Fuel Quality versus Price & Com

[johnydep]

Our fuel quality is getting better, but the refineries can't produce enough of the stuff. So they are importing it in at a premium price with high freight charges included; who pays in the end?

I wonder if this is one of the executives idea of foresight; keep the industry demand higher than supply and prices will adjust accordingly.

How many refineries do we have in Australia?

I know of three; BP, Caltex & Mobil. Is this enough competition to make the industry efficient?

Clean fuels driving Caltex
1 January 2006 was an important day for Australia’s petroleum refining industry. From this date the first tranche of the
Australian Fuel Quality Standards Act 2000 came into effect. The Act requires that petrol sold into the Australian market
has a maximum benzene content of 1% (previously 3.5%) and diesel has a maximum sulphur content of 50 ppm
(previously 500 ppm).
These changes to fuel quality standards are important to the profitability of Australian refineries. Australian refineries’
fuel sales are priced according to import parity prices. That is, they are based on regional (usually Singapore) fuel prices
plus the cost of freighting that fuel to the Australian market. However, higher fuel quality standards in Australia than
elsewhere in Asia make sourcing imports more difficult. As such Australian refineries can charge a “quality premium” for
Australian fuel sales.Caltex (CTX) will benefit greatly from higher fuel quality standards and its ability to charge a quality premium. In 2005,
CTX produced 10.1 billion litres of transport fuel. Of this, around 8.6 billion litres was diesel and petrol. If CTX can
charge a quality premium of US$1 per barrel (roughly 0.85 Australian cents per litres) on the petrol and diesel it refines,
it will increase its EBITDA by around $73 million.
However, CTX’s short term prospects are weak. Delays to refinery upgrades have meant that CTX cannot produce
enough fuel at the quality required by the Act. The Commonwealth Government has granted CTX an extension,
enabling it to sell petrol and diesel at modified (less stringent) standards. However, until refinery upgrades are complete
CTX has to import high quality fuel at high prices and export lower quality fuel at lower prices. CTX is also getting hurt
by high freight rates in these import and export activities.
We believe that in order to restore investor confidence, CTX has to (1) complete its refinery upgrades, (2) prove that
higher utilisation at its refineries is possible and (3) illustrate that it is receiving a sustainable quality premium for the
clean fuels it produces.

Stuart Howe
Equities Analyst

Oh well, I had better get used to paying the cost of our refineries mistakes & inefficiencies; this debate has been going on for as long as I can remember and nothing seems to change.