Scott Morrison and Angus Taylor at the Ampol Lytton refinery in Brisbane on Monday (Image: AAP/Darren England)

Investors were quick to pick the winners from the Morrison government’s move to subsidise the continuing operations of two oil refineries: Ampol’s Lytton operation in Brisbane and Viva Energy’s Geelong refinery near Melbourne.

The shares in Ampol and Viva had risen more than 6% by midday Monday, much more than the wider market’s half a per cent rise, reflecting enthusiasm for an aid package that could cost more than $2 billion over the course of the 2020s. The two companies join the long list of Australian businesses subsidised by governments — airlines, farmers, steelmakers, aluminium smelters, defence manufacturers — not to mention the taxpayer-backed deposit insurance scheme for banks.

The handouts to refiners has been deemed essential for energy and national security so that some amount of national oil demand (about 1.1 million barrels a day) be processed here. The two refineries process about 225,000 barrels a day so it’s a small amount of daily demand at the moment.

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Ampol (formerly Caltex Australia) is owned by Australian super funds and small investors. Viva Energy is 45% controlled by Vitol, the world’s biggest commodity trader, but has some Australian investors. The previous owner, Shell, closed its Clyde refinery in Sydney a few years ago, roughly around the time when Caltex decided to close its Kurnell refinery, also in Sydney. BP and Exxon Mobil have or are closing their refineries and the final two — Lytton and Geelong — were on the block and subject to reviews.

In a statement to the ASX on Monday, Ampol said it intended to continue refining at Lytton until at least mid-2027. But it will also be good for shareholders, given the package “improves the quality of Lytton’s earnings profile by significantly reducing earnings volatility and earnings downside risk, which should result in a higher earnings outcome on average. Reduced volatility will improve earnings quality, lower average cost of capital, and enable Ampol to increase its target leverage range to 2.0x-2.5x Adj. Net Debt / EBITDA, in turn supporting incremental growth and/or shareholder returns”.

How does the government plan to ensure that Ampol and Vitol serve the interests of taxpayers not shareholders?

One of the key regulatory powers the Australian Prudential Regulation Authority has in relation to banks is a power to direct them on capital management issues — dividends and buybacks in particular.

In 2020 APRA directed the banks to conserve cash, so dividends were omitted/suspended or slashed. But there seems to be no plans in relation to the two beneficiaries to ensure a minimum capital hold or subject any capital management plans, including dividends, to scrutiny.

Ratings agency Moody’s has already signed off on a rise in Ampol’s allowed leverage for its level of credit rating because of the planned payment of the subsidy. On one reading, the maximum leverage for Ampol could rise by two-thirds to 2.5 times its earnings before interest, tax, depreciation and amortisation from the bottom of the previous range of 1.5 times EBITDA. Even these days, that is a big potential increase in debt.

That approval by Moody’s will allow Ampol to either use less capital for no change in borrowings, or keep capital steady and boost borrowings — maybe to pay a higher dividend or special dividend to shareholders, or a buyback. Without any legislated regulatory powers (the ACCC would be the ideal body to exercise them), taxpayer support will underwrite any increase in dividends from now on or other methods of returning capital to shareholders.

And there are other ways of rewarding owners. Viva’s oil imports are supplied by its big shareholder, the highly secretive global commodity trader Vitol that recently reported a US$3 billion profit for its 350 owner partners. Let’s hope the government gets plenty of transparency about the pricing contracts and financial relationship between Viva and Vitol.

One alternative way to reduce Australia’s potential vulnerability to disruptions to its fuel supply capacity — remembering that Australia also relies on imports of more than 80% of the oil it uses, regardless of whether we refine it here or in more efficient foreign refineries, and that won’t change — would be to encourage demand for electric vehicles. But the policy of climate denialists Scott Morrison and Angus Taylor towards electric vehicles is to mock and deride them as not good enough for Aussie blokes. Because of our lack of climate policies, EV manufacturers prefer to sell their vehicles elsewhere where they’re more competitive.

Lucky there are plenty of subsidies for fossil-fuel companies though.

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Peter Fray
Peter Fray
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