions and consequently lacked enthusiasm while the prospect o f the building of a refinery at Newcastle which was then being
discussed may also have had an inhibiting effect. Whatever the cause, the feasibility study indicated that at that time (1969) the prospective pipeline tariffs were competitive with other forms of transportation handling volumes of the same magnitude. This coupled with the great escalation of construction costs since and the "inflation proof" aspect of pipeline systems economics, make it regrettable (with of course the
benefit o f hindsight) that the pipeline was not then constructed. The "inflation proof" nature of a pipeline has two aspects. The capital investment is, in the main, made at one time and, with normal maintenance, the pipeline can enjoy an economic life of 40 years. Thus, pipeline transportation is protected against future inflation in the capital cost of the
equipment. Second, the labour requirements for pipeline operation are relatively low and pipeline transportation thus is insulated against inflation in labour costs. The Commission, in discussing the Botany Bay/ Clyde pipelines, has quoted statistics on the safe operation of pipelines when compared to other systems o f transport. This large safety margin and the avoidance of dangers to the ecology inherent in the constant movement of product tankers in and
out of harbours and along populous coasts strongly favours a pipeline system from Sydney to Newcastle and in due course to Wollongong.
21.2 Additional Advantages
In addition the 1969 feasibility study proposed incidental advantages well worth recording: — 1. A pipeline originating at the A.O.R. site at Kurnell would have effectively interlinked all three then existing refineries and would have
enabled the transfer of both crude and products between refineries. 2. A western distribution depot, certain to be needed because of Sydney's western spread could have been sited along the proposed pipeline route.
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21.3 Savings in Pipeline Construction
A unique opportunity is likely to exist in 1975-76 to rationalize the distribution of hydrocarbons and to effect very considerable savings. Natural gas is being conveyed into the Sydney metropolitan area by pipeline from the Cooper Basin. The "c ity gate" terminal is located at Wilton near Appin south west o f Sydney. It is planned that from near Wilton a spur line will travel to Wollongong, the main pipeline will travel into the metropolitan area and a substantial pipeline will be built to Newcastle.
An application for a permit to enter and survey concerning this Newcastle gas pipeline is presently before the State pipeline authorities presaging the hoped for construction o f the pipeline probably during 1976. Experience in other parts of the world shows that very important savings can be made if two or more pipelines can be laid at the same time
rather than separately. Lesser but still significant savings can be made if essential and costly sections of a later pipeline can be anticipated during the construction of the initial pipeline. Water crossings, which can be very expensive, are a particular example. Quite commonly overseas, where a water crossing is to be made, other sets of pipes are also installed at the crossing even if there is no immediate use for them. Further, communication systems and the like need not be duplicated if further pipelines in the same corridor can be anticipated and allowed for at the time of initial construction.
The Commission is firm ly of the view that it is wholly consistent with the terms of its inquiry into product distribution rationalization that any company or companies contemplating new grass roots capacity in Sydney as well as the current Sydney refiners should, once again, take up the question of a products pipeline to Newcastle and Wollongong.
22. POSSIBLE REFINERY SITES
Three sites have been put forward as possible sites for a new refinery. The first is the site proposed by B.H.P./Sleigh at Kooragang Island; the other two are sites at Kurnell and Lucas Heights, which are being discussed in the context of the Ampol/Total proposal for a refinery in the Sydney metropolitan area. Each site is discussed on the basis that a refinery should be market orientated, that is to say, built in the area of the market it is intended to serve. The Kooragang Island site has been chosen to serve the Newcastle market, the other two sites to serve the New South Wales market.
22.1 Kooragang Island
Kooragang Island is an area available for reclamation of about 2,600 hectares (6,400 acres), dividing two arms of the Hunter River towards its mouth at Newcastle. The Department of Public Works owns the area and is reclaiming and developing it under the Newcastle Harbour Improvements Act 1953. The purpose of the reclamation is to provide land for industrial
development. About 290 hectares (720 acres) has been fully reclaimed and a
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further 420 hectares (1,030 acres) partially reclaimed. The land is zoned as "Industrial B Heavy" under the Northumberland County District Planning Scheme which for Kooragang Island is administered by the Newcastle City Council. The first sub-division was released in 1963. Since that tim e the
planning of sub-divisions has been by necessity, on a flexible basis. The possible need for land on Kooragang Island for the establishment o f an oil refinery and also for oil and petroleum storage facilities has been recognized by the Department of Public Works for many years and has been allowed for
in its planning. The Commission has inspected the site. The closest residential area to Kooragang Island is Stockton which is about a mile to the south-east. In 1972 an inquiry directed by the Minister for Environmental
Control under the terms of the State Pollution Control Commission Act of 1970 was conducted into all existing and proposed future operations and developments on the Island in respect of matters relating to pollution. No doubt with the findings of that inquiry in mind, the State Pollution Control Commission informed the Commission that, in its opinion, there was no particular factor that would automatically render this location unacceptable, on environmental grounds, as a site for a petroleum refinery of advanced environmental design and that the site was well worthy of further study.
The Town Planner of Newcastle in evidence to the Commission stated that the Newcastle City Council in general accepts the findings of the inquiry into pollution on Kooragang Island and that those parts of Kooragang Island set aside for heavy industry are suitable for such purpose.
22.2 Lucas Heights and Kurnell
The site at Lucas Heights is situated in the Shire of Sutherland and consists of 186.4 hectares (454 acres) of Crown land bordered on the west and south west by the Heathcote Road and on the south east by the New lllawarra Road which joins the Heathcote Road to Menai. The junction of the two
roads is at the southern-most point of the site. All but 73 hectares (180 acres) of the site lies within a one mile radius from the HIFAR reactor on the Australian Atomic Energy Commission Research Establishment site. The Kurnell site consists of an area of approximately 193 hectares
(477 acres) made up of a number of parcels of land in various sub-divisions. The southern boundary is ocean front. The northern boundary is partly upon Quibray Bay and partly upon land owned by I.C.I. It is bounded on the east and west by areas of land privately owned. The site is approximately
in the middle of Kurnell Peninsula and quite close to the A.O.R. refinery which lies to the north-east of it. Ampol instructed a consulting engineer of 24 years experience to investigate, with the assistance of overseas and local specialists in process technology and environmental issues, the availability of areas within the
Sydney region considered suitable for siting a modern oil refinery. The consulting engineer was supplied with a report from Ampol containing a
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technical description of the refinery, the basis for its study and
environmental guidelines upon which the design would be carried out and the refinery constructed. The following constraints were imposed:— (a) The proposed refinery should have reasonable access to the Sydney and New South Wales markets.
(b) The proposed refinery should refine both overseas and Australian crude including both high sulphur and low sulphur stocks. (c) Supply o f crude would be by means o f large tankers, berthed in
Botany Bay. The crude would be piped to the refinery by a pipeline no greater than 30 miles in length. (d) There should be provision for reasonable expansion in the future.
The process o f selection o f suitable sites in the Sydney region was carried out in the following manner:— . Areas of existing and proposed urban development were excluded, although it was likely that sites otherwise suitable for
a refinery could be found in these areas. . Mountainous, catchment and park areas necessarily were excluded. . The industrial areas within the Parramatta River Basin were also
excluded because of the prevalent meteorological conditions and the level of pollution there existing. . The remaining areas were then examined in more detail having regard to the needs of a refinery site.
This examination included aerial and ground investigation, aided by photographs o f zones of likely suitability. The areas within these zones found to be suitable included an area to the north of the Lucas Heights site referred to above but, contiguous to or overlapping it, and an undefined area within the zone designated as being the area east and south of Captain Cook Drive on the Kurnell Peninsula. The particular site at Kurnell described above falls within this area.
The study as presented to the Commission was only a preliminary study. The conclusions reached were: —
1. That a modern oil refinery would meet all reasonable
requirements of the New South Wales Government for clean air, liquid and solid waste disposal, and noise and visual impact.
It was recognized that environmental control agencies would apply criteria not included in current legislation concerning the effect of such a refinery on the environment o f the Sydney region.
2. Provided that the refinery was situated within one o f the zones referred to in the study as suitable, an environmental impact study to the degree of detail required by the State Pollution
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Control Commission would not result in a finding requiring rejection of the development.
3. Of the areas considered suitable, first preference was given to the Kurnell Peninsula, second to the Lucas Heights area, and third and fourth to two other areas not currently under consideration, namely south west o f Prospect and north of
Narellan and Blacktown Municipality.
22.3 Inspection of Sites by Commission
The Commission has inspected all three sites. In the case of Lucas Heights and Kurnell the land concerned could only be described as waste land. From the site at Lucas Heights it is not possible to see any other habitation. The ground forms a trough between two ridges and as such is admirably situated for screening. The Commission also noted that the immediate area also contains a night soil treatment plant and that it is proposed, again in the
immediate area and between existing residential areas and the proposed refinery site, to establish what was described in evidence as a "m am m oth" garbage dumping area, 800 hectares (2,000 acres) in extent involving the dumping of 3.5 m illion cubic metres of garbage in a layer 20 feet thick over the next twenty years. This work of course is going to be carried out in such a manner as to reduce its otherwise obvious impact in the area.
The nearest area where residential development exists or is likely to exist in the foreseeable future is more than one mile distant from the extremities of the proposed site in any direction.
The Kurnell site as it appears on visual inspection consists of large sandhills and sunken areas where quite considerable sand extraction has taken place. Part o f the area is covered with shrubs and other natural vegetation.
23. SUBMISSIONS ON SITES BY GOVERNMENTAL AND OTHER AUTHORITIES
23.1 The New South Wales Planning and Environment Commission (formerly the State Planning Authority of New South Wales)
(a) Lucas Heights
In its submission the New South Wales Planning and Environment Commission stated that the Lucas Heights area is zoned "Special Uses Defence" under the County of Cumberland Planning Scheme. There has been no suspension o f the provisions of the County Scheme in respect of the
land. The draft Sutherland Plan Scheme shows the land proposed to be zoned Special Uses 5a — "M ilitary Area". The Council cannot refuse development in the military zone in the draft scheme for "M ilita ry"
purposes, except in respect of associated uses, drainage, roads or utility installation. All other uses are prohibited. Under the County scheme, zoning
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for any purpose is permitted with the consent of the responsible authority, which in this case would be the Sutherland Council. The proposed Lucas Heights oil refinery site is approximately 1.5 kilometres south of the proposed Menai residential area, which is the nearest urban development. The Menai development will contain some 60,000 persons. A t this stage no specific industrial area has been identified to support this population, but it is understood that the local council intends to identify appropriate industry areas south o f the urban area.
The Planning and Environment Commission considers that there are two possible alternative uses for that part o f the proposed site which lies outside the one mile radius from the HI FAR reactor. The first is use by general industry to provide employment for the population to be located in the Menai urban area. The second is use by a major tertiary institution, which is also required to serve this population. About 100 acres of land would be required.
Provided the sub regional aspects of pollution do not preclude the site from consideration, the Planning and Environment Commission would regard it as a possible location for a refinery subject to satisfactory engineering and environmental studies being made. If a refinery were located at Lucas Heights, it would need to be taken into account in the detailed design of the Menai development.
(b) Kurnell
The Planning and Environment Commission states that Kurnell Peninsula was zoned (Parks and Recreation) under the 1951 County of Cumberland Plan Scheme and the village o f Kurnell was designated as a 'Village Area'. The Peninsula was suspended from the provisions of the County scheme on 4th November 1952, under Section 342Y of the Local Government Act. The Planning and Environment Commission issued a direction to Sutherland Shire Council under Section 342 V (3) of that Act on 26th August 1965 in respect of certain interim development applications. The Sutherland Shire Council submitted its planning scheme to the Planning and Environment Commission and included the Kurnell Peninsula in its proposed zoning controls. The scheme was exhibited from 6th December
1971 to 10th April 1972, but Kurnell Peninsula was omitted because of its potential for certain major regional facilities. A t this stage the scheme has not been prescribed. However, Kurnell Peninsula is still administered under the provisions of the Planning and Environment Commission's direction of 26th August 1965. The responsible authority is the Planning and
Environment Commission. In the case of development applications, comments are first obtained from the Council. Appeals lie to the Minister. Kurnell Peninsula has been the subject of a study by the
Inter-Departmental Committee — Kurnell Peninsula, which has operated from 17th May 1962. Shortly before the production of the Sydney Region
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Outline Plan in 1968 the Maritime Services Board completed a series of studies which established the feasibility of constructing additional port facilities on both the northern and southern shores of Botany Bay. These studies, together with the Inter-Departmental Committee's comments, were
taken into account in the preparation o f the Sydney Region Outline Plan. The location of an airport on Kurnell Peninsula has been investigated in some detail although both State and Australian Governments have now indicated that the location is not suitable.
On 7th May 1974, the Prime Minister, The Hon. E.G. Whitlam, Q.C., M.P., made a press statement that, because of its unique ecology, a national park would be established at Towra Point.
Additional industrial areas, housing and a large park are other uses which have been suggested. A t the present time matters affecting the future o f Kurnell Peninsula have not been resolved. The area is largely undeveloped and because of its proxim ity to deep water channels and to the metropolitan area, it represents an important land resource. A t the same time the area has historical connections (Captain Cook's landing place) and its natural features have led to representations from various conservation bodies, including the National Trust, fo r the retention of its natural character in toto.
In respect of Kurnell Peninsula itself, the Planning and Environment Commission's view is that the community could best be served by achieving a balance of uses between conservation and major regional facilities. Nevertheless, the Authority would regard the site as a possible location for additional oil refinery installations should it be shown that these must be
located in the Sydney region and subject to satisfactory engineering and environmental studies being made. The Planning and Environment Commission summarizes its view by saying that it must be assumed that the State Government will wish to make the final decision as to the use o f any site for a refinery. The Planning and
Environment Commission's first concern is that any new oil refinery, because of its "grow th" characteristics, and its potential as the basis of a petrochemical complex, should be located outside the Sydney region, in order to give impetus to the State's decentralization policies. In the State context it is probable that the Hunter sub-region is the most appropriate
location for such a facility. Newcastle has an existing industrial base and workforce and, in addition, an extensive capital works programme has been carried out by the State Government to foster industrial expansion as a basis
for a more even distribution of population in the Central Coast Region. If it is decided that a location outside Sydney is not feasible, the Planning and Environment Commission's primary concern would be that any location would be within the framework of the Sydney Region Outline Plan.
In this regard, the Planning and Environment Commission would take cognizance of other major regional demands which would include various development proposals as well as possible alternative uses.
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On the assumption that further refinery capacity is required, the Planning and Environment Commission would consider the modernization and expansion of existing refineries as a satisfactory alternative to the establishment o f new refineries, providing that tolerable population levels are
not exceeded. If this does not eventuate, the Planning and Environment Commission would consider a new refinery located at Kurnell Peninsula or at Lucas Heights subject to the completion of detailed engineering and environmental studies. The Planning and Environment Commission would not recommend locations at Park lea or North Botany Bay.
23.2 Submission by the Department of Environment and Conservation of the Australian Government
This submission describes the estuarine system in the Towra Point area and the dry land zones on the Point and the importance of the system and its environs as a habitat for migratory and other birds. The Department submits that the reservation or dedication as a national park of that part of Towra Point above high water mark would be inadequate of itself to protect either that part of the estuarine system associated with Towra Point or the habitat of the birds dependent on it. It would be necessary for the national park to be delineated in such a way to include the estuarine system as a whole in the vicinity of Towra Point, including the areas o f open water, mud flat, grass bottom, mud and swamp forest. It would be inadequate to delineate the park in such a way as to include the southern and eastern shores of Quibray Bay and the Bay itself.
The construction of any pipeline in the Quibray Bay area or across Quibray Bay would seem likely to destroy or interfere with the habitat of the birds using that part of the estuarine system, as well as being a potential source of pollution, should any leakages occur. The construction of a pipeline across Quibray Bay would accelerate the decomposition of silt in this unstable area should the pipeline be built in such a way as to rest on the bed of Quibray Bay, or otherwise obstruct the movement of water in the estuarine system.
The Department opposes any construction, industrial or reclamation development including the construction of a pipeline on the foreshore of Botany Bay in the vicinity of Towra Point and opposes such activity on the foreshores of Quibray Bay. It also opposes any realignment of Captain Cook Drive which would bring any part o f the road closer to the foreshores than it is at present. It is pointed out that the attraction of the area for possible recreation should not be ignored in the light of proximity to large areas of population.
The Department is also concerned with the deterioration of the dunal system on Kurnell Peninsula and states that to achieve a stable and manageable dunal area on the beach it would be necessary to establish a zone behind the beach of a width equal to the recreation reserves south-west of
Lot 5 which at the boundary is about 400 metres. An integrated dunal
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system could then be established from Cronulla to the Kurnell Headland. It is the view of the Department that ideally in the long-term it would be desirable for the whole o f the Kurnell Peninsula to be devoted to conservation, scientific and recreation purposes because of its historical significance, scientific importance, habitat, particularly for birds, importance
as a recreational area adjacent to large areas of population and vulnerability to pollution and destruction.
23.3 Submission by the New South Wales State Pollution Control Commission
The New South Wales State Pollution Control Commission also made a submission, which deals with the proposed site at Lucas Heights and the proposed site of the B.H.P./Sleigh refinery at Kooragang Island. It is stated that except in exceptional cases it is not possible to say that a proposed
petroleum refinery ultimately will be or w ill not be acceptable, on environmental grounds, in any location in which it is practicable to build and operate one, unless there has been: — (a) A detailed proposal setting out the nature and extent of the
refinery and, in particular, the operations to be carried on in the refinery; and (b) A full environmental impact study. Since there has been no such detailed proposal or impact study in respect of either Lucas Heights or Kooragang Island, the State Pollution Control Commission submits that no final judgement on the merits or demerits in environmental terms can yet be made. However, so far as the State Pollution Control Commission is aware, there are no particular factors
in either location that would automatically render either location unacceptable on environmental grounds as a site for a petroleum refinery of advanced environmental design. The State Pollution Control Commission is of the opinion that each site is well worthy of future study.
The State Pollution Control Commission would not give final approval to the establishment of a new petroleum refinery in New South Wales unless and until such factors as visual impact, pre-emption of alternative uses for the refinery site and its surroundings, air pollution, water pollution, noise
pollution, and fire and safety, together with many other factors which would emerge from a detailed environmental impact study, have been considered and any problems arising therefrom subsequently dealt with to ensure that the proposed refinery incorporated all the safeguards which the Commission
required or thought desirable to prevent or minimize pollution and protect the environment.
23.4 Submission by New South Wales Government
The New South Wales Government has, it submitted, said that if Ampol/Total wish the Government to make Crown land in the metropolitan area available as a site for their proposed refinery, then of the land which the
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Government controls, Lucas Heights appears to be the site which offers apparent scope for the development of the proposed refinery, and, at the same time, a prospect of being acceptable to the Government in planning
and environmental terms. Counsel appearing for the Government, in his final address, stated that the Government has not said that the proposed refinery w ill or must be built at Lucas Heights.
The Government has said that, subject to the parties satisfying it as to the acceptability of the proposed development from an environmental point of view, it would, if the parties so desired, in due course, take appropriate steps to make the proposed site available to them for the development of the proposed refinery.
Speaking o f the Kurnell site, Counsel for the State Government said for the purposes of the Commission's inquiry the Government was content to have the Commission, if so minded, regard the site as, at least in the abstract, a possible site. Nevertheless, it would not regard itself as bound by such a view if upon a full consideration of all relevant matters, it came to the conclusion that such a development was for any reason undesirable or that other forms of development were more desirable.
23.5 Submission of the Sutherland Shire Council
The development of the site at Lucas Heights as a refinery was strenuously opposed by the Sutherland Shire Council. A Chartered Town Planner, who has been Town Planner to the Council since October, I960, and who was called in evidence by the Council, described the Shire, its population and
industries and expressed views with respect to pollution from refineries. His expressions of opinion were o f a necessarily vague nature since, as emerged in cross-examination, he was not acquainted, except through the study of the press and technical journals, with the nature and propensities of modern refineries and had not read any of the submissions made to the Commission.
He summed up the Shire's attitude as follows: — "The Council's view is that any further industrial development should not be of the noxious or obnoxious or hazardous types; it should certainly be confined to the present industrial area and the residue which is the greatest part of the Peninsula should be open space".
It can be immediately accepted, as has been accepted by State Government authorities, that the ultimate decision as to whether or not a refinery should be constructed on any particular site, can only be taken after a full environmental evaluation has been made. There is, however, a tendency to prejudge the issue. Thus one finds the Council's submission expressed in the following terms:--
"In this connection, residents of the Shire already have the disability of the A.O.R. refinery at Kurnell, and its associated
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noxious petro-chemical industry which in themselves are a source of environmental pollution to the Shire. This existing refinery is situated on the eastern boundary of the Shire. If a
further refinery is constructed at Lucas Heights, which is on the western boundary of the Shire, then the residents will be sandwiched between two quite obnoxious industries which must have an effect on living conditions over the whole area and
reduce the value of the home sites occupied by those residents. Worse, as the crude oil terminal w ill be located at Botany Bay and as it is proposed that the crude oil w ill be transported to the new refinery, by underground pipeline, and the refined
products returned in the same manner, then passing through this excellent living area w ill be a pipeline complex of three separate pipes carrying crude oil, petrol and other refined products, over 20 miles in length."
The Commission notes that the "sandwich" referred to above is something more than 30 kilometres thick. It seems to the Commission that the Sutherland Shire Council takes
the view that whatever may be the result of a full scale environmental inquiry, the Council will strive to prevent the construction of any refinery at Lucas Heights or for that matter, Kurnell or anywhere else in the Shire.
