This report was produced using data, forecasts and price information current at the time of writing (2013). It should be noted that these inputs are likely to
Factors in considering a non-IEA country
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- 8.2Benefits and issues for the host country
- 8.3Ticket contract structure
8.1Factors in considering a non-IEA countryThe reason for investigating the development of a ticket market in a non-IEA country is that within Australia’s normal petroleum supply envelope there are only four IEA members (including Australia). Of these, New Zealand is short of commercial stock to meet its IEA commitment so holds ticket stock, and South Korea restricts how stocks are released in a market disruption event. This leaves only Japan as a possible location for holding ticket stock in this region. Australia could hold ticket stock in Europe but it would make sense to develop locations closer to Australia, within its normal supply envelope. Factors to consider in the choice of country include: Availability of petroleum infrastructure; Ease of transport of stock to Australia in an emergency; Access to shipping; Stability of the country, rule of law, and sovereign risk; and Suitable entities operating in the country that would be acceptable counterparties for holding ticket stock. Some of the factors to be considered in assessing countries are outside the expertise of the author, but in terms of availability of petroleum infrastructure in this region both Malaysia and Singapore have substantial petroleum infrastructure. Indonesia would also suit with regards to its location in relation to Australia. 8.2Benefits and issues for the host countryThere are benefits for a country holding oil stocks on behalf of another country. These include: It is likely to provide additional financial incentive for petroleum companies/traders to hold stock in the country and therefore enhance the country’s attractiveness for locating these businesses; It may see some benefit from being associated with IEA oil security system; It may see an opportunity to position itself in the centre of a developing strategic stocks market in Asia and particularly the trading of stock tickets; and It could be viewed in the context of wider energy security (Australia is an exporter of energy in form of coal and gas (LNG) for example). There will be a number of issues for the host county to consider including: The potential for any arrangement with Australia (or any other ticket buyer) to compromise the host country’s own oil security; The need to ensure any stocks that are used for tickets are additional to normal domestic supplies to ensure that supply is not affected in an emergency; and Who should be able to offer tickets and over what types of stock. One of the key issues to be considered will be the host country’s current security arrangements for petroleum supply (if any). The country’s law may cover petroleum allocation/distribution in a supply disruption or a sovereign right to intervene so any bilateral arrangements needs to be consistent with the law. 8.3Ticket contract structureThe ticket contract structure was summarised in Appendix 2 of the 2012 Report. Any contract between Australian and entities in the host non-IEA country would be expected to follow a similar structure. Table : Key elements of ticket contract
The option for how and when the purchase option could be exercised would be in line with the standard contracts. That is: The contract could only be exercised in an IEA declared emergency; The stock purchase price is specified in the contract and will be related to the market prices at the time of the purchase option being exercised; and Volume could be specified at the time up to the total volume of the ticket. The entity holding the ticket would have the option of releasing the stock by ending the contract (so the stock owner could then sell it) or exercising the purchase option. Under purchase, that entity would then be responsible for lifting the product (assuming the ticket was exercised in order to secure product for Australia supply). That means it would need to arrange a ship for transportation, or on-sell the cargo to another party which would then organise shipping. The risks associated with this transaction include: The counterparty honouring the contract; The host country honouring its agreement to impose no impediment; The shipping risk; and Any issues with the transportation route. The counterparty risk should be addressed before contracting, in that only entities assessed as reliable and financially secure should be approved as counterparties. The host country risk would be managed through Australia’s decision as to which non-IEA countries were acceptable for having a bilateral agreement with. The third and fourth risks would need to be assessed at the time of exercising the contract - if the disruption was due to an event in another location (e.g. Middle East) neither of these issues should be a risk. If the disruption was in this region (e.g. affecting regional supply routes) then that would need to be taken into account in any decision to exercise the contract.
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