Viva Energy collected $100 million in government handouts from JobKeeper and other corporate welfare programs, then handed $140 million to shareholders. By John Durie.
Viva Energy and corporate welfare
The administration of the federal government’s $88 billion JobKeeper program has attracted much-deserved attention, but it is only one corporate slush fund established by the government in the wake of the pandemic.
Case in point is the money going to Geelong-based refinery Viva Energy, which is returning $140 million to shareholders after collecting about $100 million in handouts, including $24.9 million in JobKeeper, $33.3 million to build a new diesel storage plant as part of the fuel storage plan, and $40.6 million as part of the potential $2 billion-plus refinery support plan, to keep its Geelong refinery running.
Viva is best known in Australia as the owner of the retail Shell petrol stations – and like the rest of the industry is facing a battle for survival as it converts to rely less on fuel and more on mainstream retail sales.
In announcing the money, Energy Minister Angus Taylor said, “The government’s fuel security package will help secure Australia’s recovery from the Covid crisis and it will help secure our sovereign fuel stocks, locking in jobs and protecting families and businesses from higher fuel prices”.
Prime Minister Scott Morrison added that the government was “delivering on its commitment to maintain a self-sufficient refining capability in Australia”.
This has turned into a bonanza for Viva and Australia’s only other refiner, Ampol, which received funds for its plant in Lytton, Queensland.
There will also be about $150 million in funds available to each company, to help convert their refineries to be lower sulphur fuel producers, as part of the government’s fuel storage package.
Ampol and Viva will begin negotiations with government shortly on the fuel storage plan. Their prominent role in the process is in part because they produce about 20 per cent of the country’s refined fuel needs.
Just who will be included in the plan is yet to be worked out, based on a goal of maintaining at least 20 days’ supply of petrol and jet fuel under local production, as well as 24 days’ worth of diesel. This is the same as what is stored presently and forms the base case for the long-term plan.
As the details are hammered out, Viva has restructured the way it presents its accounts, isolating the refinery earnings, which attract the biggest money in terms of government support.
The change has collapsed the supply, corporate and overhead costs division, allocating all costs to a divisional level.
In the past year, this has meant earnings from the retail fuel and marketing divisions fell on a reported basis from $340.8 million to $222.6 million after costs. The refinery division earnings fell from $62.4 million to $43.8 million.
The stated goal is to attach costs to where they were incurred, which also means fuel subsidies go to refining division as well as costs. This also means that retail division earnings can pay the dividend.
The government rescue package followed the continued rationalisation of the sector, with BP and Mobil closing their plants in Kwinana, Western Australia, and Altona, Victoria, over the past 12 months. This has meant Australia has gone from having eight refineries 20 years ago to just two in 2021.
The reason is a combination of Australian costs and an explosion of new plants in South-East Asia, where even the smallest refineries are bigger than the entire Australian industry was 20 years ago.
Oil prices are notoriously volatile but tend to move on supply–demand metrics, with lower global economic growth creating a weak oil price.
The collapse in global demand last year saw a massive oversupply of crude oil, which in turn slashed the Australian refinery margin, which in effect is the import parity price.
When that falls below the cost of local production the refinery is in financial trouble, as happened last year and, to an extent, this year.
The Australian refineries import crude oil, which is then refined for Mobil, BP and others. Those outlets have decided it is cheaper to import the finished product from Asia rather than refine it locally.
Australian oil accounts for about 20 per cent of local refined production and while this percentage has been falling, Taylor wants to continue to support local refining capacity.
The Energy minister is worried that losing Australian capacity would risk Australia’s fuel supply in times of crisis, as well as impact jobs.
There have been no shortages of fuel in the pandemic so far, but the threat was enough for Taylor to pull the trigger.
He argues having a local refinery base is worth $4.9 billion in terms of price suppression.
But someone in the industry, who declined to be named, said, “This is nonsense because you are importing the crude oil either way, so in national sovereignty terms what is the difference between the finished product and crude?”
Earlier this year the Defence Department had short-listed BP among others on a long-term fuel supply contract.
BP last year closed its Kwinana refinery near Perth, so its successful tender would have meant Defence would be supplied by imported fuel from BP.
This may still happen, but industry talk says Viva and Ampol both complained to the government, questioning the use of paying their companies to keep local refineries operating, and then awarding government contracts to imported fuel.
The original contract is now being redrawn.
The fact a new tender is being issued also highlights the hidden support afforded to Viva and Ampol by potentially locking out an import option.
At the same time this also shows how Australian consumers are at risk of paying higher prices to keep the locals running through the subsidies.
The pandemic cut in demand hurt local refining profits, with Viva earnings before interest and tax falling from $239 million in 1999 to $131 million in 2020.
Net profit fell from $136 million in 2019 to a loss of $36 million in 2020 – although with government support this is tipped to increase to a $186 million profit in 2021.
On one level, the costs of the subsidies are relatively small compared with the $89.3 billion JobKeeper program, but they highlight the wider impact of the Covid-19 recovery package.
Ownership Matters’ Dean Paatsch argues “the key issue with JobKeeper is the total lack of transparency compared to similar schemes in New Zealand, the US and UK, where a public register is maintained of just who has received what in grants”.
Ownership Matters figures show top 300 companies such as Viva received $3.8 billion in support, of which $2.5 billion was JobKeeper. The most went to Qantas, at $726 million.
It’s a sensitive issue, which explains in part why Viva restructured to collapse the old supply and corporate overheads division to book costs directly to the division, and also to keep the refinery operations separate from the rest of the company.
Viva’s chief executive, Scott Wyatt, said this “separates the more stable earnings and cash flow of retail, fuels and marketing from the more volatile and government-assisted refining division”.
Going forward, the retail fuel and marketing division is a more reliable earner and is relatively untouched by geopolitical issues, which can drive crude oil prices.
By isolating retail, the company can also be expected to be a more reliable dividend-paying company, which in sharemarket terms is highly sought after, thanks in part to the fact retail earnings are no longer needed to support refining.
Taylor’s refinery support package is a classic exercise in socialising the losses by paying the company support when the refining margins are too low, while privatising their profit when the margin increases.
When the margin is low, below the cost of production in Australia, the economics demand questions as to why anyone would buy Australian refined product when you can get it cheaper from Asia.
At this point the government subsidy kicks in. It tapers off as the refiners’ margin increases, which makes local production look economically more attractive.
Viva’s margin now stands about $7.30 a barrel, which is in the middle of the government’s price band. The support package kicks in when the margin falls below $10.20 a barrel. Based on its most recent published accounts, