Nesa identified Issues: Strait of Hormuz

1Introduction

The terms of reference are provided at Attachment A. This project arose against a backdrop of threats to closure of the Strait of Hormuz arising from political developments in the Middle East. These developments have coincided with a potential shift in Australia’s imports from crude oil to refined petroleum products because of consideration being given to closure of one and potentially three of Australia’s oil refineries.

The 2011 National Energy Security Assessment (NESA) concluded that the reliability of liquid fuels supply is likely to be high in the medium term, falling to moderate in the longer term. It found that Australia’s current liquid fuels supply security was underpinned by access to well-functioning regional and global petroleum markets. Increasing net imports of crude oil and petroleum products over the past decade has resulted in Australia not always complying with its obligations under International Energy Agency (IEA) treaty obligations. However, the NESA found that this did not constitute a decline in Australia’s liquid fuels supply security because of the depth and resilience of the Asian oil refinery supply chain network.

The 2011 NESA drew on an analysis of a 30-day closure of the Port of Singapore to assess the implications of a supply disruption on the Australian economy. The assessment noted that there could be more severe disruptions than that represented by the closure of Singapore.

The implications of a major disruption to Middle East supplies, and the possibility that up to three oil refineries could close in the near term, justifies a closer examination of the potential impact on liquid fuel security, particularly in the light of the uncertainties that are emerging in relation to shipping through the Strait of Hormuz.

This project is to assess the likely economic impacts of a major physical supply disruption from a temporary blockage of the Strait of Hormuz. The economic impact is assessed for two scenarios: one with seven oil refineries operating in Australia; and one with four oil refineries operating. The refineries to be assumed to have closed are the Shell oil refinery at Clyde in Sydney and the Caltex refineries at Kurnell in Sydney and Lytton in Brisbane. It was also assumed that each oil refinery would be converted to a product import terminal.

The deliverables for the project were:

1. 
   A quantitative assessment of the economic impact of the temporary closure of the Strait of Hormuz assuming that the current seven refineries continue to operate.
   
2. 
   A quantitative assessment of the economic impact of the partial closure of the Strait of Hormuz assuming the Clyde, Lytton and Kurnell refineries are closed and converted to import terminals.
   

the likely duration of any closure taking into account the most likely responses from the international community and actions to address the closure

the likely impact on the global oil market, including the impact of price increases on global and regional supply and demand

policy responses from governments, including collective action by IEA member countries;

the impact on Australian imports of crude oil

the impact on Australian imports of petroleum products, including qualitative discussion on impacts on availability

the economic impact on Australia including:

impact on Australian trading partners

impact on Australian real gross domestic product and real income

impact on Australian domestic retail fuel prices

impact by sector on the Australian economy (e.g. agriculture, mining).

In the course of consultations with the Department in the course of undertaking this project, three key questions arose that ACIL Tasman was asked to consider. These questions were:

whether the scenario posed would result in a physical disruption to Australia’s liquid fuel supply

whether the economic outcomes would be affected by the possible closure of refineries in Australia

how the economic impacts of the posed scenario would differ from the economic impacts of the supply disruption represented by the Singapore disruption.

The report was also to include the following information:

modelling and analysis methodologies, including a description of the modelling tools used

basis of the modelling

description of the reference case

assumptions made

conclusions.

In consultation with the Department and in order to contain project costs, the Department agreed to provide the following information:

1. 
   a profile of the nature of the shock including
   

1. 
   the quantities of crude and product that will be taken off the market
   
2. 
   the duration of the time taken for the market to recover
   
3. 
   the amount and nature of petroleum that might be supplied through pipeline to alleviate the closure of the Strait of Hormuz
   
4. 
   assumptions on IEA cooperative action including the quantities and timing of release of stocks and any other actions including demand management.
   
5. 
   assumptions regarding actions that Asian nations might make, particularly with respect to China and India
   
1. 
   an assumed date for the closure of the Strait of Hormuz, 1 March 2012
   
2. 
   an assumption that an oil supplies emergency is not declared under the Liquid Fuels Emergency Act 1984.