23.6 Submission by Australian Atomic Energy Commission
The A.A.E.C. expresses concern from two points of view. It wishes to see restrictions applied to the use o f land adjacent to the research establishment at Lucas Heights so as to maintain a degree of isolation. This is based on an acknowledgement that despite all precautions, there is a remote possibility of accident involving the reactor which could extend beyond the boundary of the establishment. The A.A.E.C. current siting criteria for its research establishment are as follows:
(a) A total exclusion area of one mile radius measured from the reactor HI FAR should be maintained permanently. (b) Development beyond the one mile radius up to a radius of three miles from HIFAR should be limited such that the population
in any 20 degree sector w ill not exceed 5,000. In addition, no food processing or food manufacturing industry or large hospitals should be established in this area. (c) Settlement in the Woronora Valley within a two miles radius
should be discouraged below the 200 ft. contour line. These criteria are said to be of long-standing. Subject to some minor changes they are essentially the same as those first adopted by the A.A.E.C. in 1959.
The exclusion area of one mile radius, creates a zone in which there must be no permanent residents and in which all activities are limited to those which can be readily controlled in the event of an accidental release to
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the atmosphere of radioactive or toxic materials at the research establishment. An exception has been made with Stevens Hall, a residential hostel, since this comes under the direct control of the A.A.E.C. There is also some industrial activity approved by the A.A.E.C. centred on clay quarrying and the Sutherland Shire Council sanitary works.
The A.A.E.C. has not made it clear whether it has any real objection to the area within the one mile radius being used for refinery storage facilities. The use of the land by static non-labour intensive installations such as tankage and the like may be acceptable.
The A.A.E.C. is also concerned about the possible effects of accidents in the refinery on the operation of the A.A.E.C. facilities. It is said that before a safe siting distance for the refinery could be established, it would be necessary to examine the full range o f potential accidents in the refinery up to and including fires and explosions involving the total contents o f refinery
plant, and the pipelines which serve them and their possible impact on the operation of all plant at the research establishment. It would be necessary to demonstrate extremely low probabilities for accidents which could damage plant containing radioactive or fissionable materials or both at the research establishment, since such accidents might simultaneously disable such essential research establishment services as power supplies and the emergency organization.
In summary, the A.A.E.C. states that it must oppose the
encroachment of the proposed refinery site into the one mile exclusion area and at the present time and in the absence of the results o f a number of detailed studies, must also oppose the proposal to site a refinery in the vicinity of its research establishment.
This conclusion seems to be based on an entirely arbitrary assessment unrelated to any statistical information as to the potential dangers of oil refineries and unrelated to any set levels of acceptability of dangers from refineries.
The Commission is aware that stringent standards are both necessary and appropriate. To the extent that it is possible to identify these standards in this situation, it must be said that they are arbitrary and appear unrelated to examinable criteria.
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PART II
24. THE REFINERY PROPOSALS
24.1 B.H.P./Sleigh Proposal
B.H.P./Sleigh propose to construct on Kooragang Island, near Newcastle, a hydroskimming type refinery, with a relatively low capital cost. Secondary processes would be kept to a minimum, limited to a crude distillation unit, a Merox treater, a gas plant, a reformer, a feed hydrotreater and a catalytic
reformer. The distillation unit at the proposed refinery would have a design capacity of 65,000 barrels per stream day and would use as feedstock 100% indigenous low sulphur crude produced by B.H.P.
24.2 Ampol/Total Proposal
Am po I/Total propose to build a refinery with a capacity of 70,000 barrels per stream day in the Sydney metropolitan area at a site not yet determined. The refinery would be versatile and designed to process a wide range of crude oils including high sulphur crudes from both Middle East and
indigenous sources. The precise configuration of the proposed refinery has not been settled but it is said that it would be designed by an international contractor to include a crude distillation unit, a gas plant and a
hydrocracker.
25. QUESTION OF URGENT HEARING
Each of the four companies presented reasons in writing why some priority in hearings should be given to their proposals. The Australian Government also made a written submission. Shortly summarized these submissions were to the following effect: —
25.1 Sleigh
Sleigh after pointing out that it was a major marketer which owned no refining capacity, alleged that it could have difficulty in negotiating a suitable refinery agreement and in ensuring the security of its supply of refined product. Its present processing agreement runs until 31st December,
1976 and from year to year thereafter but subject to termination by either party to it on 31st December, 1976 or on any subsequent anniversary thereof upon two years' notice. It could be difficult to renegotiate an adequate agreement.
25.2 B.H.P.
B.H.P. sought an opportunity to present in detail reasons why its proposals should be considered very early in the deliberations of the Commission and why the views of the Commission should be known without awaiting its final
report.
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25.3 Ampol
Ampol also sought a priority hearing. It made reference to an anticipated shortfall of refinery capacity to meet anticipated demand in New South Wales for the years 1977/78 and following. It alleged that it had commercial
difficulties caused by an imbalance between Ampol's product demand in its largest market, Sydney, and the refinery capacity o f its Lytton (Brisbane) refinery. Further delay in the construction of its proposed Sydney refinery would, it was said, involve Ampol in an otherwise avoidable duplication of expenditure on plant at the Queensland refinery.
25.4 Total
Total stated that there was a prospective shortage of refinery capacity in the Sydney area and that the repercussions to the national economy of any delay in the increasing of such refinery capacity might be considerable. In dealing with an anticipated shortfall Total submitted: —
"As the time required to plan, construct and bring on stream a new refinery requires four to six years. New South Wales is likely to be short of refined petroleum products towards the end o f this decade, even if a rapid solution to the problem of
locating a suitable site can be found. An important lesson may be learned from the American experience which has revealed the great social and economic pressures resulting from an inability to plan and construct adequate refinery capacity to meet projected needs. The problem must be seen a$ one involving not only the energy to power private motor vehicles, but also the public transport system including the road, sea and air, the defence forces and the industrial processes, including
manufacturing as well as construction of service industries, not to mention feedstocks for the plastics and other petro-chemical industries."
25.5 The Australian Government
On 15th February 1974 the Australian Government furnished a written submission. The Government stated that it opposed the Ampol/Total application for a priority hearing because this would involve consideration of the proposal for a refinery in the Sydney area in isolation from consideration of the basic patterns of a national refinery policy.
"Consideration of the refinery installations in the Sydney metropolitan area has to be fitted to this rather than treated in isolation. There are problems involved in siting refineries in the Sydney area. The solution of these lies in the rationalization of new capacity and relocation o f existing refineries. But, these are concepts inherent in a major refinery policy, built up from considerations of the whole Australian position."
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On the other hand, the Australian Government stated that it did not oppose on those grounds the application by B.H.R./Sleigh for a priority hearing.
"There do not at this stage appear to be any special problems connected with this application which would of necessity require that it should be deferred until a later date. It may be that on the hearing of the substantive application for the
establishment of this refinery, particularly if it is opposed by other companies, that such problems w ill emerge as could require any decision on it to be deferred until the whole question of the matters raised by paragraph 2(b) of the Terms of Reference has been investigated."
26. THE PRIORITY HEARING
On 19th February 1974, the Commission heard oral submissions on competing applications for priority hearings. During the course o f these submissions, B.H.P. urged that if approval for the refinery were to come that day: —
"We could start work straightaway and be on stream before the middle of 1977. We are ready in all concrete respects." On behalf o f Sleigh it was stated that unless there was a speedy hearing of the refinery project at Newcastle and its consequent approval and establishment, there was a very high risk that the hearings of the Commission would proceed simultaneously with the demise of Sleigh as a marketer o f petroleum products in Australia.
Counsel for Sleigh said: — "We have the site, we have the application before the relevant responsible authority and I am permitted to say we have every reason to believe there will not be any bar to our obtaining all
requested approvals and consents and, consequently, in distinction to the necessarily vague nature o f the application by Ampol/Total we are in a position of being ready to go." It was stated that the only reason that B.H.P./Sleigh could not proceed was because as a matter of necessity the proposals had to be brought before the Commission.
In its final submission the Australian Government supported an alternative application which had been canvassed that priority be given to consideration of the whole of the matters in Terms of Reference 2(a) and 2(b), commencing with evidence concerning these two refinery proposals.
27. COMMISSION'S DECISION ON PRIORITY APPLICATIONS
In the light of the matters of urgency thus pressed upon it, the Commission decided on 26th February, 1974, that having considered the material and
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submissions the whole of the questions raised by Terms of Reference 2(a) and (b) should be brought forward and considered as a matter of priority. Accordingly the Commission sought written submissions from a wide range of parties including all refiners and marketers, the Australian Government and State Governments and Instrumentalities.
28. THE PROCEEDINGS
The hearing of oral evidence commenced on the 5th June, 1974 and concluded on 17th October, 1974. The Commission took evidence from 35 witnesses and received approximately 212 written exhibits. It soon became apparent during the course of the Commission's inquiries and from the material and evidence submitted to it that the immediate refinery question in Australia in terms of the next five to ten years is substantially concerned with the provision o f additional refining capacity in New South Wales to meet any increased demand in that State. Longer term proposals to build very large service refineries in other parts of Australia designed to achieve a radical restructuring of the refining industry have been received. These are designed to meet the needs of the next decade and thereafter. None of them offers any solution to the immediate problem of a shortfall in refining capacity in New South Wales during the remainder of this decade.
Necessarily the Commission's attention has been focused on these two priority applications, but the Commission has gathered a considerable amount of fundamental information about the industry in Australia as a whole. It has inspected every operating oil refinery in Australia, visited the three great development areas of Bass Strait, the North West Shelf and the Cooper Basin and gathered a comprehensive collection of published material, departmental inquiries or investigations, feasibility studies and commercial appraisals to inform itself of the background to the refining industry.
29. THE APPLICANTS
29.1 Sleigh
Sleigh is a public company. It was incorporated in Victoria on 30th June 1947 for the purpose of acquiring the business of H.C. Sleigh, a business founded in 1895 which became an importer and distributor of petroleum products in 1913. The activities of the company are varied and include petroleum marketing and shipowning.
The paid up capital o f the company as at 30th June 1974, was $43,816,741. $10,000,000 of its share capital is held on behalf of Caltex Petroleum Corporation o f New York, a joint venture of the Standard Oil Co. of California and Texaco Inc. This share holding represents 22.8% of the issued capital o f H.C. Sleigh Ltd. It is said that neither Caltex nor its subsidiaries has any representation on the Board of Sleigh or of Sleigh's subsidiaries, and that Caltex does not exercise any control directly or
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indirectly over Sleigh.
Sleigh claims to have approximately an 8.1% share of the total motor spirit market in Australia. Its overall share o f the market for petroleum products is approximately 6.3%, excluding sales made by it to the Robe River Iron Ore project, which consist predominantly of fuel oil.
The Company has a 25% interest in the Australian Lubricating Oil Refineries Pty. Limited (A.L.O.R.), which owns the lubricating oil plant at Kurnell, the other owners being Caltex — 50% and Ampol — 25%. This refinery, which came on stream in 1964 and cost $25,000,000 has an output of lubricating oils o f 3,750 barrels per stream day, 196,000 tons a year. It is the only refinery in which Sleigh presently has any proprietary interest.
Until 1965 Sleigh, in order to meet its market requirements, purchased refined products from Caltex. On 1st July, 1965 it entered into a processing agreement with A.O.R. (Caltex) which provided for the processing by A.O.R. into refined products of crude oil supplied by Sleigh to A. O.R's refinery at Kurnell. Sleigh currently meets its requirements for
refined petroleum products in five main ways:--(a) pursuant to the agreement with A.O.R.; (b) by purchase of refined products from the Caltex organization; (c) pursuant to a motor spirit purchase contract with Shell; (d) pursuant to an avtur purchase agreement with Total; and (e) pursuant to special purchase arrangements for supply in
north-west Western Australia and Darwin. Certain other petroleum products such as lubricating oils, speciality products and medicinal white oil are obtained elsewhere.
29.2 B.H.P.
B. H.P. is a public company which was incorporated in Victoria on 13th August 1885 to mine smelt and refine the silver, lead and zinc ores found at Broken Hill in western New South Wales. In 1911 it entered the steel industry. Because o f the availability of a plentiful supply of coal and established port facilities, Newcastle was chosen as the site for its steel works. It first produced steel in 1915.
In addition to its activities as iron and steel makers and shipbuilders, B.H.P. has, since 1964, been interested as to a one half share with Esso in oil and gas discoveries and exploration in Bass Strait. A t 30th May 1973 the paid up capital of the company was
$312,429,000. In 1961 a wholly owned subsidiary of B.H.P. called Haematite Explorations Pty. Limited was incorporated. All exploration titles held by B.H.P. were subsequently transferred to Haematite. Haematite Explorations Pty. Limited was later renamed Hematite Petroleum Pty. Ltd. B.H.P., although now a major producer of Australian crude oil requirements, is not presently involved in either the refining of crude oil or marketing of petroleum products.
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29.3 Ampol
Ampol is a public company which was incorporated in New South Wales on 23rd March, 1936 under the name Australian Motorists Petrol Company Ltd. That name was changed to the present name in March, 1949. Its business includes importing, refining and marketing petroleum products. Its paid up capital at 30th September, 1973 was $60,760,000.
Ampol owns and operates a refinery at Lytton on Bulwer Island, near Brisbane, which was completed in 1965 at a cost of $42,000,000. This refinery has a primary processing capacity of 60,000 to 70,000 barrels per stream day. It produces a wide range of finished products including both grades of motor spirit, lighting kerosene, power kerosene, avtur, automotive distillate, industrial diesel oil, residual fuel oil, both low and high sulphur,
LPG, refinery gas and naphtha.
29.4 Total
The Total group of companies in Australia comprises Total Holdings (Australia) Pty. Ltd., Total Oil Consolidated Australian Ltd., Total Australia Ltd., Total Refineries Australia Limited, Total Oil Development Australian Pty. Ltd. and Total Exploration Australian Pty. Ltd. These are wholly owned subsidiaries o f the parent French group headed by the Compagnie Francaise des Petroles, (C.F.P.) a company founded in Paris in 1924. The French Government is a substantial shareholder of C.F.P., owning 35% of its shares with 40% of the voting rights. C.F.P. is one of the major international oil groups ranking within the first ten for both production and re fining and marketing. It is at the head of the multinational group known as Total, a brand name introduced in 1954.
In January 1955, C.F.P. became 50/50 shareholder with the Australian general public in a listed public company which had also been incorporated in Australia to market petroleum products. In 1959 this company, then called Total Oil Products (Australia) Ltd., became a wholly owned subsidiary of C.F.P. C.F.P. acquired the shares of the Australian shareholders on terms attractive to the later after Total Oil Products
(Australia) Ltd. had made a series of losses and it was obvious that no dividends could be paid to shareholders for some years. When Total entered the Australian market in 1955, it sold petroleum products in New South Wales only. Distribution was extended to Victoria in
1960 and to Queensland in 1970. Total owns and operates a refinery at Matraville on the northern side of Botany Bay. The refinery was built by Bitumen Oil Refineries (Australia) Limited (Boral), as a 2,400 barrels per day bitumen plant in 1948, on a site consisting of 45 acres. It was expanded to produce 6,000 barrels per day
including petroleum fuels in 1956 and to 18,000 barrels per day in 1960. In 1967 Boral approached Total with a view to merging Boral's refinery and petro-chemical interests with the Total marketing network. A joint venture was formed to operate from 1st January 1969, refining and marketing
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petroleum products in Australia. Total and Boral each had a one half interest.
In 1971 Boral withdrew from the venture and sold its share of the refinery to Total. The current capacity o f the primary processing units of the refinery is 20.000 barrels per stream day. The refinery produces LPG, motor spirit, avtur, distillate and fuel oil as well as quantities o f commercial solvents and bitumen.
On 31st July 1974 Total announced to the Commission it had been forced to reach a decision that as from the end o f 1974 the production of the Matraville refinery would be limited to supplying bitumen and other products arising from the bitumen making process. This will involve the closing of one plant, leaving only plant necessary to supply Total's bitumen
market. Special plant would operate on a continuous basis at 7,000 barrels per day, supplying approximately 60% of New South Wales bitumen requirements together with certain other products arising from the bitumen making process including some avtur, high sulphur distillate and naphtha.
30. COMMON FEATURES OF PROPOSALS
30.1 Insufficiency of Refining Capacity in New South Wales
All four proponents allege that there w ill shortly be insufficient refining capacity in New South Wales to meet the State's demand for petroleum products. In their submission to the Commission, B.H.P. and Sleigh after
referring to the forecast consumption of primary fuels published by the Fuels Branch in August, 1973, said:— " I t will therefore be necessary for additional refining capacity to come on stream in 1977, the anticipated start-up time of the
proposed refinery, if New South Wales is to maintain its supply o f petroleum products ... it will be seen also that,
notwithstanding the additional capacity provided by the proposed refinery of the partners, namely 65,000 barrels per stream day, there will be by 1981, a necessity for additional refinery capacity to meet the increased New South Wales demand by that tim e."
In its final submission Ampol said that:-"W ith the closure of the Total Refinery, New South Wales will begin to experience a shortfall in refinery capacity in 1975. The magnitude of that shortfall will vary according to the real capacity of the two New South Wales refineries in that and subsequent years. On the most probable case the shortfall
would be 23,000 barrels per stream day in 1975 growing to 84,000 barrels per stream day in 1980."
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Each of the proposals proceeds on the basis that the projected refinery w ill contribute to meeting this shortfall.
30.2 Commercial Needs
All four proponents advance reasons o f commercial necessity for having an interest in a new refinery. Sleigh is the only major marketer of petroleum products in Australia w ithout an interest in an oil refinery. B.H.P. sees in its proposed refinery security of supply o f low sulphur fuel oil with the benefit of cost advantages stemming from the use of its own indigenous crude. Ampol wants an interest in a refinery in the area o f its largest market, which
is centred on Sydney. Total needs an interest in an economically sized refinery designed to supply its Australian market share. These claims will be stated in greater detail later in this Report. The claims of commercial necessity have to be weighed against the economic advantages, if any, of importing finished products from other States or from overseas or of expanding the capacity o f existing refineries in
New South Wales.
30.3 Three Possible Refinery Sites
If the national interest requires a new refinery in the Sydney area or Newcastle, so far as all the evidence before the Commission goes, there are only three possible sites, namely, at Kooragang Island, Lucas Heights and Kurnell. On the evidence the Commission considers that all three sites seem likely to be able to accommodate a refinery of modern design without infringing acceptable environmental standards. Of course, much more detailed studies w ill have to be carried out and possibly the design o f any proposed refinery modified to allow for environmental requirements. In particular on evidence before it, if the national interest requires a new refinery in the Sydney area, the Commission does not think that the environmental arguments are such that the area should be denied a new refinery for this reason alone.
The Commission considers where bodies or persons oppose the use of certain sites, that it is not sufficient to criticize the proposal without attending to the consequential questions raised — what site is to be employed? — where is the refinery to be built?
The Commission notes that no critic has seriously propounded any alternative to the three sites discussed.
30.4 Shared Cost of New Refinery
Both groups o f partners intend to share the cost of construction of the refinery they propose. They claim that this is a step towards refinery rationalization which enables them to enjoy various advantages o f economy and efficiency. The precise terms of ownership or operation have not been spelled out but in broad terms each group contemplates a 50/50 arrangement. Indeed as both proposals contemplate refineries near minimum
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economic size, if the respective parties did not join forces, no truly economic refinery could be built. The essential need for joint operating or sharing is therefore conceded and the effective issue is restricted to an examination of the extent of the arrangements.
All applicants are committed to the concept of sharing. The Commission is required by its Terms of Reference to make inquiry into and report upon the rationalization o f oil refineries by joint operating or sharing. Therefore, the Commission has investigated refinery sharing not merely between tw o parties but also between more than two parties to see whether greater advantages are possible. No party takes issue with the broad proposition that within certain very wide limits the larger a given refinery, the more substantial and significant are the economies of scale. In today's situation this means refinery sharing.
The increasing scarcity o f suitable sites and the very large escalation of capital costs are further factors pointing to the need for refinery sharing. The Commission received evidence from the Managing Director o f the Total group of companies in Australia. He had been involved in the establishment of the Lindsey refinery at Killingholme in the United
Kingdom. This refinery is owned 50% by C.F.P. and 50% by a Belgian company, Petrofina. It is a large refinery with a crude capacity of approximately 188,000 barrels per stream day. It is managed by an operating company owned 50% by C.F.P. and 50% by Petrofina.
. Total was relatively late to enter marketing and refining activities. To increase its involvement, to participate in the economies of scale and to hedge against rapidly escalating capital costs, Total has as an act of commercial judgment sought to share refineries and product outturn with other participants. Thus, although at the end of 1973 the Total group had an
interest in 25 refineries of which 21 were located outside France, only 7 refineries were fully owned by the group and the remaining 18 were operated in partnerships with other companies, in varying proportions and with up to thirteen participants.
In the case o f the Sud-Ouest S.A. refinery at Collombey-Muraz in Switzerland where C.F.P. is one of six participants, its interest is only 3%. The other participants in the shared refineries are oil companies and in some cases governments or government agencies. In evidence, the Managing
Director said that he was quite convinced that in a situation where the requirements of two or more companies are to some extent complementary and provided they are prepared to give and take in commercial negotiation,
it is possible to establish joint refineries without any undue difficulties. A t the request of the Commission, Total produced to it agreements made between refinery participants, which demonstrated the areas of necessary agreement and the nature of agreement reached.
P.R.A., a company in which Mobil holds 60% of the shares and Esso 35%, owns two oil refineries, one at Altona near Melbourne and the other at Port Stanvac near Adelaide. Mobil is the operating company in both cases.
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Under a processing agreement, the two shareholding companies supply crude oil and P.R.A. processes the crude oil into petroleum products as directed by and agreed with the tw o companies. In general each company has access to a percentage o f capacity equal to its percentage o f shareholding, although this can vary slightly depending on their requirements.
