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.PART B: A domestic ticket market within Australia
- 10.1.1Ticket tender system
- 10.1.2Industry obligation system
9.2Singapore summaryOf the non-IEA countries in the region, Singapore provides an ideal location for Australia to hold emergency stocks offshore, in that it is already a key part of its petroleum supply chain, and Australia and Singapore have a history of close trading, investment partnerships and defence relationships. Singapore also has a large petroleum infrastructure which would avoid the need to build purpose built facilities. Although Singapore is not an IEA member, it appears there may be ways where a system could be set up which meets the requirements of the IEA and its members, such that they accept that stock to be included in Australia's stockholdings. The view of the Singapore Government is not known at this stage, although the proposal should bring benefits to the government and Singapore industry. Due to the high demand for storage facilities in Singapore it may be that the options to hold stock there are too expensive (relative to holding stock in Australia or other locations), although this will not be known until it is investigated in more detail with the industry. Table : Benefits and risks for Australia holding stock in Singapore
If Australia wants to pursue this option, we suggest that a more detailed paper on Singapore's capability (including reviewing the oil market and legislative framework) be prepared. 10.PART B: A domestic ticket market within Australia10.1A domestic ticket marketThe scope of work (3.1) noted a number of issues that required further clarification on the benefits of setting up a domestic ticketing system. These include: The implications of domestic ticket stock for domestic supply security; Issues associated with co-mingling emergency and commercial stocks; How market incentives might assist so that stockpiling is not a deadweight cost against an unlikely even; How longer term tickets (multiple years) would make it worthwhile for expansion of current domestic physical stocks; and The possibility for ticket contracts to lock in purchase pricing over the period (rather than purchase at prevailing market prices), to mitigate against probable inflated prices during time of need. The 2012 Report noted two ways a domestic ticket market could be established. These were: A ticket tender system - a contract where companies could offer stock for ticket contracts as long as they could demonstrate the stock is additional to normal commercial stock; and An industry obligation system - where there is a more extensive domestic market for ticket trading which can be used by companies as one means to meet a stock obligation. The first system is relatively straight forward to set up with the key requirement being the means to ensure the stock is additional to normal commercial stock. Unless this condition is met with certainty, there is no way the system can ensure that the purchase of a domestic ticket will lead to an overall increase of the level of stock in the country. New Zealand offers this opportunity domestically in its tenders for emergency stock and it is up to the company offering the stock to demonstrate that the stock is additional to normal commercial stock. It can do this by showing that the storage facility (or a portion of it) has not been used for commercial stocks over the previous two years and to demonstrate how its future supply arrangements (over the time period of the contract offered) can continue without the need for this facility and the stock it contains. This is called the “ticket tender system” and is covered in more detail in Section 10.1.1. A more extensive domestic ticket structure where companies trade between each other, as in many European countries, requires an industry obligation system along with rules as to how much of an obligation can be met with ticket contracts. This is called the “industry obligation system” and covered in more detail in Section 10.1.2.
This structure is likely to capture opportunities where there is the ability for companies to hold additional stock in existing facilities (or parts of facilities) that are no longer needed to meet the requirements of their normal commercial market. For example, with the refinery closures in Australia there may an opportunity to use some of the tankage not needed for direct import under this structure. The stock does not necessarily have to be completely segregated from normal commercial stocks (i.e. could be commingled). If companies had large tanks where the supply operation was such that only a small portion of the tank was used (e.g. deliveries of 8 ML into a 20 ML tank) then they could offer a portion of the tank to hold stock over which a ticket was offered. In this example it could be done by adjusting the minimum level in the tank upwards to include the stock offered in a ticket and then they would operate above the adjusted minimum. This system has the benefit of managing product quality on a continual basis but requires a good audit system to ensure the contractual requirements are met at all times. As companies need to make some commitment regarding the tanks used to hold the stock, the ticket length should be longer than a normal ticket to ensure there is the ability to get a return on any investment made (likely to be 2 to 5 years in length rather than 3 to 12 months for the offshore ticket market). However this system is not considered suitable (from an incentive viewpoint) for companies to build dedicated new storage facilities to hold emergency stock (see 10.3 for more discussion on this issue). In New Zealand’s tender, the storage and stock can be priced separately (in comparison to a single price for offshore tickets) and the storage cost is paid for the full term of the ticket even if the stock purchase is exercised. Table : Benefits and issues of ticket tender system
10.1.2Industry obligation systemThe 2012 Report noted how countries such as France, Japan, Korea and the United Kingdom put stock obligations on their petroleum industry. This is often to ensure a suitable level of in-country security of supply as well as meeting IEA commitments (e.g. Norway puts a stock obligation on its industry despite being a net exporter of petroleum). An active domestic ticket market (in comparison to the tender ticket system covered in the previous section) is only possible if companies have a stock obligation to meet and tickets provide a more flexible (and cheaper) way of achieving this rather than holding the stock themselves. A stock obligation is usually apportioned by requiring each market participant to hold a minimum amount of stock equal to or above a number of days of their market supply. While the obligation relates to total stock, allowing ticket stock as part of an obligation system gives flexibility to the participants managing against their obligation. The portion of stock allowed to be held as tickets will depend on how much flexibility is appropriate given the obligation target and how frequently it is expected to change. Offering flexibility through tickets needs to be considered carefully. If the minimum level of stock has been set at a level which is considered the minimum appropriate to provide security of supply, then it may not be considered appropriate to allow ticket stock (at least not outside the country). If ticket trading is only allowed domestically then effectively the ticket system is allowing companies to smooth their inventory profiles. Companies which happen to be holding more stock for a period will sell tickets to those which might be under target for a period (e.g. a company might have some facilities out of service for maintenance which makes it difficult to meet its normal inventory target without the ability to purchase tickets). The authorities will still be comfortable as they know overall there will be sufficient stock in the country to meet the obligated days' target. The ability for companies to purchase offshore tickets may need to be limited depending on the level of stock that is agreed as suitable for in-country stock. The following analysis doesn't consider the benefits and risks of an industry obligation system, it just covers the benefits of allowing ticket trading should there be an industry obligation imposed. Table : Benefits and issues of using tickets with an industry obligation system
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