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
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- 10.3Ticket contract structure pricing
- 10.4Links to global market
- 10.5Rules for release
- 10.6Summary
10.2Market incentivesMarket incentives can be used to encourage stockholding through indirect incentives (a market opportunity) or through more direct intervention to reduce the cost of stockholding obligations. The market incentives relate to emergency stock in general rather than ticket stock in particular. The ticket tender system is a market opportunity where companies can choose to offer stock using a ticket contract to a central agency. Companies will only offer at a level where they will cover their costs (for the facility and stock) and make a profit. No direct incentives are required and if the offers are too high the central agency can look for other means to satisfy its requirements for stockholdings. More direct interventions are sometimes used in the industry obligation system, as the obligation will put a cost on the industry (the interventions relate to the industry obligation rather than the ticket market). Japan is an example where the private sector is supported by the government in meeting its obligation. Japanese companies have an obligation to hold at least 70 days of stockholding proportional to the volume of imports, production and sales. The system, which has now been operating over many decades, includes direct support through loans and funding from the government-controlled Japan Oil, Gas and Metals National Corporation (JOGMEC).16 Direct market incentives to individual companies for stockholdings are not common internationally. More common (for an industry obligation system) is to allow industry to set up a central agency which individual participants can sell a portion of their obligation to. The central agency then seeks the most efficient collective solution to meet the obligation. This agency can either be funded by the companies paying for taking their obligation or a levy on fuel sales. In both cases, as the funding is effectively backed by legislation, it allows the central agency to secure low cost funding, reducing the cost of meeting the obligation and to an extent equalising the cost across industry (these structures are normally non-profit). This takes the obligation away from being a competitive element of the market and reduces the costs involved as companies do not need to raise the capital or generate a profit element on that capital. Government involvement is required as the central agency is removing the emergency stockholding element of the supply cost from the competitive market. 10.3Ticket contract structure & pricingSection 10.1.1 noted that longer period tickets (up to five years) might be needed to encourage domestic companies to offer tickets on stock in facilities that are no longer needed for commercial operations. Companies may prefer even longer than five year terms. This may be an option although before making a ticket contract too long in term, the purchaser should consider whether contracting in a different way may be more cost effective. For instance there may be value in the buyer taking the exposure on the change in product value if it has an ongoing requirement to hold stock (therefore will be entering another contract at the expiry of this contract). The ticket structure is also not suitable for making commitments for new storage infrastructure, which is a long term (30-40 years) investment decision. In this case the contracting structure would need to be different given the complexities involved (e.g. the commitment to building the infrastructure may be four years before any stock is purchased and stored). The TOR ask if it is possible to lock in the exercise price of the stock purchase in the event of an IEA event. As an IEA event will be related to a market disruption, prices are likely to be elevated which will make the stock purchase expensive. The market pricing at the time of purchase is an essential feature of the ticket market. A company would not want to offer a fixed price of purchase in the ticket contract as it has no means of knowing when or if the contract will be exercised. This makes it difficult (and certainly costly) for that company to hedge its exposure. For the buyer (Australia) to get certainty of cost of product in an emergency (i.e. lock in current value) either physical stock needs to be purchased and held, or a hedging arrangement needs to be made (likely to be a separate contract to the ticket contract). However the value of hedging may be questionable - if the government is holding stock that it might release to respond to a market disruption, it should do this at market value, not the value it was purchased. The released stock will only be a small portion of the total market supply, with the rest of the market likely to be at elevated prices. To sell at a discounted price is only likely to result in windfall gains to the purchaser. In summary, holding emergency stocks should not be seen as a way to manage prices domestically in a disruption event, given the volumes held will be relatively limited compared to total market supply. We note that one of the aims of the IEA collective response of stock release is to moderate price increases in a disruption – in this case it makes sense as it is a global response affecting the total market.