The lubricating oil plant at Kurnell is owned by A.L.O.R. shares in which are held as to 50% by Caltex, 25% by Ampol and 25% by Sleigh. This specialist refinery is operated on a permanent basis by Caltex. B.H.P./Sleigh in their final submission expressed strong reservations about multiple ownership, that is to say, ownership by more than two parties, and pointed to particular difficulties B.H.P. felt in obtaining from such a refinery its requirements of fuel oil. The companies also asserted that a three party project, where two parties can outvote the third, is
unsatisfactory and could not be treated simply as an extension of a two party project. The Commission notes that in support o f its reservations about multiple ownership of refineries, Sleigh has not suggested any problem arising from the multiple ownership o f A.L.O.R.
Shell stated that the Shell group has had experience of shared refineries in other countries. The basis on which such companies have been owned and established varies, but in Shell's view it is of critical importance that there should, in the case of any jo intly owned refinery, be only one operator at any one time. Shell regards jo in t ownership o f refineries as being,
in principle, a relatively unsatisfactory expedient. Mobil, in its written submission to the Commission, states that although joint operation of refineries can have many complications, it is a possible method of maximizing the benefits of economies of scale which exist in the refining process. With larger and fewer refineries, other benefits such as improved pollution control can result. The company does, however,
refer to managerial difficulties and doubts the need for shared refineries. However, the company sees no disadvantage to a new refinery being jointly owned should this prove to be an economically viable proposition.
31. THE BHP/SLEIGH PROPOSAL - MATTERS IN SUPPORT
31.1 Motivations
(a) Sleigh
Sleigh's motivation is a simple one born o f commercial necessity. In its early submissions it expressed apprehension that the processing agreement with A.O.R. would be terminated on 31st December, 1976, thereby cutting o ff a major source of supply. For this reason the company said that it intended to make immediate provision after that date for an alternative
source of supply of refined products.
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Caltex has since indicated to Sleigh that it will continue to supply Sleigh's Australian requirements to the lim it o f the capacity available at the Kurnell refinery, but this w ill not necessarily be on the same terms as the current processing
agreement. Furthermore Caltex may not be able to supply Sleigh's total Australian requirements in 1977 and thereafter. Sleigh is the only major Australian marketer which does not have an interest in an oil refinery. It needs such an interest, it
says, to ensure availability o f supply, to reduce costs and to give it greater flexibility in its product range. Even with the
continuation o f the processing agreement it w ill be faced with the need to purchase refined products.
The Company wants to achieve the financial and other benefits of participating in a refinery and sees its participation with B.H.P. in the manner proposed as the only method of establishing or obtaining equity in a refinery.
(b) B.H.P.
B.H.P. is not a marketer of petroleum products but it consumes an amount of fuel oil which represents over 10% of the total Australian consumption. It uses fuel oil for injection into blast furnaces and to supplement other fuels in the steel works. For technical reasons, B.H.P. claims to require that much o f its fuel oil be o f low sulphur content. Customers, it is said, are tending
more to require high quality steel. The production of high quality steel requires low sulphur fuel oil.
By participating in the proposed refinery B.H.P. hopes to achieve security of supply of low sulphur fuel oil in the quantities it w ill require. It says that the only way it can secure
its supplies is by refining its own crude. Furthermore it does not wish to sell its own crude at a low price and at the same time have to buy imported fuel oil at a high price. It seeks to follow the alleged trend o f oil producers towards becoming oil refiners.
31.2 Inception and Development of Project
(a) Inception
The B.H.P./Sleigh proposal stems from an examination made by B.H.P. in 1971 o f the viability of refining indigenous crude produced by it to supply its Newcastle and Port Kembla fuel oil requirements. Sleigh was early recognized by B.H.P. as the only suitable outlet for the white end products produced by the
refinery. Studies made in 1972 indicated an acceptable rate of return from a joint refinery designed to produce the combined requirements of the two companies for petroleum products.
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(b) Agreement
On the 6th February, 1973 the parties prepared a document described as a "Statement of Intent and Basic Pricing and Offtake Agreement" which set out the understanding reached in discussions between the representatives of the companies. Its terms were in part as follows: —
INTENT
1. Sleigh/B.H.P. to provide equally the equity and
borrowing requirements, and to share equally the benefits and risks o f the project.
2. The refinery to guarantee the production and supply of the defined basic requirements of both Sleigh and B.H.P. It is envisaged that these basic requirements will be defined prior to any decision being taken to build the refinery.
3. Sleigh/B.H.P. in turn, to undertake to jo in tly take up such defined basic requirements from the refinery.
4. The processing fee of the refinery, payable equally by the partners, to guarantee a nominated discounted cash flow rate of return, say 14%.
BASIC PRICING AND OFFTAKE AGREEMENT
1. The acquisition o f the crude requirements shall be the responsibility of the refinery and their cost shall be borne equally by Sleigh/B.H.P.
2. The ownership of the total outturn of each product to be 50% Sleigh and 50% B.H.P., with the required processing fee to be paid in the same proportions.
3. Sleigh to undertake to purchase the surplus white products owned by B.H.P. at the notional values described below.
4. B.H.P. to undertake to purchase the surplus fuel oil and L.P.G. owned by Sleigh at the notional value described below.
The document also provided a basis for calculating notional values of both white products and fuel oil. The parties intend to proceed in accordance with the arrangement evidenced by this document.
(c) Feasibility Study
Meanwhile the parties had approached C.F. Braun & Co., A United States contracting company which specialises in hydrocarbon processing, to provide an economic evaluation of
the project. This company's study was published on 26th July, 1973. On 24th August, 1973, Foster Wheeler Limited prepared an estimate of the Australian cost of producing units for the project. In September, 1973, a feasibility study was produced.
On 24th October, 1973, C.F. Braun favourably reviewed the feasibility study.
(d) Decision to Proceed
In November, 1973, the company decided to proceed with detailed processing design and approved expenditure of $275,000 to cover its half share, including contingency, of the estimated cost of having a refinery process design carried out by a selected contractor. However, it was stated in evidence, that
by this time the implications of the Royal Commission were becoming clearer and it was decided it would be unwise to proceed even with process design, before the views of the Commission and subsequently the Australian Government, were
more clearly defined.
31.3 Fundamental Features
As has been said B.H.P./Sleigh propose to site at Newcastle a hydroskimming type refinery with a design capacity of 65,000 barrels per stream day using a feedstock consisting of 100% indigenous crude. There are particular reasons
why the tw o partners have chosen this site and this type and size of refinery. The refinery has three fundamental features:— (a) A Newcastle Location;
(b) A proposed feedstock of 100% indigenous crude; (c) A hydroskimming configuration with minimal secondary capacity.
(a) Newcastle Location
Newcastle and its hinterland are claimed to be a distinct region with an appreciable consumption o f petroleum products. The demand for white products in the region when combined with the demand presently serviced by the industry from terminal facilities at Trial Bay, is said closely to resemble Sleigh's
Australian market. Thus it should be possible to make satisfactory exchange arrangements w ith other companies. It is the belief of the partners that a refinery at Newcastle would
take over the area supplied from that city and from Trial Bay. Moreover it is said that: — (i) there is on Kooragang Island a site available which appears to be environmentally suitable; (ii) Newcastle Harbour as it stands is adequate to handle the
import of indigenous crude for the refinery and will
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almost certainly be deepened; (iii) the construction of a refinery at Newcastle will
contribute to the decentralization o f the Australian refining industry away from the capital cities; (iv) the construction work will provide jobs for about 600 people during a period o f two and a half to three years
with a peak o f about 1,000 people being employed and will create additional jobs through subcontractors and others servicing the project. (v) the refinery when constructed w ill reduce refined product shipments on the Australian coast and thus the exposure o f the environment to possible tanker mishaps. The Newcastle Council has publicly supported the B.H.P./Sleigh proposal.
(b) 100% indigenous crude feedstock
In their final submission B.H.P./Sleigh stated: — "The B.H.P./Sleigh project has always been, and remains, based on a feedstock of B.H.P. Gippsland crude." In their original submission the parties stated: —
" I f the proposed refinery cannot be assured full access to Gippsland crude, several penalties will be incurred. In fact, the economic consequences pould be sufficient to force B.H.P./Sleigh to abandon the venture." The submission went on to outline the penalties the parties allege they would suffer if denied access to Gippsland crude. These included the higher cost and possible limited availability of imported crude, the uncompetitive cost of transporting imported crude to Newcastle and capital and operating cost disadvantages. It is claimed that indigenous crude is capable of efficiently meeting the product demand o f the partners and that
its use will enable capital and operating cost o f the refinery to be minimised because little secondary processing will be employed. In their 1973 feasibility study it was stated:—
" I t was therefore agreed that the feasibility study be based on a feedstock of 100% Gippsland crude but that the flexibility of the proposed plant to process an imported Middle East crude — say Light Arabian — should be studied." B.H.P. regards the right of access on its part as the producer to its own crude as a fundamental right and firm incentive to
exploration. Such a right of access, it says, naturally and inevitably flows from the fact that B.H.P. is the joint owner of that indigenous crude. It would be a unique legal situation to suggest, in the absence of precise agreement, that the producer o f a commodity to which it has title, is unable to utilize it for
its own purposes, but that the same crude should be processed by other persons from whom the owner must purchase the processed product. B.H.P. seeks to use its own crude in order to make its entry into the refining sector of the industry in
Australia. It claims that to suggest that this is an undesirable or unique ambition is unjustified. It is, so the argument runs, the basis upon which many of the international majors themselves entered the industry. That the Australian refining industry is about 90% foreign owned reflects the fact that a secure supply of cheap crude has been a key to the successful entry into the
refining and marketing industry in Australia. Under present arrangements the system for the absorption of indigenous crude oil terminates in 1980. The partners say they w ill make whatever arrangements are necessary to provide
feedstock for the refinery during the relatively short period between start-up and the termination o f the allocation systems. The partners do not seem to have ever considered whether allocation arrangements of one sort or another may not be extended beyond 1980. B.H.P. has proven reserves of crude oil adequate to supply the refinery with feedstock until 1990. By the tim e the need arises it claims it w ill have available additional feedstock from other sources of its own, possibly outside Australia. The proposed refinery project is claimed to contain the flexibility to accommodate changed circumstances. The
requisite quality of steel will be used in the plant to enable high sulphur crude oil to be run if this becomes necessary in the future. Furthermore, the partners say that the proposed refinery being
a simple one using low sulphur crude will create a minimal risk from air pollution and liquid effluents.
(c) A Hydroskimming Type Refinery
In their original submission B.H.P./Sleigh stated: -"The 1973 feasibility study has shown that the product requirement of the partners can be met by a plant with a minimum of secondary processes
...this type of refinery has the following
advantages:
— capital and operating costs are minimized - sources of water and air pollution are
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considerably reduced — the percentage of crude that is consumed within the refinery as fuel is reduced and so more products are available for market
consumption
— the plant is less susceptible to mechanical breakdown and thus gives better security of supply to the area. It is also felt that the proposed refinery has an outturn o f products very closely approximating the Australia wide forecast product pattern and that it will produce part of Australia's essential
requirements for low sulphur fuel oil in an
economical way." The outturn of the hydroskimming type refinery processing only Australian crude w ill approximate to 70% white product and 30% fuel oil. In addition to matters o f cost saving and convenience of plant operation B.H.P. claim to justify the construction of this type o f refinery by relating its outturn to the requirements of the partners. The volumes and patterns of product requirements o f B.H.P. and Sleigh are said to be largely complementary. B.H.P. requires fuel oil predominantly. Sleigh requires white product. In volume, it is said, the percentage outturn o f fuel oil and white products will match the requirements of the two partners. Therefore, each party considers the other a most appropriate and unique refining partner.
It is argued that the basic premise for the design and operation of any refinery project lies in the supply of a clearly defined market for petroleum products in the most efficient and economical way from the most suitable crude oils available.
B.H.P. Gippsland crude is the only really secure source of crude oil supply available to the partners. The partners submit that the refinery as proposed will produce from this crude the products required to be outturned from it in an efficient and economic manner. Ampol claimed that this use o f Gippsland crude in a
hydroskimming refinery would in turn require more expensive light crude to be imported to take the place o f the 30% of the Gippsland crude that would be left as fuel oil and not further refined. On the other hand, it said a refinery with adequate secondary processes could handle a heavy and cheaper imported crude to achieve the same result.
In answer, B.H.P./Sleigh submitted:—
(i) that imported Middle East crudes produce essentially high sulphur fuel oil whereas B.H.P.'s main requirement is for low sulphur fuel oils which are produced simply from low sulphur Gippsland crude. (ii) the lower cost o f the heavier imported crudes has
therefore, to be offset against the increased capital cost required for additional equipment to desulphurize fuel oil. (iii) even where a refinery has both Middle East crudes and
Gippsland crudes available, the cost of producing low sulphur fuel oil is minimised when a hydroskimming process is used. (iv) price differentials between light products and fuel oils
and between light and heavy crudes, have steadily decreased through the last year with the rapid rise in overseas prices. B.H.P./Sleigh therefore seek to have the conclusion
drawn that in the longer term it will be most appropriate to produce the required product using a feedstock which w ill require the minimum of processing and which will leave as fuel oil approximately 30% of Gippsland crude
run.
31.4 Economic Considerations
In their submission B.H.P./Sleigh stated that:— "Newcastle...is a discrete market area with a demand of similar size to the desired output of the proposed refinery, and can be supplied with minimum disruption to existing petroleum
industry exchange arrangements. In addition, a refinery at Newcastle would be adjacent to one of B.H.P.'s major steelworks. The only relevant disadvantage of the site is the need to transport crude oil from Westernport and to receive it
into Newcastle Harbour, which has a draught limitation of 36 ft."
In summary the 1973 feasibility study concludes that a simple hydroskimming type refinery of 65,000 barrels per stream day capacity processing Gippsland crude of the composition expected to be produced between 1976 and 1982 would fu lfil the combined product requirements of Sleigh and B.H.P. with a shortfall of 400,000 to 700,000 barrels per year of
motor spirit and a roughly equivalent excess of fuel oil. This additional fuel oil could be used to replace high sulphur fuel oil in the Port Kembla steel works. The investment for refinery plant, suitable land, catalyst and paid-up royalties was expected to be $47,000,000 in then current values.
The economics of the proposed refinery are discussed at length in the
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feasibility study. It is stated that they depend heavily on the availability of 100% crude oil as a feedstock. Appreciable quantities o f either Middle East or South East Asian crudes would require considerable additional capital expenditure in secondary processing plant and equivalent increases in operating cost. The feasibility study assumed that 100 acres of land on
Kooragang Island would be available for the refinery at $14,000 per acre. The use o f 100% Gippsland crude feedstock would also enable the Newcastle refinery to avoid cost penalties in the importation o f overseas crude in relatively small vessels due to the limitations of Newcastle.
During the course of the hearing B.H.P./Sleigh tendered evidence updating the figures used in the feasibility study. The estimated costs of major items o f equipment were brought forward to 1st July, 1974. The estimated cost of installed process equipment based on the contract being awarded for the same on 1st January, 1975 and construction being completed by mid-1977 was estimated at approximately $24,800,000, an increase of 30.5% on the similar costs shown as at August, 1973 in the feasibility study. The increased cost of off-site items estimated on the same basis put the estimated overall cost of the proposed refinery up to approximately $83,700,000.
After examination by the companies of these figures and other escalated cost items, it was said that nothing had happened to affect the viability of the project on the down side. If anything, the project was shown to have improved viability. It was said that a perusal o f the studies made showed that in the advent of the most adverse circumstances the project still offered an acceptable rate o f return. The most conservative '(pessimistic) approach had been taken in all instances and accordingly the actual result would almost certainly be better than that reflected in the studies.
31.5 Transportation Economies — (The T r a n s p o r t a t io n S h ie ld )
In support of their proposal to build a refinery at Newcastle, B.H.P./Sleigh cited transportation economies which were considered to "have been a contributing factor to providing a justified return on funds employed by the partners in the project." These economies were claimed to arise on the savings in transporting crude oil from Westernport to Newcastle versus transporting crude oil from Westernport to Botany Bay and products from
Botany Bay to Newcastle. In their final submission, B.H.P./Sleigh stated that calculations done by them and tendered in evidence demonstrated:— "..that the savings occasioned by shipping crude from
Westernport to the Newcastle refinery as opposed to shipping crude to Kurnell and subsequently hauling the finished products to Newcastle amount to approximately 43 cents per barrel of product. The total transportation savings realized by Sleigh and which are incorporated in the feasibility study amount to 16.8 cents per barrel."
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In these calculations, it is assumed that fuel oil is backhauled from Newcastle to Port Kembla in crude oil tankers. No allowance for the cost of moving other products out o f Newcastle is contained in the B.H.P./Sleigh calculations. Large amounts o f other products are to be shipped out; see 38.2. Furthermore, the calculations are based upon the refinery receiving a
feedstock of 100% indigenous crude. These alleged transportation economies might be termed a "transportation shield" for a Newcastle refinery in that the cost benefits would be available to protect or subsidize a Newcastle refinery from competition from Sydney refineries and thereby offset any diseconomies of the Newcastle refinery in terms o f its size (due to the relatively small
Newcastle market) and port facility limitations.
31.6 Australian Ownership
In terms of public interest and additional to the proposed refinery's contribution to needed New South Wales refinery capacity, B.H.P./Sleigh claim that the refinery will increase Australian ownership in the refining industry from about 10% to about 20%.
32. THE AMPOL/TOTAL PROPOSAL - MATTERS IN SUPPORT
32.1 Motivations
(a) Ampol
The Sydney metropolitan area and inland areas supplied from Sydney represent Ampol's largest single marketing region with about 30% of its Australian sales. Ampol's only refinery is at Lytton near Brisbane. The Queensland market for petroleum products supplied in part from the Ampol
refinery is not, so it is claimed, of a character or size that corresponds to Ampol's Australian national market. This causes an imbalance of refinery exchange which puts Ampol at a commercial disadvantage compared to its competitors. This imbalance together with market demands for products which the Lytton refinery is unable to produce or which Ampol is otherwise
unable to provide has to be satisfied by imports, process deals and purchases, usually from competitors. For the year ended 30th September, 1973, 600,000 barrels of product had to be purchased by Ampol from overseas or local refineries representing in round figures a cost penalty to Ampol of
$750,000. Other reasons why it is said to be preferable for Ampol to share with Total in the proposed refinery rather than expand its refinery at Brisbane at this stage are: —
(i) There is a population shift in an absolute sense to the Sydney South area; (ii) Future anticipated refinery feedstock if market demand continues to grow, will consist of an increasing proportion of
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high sulphur imported crude oil, which Lytton is unable to handle. A new versatile refinery with adequate secondary processes w ill be able to handle the more d ifficu lt feedstocks; (iii) In order to expand Lytton, it would be necessary to consider a new grass roots refinery processing chain and such new chain should preferably be located in or near the Sydney market and the port of Botany Bay; (iv) The Sydney refinery proposed, because it w ill serve not only the market requirements o f Ampol but also those of Total, will by virtue of the resultant greater size offer economies o f scale; (v) The port o f Brisbane cannot accommodate vessels of more than 70,000 tons; and (vi) The draught limitations of Torres Strait prevent the use by vessels of 65,000 tons and upwards o f the direct northern route from the Middle East to Brisbane. Ampol also claims that it can suffer in Sydney from disruptions to supply which occur for reasons outside its control and have a severe effect on its overall operations and economics. Furthermore, the lack of any backup processing facilities for the Queensland refinery results in more severe effects in that State when the Lytton refinery is shut down for any reason. Ampol has no seaboard terminal in Sydney and this, it is said, has led to reduced flexibility and increased distribution costs. The joint project with Total envisages the conversion of the Total refinery site at Matraville to a crude and product terminal providing Ampol with the necessary facilities.
(b) Total
Total claims that its market requirements w ill also require a substantial increase in refinery capacity during the period 1977-1980. In its original submission Total stated that the continued operation of the Matraville refinery was not economic due to its small scale, some obsolescence of equipment and that the shortage o f land at the site prevented its economic expansion or reconstruction as a refinery site. As indicated earlier in this
Report Total has announced that from the end of 1974 the production of the Matraville refinery would be limited to supplying bitumen and other products from the bitumen making process. Until a new refinery is established Total will be relying upon the refining capacity of one or more of its competitors for other petroleum products.
The location of Total's market, both generally and in respect to special products (such as avtur, bitumen, solvents and aromatics), makes it logical for Total to site any new refinery capacity in the Sydney area. By combining with Ampol, Total can join in building a refinery of economic size.
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32.2 Inception and Development
(a) Ampol/Total Studies
The Ampol/Total proposal dates back to the period 1972/1973 when studies of the feasibility of a refinery in the Sydney area were conducted by officers of the tw o companies. These studies were designed to ascertain the optimum
configuration of such a refinery. A summary o f the procedure and results was set forth in a refinery study. Discussions were then held at management level between the two companies at which it was agreed that it could be beneficial to construct a jo intly owned refinery in the Sydney area.
On 18th February 1972 a meeting was held between officers of the two companies to agree on certain ground rules to be applied to the new refinery project. Further meetings were held on 14th March 1972 and 18th April 1972.
A t the same time as the Ampol/Total study was about to get underway, Ampol carried out concurrently a study o f the refining expansion alternatives available to it including the joint New South Wales refinery proposal. In September 1972 a report was prepared called "High Sulphur V.
