Australia’s military flex masks a deeper insecurity

Australia has announced it will join the United States and United Kingdom in patrolling the Strait of Hormuz, a move aimed at bolstering Canberra’s delicate fuel security situation.

Prime Minister Scott Morrison revealed the decision on August 21 after weeks of deliberations, saying that recent disruptions to shipping in the region represented a threat to Australia’s national interests.

An estimated 16% of Australia’s crude oil deliveries and 25-30% of its refined oil imports travel through the Strait of Hormuz, a boiling maritime theater where Iran and the UK have seized each other’s fuel tankers in recent weeks.

“So it is a potential threat to our economy,” Morrison said, promising a “limited and time bound” deployment of one frigate, surveillance aircraft and around 200 troops. The deployment will be limited to six months, he said.

Significantly, the move also has bipartisan political support from the opposition Labor Party. But there could be more at play as Australia seeks new ways to bolster its weak fuel security.

One possible rationale for Australia’s deployment could be to win favor with the US to gain access to its Strategic Petroleum Reserve (SPR), the world’s largest emergency fuel storage with a capacity of 727 million barrels. Washington had reportedly dangled access to the fuel stock in negotiations over the Hormuz patrols.

Access to that rich store could potentially shore up Australia’s perilous fuel stock security, which is currently far below the Paris-based, intergovernmental International Energy Agency’s mandated 90 days for liquid fuel supplies. Australia had been non-compliant for 88 consecutive months as of June. Last year, the country’s stocks briefly dipped below 50 days.

It may seem counterintuitive that the world’s largest liquified natural gas (LNG) exporter, a top coal exporter and home to the third-largest uranium resources worldwide has a long-running problem with crude and refined fuel supplies.

But shocks to the global oil market, especially in areas where Australia imports most of its fuel, have shook a nation that consumes 1.1 million barrels of oil per day but can only supply 18% of its own refinery stock. Most locally produced oil comes from the Carnarvon Basin in the far north of Western Australia and is then sent to Asia for refining.

There have been multiple warnings, reports and government promises to address the shortfall yet the problem remains unsolved. The government promised a review of the situation, missed its own deadline and finally issued a report that has yet to result in decisive action.

It also tagged three million barrels of oil it could call up in the Netherlands, which being a world away will not be remotely useful should shipping security issues constrain supply, though the stocks are recognized by the IEA.

However, the most recent Australian Petroleum Statistics, released this week but accounting for stocks through June, show that Australia is still IEA non-compliant. Indeed, even one of Australia’s trickier accounting methods, which is to count oil en route or due to be shipped, has fallen.

In a good month, when the oil that has not yet arrived on Australia’s shores is counted, the nation can make it to 90 days. But June statistics show that en route oil dipped steeply, meaning the nation had only 76 days of fuel stock security.

Liam Wagner, an academic at Australia’s Griffith University, has long been critical of the situation and views counting oil that has yet to arrive on the nation’s shores as nonsensical. “The IEA have been calling for us to have an alternative fuels policy for some time thanks to increasing uncertainty and reduce carbon emission,” he said.

That could include moves towards biofuels, electric vehicles or even hydrogen fuel cells, but government enthusiasm for all those except the last has been mostly muted.

“I think increasing domestic supply (of oil) isn’t going to help in the short or medium term as we’ve got nowhere to store it,” Wagner said. He suggests any access to America’s SPR would take at least a month to arrive, leaving Australia “running on fumes” in a crisis situation.

The ticketed supply in Rotterdam, Netherlands faces the same problem. “It would take at least a couple of weeks for it to go through the Suez Canal and that assumes no disruption along there either.”

Meanwhile, unlike the US, Australia has no strategic oil reserve or plans to build one. Western Australia’s state-based domestic gas policy, which mandates 15% of the gas from LNG export projects must be kept for domestic consumption, is the closest the nation has to a strategic reserve.

One of Australia’s last great untapped oil reserves is based at the Great Australian Bight, which could hold untold billions of barrels and support industry and related jobs worth tens of billions of dollars, according to a report from consultancy ACIL Allen.

Oil development in the Bight could go a long way to restoring Australia’s oil stocks, according to resources minister Matt Canavan, a man who never met a hydrocarbon he didn’t like, though commercial production from an initial discovery takes years and at best would be a midterm solution.

That, of course, is also hampered by the fact that Australia no longer has the refinery capacity to handle that kind of find. The country only has four refineries now in operation, shuttering many since 2000 after they were deemed uneconomic compared with cheaper facilities in East Asia.

All of that supposes the company planning to spud the area’s only exploration – Norwegian giant Equinor – actually follows through given the strident opposition it has faced from activists and locals terrified that an oil spill could destroy fishing and tourism industries.

Meanwhile, the most recent Resources and Energy Quarterly (REQ) for June notes that Australia is bucking the OECD trend by using more and not less oil, thanks to relatively lower pump prices.

The IEA found that the US and Australia have not followed the rest of the OECD in investing in more economical and cleaner cars; rather, they’ve stuck with their traditional gas guzzlers.

“In the absence of policy change, Australia’s consumption of oil products is expected to grow at an annual rate of 1.6% to 2021,” the REQ’s report released July 1 said.

In the quarter through March, Australia’s refineries produced just under 500,000 barrels of oil per day, with 60% of that imported to meet demand, comprised of 70% diesel and 36% petrol.

While energy security warnings have sounded through the decade, part of the problem can be chalked up to a lack of foresight. In 2009, the Federal Labor-led government assessed fuel security through 2018 to be “high” and “moderate” through 2023.

It predicted then that domestic crude production would increase as new fields came online in 2013, plateau and start to decline by 2018, and decline at a moderate rate in the absence of unforeseen new discoveries by 2023.

“Australia’s declining liquid fuel self-sufficiency does not necessarily imply reduced energy security,” it surmised. “However, a greater reliance on long global supply chains, particularly as crude oil becomes increasingly sourced from unstable regions, does threaten reliability.”

In 2009, those energy-rich regions and the linking Strait of Hormuz seemed far more stable than at present, witnessed in the government’s decision this week to deploy military assets to the region to secure its energy supplies.