As long as Australia is not meeting its IEA commitment (or is at risk of not meeting it), it is difficult to see why the government would allow Australian entities to offer stock tickets to other countries. As that stock is subtracted from Australia’s stocks, it makes the stock position worse. If Australia sets up an industry obligation system which ensured its internal requirements were met, it could then allow companies which held stock greater than the obligation level to offer stocks to other countries. However as long as Australia is having to make investment in additional storage facilities and stock to meet its IEA commitment, it is difficult to see how any company could offer tickets to another country at a competitive price. In a case where developments in Australia meant that it could meet its commitments to the IEA (e.g. significant oil discoveries turning Australia into a net exporter), there is more flexibility in considering options to hold stock for other countries. However even in this case Australia would need to exercise caution in what it allows to be offered. If Australia allows domestic companies to offer tickets on their normal commercial stock to other countries, in the event that tickets were exercised in response to a disruption, Australia might find that the ticketing companies are short of stock. This is similar to the issue we note in the section on holding stocks in a non-IEA country: where a country offering ticket stock needs to consider the volume, and on what stock type, it should allow tickets to be offered (Section 8.2). 10.5Rules for releaseFor both the tender ticket and the industry obligation systems, the rules about the release of the stock held need to be well defined in advance to ensure there is no risk of impacting the normal commercial market. In the case of tender ticket stock, as the stock is additional, it will be extra physical stock available to manage a disruption. Therefore the rules need to be similar to those for physical stock which are discussed in the Oil Storage Options & Costs report (Section 4.1). These include: Ensuring the rules do not just advantage one company to manage a disruption to their supply chain; That the rules of release do not affect companies’ commercial stock decisions; and Companies still get impacted by failures in their own supply chains. For a market where there is an industry obligation, the easiest way to manage a disruption is by reducing the obligation on a temporary basis. This will allow all companies to release additional stock to the market. The government could come under pressure to do this in an event where one or two companies have a major supply issue rather than a general market shortage. In order to avoid stock disruption the obligation could be reduced but this may be an easy “out” for the companies concerned. It may give companies not directly impacted an opportunity to sell more of their stock to the companies with the disruption (at a premium one assumes), however any actions taken would need to consider whether they are giving an indication to commercial operators that there is a "cheap" backstop available if they were not carrying enough stock to manage normal market disruptions. 10.6SummaryA domestic ticket market will be a valuable component of most stockholding models that Australia might implement. It provides a simple contracting structure for a central agency to secure additional stock utilising existing facilities. Should an industry obligation be part of the stockholding model, a ticket market provides a flexible way for companies to manage their stocks to ensure compliance with the obligation. Associated Reports The following list includes all the reports produced by Hale & Twomey (H&T) for the Department of Industry (formerly the Department of Resources, Energy and Tourism, or RET) relating to Australia’s International Energy Agency Oil Obligation along with related reports by H&T and other authors. This report is highlighted.
1 IEA collective actions cover a range of options including the joint release of stock as an initial response to market disruption. Other responses include demand restraint, fuel switching and surge production. The actions chosen are tailored to each situation, involve widespread consultation and co-operation and can be instigated rapidly. 2 The issues of shipping availability, security of supply routes and marine emergency situation protocols are largely covered in Australia’s Maritime Supply Chain for Petroleum Trade (2013) report rather than this report. 3 New Zealand ticket pricing information provided in confidence to the then Department of Resources, Energy and Tourism (now the Department of Industry). It is not to be publicly released without obtaining the approval of New Zealand’s Ministry of Business, Innovation and Employment. 4 Article 3 of the Annex on Emergency Reserves to the IEP. 5 These are referred to as SEQs – Standing Group on Emergency Questions. 6 IEA-SEQ (2011)20. 7 Australian Petroleum Statistics 2011/12 (Table 4B). 8 US Energy Information Administration (March 2013). 10 2012 Report pg5. 11 Sources include US Energy Information Agency, Singapore Energy Market Authority Energy Statistics 2011, Singapore Energy Development Board Factsheet 2011, Singapore Issues Paper RET, Hale & Twomey. 12 This section is sourced from the Singapore Issues Paper by RET (2013). 13 H&T telephone discussion with Glencore discussing New Zealand’s options for holding stock in other locations. 14 IEA- SEQ (2013)20- Costs and Benefits of Stockholding – Final paper. 15 This is more fully covered in H&T’s report Australia’s Maritime Petroleum Supply Chain. 16 http://www.egcfe.ewg.apec.org/publications/proceedings/ESI/ESI_Bangkok_2001/2-6-1_Iwahara.pdf 17 This report was produced jointly for RET and the New Zealand Ministry of Business, Innovation and Employment. 
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