Low Sulphur Refinery Proposal" which considered three basic cases; a first case, the supply from Lytton of Ampol's Australian demand based on a crude feedstock of 100% Australian crude; a second case, introducing high sulphur crude processing facilities for an appropriate feedstock, and; a third case considering a new high sulphur refinery in Sydney in 1977 to meet
Ampol's New South Wales market requirements. The joint study meanwhile proceeded and reached a compiled form in December 1972 which was revised in April 1973. The study as submitted to the Commission omits certain matters related to the examination of the
proposed site at Parklea and to a lesser extent the Lucas Heights site, which were the areas successively under consideration. A t the same time a technical description of the proposed refinery processes, the basis of the study and the environmental guidelines upon
which the final design and construction of the proposed refinery would proceed were presented to the New South Wales State Government Authorities. The document included a description of the hydrocracking refinery selected by a linear programming configuration study as the optimum design in the year 1981. Included were a:
63.000 B.S.D. atmospheric distillation unit; 22.000 B.S.D. vacuum distillation unit; 16.000 B.S.D. hydrocracking unit; 17.000 B.S.D. naphtha hydrotreating unit;
17.000 B.S.D. catalytic reformer; saturated gas plant; Merox liquid treating unit; 6.000 B.S.D. distillate hydrotreating unit; and Sulphur plant
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(b) Options to Purchase Land for Refinery
In mid 1972, Total obtained an option over 311 acres at Parklea, but this site was found unavailable for refining purposes. It was submitted on behalf of Ampol that since the interest o f the Australian Government in the location of a Sydney refinery expressed early
in 1973 and the establishment of the Royal Commission, Ampol had deferred taking further steps in the establishment o f a refinery,
notwithstanding the growing effect o f the delay both in terms of market disadvantages and what was said to be real operating problems at Lytton. Ampol did, however, take what was described as an option over an area of land at Kurnell. For this option it paid an amount of $105,000.
32.3 Essential Features of Proposed Refinery
The proposal has the following essential features: —
(a) The proposed refinery w ill be a versatile refinery to process both indigenous crude and high and low sulphur imported crudes; (b) It will be located in the Sydney area, that is to say, close to the
Sydney and South Sydney markets; (c) It will be sited so as to benefit from the existing port facilities in Botany Bay, including the Total refinery site at Matraville and the structures and single buoy mooring operated there, and
from the planned port facilities in Botany Bay; -(d) The refinery will be o f a modern design incorporating features designed to provide a high level of protection for the
environment; (e) The proposal is flexible enough to permit further interested parties to be brought in on a partnership basis and thus has an inbuilt capacity to solve a number of the industry's problems —
not just those of Ampol and Total; and (f) It would have the design versatility to handle the crudes necessary to produce feedstock for the bitumen and by-product process presently handled by Total.
32.4 Site The partners have not defined the site upon which they propose to construct the refinery. As stated earlier, two possible sites have been proposed, namely Lucas Heights and Kurnell Peninsula. All the discussion which has taken place in the Commission from Ampol, Total, State and Australian Governments and Instrumentalities, and the oil companies' own processes of selection now extending over several years, have resulted in these two sites and only these two sites being proposed.
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32.5 Arrangement Between the Parties
So far as the evidence goes, the precise terms upon which Ampol and Total propose to participate in the refinery have not been determined.
32.6 Ampol/Total on Public Interest
The parties maintain that from a technical point of view that it is essential that any new refinery capacity has the versatility to refine a wide range of Australian and imported crudes, especially the more demanding high sulphur crudes.
Further, the parties assert that it is in the public interest that a new refinery must be capable of maximizing the production of motor spirit and similar range material at the expense of the destruction and conversion in the refining process of the fuel oil end of the barrel.
In this connection, the parties' approach is in direct contrast to the B.H.P./Sleigh proposal. The parties point to the additional flexibility to be achieved by rationalizing production between their proposed new refinery and Lytton — with each refinery being utilized to produce a combined slate of products with the greatest efficiency.
The new refinery it is claimed at either Kurnell or Lucas Heights would fit admirably within the New South Wales Government's plans for the development of Botany Bay as a major bulk port and increase thereby the effectiveness o f the large capital investment in that area, and result in large costs savings in importing foreign crude.
Total claims to be one o f the very few major oil refiners and marketers which on the world market is a net seller of crude. While not suggesting that this guarantees supply, it is put that Total's involvement cannot fail to assist in securing supply.
As has already been referred to in this Report, Total is part of a major international group o f companies which ranks w ithin the first ten for both production and refining of crude oil and marketing of petroleum products. The Commission received evidence from Total that as a participant in a new joint refinery in the Sydney region, it will make a significant contribution to the project, not only because it has been established as a refiner locally, but
also because it is a member of the international group. Because of its international affiliations, it is claimed that Total has: —
(a) Access to substantial and diverse sources of overseas crude; (b) Access to extensive expertise in refining and other technology, including pollution control; and (c) Wide and possibly unrivalled experience in techniques for the
setting up and operation of shared refineries, including methods for equitable operation where, as is normally the case, the shareholders in a jo in t refinery operating company consist of, or include, market-place competitors.
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33. AMPOL'S CASE FOR A NEW REFINERY IN SYDNEY RATHER THAN EXPANSION IN QUEENSLAND
33.1 Queensland Consumption and Production
For the year 1972-73 consumption of petroleum products excluding refinery fuel, bitumen, lubricants, solvents, LPG and refinery gas fo r the State market area o f Queensland was 23,227,000 barrels. For this purpose the State market area is the political area plus the Murwillumbah district o f New South Wales.
The finished products outturn from Ampol's Lyton refinery was for the years: —
and for the
8 months to February, 1974 — 9,887,000 barrels The primary capacity of this refinery is 60,000 to 75,000 barrels per stream day.
The capacity o f the other Queensland refinery, operated by Amoco, is 28,000 barrels per stream day, production from that refinery was for the years —
The total production o f petroleum products in Queensland for 1973 appears on these figures not to have been sufficient to satisfy the Queensland demand, although it is notable that over the years mentioned Amoco's refinery has been producing near to capacity while Ampol's refinery has been producing well below capacity.
Ampol's market requirements in Queensland have been met by the maximum conversion of Gippsland crude to white products and the importation of Kuwait fuel oil for the balance.
33.2 Queensland Population Trends
When the Lytton refinery was designed the Queensland population was growing proportionately faster than the Australian average. This trend apparently reversed about 1962. Over the period 1954 to 1966 the Queensland population actually fell from 14.67% to 14.39% of the Australian population. The evidence was that the percentage of Queensland demand to the total Australian demand was 12.6% in 1969.
Although high growth rates as a percentage were predicted for certain areas in Queensland, the southern area of Western Australia and other specific locations, they were growth percentages on a small base. When the
1970- 71 1971- 72 1972- 73
11.192.000 barrels 13.651.000 barrels 12.922.000 barrels
1970- 71 1971- 72 1972- 73
7,923,482 barrels 7,998,030 barrels 8,966,901 barrels
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absolute levels o f population increases were examined they showed the major population increase would be in the existing dense population area from Sydney south to Melbourne. These market factors were said to coincide substantially with the market experience of Ampol. This factor combined with a concentration o f Ampol's market in New South Wales was
regarded as an extremely strong influence in locating a refinery in the Sydney area.
33.3 Comparison of Growth Between Queensland and Sydney South Area
Evidence was led by Ampol that population shifts in the absolute sense to the Sydney south area (in this context defined as every part of New South Wales south of Sydney and as including the Australian Capital Territory), will cause increasing imbalance between Ampol's Australian white product
market requirements and the company's ability to exchange these against its production in Queensland. It was said that these imbalances would have the effect of restricting Ampol's growth in the market place. The effect of these population figures was challenged by
B.H.P./Sleigh. For example, it was pointed out that the figures published by the Fuels Branch in August, 1973, show that the forecast Queensland consumption o f petroleum fuels is expected in 1978-79 to grow from 15.9% and in 1984-85 to 17.4% of the total forecast Australian consumption. These compare w ith 13% in 1971-72, 13.5% in 1972-73 and 14% in 1973-74.
Ampol tendered absolute growth figures of population on a State basis and on a statistical regional basis in New South Wales. This evidence has been referred to earlier in this Report. It indicated a growth in New South Wales between 1976-1980 of 470,000 people or 33.38% of the anticipated
Australian growth o f 1,400,000 people for the same period. By contrast over the same period growth in Queensland is expected to be 188,000 people or 13.6% o f the anticipated Australian growth. Sleigh compared the average annual combined growth rates for various
areas for the period 1966-1973 taken from the Australian Bureau of Statistics — Population Census and Revised Inter-centre estimate. These indicate a higher average annual combined growth rate for the Brisbane
statistical division over the period (2.3%) than the Sydney statistical division (1.8%) and for Queensland (1.9%) than New South Wales (excluding A.C.T.) (1.5%). For market purposes the most relevant factor is plainly the absolute increase in population numbers.
33.4 Questions Raised Concerning Alleged Imbalance
Ampol's witnesses were cross-examined on the basis that the Queensland market was sufficient to balance Ampol's Australian market projections. In rebuttal the following matters were advanced:-(a) This approach limited Ampol to its current share of the
Australian market.
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(b) It did not take account o f imports into Queensland by other companies, such as those under long term bulk contracts for Gladstone Alumina and the Greenvale Nickel projects. These contracts are made outside the usual exchange arrangements by direct import from other States and from overseas. Fifty percent of Queensland's requirements for fuel oil and over
1,000,000 barrels per year of white products are currently imported into Queensland by other companies. They have therefore to this extent no need to exchange. (c) Exchanges o f one barrel o f a particular product for another
barrel of a different product is mostly to Ampol's commercial disadvantage. As far as possible companies in Australia try to exchange like product for like product. Ampol wishes to do the same and exchange like for like, motor spirit for motor spirit, heating oil for heating oil. Under those conditions its Australian market and Queensland market just do not fit. In 1973 Ampol had to import 750,000 barrels o f product into Sydney to check imbalances. It is impossible to absorb motor spirit, heating oil, lighting kerosene, distillate and avtur in Queensland. By contrast there is vast potential for absorbing amounts o f fuel oil, which Ampol produces only in small quantities.
33.5 Alleged Deficiency in Queensland Market
In an attachment to its initial submission Ampol tendered revised sales projections for its Australian market o f 20,657,973 barrels for the year 1977. Ampol also produced an assessment which indicated on the company's projections for 1977 that there w ill be a deficiency in the Queensland market as against Ampol and Amoco's Australian markets in motor spirit of
1,514,000 barrels and in kerosene of 1,413,000 barrels. On the other hand, the Queensland market for distillates exceeds the Amoco/Ampol projections for that year by 2,532,000 barrels.
34. REPORT ON PROPOSALS-GENERAL
34.1 Overall Australian Situation
On the evidence the Commission concludes: -(a) that for the industry to maintain its present level of
self-sufficiency in Australia, with enough spare capacity to meet contingencies, new refining capacity will be required no earlier than mid 1977 and no later than the third quarter of 1979. (b) that there will be a sharp decline in the rate of growth of fuel
oil demand and possibly a decline in the absolute levels of demand for fuel oil. (c) that from 1980, the absolute amount of Gippsland crude oil available will be declining. Already the proportion of Gippsland
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crude to the total amount of input crude oil required has started to decline. (d) that because of the decline in the rate of growth of fuel oil demand and in the amount of Gippsland crude oil available,
there w ill be a resultant shift to heavier imported crudes. Existing refineries w ill have to modify plant and install equipment to reduce fuel oil yield and produce additional motor spirit and other white products. Shell has already announced a substantial programme for this purpose at Clyde.
34.2 Parties have Demonstrated Commercial Need
The Commission agrees that Sleigh, Ampol and Total have sound commercial reasons for desiring to acquire new refining capacity. Further, the Commission agrees, that appropriate commercial considerations by B.H.P. have led to its interest in refining crude and securing a favourable supply of fuel oil for its steelmaking enterprise.
34.3 Importation, or Expansion of Existing Refineries
Although argument was often conducted before the Commission as if the transportation o f product interstate was at all costs to be avoided, in fact this is simply not so. Petroleum products could be imported into New South Wales from
other States or from overseas to meet any shortfall in the State's refinery capacity. Quite considerable volumes of product have been moved interstate for many years. The cost of such imports would not necessarily exceed that
of product refined locally. For example the cost of producing the relevant products in an existing Victorian refinery with surplus capacity and transporting those products to Sydney could be less than the cost of producing the same products in a high capital cost new Sydney refinery.
The Shell refinery at Clyde or the A.O.R. refinery at Kurnell could be expanded to meet the shortfall, at least to a limited degree. Probably both the construction and operation costs of such expanded facilities would be less than those of a new grass roots refinery providing the same additional capacity.
But the alternatives o f import or expansion leaves Sleigh without the security of its own refining capacity refinery and Ampol and Total reliant, if they are to maintain their present market share of an increased demand, upon competitors for supply.
Theoretically, the facilities of an expanded existing refinery could perhaps be shared in some way. Although the Commission is called upon to inquire into the rationalization by joint operating or sharing of existing refineries, no authority, Governmental or otherwise, has propounded any scheme or indeed made any suggestion whereby Ampol, Total or Sleigh could be brought in to share available or expanded refining facilities at Clyde
or Kurnell.
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34.4 Imports Not a Long Term Solution
The Commission considers that although imports from other States can be used to advantage to postpone the effects o f a shortage o f New South Wales refinery capacity, long continued imports do not represent a true alternative to new capacity.
It seems fairly certain that demand will exceed supply at least with respect to white end products at some point in the next few years.
34.5 Commission's Finding on the Need for a New Refinery in New South Wales
The timing of new grass roots capacity does not turn simply on a mathematical balance between refinery capacity and product demand; see 17.2. Nevertheless, in the light of the matters discussed in 17.2 and above, the Commission finds that in the public interest there should be a new grass
roots refinery built in New South Wales to meet the shortage of capacity in that State and the need for this new capacity should be anticipated now.
35. PROBLEMS INHERENT IN THE PROPOSALS
35.1 The Applications Appear Mutually Exclusive
Each group of parties has placed before the Commission a refinery plan which serves the needs of that group but does not provide for tfie needs of the other group. B.H.P./Sleigh offer no solution to the problems o f Ampol or Total and conversely Ampol/Total offer no solution to the problems of B.H.P. or Sleigh. Looked at in the terms o f the national interest the Commission considers this to be a fundamental defect o f both proposals. As already stated, the Commission respects each party's claim that in a commercial sense it is desirable that it participate in the operation of a refinery of which it is a part proprietor. For this reason any refinery wherever built should, if possible, cater not merely for the needs of one group of parties but for the needs o f as many parties as possible.
It must be mentioned that on 20th February, 1974 Counsel appearing for Ampol invited Sleigh to join Ampol and Total in any refinery with which Ampol and Total might proceed and indicated that his client might consider the position of B.H.P. Ampol confirmed this invitation to Sleigh in a letter to the Chairman o f Sleigh dated 16th April, 1974, tendered in evidence. No terms or conditions were spelled out and the proposal did not really amount to more than a declaration that Ampol was prepared to adopt a flexible position with respect to the general proposal that there should be a shared new grass roots refinery.
Sleigh very firm ly rejected the proposal. In view o f its commitment as a partner to B.H.P., this refusal was inevitable. Nevertheless, the problem presented — that of satisfying the legitimate
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commercial requirements of all parties still remains and is in the view of the Commission, a problem for all parties.
35.2 The Shared Refinery
Each proposal involves a sharing by the parties o f the construction costs of the refinery and o f the refinery facilities when it comes on stream. The Commission considers that such sharing of costs and facilities is a desirable feature of both proposals.
The reason why no single company makes application for a new refinery is plain. Each company needs to combine forces with at least one other to achieve minimum economies of scale by building a refinery with a capacity of 65,000 to 70,000 barrels per stream day. The approach is sound.
But in Europe and the United States today, except in special circumstances, new grass roots refineries are typically in the 150,000 to 200,000 barrels per stream day class. The true economies lie in taking the further step of putting together all the companies' product demand and building a refinery towards
this size. The parties should be aiming to take this further step. The need for a new refinery in New South Wales and the need to provide fo r all four parties led the Commission to conclude that, if possible, a refinery should be constructed of a size sufficient to cater for the stated commercial requirements of Sleigh, B.H.P., Ampol and Total. Such a
refinery might be owned or operated or both by all four parties or any three of them. A refinery larger than either proposed, the outturn of which aggregates the demand of all four parties, should basically be a more economic refinery in terms o f both capital and product cost. There is no
reason why such a refinery should not be operated probably by a free standing company owned by a number of parties. The ability of such a company to serve the needs o f those interested in it is a challenge to management. The Commission is satisfied by the evidence, and particularly
the evidence given by Total, that it can be done and has often been done. Accordingly, the Commission is of the opinion that if a joint refinery can be designed to serve the market needs of Ampol, Sleigh and Total and the consumption needs of B.H.P. in a manner which is economically
attractive, parties wishing to participate in ownership of it could arrive at an agreement for participation on satisfactory terms. In this regard the Commission does not exclude the possibility of participation by government or government agency such as the Australian Industry Development
Corporation or for that matter by any other party.
36. THE TABS STUDY
36.1 Commission Investigates a Combined Refinery
Anticipating that a joint refinery might lead to economies of scale, the Commission decided to investigate the viability of a refinery serving the product demands of all four refinery proponents: —
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(a) Against the background of the two refinery proposals before the Commission, neither o f which met the demands of the other; and (b) With a view to looking at the basic question of whether a
refinery which met all these product demands could reasonably be devised. In carrying out the study, which was called the TABS (Total, Ampol, B.H.P. Sleigh) study, the Commission was investigating the possibility of a refinery which would service the market or consumption requirements of more than two parties and the ownership o f which would be shared by more than two parties. For the purposes o f the study, such sharing was between oil industry companies. No particular investigation has been conducted into the possibility of a government or non-oil company private party being
interested in the ownership of such a refinery.
36.2 The Working Group
The four companies agreed to supply representatives to meet as a working group under the Chairmanship o f Counsel assisting the Commission. The group meetings were held concurrently with the sittings of the Commission over a period from 21st August to 18th September, 1974.
The meetings of the working group were held in the Commission offices. The Commission provided assistance from its Consultants and undertook to arrange computing facilities. The function o f the working group was to provide data on product demands and specifications, feedstock availability and characteristics, process unit capital and operating costs. The working group participated with the Consultants in the designing, costing and optimization studies.
36.3 A Preliminary Feasibility Study Only
The TABS study was carried out on the basis that it would not prejudice the individual cases being presented. Parties undertook not to refer to the working group activities in their cross examinations. The study made no attempt to deal with the comparisons between a rationalized refinery serving all four members versus the individual proposals put to the Commission.
It was not intended to produce a refinery design which the
Commission would recommend should be constructed by the parties or by anybody else. The study was intended simply as a preliminary feasibility study to assist the Commission in determining whether a single large refinery serving the needs of all four parties might be feasible.
36.4 Computer Techniques
Linear programming techniques were used to optimize a design and to determine the costs associated with the joint refinery. These studies could lead to further study by the four parties or other parties concerned with
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refining in the Sydney area. Linear programming is a mathematical technique for determining the optimum allocation of resources (such as capital, raw materials, manpower, plant or other facilities) to obtain a particular objective (such as minimum cost or maximum profit) when there are alternative uses for the resources.
Linear programming can also be used to analyse the economics o f alternate availability of resources, alternate objectives, and so on.
36.5 The Results of the TABS Study
The TABS working group determined that such a rationalized refinery facility is feasible on the basis of the approach taken by the working group and that the product demands for all parties can be met from a relatively
straight forward refining installation. A statement setting forth the results of the TABS study, together with letters from the parties confirming the results, was made an exhibit before the Commission. The Commission considers this document to be of sufficient importance to warrant its inclusion in this Report and accordingly
it has been made Annexure "G ". The study resulted in refinery designs capable of producing the several sets of product demands suggested by the TABS working group. The designs were optimized to give minimum production costs of the demand required,
using an indigenous and imported crude mixture which is typical of the refining industry in Australia. Economic evaluations were based on the average production cost per barrel of product compared with an average import parity cost per barrel of
the same product mix. (Attachment 3 o f Annexure "G "). Such import parity costs would however, reflect the current cost of foreign crude which is several times the cost of indigenous crude. For such comparison to be valid the cost of indigenous crude was taken at its import parity value.
The design capacity of the refinery to supply the needs of the four companies is approximately 135,000 barrels per day using a mixture of approximately half Gippsland and half light Arabian crude oil. The total cost in 1977 is estimated as being approximately $ 190,000,000 excluding land acquisition cost and incremental working capital. The study and resulting costs are based on costs prior to the October, 1974 Australian dollar
devaluation. Several problem areas became apparent during the course of this work: — (a) The anticipated reduction in the maximum amount of lead in
motor spirit will impose economic penalties on this and other refineries. (b) B.H.P.'s demand requirement of low sulphur fuel oil (0.5% sulphur) is more economically met by employing substantial
quantities of Gippsland fractions for blending with higher
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sulphur Middle East fractions, even with Gippsland crude priced at its import parity. (c) The high proportion o f distillate demand necessitates more extensive use of hydrocracking in combination with catalytic
cracking than is currently prevalent in Australia. (d) The specifications for motor spirit volatility appear to be restrictive with a mixture o f Gippsland and Arabian crude unless the naphtha that would be used to manufacture the
motor spirit can be separately disposed o f by concurrent sales or used as refinery fuel. (e) The production o f LPG as a refinery product tends to impose restrictions on the refinery because of the associated costs and
the need to produce refinery fuel limited by legislation to no more than 1% sulphur. These problems call for further investigation and analysis of a kind more appropriate to a detailed analysis o f a project rather than the preliminary study sought by the Commission.
There is no reason to doubt that on the basis o f further studies, acceptable solutions can be found. If B.H.P.'s demand for low sulphur fuel oil was reduced or eliminated, a number of problems encountered are likely to be substantially simplified.
36.6 The A ttitude o f the Four Parties to the TABS Study
The four parties which took part in the TABS study all acknowledged that the Joint Refinery Feasibility Study Report was an agreed statement o f the working group and in accordance with the results of its work. Ampol advised the Commission that, in reaching a consensus, the group found it necessary to om it certain significant statements of work covered by it to prevent the withdrawal from consensus by one o f the four parties and that, in the view o f Ampol, this accommodation unnecessarily diluted the findings relating to feasibility as determined by the working members of the group.
