Investors were quick to pick the winners from the Morrison government’s move to subsidise the continuing operations of two oil refineries: Ampol’s Lytton operation in Brisbane and Viva Energy’s Geelong refinery near Melbourne.
The shares in Ampol and Viva had risen more than 6% by midday Monday, much more than the wider market’s half a per cent rise, reflecting enthusiasm for an aid package that could cost more than $2 billion over the course of the 2020s. The two companies join the long list of Australian businesses subsidised by governments — airlines, farmers, steelmakers, aluminium smelters, defence manufacturers — not to mention the taxpayer-backed deposit insurance scheme for banks.
The handouts to refiners has been deemed essential for energy and national security so that some amount of national oil demand (about 1.1 million barrels a day) be processed here. The two refineries process about 225,000 barrels a day so it’s a small amount of daily demand at the moment.
Ampol (formerly Caltex Australia) is owned by Australian super funds and small investors. Viva Energy is 45% controlled by Vitol, the world’s biggest commodity trader, but has some Australian investors. The previous owner, Shell, closed its Clyde refinery in Sydney a few years ago, roughly around the time when Caltex decided to close its Kurnell refinery, also in Sydney. BP and Exxon Mobil have or are closing their refineries and the final two — Lytton and Geelong — were on the block and subject to reviews.
In a statement to the ASX on Monday, Ampol said it intended to continue refining at Lytton until at least mid-2027. But it will also be good for shareholders, given the package “improves the quality of Lytton’s earnings profile by significantly reducing earnings volatility and earnings downside risk, which should result in a higher earnings outcome on average. Reduced volatility will improve earnings quality, lower average cost of capital, and enable Ampol to increase its target leverage range to 2.0x-2.5x Adj. Net Debt / EBITDA, in turn supporting incremental growth and/or shareholder returns”.
How does the government plan to ensure that Ampol and Vitol serve the interests of taxpayers not shareholders?
One of the key regulatory powers the Australian Prudential Regulation Authority has in relation to banks is a power to direct them on capital management issues — dividends and buybacks in particular.
In 2020 APRA directed the banks to conserve cash, so dividends were omitted/suspended or slashed. But there seems to be no plans in relation to the two beneficiaries to ensure a minimum capital hold or subject any capital management plans, including dividends, to scrutiny.
Ratings agency Moody’s has already signed off on a rise in Ampol’s allowed leverage for its level of credit rating because of the planned payment of the subsidy. On one reading, the maximum leverage for Ampol could rise by two-thirds to 2.5 times its earnings before interest, tax, depreciation and amortisation from the bottom of the previous range of 1.5 times EBITDA. Even these days, that is a big potential increase in debt.
That approval by Moody’s will allow Ampol to either use less capital for no change in borrowings, or keep capital steady and boost borrowings — maybe to pay a higher dividend or special dividend to shareholders, or a buyback. Without any legislated regulatory powers (the ACCC would be the ideal body to exercise them), taxpayer support will underwrite any increase in dividends from now on or other methods of returning capital to shareholders.
And there are other ways of rewarding owners. Viva’s oil imports are supplied by its big shareholder, the highly secretive global commodity trader Vitol that recently reported a US$3 billion profit for its 350 owner partners. Let’s hope the government gets plenty of transparency about the pricing contracts and financial relationship between Viva and Vitol.
One alternative way to reduce Australia’s potential vulnerability to disruptions to its fuel supply capacity — remembering that Australia also relies on imports of more than 80% of the oil it uses, regardless of whether we refine it here or in more efficient foreign refineries, and that won’t change — would be to encourage demand for electric vehicles. But the policy of climate denialists Scott Morrison and Angus Taylor towards electric vehicles is to mock and deride them as not good enough for Aussie blokes. Because of our lack of climate policies, EV manufacturers prefer to sell their vehicles elsewhere where they’re more competitive.
Lucky there are plenty of subsidies for fossil-fuel companies though.
Lets’ be real. Did anyone really expect this Liberal govt to protect taxpayers from the rorting tax avoiding fossil fuel multi nationals?
Not even the “joy” of being ripped off by an Australian companty that will at least keep the money in Australia
The electrification of all road transport in Australia would be the greatest move towards national security ever made on this sun washed, wind blown, Snowy hydro rich, Tasmanian ‘battery’ continent (and island). No supply chains, all components able to be built in country. We all forget that the sun delivers in one hour a day enough energy for all of humanities (ALL of humanity that is) needs for a year, to say nothing of southern ocean winds, rain and snow. But no, despite the market saying ‘this fossil fuel stuff is not worth our while’ the federal government thinks otherwise! Astonishing. Bit like the failed bailout of the car industry, more tax money into someone else’s big pockets. Come on SmoCo get with the policy delivery needed to really make a difference.
Problem is that the fossils have all the money.
I wouldn’t mind betting that almost no one in our govts know that Europe is already full of EV delivery vans and trucks (french postal service has 35,000). That Tesla and others already have 40 ton semis being tested on the road. It is estimated that a $200k Tesla semi truck will save about $200k on fuel and servicing in the 1st year alone. Even if that’s out by 12 months, which company in their right mind wouldn’t buy one just to evaluate. Mind you, Australia is already so far behind the rest of the world in infrastructure which, coupled with that we might soon be the only country in the world to add tax to our purchase of an EV, we might be amongst last in the developed world to embrace EVs. Over to you Labor, yet another potential opening…
The Minister for Illawarra Coal deep in denial of the renewables electric era greasing palms with the Australian taxpayers coin.
Australian embarrassment doesn’t come much deeper than this grifter’s example of a closed mind.
Absolutely bloody fabulous, don’t you think?
“Here’s a bucket of money and please don’t worry about accounting for it”.
That accounting stuff is just for those vulnerable, the sick and the disabled that we will unleash our debt collectors onto to help our mates in their new debt collecting businesses.
“How am I meant to know whether the debt is real or not?”
You cynic.are not. the members of parliament honourable
A text book example of political corruption.