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Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
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Australia | Publication | June 2024
The introduction of a minimum stockholding obligation under the Fuel Security Act 2021 (Cth) has underscored the importance of traditional liquid fuels to safeguarding Australia’s energy security as it navigates the energy transition.
Ahead of changes to the MSO from 1 July 2024, this briefing examines the impact of the MSO on Australia’s liquid fuels sector, including potential future developments
The MSO was introduced under the Fuel Security Act 2021 (Cth) (the FS Act) and the Fuel Security (Minimum Stockholding Obligation) Rules 2022 (Cth) (the MSO Rules), which commenced operation on 1 July 2023. In short, the MSO requires importers and refiners1 of liquid transport fuels to “hold” a designated quantity of fuels in storage in Australia.
The MSO seeks to address the national and economic security risks of Australia’s heavy dependence on imported fuels. With Australian oil and condensate reserves depleting and the successive closures of most Australian refineries over the past 20 years (only two refineries now remain in operation), approximately 90% of Australia’s refined fuel demand is now met by imports of refined products and crude oil/other refinery feedstocks. Significant interruptions to fuel supplies due to external factors for an extended period would have serious economic and societal impacts. The MSO is intended to bolster Australia’s resilience against such risks.
The MSO applies in relation to each major liquid fuel type used for road or air transport purposes: petrol (across all grades in aggregate), diesel and jet fuel. The required volume is calculated as the average daily volume of the particular fuel type imported by an entity during a prior 12-month reporting period multiplied by a “target number of days” which has been prescribed by ministerial declaration2 for each fuel type.
For each fuel type, the target number of days has been initially set at the 2018 and 2019 calendar year (pre-Covid) average level of “consumption cover days” (i.e. the number of days that stocks would last at average levels of demand if no further supplies were made). In the case of diesel, the target number of days will increase to 140% of that number of consumption cover days from 1 July 2024. The more onerous stockholding requirement for diesel reflects:
Although the MSO is helping to reduce Australia’s vulnerability to fuel supply disruptions, it is also imposing a new and substantial financial burden on the liquid fuels sector. A number of companies have implemented capital works programs to increase their land-based storage capacity. This is counter to concerted efforts of the fuel majors in recent years to optimise their product distribution by selling off their networks of inland fuel depots and moving to a near “just in time” model where fuel orders are picked-up (or delivered) directly from import terminals and refineries to retail fuel outlets and commercial customer sites.
Increasing diesel storage has been a particular focus since the introduction of the MSO due to the higher MSO target number of days requirement and relatively low levels of existing storage. In recognition of this, the Commonwealth government’s Boosting Australia’s Diesel Storage Program provided matching grants totalling $227 million for eight additional storage capacity projects completed by 30 June 2024. However, this still leaves the industry needing to fund substantial storage infrastructure development.
The financial impacts are not restricted to building new storage facilities. The MSO has also meant that importers are carrying additional fuel inventories on their balance sheets – a significant increase to their working capital burden.
From the perspective of wholesalers, distributors, independent retailers and end-users, there are concerns that amid an inflationary environment, the MSO is:
The MSO has been implemented progressively in recognition of the time needed for the industry to ready for full compliance.
The key changes taking effect on 1 July 2024 are:
For the 12 month periods ending 30 June 2024 and 30 June 2025, importers have been able to apply to the DCCEEW to reduce their MSO volume commitments by up to 25% if the DCCEEW is satisfied (among other things) that an importer has taken all reasonable steps since 1 July 2023 to prepare for meeting the MSO. This transitional arrangement is ending. For periods commencing on or after 1 July 2025, applications to reduce MSO volumes will only be considered by the DCCEEW on more limited grounds, such as:
Although fuel importers will do what it takes to achieve compliance with the MSO, many will be reticent about committing significant capital to expanding their storage capacity, particularly in the face of uncertainties about the timing, extent and nature of impacts of the energy transition on demand for traditional carbon-based fuels.
On the one hand, the move to cleaner transport fuels (such as hydrogen-based fuels, sustainable aviation fuel and other biofuels) and increasing take up of electric vehicles will see demand for certain liquid fuels reduce over time.
On the other, there may be sporadic and unpredictable spikes in demand, particularly for diesel, depending on how smoothly the energy transition proceeds. For example, the Australian Energy Market Operator’s latest gas market outlook3 forecasts a structural gas supply gap in Australia’s southern states from 2028 due to depleting Bass Strait gas reserves that will require greater supply to resolve than is currently committed or anticipated, which may necessitate use of diesel as a back-up power generation source. This will potentially require significantly larger volumes of diesel imports until renewable electricity generation sources reach sufficient scale to satisfy market demand.
Although the FS Act and the MSO Rules embed flexibility for the DCCEEW to temporarily reduce or suspend MSO requirements to respond to market developments, there is no certainty about how those powers will be exercised in future periods of market disruption. The fuel security concern will remain a very real one for policymakers for the foreseeable future, so it can be expected that such powers will only be exercised reluctantly and in a manner that remains aligned to the MSO’s objective.
Bearing those considerations in mind, we expect that importers will increasingly look for more flexible means to meet their MSO commitments.
Here are some specific responses and market developments we anticipate seeing as a result of the MSO:
In addition, the MSO is likely to create greater impetus for the development of cleaner transport fuels from renewable and sustainable sources, which have the potential to become gamechangers over the longer term in meeting Australia’s fuel security challenge.
Julian Traill, Partner, Brisbane
julian.traill@nortonrosefulbright.com
+61 7 3414 2718
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Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
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