In their final submission, B.H.P./Sleigh reaffirmed their desire to build a refinery at Newcastle as proposed by them rather than enter a larger group to build a refinery such as the TABS refinery at Sydney. Submissions were put before the Commission as to the reservations they had regarding the TABS study. In the light o f these submissions, B.H.P./Sleigh informed the Commission that they could at present see no justification for participation in further studies toward a four-party refinery in Sydney.
Counsel for Sleigh put the matter more forthrightly in his final address. He said that in the event of the Newcastle project being for some reason abandoned or required to be modified, Sleigh would in determining its method of achieving equity in the refining industry consider a wide range of alternatives. On the material which had been made available to it joinder with Ampol certainly did not range amongst these alternatives.
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36.7 Commission's Findings on the TABS Study
As a result of the TABS study, the Commission concludes that it is feasible to design and build a single refinery located in the Sydney metropolitan area, which could supply the product requirements of the four parties as disclosed in their evidence to the Commission. Such a refinery offers potential
economies of scale. A preliminary economic analysis developed by the TABS working group indicated a Discounted Cash Flow rate o f return on the refinery investment of about 14%. Further economic analysis will be required if a firm proposal for such a refinery is to be developed and presented.
Nevertheless, the Commission is satisfied on the evidence produced to date that such a refinery is economically feasible on the assumptions used by the TABS working group. The Commission concludes that there are solutions to the refinery problem available which will solve the problems of all four companies and
that there are strong reasons why in the public interest these solutions should be attempted. The Commission has compared the size of the market for the Sydney and Sydney South region with its absolute growth potential and has compared it with the size of the market for Queensland, the Brisbane and
Northern New South Wales region and Newcastle. The Commission concludes from this comparison that a refinery located in the Sydney area w ill be closer to the largest growing market area than any alternative.
It concludes that the location for new refinery capacity should be Sydney.
37. REPORT ON THE SYDNEY MARKET AREA AS COMPARED WITH NEWCASTLE OR QUEENSLAND
37.1 Where is the Growth Potential?
The Commission has compared the size of the market for the Sydney and Sydney South region with its absolute growth potential and has compared it with the size of the market for Queensland, the Brisbane and Northern New South Wales region and Newcastle.
The Commission concludes from this comparison that a refinery located in the Sydney area w ill be closer to the largest growing market area than any alternative. It concludes that the location for new refinery capacity should be
Sydney.
37.2 Botany Bay and Newcastle as Oil Ports
The capital cost of providing a V.L.C.C. berth in Botany Bay is considerable. The economics of using it w ill be available to Shell at Clyde by means of a proposed pipeline and to A.O.R. which is already sited at Botany Bay. It
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would be a significant waste o f a highly specialized and expensive facility if future refining capacity in New South Wales were not related to this new port facility. If it were not, the grand design o f providing an essential entry point to serve the needs o f the whole continent would necessarily in part be lost. This is especially important in view o f the significant increase in foreign crude oil which w ill have to be imported in the 1980's and the prospective economies of two-port discharge, at Botany Bay and other Australian oil refinery ports, o f V.L.C.C. tankers.
The Commission considers it improbable that the Port of Newcastle will be able to receive V.L.C.C.'s even in a partly laden condition and consequently any refinery situated at Newcastle would not share the economies of scale available to refiners making use o f port facilities which are capable of receiving V.L.C.C.'s.
The Commission finds that the size and anticipated growth o f the Sydney region and Sydney South region populations and the need to exploit to the maximum the proposed development o f Botany Bay, combined with the potential o f two-port discharging based on a first partial discharge in Botany Bay make it completely desirable that new refinery capacity should be sited so as to take full advantage of the Botany Bay port facility.
38. REPORT ON THE B.H.P./SLEIGH PROPOSAL
38.1 Use of 100% Indigenous Crude Feedstock
B.H.P./Sleigh's proposal is built around the concept o f 100%, indigenous crude feedstock. In their first submission to the Commission, the partners stated that if the proposed refinery could not be assured full access to Gippsland crude several penalties would be incurred and, in fact, the economic consequences could be sufficient to force B.H.P. and Sleigh to abandon the venture. The B.H.P./Sleigh project has always been and remains based on a feedstock o f 100% B.H.P. Gippsland crude.
Most refineries at present refine what has been called, the "national feedstock", which put broadly consists of a mixture approaching 70% indigenous crude and 30% imported crude. Some refiners who have more than one refinery may rationalize production between refineries, but the combined outturn remains the product of the 70%-30% "national feedstock".
When the indigenous crude absorption policy was first formulated (see the then Prime Minister's statement of 10th October, 1968, referred to earlier in this Report), the price of indigenous crude exceeded the price of imported crude. Especially since the world oil crisis commencing in October,
1973 this position has been dramatically reversed and Gippsland crude is presently priced at $2.09 per barrel while imported crudes are varyingly priced but not likely to be less than $8.50 per barrel (US$11.18), the equivalent after the devaluation of the Australian dollar announced in September, 1974, of the price prior to that date.
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Any refiner, therefore, who obtains 100% indigenous crude at $2.09 per barrel as a feedstock secures an enormous financial advantage over rival refiners, 30% of whose feedstock costs $8.50 or more per barrel. Assuming a refinery the size o f that proposed by B.H.P./$leigh this saving (or subsidy) on operations works out, as the witnesses called by
B.H.P./Sleigh conceded, at about $100,000 per stream day or over $25,000,000 a year. The advantages by no means end there. Known reserves of indigenous crude form a limited finite pool. If any refinery receives more than its ordinary allocation it must do so by reducing the allocation available to
other refiners. Therefore, if the B.H.P./Sleigh refinery were to draw an allocation of 100% indigenous crude, the "national feedstock" for all other refiners would necessarily change so that on a current basis, less than 70%
would be indigenous and more than 30% would be imported crude. Consequently they would acquire the added financial burden of receiving less Gippsland crude at $2.09 per barrel and would have to buy more expensive crude for at least $8.50 per barrel. If the price of imported crude
rises and the price of indigenous crude remains constant, or rises at a lesser rate, and this seems likely, these disadvantages will be even more pronounced. But that is not all. A fter 1980 the overall production of indigenous
crude is expected to drop steadily. The B.H.P./$leigh proposal envisages a continued supply to it of 100% indigenous crude feedstock. The allocation to all other refiners will necessarily decline requiring them to import increasing quantities of crude at high prices until, within a few years, their
input of indigenous crude will be small or even minimal. $hould present price differentials be maintained, an extraordinarily large financial windfall will thus accrue to the B.H.P./Sleigh refinery.
It is not therefore simply the case that B.H.P./Sleigh receive advantages from a feedstock of 100% indigenous crude. These very large price advantages are at the expense of and directly offset against a corresponding disadvantage and cost penalty falling upon other refiners. Such a proposal would introduce a major element of dis-equilibrium into the whole structure of Australian refining and the competitive position of all
other refineries. The Commission considers that any new refinery capacity should not as a result of special treatment, have such cost advantages built into it, but should be subject to the same competitive situation and broadly the same
feedstock costs of other refiners. Further it considers that the
"proprietorial" interest of B.H.P. is not an appropriate base for a proposal which would so radically alter the competitive basis for refining. Even if this "proprietorial" interest of B.H.P. were accepted, the inclusion of Sleigh in the benefits of this special supply would create additional problems in the
equitable distribution of indigenous crude as Sleigh certainly has no "proprietorial" interest. Presumably Esso, as a partner in the Gippsland
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fields, could also claim a "proprietorial" interest and then Mobil as a partner with Esso in two refineries might also claim that its interests should be treated no less favourably than Sleigh's. If a refinery is built to be operated on a supply o f 100% indigenous crude, other refiners w ill be further disadvantaged. Significant investments have been made in Australian refineries to enable them effectively to process crude oil of the character and quality o f indigenous crude. To the extent to which the supply o f Australian crude to these refineries decreases, the
refiners will be seeking to replace it with imported crude o f the same character and quality. Such crude, apart from being more expensive, w ill be scarce or unobtainable. If crude of a comparable character and quality is unavailable, additional refinery investment will be required to produce the Australian product demand from less suitable imported crudes.
For the above reasons the Commission does not recommend the construction of a refinery which requires a feedstock o f 100% indigenous crude.
38.2 Is there a Market for the Refinery?
The proposal to build a refinery at Newcastle must in the first instance depend upon the availability o f a Newcastle market. "Newcastle market" in this sense includes areas remote from Newcastle itself, but more conveniently supplied from Newcastle than from elsewhere. These areas while in part perhaps debatable, extend to include Tam worth, Narrabri and Walgett and also the area including Grafton and Armidale currently supplied through Trial Bay. A t the present time the whole area is normally supplied from Sydney and Botany Bay. But the proposed Newcastle market is also to include areas such as Sydney and Port Kembla which are not strictly Newcastle market areas and which might more accurately be described as areas in which Sleigh sells and B.H.P. uses petroleum products.
It was accepted by an expert called on behalf of Sleigh that as a broad rule o f thumb, a minimum economic sized refinery as here proposed in a society such as our own, needs a market o f one and a half million people to absorb an economic level o f outturn. If such a market is not available, the refinery would have to accept either the substantial diseconomies of reduced output (loss of economies o f scale, wastage o f standing capital assets) or the re-export of product elsewhere, in this case to Sydney or perhaps Wollongong.
The Newcastle market contains nothing like a population o f one and a half million people. Moreover the population is growing relatively slowly. Thus according to the booklet compiled by the Hunter Valley Research Foundation, the population o f the total Newcastle region in 1947 was 230,803 and in 1971 was 352,122. In the booklet Regional Growth Patterns produced by W.D. Scot, the figures for urban growth in New South Wales
1966-1971 show an increase in the urban area of Newcastle o f 6.82% the lowest in New South Wales.
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The net result is that such a refinery will have a substantial excess in outturn o f product which will, in fact, have to be re-exported to Sydney, WoMongong and elsewhere. In order to market such products, substantial discounts may be required to offset the transportation costs to markets where they are sold. According to the partners' original submission, for the design year then contemplated, 1982/83, approximately 75% of the fuel oil
outturn would be shipped from Newcastle to Port Kembla. In addition, the same submission shows a surplus o f white products produced by the refinery over refinery demand of 2,475,000 barrels which, presumably, would have
to be shipped to Sydney. These difficulties may be compounded because there is no assurance that the refinery w ill be able to sell its fuel oil outturn to the B.H.P. Steel Division. In its submission, B.H.P. emphasized that the refinery would have to compete with other companies for this market. In addition, it may also
have to compete with alternative fuels including natural gas which is likely to become available in the Newcastle and Wollongong/Port Kembla areas. In the event o f the refinery's fuel oil market contracting, there is no evidence of what w ill be done with this 30% part of the refinery's outturn.
The Commission therefore concludes that the Newcastle market is and is likely to remain an inadequate market for a refinery of minimum economic size. This means that any such refinery would have to accept the diseconomies of re-export from Newcastle to Sydney and elsewhere and the disadvantages of these diseconomies are compounded by considerations arising out of the nature of the "transportation shield" claimed by
B.H.P./Sleigh to favour their proposal.
38.3 Is there a Transportation Shield?
As stated earlier in this Report B.H.P./Sleigh claim that the proposed Newcastle refinery would enjoy a cost benefit for a barrel of refined products of approximately 43 cents per barrel. However, this figure is misleading. Firstly, it neglects to take into account the significant product movements out o f Newcastle which would
be required. Secondly, an analysis of the purported transportation shield for a Newcastle refinery must take account of all elements of the total transportation system involved in supplying crude oil to the refinery and in distributing the products manufactured by the refinery.
An analysis, carried out by the Commission suggests that if these matters are taken into account, the alleged cost benefit is very substantially reduced and indeed could be negligible. If the Newcastle refinery does not have access to a 100% indigenous crude oil supply, and the Commission has already stated its view that a refinery requiring such a feedstock should not
be built, then it seems likely to be at a transportation disadvantage. Any disadvantage w ill be aggravated as the percentage of foreign crude required increases. By 1984 it will have increased to between 55% and 70%. Furthermore, by the early 1980's Botany Bay will be capable of receiving
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imported crude oil in V.L.C.C. tankers of about 220,000 dw t which will increase the economic advantage o f crude oil delivered to a Sydney refinery as against a Newcastle refinery. The Commission is not satisfied that the B.H.P./Sleigh claim that the proposed refinery at Newcastle w ill be protected by a transportation shield, has been made out.
38.4 The Inadequacy of Newcastle Harbour
The Commission has earlier in this Report referred to the inadequacy of Newcastle Harbour at its present depth or even deepened in accordance with the most extensive plans now current to a depth of 50 ft. to cater for crude oil tankers of a size which could economically supply refineries in the future.
It is the Commission's view, as has already been stated, that any new refinery in New South Wales should be located so as to make use of the planned Botany Bay port facilities. It is a major flaw in the B.H.P./Sleigh proposal that the location at Newcastle o f a refinery does not take advantage of these facilities.
38.5 Is a Hydroskimming Type Refinery in the National Interest?
In their application B.H.P./Sleigh propose to construct a refinery with a minimum of secondary processes, that is to say what is described as "a simple hydroskimming type refinery" producing an outturn of
approximately 30% fuel oil. This involves minimizing the white end products that would normally be produced from indigenous crude and producing a much higher quantity of fuel oil to be shipped out to Port Kembla and beyond.
The refinery would be a comparatively simple refinery characterized by relatively low capital cost. It would lack more sophisticated and expensive technology found in most, though not all, other Australian refineries, and the severity of the refining processes would therefore be reduced.
Indigenous crude has been described as an excellent quality crude capable of being subjected to the catalytic cracking process with very good results. The Commission was told in evidence that Gippsland crude produces ideal cracking unit feed and it would be wasteful to downgrade it by leaving any substantial part of it as a crude oil residue. With some units it produces a 93% conversion to gasoline range material. Using quite conventional technology approximately 90% of each barrel can be refined into white products; motor spirits, avtur, diesel and so on. A remaining 5% constitutes a residue which can be burnt as fuel oil.
The B.H.P./Sleigh hydroskimming proposal involves refining to a stage where 70% approximately is derived as white products with a 30% residue. This residue it is proposed to use as fuel oil, that is to say, to burn in furnaces, use as bunkers, and so on. This 30% residue is capable, as discussed, of being reduced to a 5% residue with the remaining 25% converted to white
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product, using conventional technical processes. In short, if the 30% residue is further refined by quite conventional methods, something like 80%-100% of it can be reduced to valuable gas and white products such as motor spirit, avtur and kerosene.
A ll else apart, black end products such as fuel oil, are more likely to be replaced by emerging alternative fuels than are white end products, such as motor spirit. Further the 10% o f total fuel oil production in Australia presently used by B.H.P. and presumably to be replaced by their own very large capacity to produce fuel oil, w ill have to go somewhere. Either it must be exported or one or more refiners w ill need additional capitalization further to refine their greatly increased residue. This is against a relative and perhaps absolute decline in fuel oil consumption. The least desirable further capacity that Australia needs is the capacity to produce large fuel oil residues.
The Commission views the reserves of indigenous crude as constituting an invaluable and probably irreplaceable national resource. In times when crude oil was cheap and plentiful, hydroskimming refineries and the burning of crude oil, as in Japan or the United States, and of large residues, even
where quite capable of being further refined, was perhaps not objectionable. But in today's conditions of scarcity the Commission considers that the burning of such fuel oil residues instead o f further refining them to maximize the production of motor spirit and other white products is contrary to the national interest and cannot be justified. It does not consider that the product outturn from a hydroskimming refinery, is appropriate for
future refining capacity. The Commission could not in any location in New South Wales recommend a hydroskimming type of refinery as described in the B.H.P./Sleigh proposal.
38.6 Low Sulphur Fuel Oil
B.H.P. has given reasons why it prefers from a commercial point o f view to use low sulphur fuel oil rather than high sulphur fuel oil in its steel works. Low sulphur fuel oil can be obtained at least cost by processing cheap low sulphur indigenous crude but this cost advantage to one company, albeit the
supplier of a basic commodity to the Australian public, has to be weighed against the loss of a scarce national resource, which can substantially be converted to motor spirit and other white end products. There are obvious alternatives to fuel oil, such as coal and the
by-products of coal, as well as natural gas. Australia has abundant coal resources. Many individual processes in steel works can satisfactorily use natural gas, coke and sometimes coal, and as statistics, reviewed by the Commission, of United States consumption show, do presently use those alternatives. In fact many such processes were originally designed to use other energy sources.
On a long term planning basis, steel works and many other industrial enterprises must plan to reduce, where opportunity permits, heavy
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dependence on fuel oil especially low sulphur fuel oils. By contrast the alternatives to motor spirit for use by the ordinary Australian motorist are by no means apparent. Commonsense dictates that limited resources which provide an energy source in situations where there are no alternatives should not be squandered in situations where there are alternatives.
38.7 The Proposal was not "Ready to Go"
In applying to the Commission for a priority hearing and in the course of their later submissions, B.H.P./Sleigh asserted that their proposal was "ready to go" and was only being held up because as a matter o f necessity the proposals had to be brought before the Commission. The assertion that they were "ready to go" turned out on the evidence, as the Commission discovered after agreeing to a priority hearing, to mean no more than that the parties were ready to go to the next step of design and accurate costing of the plant. In short, as again was conceded in evidence, the parties were asking not for a recommendation o f approval of the project but rather for a statement from the Commission that, in principle, it either would or might approve of some refinery project at Newcastle. That project might to a lesser or greater extent relate to the material produced by the parties before the Commission. If the Commission had reported favourably the parties would then have gone away and carried out a lot o f essential investigations which might eventually have put them in a position o f being able themselves to decide whether or not they wished to proceed to actually build a refinery. The Commission was being asked to approve a proposal which had not even
reached the stage where the management o f either company could obtain its own Board's approval. A ll other matters aside, the Commission considers that the proposal was brought before it prematurely and that, as the evidence ultimately revealed, the application for a priority hearing was misconceived.
39. REPORT ON THE AMPOL/TOTAL PROPOSAL
39.1 Location in the Sydney Area
In considering Ampol's argument that the expansion of its Lytton refinery near Brisbane to supply only the Queensland market, rather than the building o f a new refinery in Sydney, w ill disadvantage the company, three important points must be borne in mind.
First, the refinery "hinterland" must be identified. This is the geographical area most economically supplied from Lytton, its true natural market. Evidence was submitted indicating that the Lytton refinery hinterland did not include all o f Queensland, but might include part of northern New South Wales. If Ampol were to rely only on Lytton as its Australian source of supply, the relevant comparison would be between the size and growth rate of the Lytton refinery market and the size and growth
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rate of the total Australian market. If the Lytton refinery market is growing at a faster rate than the total Australian market and if Amoco does not expand its refinery, then at least conceptually Ampol could increase its share of the Australian market by supply from Lytton since the Lytton market, as a share of the total Australian market, would be increasing. A t least some
evidence has been introduced that this w ill be the case. Secondly, there is an important distinction between the product demand pattern in the Lytton market as against the product demand pattern in the total Australian market. If marked differences exist, and evidence
indicates that the motor spirit share o f the Queensland market is lower and the fuel oil share higher than of the total Australian market, then there may be constraints on Ampol's marketing ambitions for certain products such as motor spirit which Ampol may find more economic to market than other
products such as fuel oil. Unlike product exchanges, such as fuel oil for motor spirit, are not impossible, but the economics of the exchange may reduce its profitability. The evidence presented in regard to this argument is inconclusive.
The third important point to consider is the type of refinery capacity required to supply a growing Lytton market, assuming Amoco does not expand. Ampol have led evidence that what amounts to essentially a new refinery would be required, based on handling significant amounts of
imported high sulphur crudes and producing a higher percentage of fuel oil in its outturn than does the Lytton refinery which runs almost exclusively on low sulphur indigenous crude oil. Thus, the theoretical economics of expanding an existing refinery as against building new grass roots capacity would be significantly eliminated. Furthermore, the imported crude would have to be delivered into a port where it is unlikely that tankers over 70,000 dwt can be accommodated. Thus in Ampol's view it would be preferable to incorporate this kind of additional capacity in a new Sydney refinery.
The Commission is not totally persuaded by Ampol's arguments that, in order to retain its Australian market share and remain reasonably competitive, it must have Sydney's refining capacity. However, the need to build additional capacity to handle imported crudes and the need to achieve transportation economies on the crude imports do seem reasonable
arguments for the erection o f additional capacity in Sydney rather than in Brisbane.
39.2 Refinery Site
The essential problems which face the partners in finding a site are those which would face any new grass roots refinery to be established within the area capable of exploiting the economies of scale inherent in the use of Botany Bay as Australia's major port. The site must be within 25 miles of
the point of unloading. As has already been stated, two possible sites have been proposed. A considerable amount of attention has been given in evidence to the qualification o f these sites as refinery sites.
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It must be said at once that with respect to neither site has any comprehensive environmental evaluation taken place. No site can or should be firm ly indicated until such a study determines its suitability. But a start has to be made somewhere and, consequently, subject to this most important reservation already made, the Commission does propose to indicate its preferences.
39.3 The Kurnell Peninsula
The essential advantages o f the Kurnell Peninsula can best be marshalled from the submission presented to the Commission by the New South Wales Planning and Environment Commission.
"The Kurnell Peninsula is recognized as a valuable land resource. It is adjacent to Sydney's metropolitan areas, it is serviced, there is sufficient flat land for large scale development, it is largely undeveloped, it would be easy to extend rail facilities to the area and most important, it is adjacent to Sydney's new port at Botany Bay.
The Authority's view has always been that development at Kurnell Peninsula must maximize the development o f these port opportunities. The establishment o f an oil refinery at this location would be appropriate relative to maximization of the port. The location is sufficiently remote from the main urban area to meet criteria relating to the nature of the activity." The Planning and Environment Commission's attitude to Botany Bay was clearly stated in the Sydney Region Outline Plan Report as follows:—
" I t is clear that most of the additional port space which will be needed in the future w ill have to be supplied at Botany Bay as very little land suitable for conversion to future port uses remains in Port Jackson. The Outline Plan has accepted as essential planning objectives the efficient functioning o f Port Jackson and the development o f the full potential of Botany
Bay for port purposes."
and that:
"Botany Bay be planned for maximum utilization as a port industry complex." These policies were crystallized in a letter to Sutherland Shire Council (3rd December, 1971) informing it that the Minister did not issue his certificate for the Kurnell Peninsula in the Shire Scheme because:—
"The future uses of the former area is a matter for the
Government's decision in regard to the overall development of Botany Bay."
Presently the Kurnell Peninsula as a site has four broad uses: — 1. A small and compact area is used for residential purposes.
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2. Wide areas in the interior of the Peninsula are used for industrial purposes, notably the A.O.R. refinery and two carbon black chemical plants. 3. Large areas are actually or potentially given over to park or
recreation uses. These areas include a handsome reserve dedicated, amongst other things, to the preservation o f the landing place of Captain Cook in 1770; a broad recreation area along the seaward frontage of Cape Solander and a natural environment area which it is proposed to dedicate at Towra
Point. (The Prime Minister's press statement of 9th May, 1974, referred to earlier). It would be consistent with this development that the foreshore areas o f Quibray Bay and the Wanda Beach to Boat Harbour foreshore together with the immediate frontal sand dune area, perhaps some 200 metres in depth, should also be reserved as recreation areas. 4. An area on the interior of the Peninsula is presently used for
sand-mining. This area together with some smaller additional areas is subject to the option to purchase (perhaps more accurately defined as a conditional contract to purchase), earlier referred to, by Ampol from the present owners.
The area has been inspected by the Commission. It constitutes such a scene o f desolation that in no sense could it suffer from the erection of a modern refinery.
The Commission concurs in the view of the Planning and Environment Commission previously quoted. Subject to an environmental impact statement and the appropriate engineering studies the Commission firm ly favours the interior of the Kurnell
Peninsula excluding foreshore areas as the site for a refinery. The actual land could consist o f the land, the subject of the conditional contract entered into by Ampol, excluding actual foreshores, and include if necessary other land presently dedicated to industrial uses on the exterior of the Peninsula.
There remains to be considered the objections raised by the Sutherland Shire Council to the erection of any refinery anywhere in the Shire.
The Commission has quoted from the Council submissions that any further industrial development within the Shire should not be of the noxious or hazardous types and that the construction of a further refinery within the Shire must have an effect on living conditions over the whole area and reduce the value of home sites occupied by residents.
The Commission has no evidence before it that would lead it to conclude that any such alarmist view of a currently engineered refinery is at all justifiable. In particular, having closely inspected both Lucas Heights and the
Kurnell Peninsula site, it does not consider that there are residents who live
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closely enough to either of the proposed sites to be adversely affected by their propinquity provided that adequate engineering and environmental controls are laid down for the design and construction of the refinery. With the development o f Botany Bay as a major port, far reaching secondary developments such as the establishment of refineries, pipelines and storage places are unavoidable.
Often these considerations involve a "credit and debit" type assessment o f advantages and disadvantages to citizens over areas which range far wider than one shire. In cross-examination, this type o f issue was raised by Counsel Assisting the Commission with the Sutherland Shire Town Planner.
"M R. FISHER: You, of course, are aware that the State Government o f New South Wales has proposed and indeed is developing Botany Bay as an alternative port to Sydney? A: Yes. Q: And that if one characterised the development it is aimed at meeting the newer style o f requirements for shipping, for handling very big ships, container vessels and the like? A: Yes. Q: Rather than in terms of individual shires and locations? A: Yes. Q: None of this, of course, is inconsistent with an earnest endeavour to preserve in Botany Bay any features that are particularly desirable to preserve, such as the southern scenic foreshore o f the
Bay? A: Yes. Q: But against that, if this whole great scheme is to be a success, it is essential that Botany Bay be utilized by shipping? A: Certainly the northern part and to some extent the southern. Q: For if it is not utilized by, in effect, all or most o f the shipping that might be available to utilize it the rest of the shipping simply will not pay for it? A: Yes. Q: In terms of oil we have been told in this Commission that for technical reasons you cannot send oil down a pipeline to a refinery beyond a radius of about 25 miles, or you can only do so incurring very considerable penalties. If that be so, it is obvious that a refinery,
if it were to be built to serve this area utilizing Botany Bay, would have to be built within 25 miles o f Botany Bay? A: On your
statement, yes. Q: Which involves a very considerable capital outlay? A: Yes. Q: As part of the benefit that comes from this development one can anticipate a considerable relief to overcrowded conditions in Sydney Harbour itself? A: Yes. Q: And shipping that at present is using Sydney Harbour not particularly well adapted to receiving those ships, such as container vessels, will in future go to Botany Bay? A: Yes. Q: If one looks at the oil industry obviously a number o f the small terminals that are dotted around Sydney Harbour will in the course of time be abandoned and their activities concentrated at Botany
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Bay? A: Yes.
Q: I put to you that this all involves a balance of benefits and
deficits? A: Yes.
Q: In terms of a natural environment there is no way in which these arrangements w ill benefit Botany Bay? A: Agreed. Q: But in terms o f environs of Sydney Harbour there is to be anticipated a very substantial improvement? A: Yes.
Q: And that if anyone tried to make a value judgment about the whole arrangement one would have to make a value judgment in terms of the whole metropolitan area? A: Yes.
Q: Of course, one would have to add to that that the shorter the pipeline there and back obviously the better? A: Yes. Q: Indeed, to that extent a great deal may be said in terms of economics in favour of a site that is actually on the port
itself? A: Yes. If a new refinery is to go in that regional area, yes. Q: Just looking at the alternatives, once you grant that Botany Bay is to be used for the large scale shipping that a refinery involves, both shipping and shipping out, and once you take that 25 mile factor into account, and indeed once you throw in the desirability of a waterfront site — geography being what it is, Sutherland Shire almost looks elected? A: Unfortunately, yes; but you must have a balance and
have regard to the local interest, and it is not impossible within the 25 miles to go a considerable distance inland. I know Parklea has been ruled out, but obviously it was considered as a possibility, presumably economically. Q: So if we might take that 25 miles radius for the moment, there is hardly a 25 mile radius east because it is out to sea. Another whole quadrant you cannot use because it would be under Sydney Harbour and back to Palm Beach. So you really only have two basic directions
and they lie between west and south? A: Yes. Q: So for the most part it is Sutherland Shire? A: Unfortunately. Q: And although I well understand what you say on behalf of the residents of Sutherland, I want to suggest to you there is in your own statement another reason why one would tend to look in the direction
of Sutherland, namely, it is the growth area? A: Yes. Q: Along with, perhaps, the rest of the west and south of
Sydney? A: It is in the metropolitan development plan. The seaboard is the only area where there has been a large release of land for residential development. Q: I am not an expert town planner, but whatever view you take of the Holsworthy situation, of your Menai development, it looks as if to
a very considerable extent if Sydney is to expand — either more quickly or more slowly as the case may be — it is going to expand south west? A: That is unfortunately so. In the interest of Sydney and the Shire of Sutherland clearly the refinery should be elsewhere
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and not in the Sydney area. I think economics of itself is just not sufficient. We have to have regard to the importance of the Kurnell peninsula. It should be a national shrine. Q: I am going to come back to that, if I may; but you appreciate that to say there should not be a refinery either in or near the Sutherland Shire simply means that the same refinery has to be located away from the market and away from the metropolitan area? A: Yes, in view of the existing large population in the metropolitan area. Q: You could put another one somewhere around Melbourne and ship the product up? A: Or elsewhere in New South Wales — which of course would have the advantage of encouraging a new growth area.
It would create employment and help in decentralization. Q: As you are no doubt aware, in past times public interest in the location of refineries was not near as acute as it is now? A: Yes. Q: Indeed, there was a time when practically any shire would welcome a refinery with open arms? A: Yes. Q: Therefore, if you look back on all refineries in Australia — which were all built before 1965, I think — you see a series o f locations based on economic criteria rather than social criteria? A: Yes. Q: And the one thing that the location o f all the refineries
demonstrates is that they have been located close to or upon the market? A: Yes. Q: Without being an expert in refinery economics, this would ordinarily lead one to conclude that that is a pre-condition for their economic success? A: That is what you would expect w ith industry, yes. Q: Assuming that the rules for success have not been changed, the real problem is to place this refinery alongside a market, a market in Sydney or Newcastle being the only one to profit. You appreciate that? A: I appreciate that, and I take it that is one of the factors this Commission would be looking at." The Commission is impressed with the large body of professional opinion favouring the Kurnell site. The development of the site for a refinery is consistent with the New South Wales Government's capital intensive development of Botany Bay as a major bulk carrier port.
Having carefully inspected the scene of the present sand-mining on the Kurnell site and noting that both the Botany Bay and ocean front shore line should be preserved and protected and kept available for public recreation, the Commission considers that there is or should be available in the interior of the Kurnell Peninsula a refinery site which can be effectively screened visually, and which, because of its modern refinery design, its remoteness from inhabited areas and the advantages o f a promontory site, will not adversely affect the area. Indeed compared to present uses o f the area, its use for a refinery site may be a preferred use.
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39.4 Lucas Heights
The Commission, however, has closely considered the Lucas Heights site which it has aiso inspected. The Commission appreciates the statements it has received concerning possible disabilities to residents of the Shire, none of whom, however, live at or close to the site.
Reference has already been made to the night soil treatment plant and the planned "m am m oth" garbage dumping area in the immediate vicinity. To maintain a criticism that the establishment of a refinery "must have an effect on living conditions over the whole area and reduce the value of homesites.." in the light o f these published proposals is an exercise of supererogation.
The Commission considers that subject to a full environmental impact study and appropriate engineering studies that Lucas Heights is a suitable site for a refinery.
It must however be observed that no full environmental impact study has been done and that the New South Wales instrumentalities and authorities have their independent duties to perform in relation to the site.
39.5 Conclusions on Sites
The Commission therefore limits its expressed opinion to the following statements: — 1. The new refinery for many reasons should be located in relation to the use of Botany Bay as a bulk port. A consideration of its
economies in the cost of importing, refining and distributing petroleum products makes the Kurnell Peninsula site the most satisfactory site which has been produced to the Commission for consideration. 2. In any examination of the suitability of sites the first site to be
considered should be the Kurnell Peninsula. 3. Subject to the reservations already made concerning
environmental and engineering studies, both the Kurnell and Lucas Heights sites are, when considered merely as sites, appropriate for the development of a modern refinery.
40. SUMMATION OF REPORT
40.1 In a world which must increasingly adapt to the scarcity of petroleum products caused either by lack of resources or by inability to pay for them, production patterns must emphasize the outturn o f those products for which there is no practical alternative, at the expense of those products for which
in part or whole alternatives do exist.
40.2 In Australia this means that production capacity must be designed to increase the outturn of motor spirit range products (white products) for
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which there are no effective large scale substitutes at the expense of fuel oils (black products). Natural gas, coal and coke are available in part substitution for fuel oils.
40.3 It follows that new grass roots capacity must be designed with adequate secondary refining capacity to produce maximum amounts of white products and to leave as little residual fuel oils as possible.
40.4 By reason of its composition and type, indigenous crude is particularly suitable as a feedstock to produce high proportions of motor spirit and similar range products (white products) (9.0).
40.5 Hydroskimming refineries such as proposed by B.H.P./Sleigh, with little secondary capacity, and which emphasize the production o f fuel oil (30% of total) at the expense of white products, are therefore strongly contra-indicated and must be regarded as unsuitable in terms of the national
interest (38.5). In particular, it is not appropriate to turn o ff as fuel oil, furnace oil and ships' bunkers approximately three tenths of the crude run when, by using secondary capacity, approximately 80% o f that fraction can be refined into motor spirit and similar range products. (38.5).
40.6 The B.H.P./Sleigh proposal involves the use of 100% indigenous crude oil at $2.09 a barrel as feedstock. (31.3,38.1). This contrasts with the feedstock of other refiners who have to pay $8.50 a barrel for the
approximate 30% of imported feedstock and $2.09 for the 70% indigenous crude oil balance. '
This cost difference in feedstock for a refinery o f the size proposed is of the order of $100,000 per stream day. (38.1).
40.7 As indigenous crude supply is limited, such a supply of 100% indigenous crude to B.H.P./Sleigh must result in the share o f all other refiners being proportionately diminished. They would need to import more crude at $8.50 and would receive even less indigenous crude at $2.09. Therefore, B.H.P./Sleigh's 100% supply at $2.09 a barrel must be at the direct expense of other refiners and would fundamentally distort the pattern of the refining industry in Australia (38.1).
40.8 Refiners, including new refiners, to the extent possible, should have available to them approximately the same access to cheaper and dearer crudes (38.1).
40.9 Production from the Gippsland fields is already providing a declining proportion of Australian feedstocks and from about 1980 production will fall in absolute terms. (10.0). The shortfall can only be filled from imports on an increasing scale which are likely to prove very expensive. (12.0).
Economies in the importing process are, therefore, essential. Large scale economies are achieved by the use of V.L.C.C.'s but considerable capitalization is needed to provide port and tankage facilities.
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40.10 The Maritime Services Board of New South Wales is currently developing Botany Bay as a bulk port capable of receiving V.L.C.C.'s of 200,000 dwt (18.3). In Australia, only Botany Bay will be capable of taking V.L.C.C.'s
fully laden and of giving other major ports the opportunity to receive the vessels part laden on the necessary return voyage. This "two-porting" pattern should achieve significant economies over alternative methods of importing
directly using smaller and notably more expensive tankers (18.4-18.6 and Annexure "F "). Botany Bay therefore becomes pivotal in the introduction o f real economies of scale in the importing process (18.4).
40.11 To increase the effective use of the very large capital sum to be expended on Botany Bay's development, it is desirable that all new refinery capacity should relate to Botany Bay and use its facilities (37.2).
40.12 Despite great uncertainties attending the forecasting of demand, (6.1-6.4, 7.1-7.3), it seems probable that New South Wales refining capacity will fall so significantly short of demand within at the most the next four years as to make advisable new refining capacity in New South Wales.
(17.3-17.5, 30.1, 34.5). The need fo r this new refining capacity should be accepted now (34.4, 34.5).
40.13 The only market of sufficient size available to a new refinery of at least minimum economic size is in the Sydney and Sydney South region (33.3). There is no market o f sufficient size in Newcastle and on population
trends for both Newcastle and related areas such a market is unlikely to emerge for many years (19.1,38.2).
40.14 The port of Newcastle is not and is not likely to become adequate as a major oil port, and no new refinery should be located there (19.2, 19.3, 38.4).
40.15 Any new refinery should be located in the Sydney metropolitan area and should relate to Botany Bay and its facilities (37.2, 38.4).
40.16 The Ampol/Total proposal for a refinery is not sufficiently advanced to be satisfactorily assessed. There is no firm site (32.4). The proposal demonstrates the following characteristics: — (a) The refinery is of minimum economic size;
(b) it has adequate secondary processes; (c) it is capable of handling a wide range of crudes; (d) it does relate to Botany Bay and could share in the economies involved;
(e) it is positioned to serve the principal available market. All these characteristics are consistent with the type of new refining capacity the Commission considers is required.
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40.17 The Commission finds that all four companies have appropriate and proper commercial interest in proposals for a new refinery (30.2, 34.2).
40.18 The Commission finds that a new refinery, appropriately located, technologically adequate and in the context of the port o f Botany Bay and the market of the Sydney and Sydney South region is in the public interest (37.2).
40.19 The Commission finds that it is a fundamental defect o f each of the tw o proposals that they do not meet in any way the commercial problems of the other companies. (35.1).
40.20 The Commission strongly commends the prospect o f co-operation of all or any three of these companies in a shared refinery and finds that such a rationalization is in the public interest (35.2, 36.1).
40.21 The Commission considers the TABS Refinery Study demonstrates that it is feasible for the joint needs o f the parties to be met by one refinery and that substantial advantages of scale can be expected to flow from such a refinery. (36.3 — 36.7 and Annexure "G ").
40.22 The Commission has considered criticism o f the sites propounded. It notes that no alternatives to the sites have been suggested (39.3-39.5). The Commission considers that any site should be subject to full engineering and environmental impact studies before final approval. (39.2).
Subject to this reservation the Commission considers Kurnell and Lucas Heights in that order to be appropriate sites for a new refinery of modern design (39.5).
40.23 The Commission considers that there is a strong prima facie case for supplying petroleum products by pipeline to Newcastle and that this prospect should be kept under review, (21.1, 21.2). The Commission directs attention to the economies which may be
available if the construction o f such a pipeline could be coordinated with any supply of natural gas by pipeline to Newcastle (21.3).
40.24 Having inquired the Commission reports: — (a) That there is a need for an additional refinery located in the Sydney metropolitan area; (b) The refinery should be o f modern design, o f not less than
minimum economic size, located in proxim ity 'to the port facilities of Botany Bay with primary and secondary processing units capable of maximizing the production of white products from a wide range o f indigenous and imported crudes. (c) That the refinery should be jo intly owned by all or any three of
the four applicant companies. (d) That the supply of petroleum products to Newcastle by pipeline should be kept under review.
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Annexure "A "
RELEVANT PARTS OF THE TERMS OF REFERENCE
NOW THEREFORE WE do, by these Our Letters Patent, issued in Our name by Our Governor-General of Australia on the advice of Our Executive Council and pursuant to the Constitution of Australia, the Royal Commissions Act 1902-1966 and all other enabling powers, appoint you to be a Commissioner to make inquiry into, and report upon, the following
matters, so far as they are relevant to laws that have been, or could be, made by the Parliament, namely:—
1. All aspects of the production by refining...in Australia of all types o f petroleum, diesel and other fuels for internal combustion and jet engines, derived from any form of liquid or gaseous hydrocarbons, whether such hydrocarbons are
produced in Australia or elsewhere, and all types of residual furnace and heating fuels and other by-products likewise derived.
2. Without limiting the generality of paragraph 1: —
(a) the need, in the public interest, for any changes in the number, location, capacity, technology, and type of refineries in Australia of any such form of liquid or gaseous hydrocarbons, and whether the allocation of the output of such fuels should be rationalized by joint operating or sharing of such refineries;
(b) the need for additional refinery capacity to be located within the Sydney metropolitan area to serve the needs of that area...
3. All matters incidental to any of the abovementioned matters and in relation thereto.
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Annexure "B"
GLOSSARY
AO.O.automotive distillate
alk y la tio n , a refining process to increase quantity and quality of motor spirits by the
joining of aromatics and other molecules of hydrocarbons not normally suitable for motor spirit.
arom atic, a benzine type hydrocarbon molecule containing carbon atoms formed in a
ring.
asphalt, bitumen — a black to brown solid or semi-solid hydrocarbon occurring n atu rally
or obtained from residues in refining of some crudes. It is used for roads and waterproofing.
A .T .K . aviation turbine fuel
atm ospheric d is tilla tio n u n it — cru d e u n it — p rim a ry process u nit, a refinery process unit
for the separation of petroleum fractions in crude oil by heating at atmospheric pressure. See Annexure "E".
atm ospheric residue — atm ospheric bottom s, a heavy liquid left after atmospheric
distillation.
a u to m o tiv e distillate — a u to m o tiv e diesel fu e l — A .D .O . the fuel used generally for
non-stationary diesel engines.
aviation gasoline — avgas, fuel used for aviation piston type engines requiring a high
octane number and based on the gasoline fraction.
aviatio n tu rb in e fu e l — a v iatio n tu rb in e kerosene — a v tu r — j e t fu e l — A .J .K . the fuel
used for jet and turbo-prop engines. It is basically a kerosene fraction.
avtur. aviation turbine fuel
b a rre l Bbl - common measure of volume in the petroleum industry; 34.9726 imperial
gallons or 42 US gallons.
barrels p e r calendar day. b/d - b.p.d. - b.p.c.d. - a daily operating capacity of a refinery
unit averaged over the year after accounting for planned and unplanned m aintenance,
barrels p e r stream day. b.p.s.d. — b/sd — the amount of crude oil a unit can process
during a day when in continuous o peratio n,
b itu m e n, asphalt
b la ck p ro d u cts — b la c k e n d products, the heavy fractions including fuel oil and heavy
diesel fuels.
blast furnace, plant for the manufacture of iron.
bottom s, residue from the distillation process.
b u n k e r fuel, fuel oil used for ships.
butane, gaseous hydrocarbon with two carbon atoms in each molecule. Sold as LPG.
b uta ne d eas p h a ltin g u n it, a solvent extraction process used to separate asphalt or very
heavy oil fractions from lubricating and some residual oils by dissolving the oils in butane.
C5. pentane — liquid hydrocarbon under atmospheric conditions occurring as condensate in "wet" natural gas and also in crude oil. Each molecule contains five carbon atoms.
C7. heptanes — liquid under atmospheric conditions occurring as a condensate in "wet" natural gas and also in crude oil. Each molecule contains seven carbon atoms.
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capital charge, the return on invested capital to account for loans, dividends, depreciation and taxation.
catalyst, a component in a chemical reaction such as cracking, which brings about or
changes the rate of the reaction without itself being changed.
c a ta ly tic c ra c k e r — c a t cracker, a refinery unit for the cracking process using a catalyst
which assists the decomposition of the heavier oils to produce the lighter fractions for the production of products such as motor spirit.
c a ta ly tic re form e r, a reforming process unit utilizing a catalyst.
coke, petroleum coke — solid carbon residue left in the coking or thermal cracking
process. Contains very little hydrogen, and with processing produces almost pure carbon for electrodes and motor brushes.
coking, thermal cracking resulting in the production of lighter fractions and petroleum
coke from residue oils. See Annexure "E ".
condensate, liquids from "wet" natural gas containing pentanes and heavier fractions.
cracking, decomposition of hydrocarbon molecules by heating, into smaller molecules to
give the lighter fractions such as motor spirit from heavier oil. It includes thermal cracking, catalytic cracking and coking. See Annexure "E ".
crude oil. the many and varied naturally occurring petroleum liquids which are the feed
for refineries to produce all petroleum products.
crude u n it — atm ospheric d is tillatio n u n it — p rim a ry process unit, the refinery unit used
for the initial separation of the crude oil into its various fractions by heating at atmospheric pressure. See Annexure "E".
de-asphalting. the extraction of asphalt or very heavy oil fractions contained in the
residue of some crude oils. Used for asphalt production or refining of lubricants.
debottlenecking, modifications or additions to a refinery to allow all units to be used to
their full capacity.
d en itrog en ization . extraction of nitrogen based compounds mainly from the heavier gas
oils for purification purposes for further refining.
desalting, removal of mineral salts, mostly chloride, from crude oils.
desulphurization, reduction of the sulphur content in petroleum products.
diesel fuel, industrial diesel fuel
discounted cash flo w , the difference between the cash outlays and the cash proceeds of
an investment project after applying an appropriate interest rate (discount factor) to these flows to take account of differences in the time value of money.
discounted cash flo w ra te o f return, the rate of interest (discount factor) which equates
the present value of the cash outlays and the present value of the cash proceeds of an investment project.
distillate, product of a distillation unit often referring to the fraction including
automotive distillate and industrial diesel fuel. Sometimes refers only to automotive distillate.
distillation, process used to separate compounds of oils, each having a different boiling
point, by vapourizing and condensing in a distillation unit.
dw t. dead-weight tons, dead-weight tonnage: the total weight in tons of fuel, water, stores
and cargo that a ship can carry.
elem ental sulphur, sulphur of a very high purity which can be produced from the
desulphurization processes and sold as a by-product.
ethane, simple gaseous hydrocarbon with two carbon atoms. It is a minor component of
natural gas.
ethylene, a derivative of ethane from natural gas or refinery gases; it is an important
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petro-chemical feedstock.
F .C .C . fluidized-bed catalytic cracker.
feedstock, material to be processed such as crude oil to the crude distillation unit.
fractions, the various components of crude oil such as gasoline, fraction, kerosene
fraction, gas oil fraction, fuel oil and residue.
fu e l oil. a range of fuels which include heavy residual oils from the distillation units; used
for producing steam, general heating purposes and as a fuel in large marine diesel engines.
furnace fuel, fuel oil
gas oil. fraction from the distillation unit with a boiling point between that of kerosene
and light lubricating oil. It is normally used as a feedstock for other units or for distillate and diesel fuels.
gas p la n t, a refinery unit for the production of gases such as LPG.
gasoline, fraction from the distillation unit primarily used for the production of motor
spirit. The term is sometimes used for motor spirit.
grass roots re fin ery, new refinery.
heating oil. a kerosene fraction used primarily for domestic heating.
hectare, metric measure of area 1,000 square metres or 2.47 acres.
H .C .C . hydrocracker
h yd ro carb on , the general name for substances containing mainly carbon or hydrogen as
occurring in petroleum gases and oils.
hydrocracking, cracking with the use of considerable amounts of hydrogen to produce
the lighter fractions such as motor spirit from heavier oils.
hyd ro desu lp h urizatio n , reduction of the sulphur content in petroleum products using
hydrogen. See Annexure "E".
h yd ro skim m ing re fin ery, a simple refinery relying mainly on the distillation process to
produce its products with the minimum secondary processes. It does not use cracking which converts heavy oils to the lighter products such as motor spirit. See 16.1.
h yd ro treatin g , treatment of petroleum products by hydrogen mainly for the reduction of
sulphur.
ind u strial diesel fu e l — in d u strial diesel o il. fuel generally used for stationary diesel
engines and ships bunkers.
isom erization, a reaction which alters the arrangements of the atoms in the molecules
without adding or removing anything from the original material. It is used to increase octane number and to supply feedstock for alkylation.
j e t fuel, aviation turbine fuel
kerosene, the fraction from the distillation unit with the boiling point between gasolines
and gas oils. It is used mainly as a feedstock for secondary units and th e production of
aviation turbine fuel, lighting and power kerosene.
kilo m etre, metric linear measure; 1,000 metres or 0.62 miles.
lead, additive to motor spirit to raise the octane number added in th e form of tetraethyl
lead TEL or tetramethyl lead TML.
lead blending, the refinery process of adding lead to motor spirit in order to raise the
octane number to that specified for premium or regular grade.
lighting kerosene, kerosene used for lighting.
liq u e fie d p etro leu m gas — LPG . mixture of propane and butane gas maintained as a liquid
under pressure. Occurs naturally in natural gas and crude oil and is also produced in
refineries for sale as a heating or automobile fuel.
104
LPG. liquefied petroleum gas
L R I. tanker size in the range 45,000 dwt to 80,000 dwt.
lubricants, lubricating oils and greases.
m erox treater, a refinery process treating petroleum fuels to change the sulphur content
in a form not detrimental to its use.
m ethanol, methyl alcohol, a derivative of methane which can be obtained from natural
gas or coal and can be used to produce domestic and industrial gases or used directly in spark ignition engines. The conversion of natural gas to methanol is a possible means of shipping.
m o lec u lar w eight, the weight of a molecule compared to the atomic weight of oxygen which is 16.
m o to r s p irit — p e tro l, fuel of the gasoline fraction used for automobiles and other spark ignition engines.
naphtha, saturated ring type hydrocarbons in the low boiling point range used as solvents
or as feedstocks to manufacture motor spirit.
n a tu ral gas. naturally occurring gas used as a fuel for domestic and industrial heating.
Consists mainly of methane which is the lightest and lowest boiling point member of the simple hydrocarbons. Heavier and higher boiling point members such as ethane, propane, butane and pentane contained in decreasing proportions. "Wet" natural gas contains the liquids, pentanes etc. other components are nitrogen, carbon dioxide and sometimes hydrogen sulphide.
octane n um ber, the measure of the anti-knock quality of motor spirit based on 100 for
the particular hydrocarbon, iso-octane, and zero for normal heptane. The octane number for a fuel is equal to the volume percentage of iso-octane in a mixture of iso-octane and normal heptane; the mixture having the same anti-knock quality. The two methods used, motor method and research method, give different numbers.
o uttu rn , total production from a refinery.
p araffin , refers to the open chain type molecules of hydrocarbon of which methane is the simplest.
p etro l, motor spirit.
p etro -ch em ic al com plex, chemical manufacturing plant based on feedstock supplied from
an oil refinery possibly included in the complex.
p etro leu m fuels, those petroleum products used as fuels, i.e. LPG, aviation gasoline,
motor spirit, power kerosene, aviation turbine fuel, lighting kerosene, heating oil, automotive distillate, industrial diesel fuel, fuel oil and refinery fuel.
p etro leu m products, all those products derived from crude oil, including petroleum fuels,
lubricants, solvents, bitumen and feedstock for gas making and petro chemical plants.
p o lym eriza tio n , a process which increases the quality and quantity of motor spirit by the
combination of two or more molecules to form a molecule of higher molecular weight. The polymerization of gases from the cracking process can be used to produce motor spirit.
p o w e r kerosene, kerosene used as a fuel, mainly for tractors.
p rem iu m , supergrade — motor spirit with anti-knocking quality with octane number at
present 98.
p rim a ry fuel, natural source of fuel and power such as coal, oil, gas, wood and
hydro-electricity.
p rim a ry processing unit, atmospheric distillation unit — crude unit
p ro pa ne gaseous hydrocarbon with three atoms of carbon in each molecule. Sold as LPG.
re fin e ry fuel, the fuel, gaseous liquid or solid used to heat and power refinery units.
105
reform ing , a thermal or catalytic reforming process which is a breakdown and build-up
process for making a premium motor spirit blending stock or feedstock for other units. It increases the octane number particularly of naphtha. See Annexure "E".
residua! fuel, the residue o f th e distillation process w hich can be used as fuel.
residue, the liquid left after distillation.
saturation o f m olecules, a process which causes all the available bonds with the carbon
atoms to be filled.
secondary capacity, refinery units used to process the distillation fractions from the
atmospheric distillation unit such as catalytic cracking and reforming.
shale, a rock of silt or clay containing an oil yielding organic material.
solvent, petroleum products manufactured during refinery operations or from refinery
products. They are used directly in industry or for further chemical processing. Uses include paints, paint removers, cleaning processes, printing inks, polishes and pharmaceuticals.
so lvent de-aspha/ting. a de-asphalting process used to separate asphalt or very heavy
residues from lubricating and some residual oils by dissolving the oils in a solvent such as propane and butane. See Annexure "E".
sour crude, crude oil containing a high proportion of sulphur.
supergrade, premium grade
th erm al cracking, cracking process using heat and possibly pressure.
tw o -p o rt discharging, transportation of crude to two ports on the same trip, e.g. a
V.L.C.C. tanker unloading 100,000 tons at Botany Bay and then 100,000 tons at Westernport.
vacuum d istillation , distillation into various fractions at pressure below atmosphere using
the residue from the atmospheric distillation unit as feedstock.
vacuum residue, the heavy liquid remaining after vacuum distillation. See Annexure "E".
V .L .C .C . very large crude carriers; tankers of 200,000 dwt and above.
v o latility, a measure of the tendency to evaporate. Used for specifications of fuels such as
motor spirit.
w hite p ro d u cts — w h ite e n d products, the products derived fro m the gasoline and
kerosene fractions such as motor spirit, aviation turbine fuel and lighter distillate fuels.
106
Annexure "C"
CONSUMPTION OF PETROLEUM PRODUCTS IN AUSTRALIA FOR THE YEAR ENDED 30 JUNE 1974
Î00 Barrels
Percentage I ncrease Over Previous Year
Weighted Average Annual Increase Over 5 Years to 30 June 1974
Liquified Petroleum Gas 4,455 + 5.9
Aviation Gasoline 664 +11.4
Motor Spirit 77,248 + 6.6 + 5.7
Power Kerosene 375 - 7.4
Aviation Turbine Fuel 10,385 +14.2 + 9.7
Lighting Kerosene 1,580 +10.6
Heating Oil Automotive Distillate
4,889 +15.8 +14.9
Inland 28,181 +10.2
Bunkers 772 + 6.5
Total 28,953 +10.1 + 8.5
Industrial Diesel Fuel Inland 7,332 +14.0
Bunkers 2,732 +29.1
Total 10,064 +17.7 + 4.5
Fuel Oil (a) Inland 35,556 + 7.9 + 2.3
Bunkers 14,950 + 14.5 + 2.9
Total 50,506 + 9.8 + 2.5
Solvents (estimated) 1,872 +16.3
Lubricants 2,980 +11.9
Bitumen 2,940 + 0.2
Other Products (a) 8,347 + 7.2
Total Market Sales 205,258 + 9.0 + 5.5
Refinery Fuel Liquid 5,046 -
Gas and Coke (f.o.e.) 12,295 + 9.4
Total Consumption (b) 222,599 + 8.8 + 5.2
(a)
(b) (f.o .e .)
Excludes re fin e ry fuels.
Excludes re fin e ry losses o r gains.
= fu e l o il equivalent.
107
Annexure "D "
FORECAST CONSUMPTION OF PETROLEUM PRODUCTS - AUSTRALIA
Î00 Barrels
NON FUELS FUELS INCLUDING REFINERY FUEL
Year
Fuels Branch August 1971
Fuels Branch August 1973
Industry High November 1974 Industry Low November 1974
1974/75 13,980 227,700 225,675 222,809
1975/76 13,690 239,800 238,710 221,340
1976/77 15,620 248,230 247,353 222,729
1977/78 17,800 268,450 259,172 223,619
1978/79 19,200 284,990 274,259 223,693
1979/80 20,580 282,290 287,257 224,270
1980/81 21,600 292,050 301,011 239,794
1981/82 22,590 308,470 305,260 243,633
1982/83 23,640 325,610 317,708 248,111
1983/84 24,750 344,050 333,198 253,226
1984/85 25,950 368,250 349,465 258,964
Notes:
(1 ) Fuels Branch forecast is th a t given in th e p u b lic a tio n ;
"F orecast C o n sum ption o f P rim a ry Fuels 1 9 7 2 /7 3 to 1 9 8 4 /8 5 Fuels Branch,
D e p a rtm e n t o f M ine rals a n d E nergy, A u g u s t 1 9 7 3 ."
(2 ) In d u s try forecasts are based on in fo rm a tio n su p plied to Com m ission b y various o il
com panies, N o v e m b e r 1974.
108
Annexure "E "
BRIEF DESCRIPTION OF REFINERY PROCESS UNITS
CRUDE DISTILLATION
Crude oil distillation is the term which is applied to the primary separation of crude oil into different boiling ranges. Crude oil contains hydrocarbons with boiling ranges as low as 5 0 °F and as high as 1500°F. In the
atmospheric distillation column heat is supplied to the crude oil with the result that the low boiling hydrocarbons travel up the column and are removed as a product from the top of the column. Hydrocarbons with successively higher boiling points are removed from the side of the column and include kerosenes, jet fuels, diesel fuel in increasing order of boiling
points. From the bottom of the column, so called atmospheric residue with an initial boiling point of about 650°F is removed.
VACUUM DISTILLATION
The product from the bottom o f the atmospheric distillation is used as the feed to the vacuum distillation column. The vacuum column operates under a vacuum because hydrocarbons are sensitive to damage if the temperature employed for separation is too high. By imposing a vacuum on the column,
it is possible to distil heavier fractions from crude oil at lower temperatures. From the top of the vacuum unit the product is heavy gas oil which is suitable as a catalytic cracking unit, or hydrocracking unit feed for the production of additional motor spirit, and from the bottom of the column the product is a vacuum residue which is used for fuel oil blending or
asphalt manufacturing or refinery fuel depending on its quality.
REFORMING
Reforming is a process that is carried out at high temperature and moderate pressure in the presence of a platinum type catalyst for the purpose of increasing the octane number of naphtha from the crude unit. The potential for the improvement of octane number in a reformer depends on the composition of the naphtha in particular, the relative amounts of the
paraffin, naphthene and aromatic components. Octane numbers of 103 are readily achieved with modern reformer technology. A by-product from the reforming operation is hydrogen which becomes valuable in desulphurization of other hydrocarbon fractions.
CRACKING
The term cracking is used to describe the decomposition of hydrocarbons such as petroleum fractions, by the action of heat; thermal cracking or by heat in the presence of suitable catalysts; catalytic cracking and the relatively
109
new process o f hydrocracking which uses large quantities o f hydrogen as well. The products resulting from the process are of a lower molecular weight than the feedstock material and, therefore, convert heavy gas oils to motor spirit and lighter materials.
Catalytic cracking typically converts 85% o f the feed to gasoline type fractions leaving 15% as a light gas oil, coke and other fuel. Catalytic cracking is an important conversion process widely used in refineries that have high motor spirit demands.
Hydrocracking operates at high temperature and high pressure with design flexibility to convert heavy gas oils to r- fa) Light gas oils; (b) Jet fuels;
(c) Motor spirit, depending on the operating and design conditions. Hydrocrackers consume large quantities of hydrogen because the process involves both desulphurization, denitrogenization and saturation of the molecules.
ALKYLATIO N , ISOMERIZATION, POLYMERIZATION
These processes are all for the purpose of producing high octane components from appropriate gaseous (i.e. C6 and lighter) materials which were in turn either present in the crude oil to begin with or were produced during reforming, catalytic cracking or hydrocracking.
HYDRODESULPHURIZATION '
This process is used to remove sulphur compounds from crude oil fractions. The processes can be designed to accommodate virtually any boiling range from very light naphtha to heavy residues. Generally, the lighter the feedstock to the hydrodesulphurization process, the more successful w ill be the result. Catalysts are used in the presence of hydrogen with pressure and temperature varying according to the amount o f sulphur to be removed and the boiling range o f the feed.
SOLVENT DE ASPHALTING
Solvent de asphalting describes a process which operates on the heavy residues from the vacuum distillation unit with the purpose of removing very heavy gas oil fractions and leaving very heavy residue fractions. The heavy gas oil fractions so removed are normally treated by hydrodesulphurization and then converted in catalytic cracking units or hydrocracking units.
COKING
The process of coking is essentially designed for the thermal destruction of vacuum residues or solvent de asphalting residues. Using this process, it is possible virtually to eliminate fuel oil from the refinery and produce
110
additional quantities of gasoline and distillate fractions. The resulting coke is a product of some industrial importance which depends on the amount of sulphur in the coke. Two types of cokers are widely used, one is called delayed coking and the other is fluid coking. Recent advances promise
additional control over the amount o f sulphur in the coke.
SULPHUR RECOVERY
Sulphur plants receive gas that is rich in hydrogen sulphide from various process units and convert this to elemental sulphur in liquid or solid form. Sulphur recovery units are included in most modern refinery designs as they are one o f the principal processes employed to avoid air pollution from sulphur compounds.
Many different combinations o f the foregoing processes are possible in modern refinery planning and design. The mission of the refinery determines which processes are most economical for selection at any given location.
111
TWO-PORT DISCHARGING - AVERAGE COSTS & SAVINGS
RAS TA N U R A TO BO TAN Y BAY, WESTERNPORT & PORT STANVAC
YEAR 1980
Annexure "F "
CRUDE O IL TRANSPORT COSTS
TABLE I
Low High
Estimate Estimate
$A/Barrel
Ras Tanura to Botany Bay 220,000 dwt tanker 0.73 1.22
Ras Tanura to Botany Bay to Westernport 220,000 dwt tanker Cost at Botany Bay 0.73 1.22
Cost at Westernport 0.72 1.21
Ras Tanura to Westernport 100,000 dwt tanker 0.95 1.63
Freight savings at Westernport 0.23 0.42
Ras Tanura to Botany Bay to Port Stanvac 220,000 dwt tanker Cost at Botany Bay 0.73 1.22
Cost at Port Stanvac 0.79 1.34
Ras Tanura to Port Stanvac 100,000 dwt tanker 0.95 1.60
Freight savings at Port Stanvac 0.16 0.26
Notes:
W harfage is included.
L o w estim ate based on no re tu rn on capital.
H igh estim ate based on fu ll econom ic return.
112
Annexure "F "
CRUDE O IL TRANSPORT COSTS
TABLE II
RAS TA N U R A TO BO TANY BAY - 220,000 dwt TANKERS
YEAR 1980
Cost per Voyage $A 1,000
Capital charges on ship 778.5
Fixed running costs 422.6
Voyage costs (Port charges plus fuel costs) 579.7
Botany Bay Wharfage 161.0
Total Cost 1,941.8
Tons delivered per voyage
Delivered cost
Delivered cost less capital charges
211,000 tons
$1.22 per barrel
$0.73 per barrel
Notes:
1. Tons d elivered p e r voyage allow s fo r the need to carry stores a n d bunkers.
2. Crude o il weight is based on 7 .5 barrels p e r ton.
3. The d elivered cost is based on a n e w ship operating in 1 9 8 0 an d is considered the high
estimate.
4. The d elivered cost less capita! charges is considered the lo w estimate.
113
Annexure"F"
CRUDE O IL TRANSPORT COSTS
TABLE III
RAS TAIMURA TO BOTANY BAY TO WESTERNPORT
& PORT STANVAC
220,000 dwt TANKERS - TWO-PORT DISCHARGE
YEAR 1980
Cost per Voyage
Capital charges in ship
Fixed running costs
Voyage costs (port charges in three ports plus fuel cost)
Botany Bay wharfage
Second port wharfage
Total cost
Tons delivered to Botany Bay
Tons delivered to second port
Cost due for Botany Bay delivery $1.22 per barrel (Table II)
Cost due for second port delivery
Delivered cost at second port $ per Barrel
Delivered cost to second port less capital charges $ per Barrel
Westernport $A 1,000
Port Stanvac $A 1,000
782.20 823.85
424.60 445.88
601.94 611.81
85.45 85.45
40.00 62.60
1,934.19 2,029.59
111,700 tons
100,000 tons
Westernport Port Stanvac
1,024.92 1,024.92
909.27 1,004.67
1.21 1.34
0.72 0.79
114
Annexure "F "
RAS T A N U R A TO WESTERNPORT & PORT STANVAC
100,000 dwt TAN KER S DIRECT
YEAR 1980
CRUDE O IL TRANSPORT COSTS
TABLE IV
Cost Per Voyage
Westernport $ A 1,000
Port Stanvac $A1,000
Capital charges on ship 4 8 3 .0 0 4 6 4 .9 2
Fixed running costs 269.91 259.81
Voyage costs (port charges and fuel) 3 6 7 .3 0 3 5 3 .9 7
Wharfage 3 7 .8 4 5 9 .3 4
Total cost 1 ,158.0 5 1 ,138.0 4
Westernport Port Stanvac
Tons delivered per voyage tons 94,600 94,800
$ Per Barrel
Delivered cost 1.63 1.60
Delivered cost less capital charges 0.95 0.95
115
Annexure "G "
(Reprint o f Exhibit 191)
ROYAL COMMISSION ON PETROLEUM
JOINT REFINERY FEASIBILITY STUDIES - TABS
The TABS Working Group comprised:—
Total Australia Limited
Ampol Petroleum Limited
Hematite Petroleum Proprietary Limited
H.C. Sleigh Limited
116
PRJ/jf FA/CS/L551.
26th September, 1974.
The Secretary, Royal Commission On Petroleum, G.P.O. Box 4377, SYDNEY. N.S.W. 2001.
Dear Sir,
We refer to your letter of the 20th September, 1974 concerning the summary of the TABS Working Group, and confirm that the statement attached is from this Company’s point of view an agreed statement of the Working Group.
Yours faithfully, TOTAL Australia Limited
P.R.Johnson, S E C R E TA R Y .
117
25th September, 1974.
The Secretary, Royal Commission on Petroleum, G.P.O. Box 4377, SYDNEY. N.S.W. 2001.
A ttention: Mr. Ian Bimns
Dear Sir:
Your letter of the 20th September requests confirmation that the Joint Refinery Feasibility Report is an agreed statement of the working group to which our Company Officers contributed.
We confirm that the Joint Refinery Feasibility Study Report is in accord with the results of the group’s work. On this basis the Commission has Ampol’s permission to use this report as it sees fit.
Without limiting the approval given above, we would nevertheless wish to draw the attention of the counsel assisting the Commission to the fact that, in reaching a consensus, it was found necessary to omit certain significant statements of work in fact covered by the group to prevent the withdrawal from consensus by one of the four parties. In our view this accommodation unnecessarily dilutes the findings related to feasibility as determined by the working members of the group.
Yours sincerely,
A.C. Nommensen, Manager Economic Planning, for AMPOL PETROLEUM LIMITED
ACN: kk
118
24th September, 1974.
The Secretary, Royal Commission on Petroleum, Box 4377, SYDNEY. N.S.W. 2001
Dear Sir,
We have perused the document attached to Mr. Binns’ letter of 20th September, and confirm that it is in our opinion a valid record of the workings of the TABS Working Group.
We would also notify the Commission at this stage of our intention to make a final address in accordance with the procedures outlined by Counsel Assisting.
Yours faithfully,
R.J. Foster Manager, Planning & Development BMP 03 & Gas Division
119
24th September, 1974.
For the Attention o f Mr. I.M. Binns
The Secretary, Royal Commission on Petroleum, G.P.O. Box 4377, SYDNEY. N.S.W. 2001
Dear Sir,
Thank you for your letter of the 20th September, setting out the amendments to the TABS report which were requested by BHP and Sleigh and conveyed to Mr. Ken Brown by telephone on the 19th September.
Since those amendments have been incorporated in the statement attached to your letter under reply, I confirm that so far as Sleigh is concerned the statement is now satisfactory.
Yours sincerely,
R.S. Clark, Manager, Petroleum - Supply.
RSC/ljp
c.c. M r. P. O ’Callaghan
M r. E.G. Pask
120
TABLE OF CONTENTS
Summary
Discussion
Attachment 1. TABS Case Studies
Attachment 2. TABS Case Studies — Demand Patterns
Attachment 3. Comparison of Average Product Costs with Import Parity Prices of Products.
Attachment 3(a) TABS Refinery Study. Import Parity Prices.
Attachment 4. Operating Costs and Investments for Various Case Studies.
Attachment 4(a) Base Case 1977 costs @ 40% Capital Charge
Attachment 5. Notes on Case Studies
Attachment 5(a) Cost variations for Various Assumptions o f Demand and Sulphur Level.
Figure 1. Product Cost Versus % Capital Charge for 1974 and
1977 Base Case Costs.
1 2 1
ROYAL COMMISSION ON PETROLEUM
JOINT REFINERY FEASIBILITY STUDIES - TABS
SUMMARY
The TABS Working Group has conducted a number of studies which are reported on herein to examine the feasibility of establishing a rationalised refinery (Terms of Reference 2(a) ) in the Sydney area to meet the combined product requirements o f Total, Ampol, B.H.P. and Sleigh. Such a rationalised refining installation was sized to produce the products required for all the parties concerned and is one o f the alternatives to establishing separate refining facilities in Newcastle and in Sydney. The TABS Working Group determined that such a rationalised refinery facility is feasible on the basis o f the approach taken by the Working Group and that the product demands for all parties can be met from a relatively straightforward refining installation.
This report makes no effort to deal with the comparison between a rationalised refinery serving all four members located at Kurnell versus the individual propositions now in evidence before the Commission. However the Commission does intend to deal with the subject but not within the context of the TABS Working Group. The conclusion can be drawn that a rationalised refinery in Sydney can be a viable proposition by comparison with import parity prices for crude oil and product at a DCF of about 14%.
The design capacity o f the refinery is approximately 135,000 B/D on a mixture of half Gippsland and half Light Arabian crude oil and the total estimated cost in 1977 is in the range o f $190 million excluding land acquisition cost, and incremental working capital.
DISCUSSION
The approach taken by the TABS Working Group was to establish a design year, develop detail data in connection with a site in the Kurnell area and employ linear programming techniques to evaluate a variety of refining options and plant configurations.
The data assumes a 1982 design year with a 1977 construction year. Product demands are those which were submitted by the individual members of TABS and crude oil availabilities were assumed to be Bass Strait crude (under allocation formula) and Light Arabian crude. The Light Arabian crude is a reference crude as opposed to being the specific crude that might be selected by the TABS Group. Economic consideration was given to cost escalations, both in respect to investments and operating costs, as well as to economies related to future development potential o f Botany Bay as a VLCC port.
In addition to studies around a base case situation, seven (7) other variations were considered on the base case. These variations are shown in
1 2 2
Attachment 1 which in turn is related to Attachment 2, setting forth the demand pattern agreed to by the TABS Working Group. In addition to 1977 cost escalations similar studies were prepared based on best estimates of 1974 cost as a means of relating current economic conditions to future
expectations. Therefore, 1974 cases displayed in this report presume that this would be the condition o f a refinery o f this size if it were in operation today and by comparison the 1977 cases reflect increases in cost that can be expected between now and 1977.
Product import parity prices are shown to indicate how future costs relate to current prices. Therefore, 1974 cases may be used as a benchmark in comparing these values against 1974 product import prices, whereas the 1977 cases may be used to illustrate the effects of escalation that w ill be recovered in product prices at that time.
The method employed followed an agreed technique of cost minimisation which, in effect, can lead to determining the cost of producing products under the conditions o f this particular study. We have, therefore, displayed in Figure 1 and Attachment 3 the average cost o f products as determined by the cases and also illustrated for purposes o f comparison, the current product price postings from Bandar Mah-Shahr and Singapore.
All of the cases shown in Attachment 1 were evaluated on a consistent basis of return on investment. Three levels of capital charges were applied to capital costs in all cases.The capital charges assumed were 20%, 30% and 40%, expressed as a proportion of total capital cost excluding land and working capital. This capital charge provides funds to cover tax, depreciation and profit components. A 40% capital charge corresponds to about an
18%-20% DCF rate of return. However, not all cases are attached hereto, only those which were considered relevant for this display. More detailed return on investment studies may be undertaken by each of the TABS working member companies because the approach agreed for this purpose was to assume that the investments were made in one year and that the
incomes were uniform, which of course w ill not in fact be the case for a refinery which begins operation in 1977 at diminished throughput and reaches capacity in 1982. Also it was assumed that working capital would be omitted.
Attachments 4 and 4(a) display the operating cost and the investments that were determined from the case studies for each of the cases shown in Attachment 1.
Other comparisons of relative economics are described in Attachment 5 and provided economic guidance relative to increasing and decreasing the output from the refinery for various combinations of products. Additional work would be appropriate for the individual members of TABS to further evaluate these alternatives.
For purposes of this analysis, and this analysis only, several assumptions have been made as to crude oil prices. Light Arabian crude oil has been valued at a specific June 1974 F.O.B. third party sales price in the
123
Persian Gulf. Freight to Botany Bay was then added assuming 225,000 D.W.T. tankers at World scale 78.9 plus appropriate charges fo r insurance, wharfage and losses. Gippsland crude was then valued in the refinery model in relation to the im port parity value of Light Arabian. The resulting Gippsland crude value reflects its value in this particular refinery producing the assumed product slates. It does not necessarily reflect the value of Gippsland crude in other refineries, nor is it intended to be a prediction as to what the price of Gippsland crude w ill or should be in the future.
The availability o f Gippsland crude used in this study is based on evidence before the Commission relative to its production level. The allocation available to the TABS Group for 1982, assumes the continuance of present Government allocation procedures and each company's Category A sales of product. In the case of B.H.P. a percentage of fuel oil sales other than bunkers were deemed to be Category A; this percentage was based on the industry average.
Several problem areas have become apparent during the course of this work. Firstly, the anticipated reduction in the maximum amount o f lead in gasoline w ill impose a severe economic penalty on a refinery of this nature and probably on other refineries in Australia. Secondly, the manufacture of low sulphur fuel oil (0.5%S sulphur) in this refinery configuration compels that substantial quantities o f Gippsland fractions be employed for blending with higher sulphur Arabian fractions, this being the least costly manner of meeting this requirement even with Gippsland priced at its import parity equivalent to Arabian Light. Thirdly, the high proportion o f distillate demand necessitates more extensive use of hydrocracking in combination with catcracking than is currently prevalent in Australia. Fourthly, gasoline volatility specifications would appear to be overly restrictive with a mixture of Bass Strait and Arabian Light unless there are concurrent naphtha sales or use as refinery fuel to relieve this problem. Fifthly, and related to the naphtha use, producing LPG as a refinery product tends to be restricted in the light of refining costs and the legal requirement to burn no more than 1% sulphur in the refinery fuel system.
Much of the basic data used in this study was taken from the individual members of TABS and every effort has been made to verify its accuracy; furthermore, we do not feel that there are any significant unmeasured effects resulting from data omissions. Nevertheless, it is desirable for the individual members to further review yield and operating cost information as time permits in the future.
The Kurnell location was assumed as a refinery site. With respect to environmental questions, these were not specifically evaluated. Appropriate investments for both air and water pollution control were included in the economics predicated on Kurnell.
Details of computer inputs, solutions and other matters pertaining to this study are available to the members of TABS but are o f a confidential nature in other respects.
124
Attachment 1
TABS CASE STUDIES
Base Case - agreed aggregate demands of TABS participants.
Case 1 — As for base case but with increased BMP West Australian automotive distillate demands and South Australian and West Australian Fuel Oil demands.
Case 2 — As for base case but excluding Queensland demands of Sleigh and Total.
Case 3 — As for case 1 but excluding Queensland demands of
Sleigh and Total.
Case 4 — As for base case but with BMP Newcastle Fuel Oil raised from 0.5%S to 1.0%S.
Case 5 — As for case 1 but with BHP Newcastle Fuel Oil raised
from 0.5%S to 1.0%S.
Case 6 — As for case 2 but with BHP Newcastle Fuel Oil raised
from 0.5%S to 1.0%S.
Case 7 — As for case 3 but with BHP Newcastle Fuel Oil raised
from 0.5%S to 1.0%S.
For the base case, studies were made using 1974 and 1977 costs and at three levels of capital charge rate, i.e. 20%, 30%, and 40% — for each level of cost. Cases 1 to 7, studies were made using 1977 costs and a 40% capital charge
rate.
125
Attachment 2
TABS CASE STUDIES - DEMAND PATTERNS BARRELS PER CALENDAR DAY YEAR 1982
Products Base Case 1 2 3 4 5
Propane 1,200 1,200 1,200 1,200 1,200 1,200
Butane 1,652 1,652 1,652 1,652 1,652 1,652
Naphtha 1,291 1,291 1,291 1,291 1,291 1,291
Premium M.S. 37,617 37,617 33,322 33,322 37,617 37,617
Regular M.S. 12,519 12,519 11,088 11,088 12,519 12,519
Solvents 380 380 380 380 380 380
Power Kerosene 41 41 29 29 41 41
Lighting Kerosene 493 493 433 433 493 493
A vtur 9,375 9,375 8,206 8,206 9,375 9,375
Heating Oil 2,508 2,508 2,448 2,448 2,508 2,508
Distillate 20,665 24,410 18,311 22,056 20,665 24,410
Diesel Fuel 4,412 4,412 4,274 4,274 4,412 4,412
Fuel O il — 0.5%S 16,804 24,686 16,654 24,536 11,429 19,311
1,0%S 6,294 6,294 6,013 6,013 11,669 11,669
3.5%S 7,324 7,324 7,254 7,254 7,324 7,324
Asphalt 1,805 1,805 1,805 1,805 1,805 1,805
6
1,200 1,652 I , 291
33,322 11,088 380 29
433 8,206 2,448 18,311
4,274 I I , 279
11,388 7,254 1,805
7
1,200 I , 652
1,291 33,322 11,088 380
29
433
8,206 2,448 22,056 4,274
19,161 I I , 388
7,254 1,805
Total 124,380 136,007 114,360 125,987 124,380 136,007 114,360 125,987
Attachment 3
COMPARISON OF AVERAGE PRODUCT COST WITH IMPORT PARITY PRICES OF PRODUCTS (1) $/BBL
Advantages fo r
1974
Base Case
P roduct Cost Im p o rt Parity P roduct Cost Im p o rt Parity
Capital 20 10.009 10.477 0.468 _
Charge % 30 10.368 10.477 0.109 —
40
1977
Base Case
Capital 20
Charge % 30 40
10.722
10.431 (2) 10.900 11.395
10.477 0.245
(1) Sec. A ttachm ent 3(a) fo r Product Im port Parity Prices.
(2) Product Costs in 1977 reflect anticipated investment cost increases o f 46.0% over 1974 investment costs and operating cost increases o f 32-42%. Hence the im plied annual in fla tio n rate is between 8% and 10% whereas the current Australian in fla tio n rate is approxim ately 15.6%, (OECD Economic Report. Sept. 1974). Recent OPEC actions on prices reflect an increase in Persian G ulf costs by producers o f about 3% which if continued w ill result in average product im port parities o f approxim ately 11.723 $/B B L.
127
Attachment 3(a)
TABS REFINERY STUDY
$A/BARREL IMPORT PARITY PRICES
Ex
Singapore
Ex Bandar Mah-Shahr
Average Singapore/ Bandar Mah-Shahr
Premium M otor S pirit 98 Octane 11.733 11.662 11.697
Regular M oto r S p irit 91 Octane 11.008 10.937 10.972
Power Kerosene 11.449 10.377 10.913
Lighting Kerosene 11.449 10.752 11.101
A viation Turbine Fuel 11.425 10.759 11.092
A utom otive Distillate 9.962 9.684 9.823
Industrial Diesel Fuel 9.656 9.565 9.611
Fuel Oil 3.5%S 7.778 7.934 7.856
" " 1.0%S 9.432 9.259 9.346
" " 0.5%S 9.698 9.525 9.612
Freight: General Purpose Vessel 222%
World Scale
Insurance: 0.15% f.o.b. + FR EIG H T
Ocean Losses: White products 0.5% f.o.b. + Freight
Fuel Oil N il
Wharfage: White products $A0.11/Barrel
Fuel Oil $A0.125/Barrel
128
Attachment 4 (Cont'd)
OPERATING COSTS AND INVESTMENTS FOR VARIOUS CASE STUDIES
Base Case Case 1 2 3 4 5 6 7
Capital Charge % 20 30 4 0 4 0 4 0 4 0 4 0 4 0 4 0 4 0
1977 Costs
Investment $ m illio n 205.1
Product Cost $/B bl 10.269
Operating Costs $/B bl <1 2 3 4 ) 1.470 Products Bbl/day 124,380
% Gippsland crude in feed 40.3
Marginal value o f crude $/B bl Gippsland —
Light Arabian —
(1 ) W ith o u t FC C
(2 ) W ith o u t H C C
(3 ) Based on 8 .7 7 $ /B b l fo r G ippsland and 7 .7 6 $ /B b l fo r L t. A ra b ian
(4 ) O p eratin g costs are d e fin ed as th e sum o f all d ire c t and in d ire c t costs, in clu d in g T E L , and ta x , d e p re c ia tio n and p ro fit.
191.7 191.6 208.8
10.757 11.219 11.165
1.863 2.325 2.303
124,380 124,380 135,737
48.4 48.4 44.8
— +.81
.02 - .3 3
177.1 181.7 191.0
11.160 11.065 11.210
2.331 2.169 2.318
114,360 125,720 124,380
43.8 48.4 48.4
- +.79 -
- . 4 9 - - . 3 0
207.1 175.5 180.1
11.145 11.145 11.044
2.285 2.312 2.151
135,737 114,360 125,720
44.8 43.8 48.4
+.81 +.80
— .45 —
B b l = b a rre l
Attachment 4(a)
BASE CASE 1977 COSTS @ 40% CAPITAL CHARGE No LPG Production
W ith o u t Gas Purchases With Gas Purchases
Gippsiand L im ite d O ptimum Optimum
Crude M ix Crude M ix Crude M ix
Gippsiand Bbl/day 65,555 77,810 80,445
Lig h t Arabian Bbl/day 66,125 53,874 45,317
T otal Bbl/day 131,680 131,684 125,763
Natural Gas (f.o.e.) — — 5,949
Total daily costs $/day (D 1,370,448 1,369,233 1,353,322
Product Cost $/Bbl 11.277 11.267 11.136
Operating Cost S/Bbl 2.324 2.212 2.143
Products Bbl/day 121,528 121,528 121,528
Process Units Î 00 Bbl/day
Atm ospheric distillation 131.6 131.6 125.7
Vacuum distilla tio n 24.7 15.8 11.4
Reformer 30.3 28.6 34.0
H ydrodesulphurization 8.9 10.0 10.0
Hydrogen plant — — 5 m illio n SI
Hydrocracker 8.9 4.0 11.7
C atalytic Cracker 11.7 15.2 4.5
A lk y la tio n 1.5 1.6 0.9
Total Investment $ M illion 186.847 178.365 169.189
Direct Operating Costs $ /D ay(2* 47,619 44,112 46,865
f.o .e . = fu e l o il equivalen t Bbl = Barrels
S C F = S tan d ard cubic fe et
Notes: (1) Total daily costs include all operating costs and provision fo r return on investment, i.e. daily revenue to be recovered from product sales.
(2) Excluding lead costs.
A ttachm ent 4(a) indicates the follow ing: —
I. Reducing LPG demand in the TABS refinery tends to lower investment and other costs. The magnitude o f the saving is approxim ately $25,000 per day, i.e. Base Case on Attachm ent 4 versus A ttachm ent 4(a) fo r 2852 barrels/day o f LPG. The production cost o f LPG is lower than fo r other products used in refinery fuel hence refinery fuel is the least costly use fo r
LPG.
II. The value o f Gippsiand crude increased to approxim ately $9.09/barrel when its availability is restricted in Base Case conditions and LPG is not produced. This compares to the cost of Light Arabian of $7.76/barrel.
III. If natural gas were available to the refinery fo r use as refinery fuel, at a price of $0 95 per
thousand standard cubic feet, the effect is to reduce refinery investment and to increase the value o f Gippsiand crude oil relative to Light Arabian. Consequently, w ith Gippsiand availability lim ited to Base Case amounts its value w ould increase to approxim ately $9.00/barrel.
131
Attachment 5
Case studies 1 to 7 in TABS were performed to evaluate three major items of variance to the base case assumptions: —
ITEM 1. Evaluates the cost of including, in the demands, the additional distillate and fuel oil required by B.H.P. for South Australia and Western Australia. The added demand amounted to 3745 barrels per calendar day o f automotive distillate and 7852 barrels per calendar day o f 0.5% sulphur fuel oil. To produce this added demand, additional investment o f $17.1 m illion was required and the cost o f the added product was $10.36 per barrel. As no additional Gippsland crude was made available, this product investment was produced from Arabian Light crude, and the high investment and product cost reflects this. Where the increment could be made from Gippsland only, as in the case where Total and H.C. Sleigh Queensland demands are removed, the cost of B.H.P's added demand is reduced to $9.90 per barrel, with an added investment of $4.6 million.
ITEM 2. Determines the saving in refinery capital, which would result by removing the Queensland demands of H.C. Sleigh and Total from the TABS refinery. The removal o f these requirements reduced the TABS refinery outturn by 10020 barrels per calendar day. These products were principally gasolines and white products, having an average cost o f $11.89 per barrel. This equates to a processing fee of $2.05 per barrel o f crude input for this product mix. Refinery fuel was 9% on crude. The resultant reduction of 11013 barrels per calendar day o f Gippsland crude throughput reduced the investment
by $14.6 million.
ITEM 3. Evaluates the refinery savings associated with relaxing sulphur restrictions on fuel oil from 0.5 to 1.0% sulphur. This saving ranges between $0.20 per barrel to $0.50 per barrel of fuel oil depending upon whether it is manufactured from Gippsland or Arabian crudes.
Note: The advantage in using natural gas as refinery fuel in the TABS refinery:-Preliminary studies indicate that large investment and cost savings will accrue from the use of natural gas fuel in this refinery. The effects will be further quantified by Commission studies not yet completed.
132
Attachment 5(a)
Study Item
Cost Variations for Various Assumptions of Demand & Sulphur Level
Case Comparison
Cost o f Incremental Product M ix $/B bl
Investment Change $ m illio n
Cost of producing B.H.P. Western Case 1 vs Base Case excluding 10.36
Australia & South Australia Total & Sleigh's Queensland
demands 3745 Bbl/calendar demands. Case 3 vs Case 2. 9.90
day automotive distillate and 7852 Bbl/calendar day of 0.5%S fuel oil.
Changes in TABS refinery cost Case 2 vs Base Case 11.89
when Sleigh & Total's Queensland Processing fee equivalent
products requirements are to $2.05/Bbl crude,
excluded (10020 Bbl/calendar day)
Saving in relaxing sulphur level in Base Case demands. 0.2
B.H.P.'s Newcastle fuel oil Base Case plus B.H.P. Western
(5375 Bbl/calendar day) from Australia & South
0.5%S to 1.0%S. Australia demands.
Base Case less Total & Sleigh
0.50
Queensland demands. Base Case plus B.H.P. Western Australia & South Australia less Total & Sleigh Queensland
0.30
demands. 0.50
17.1
4.6
(14.6)
(0.7)
( 1.2 )
( 1.6 )
( 1.6 )
B b l = B a r r e ls ( ) r e d u c t i o n
Figure 1
PRODUCT COST VERSUS % CAPITAL CHARGE
FOR 1974 AND 1977 BASE CASE COSTS
IMPORT PARITY
PRODUCT PRICES
BASE CASE
CAPITAL
CHARGE
BASE CASE
30 —
BASED ON CRUDE O IL
COSTS OF
S8.77/BBL for Gipps.
$7.76/8 8 L for Lt. Ar.
20 —
10 —
PRODUCT COST $/BBL
134
R 74/1204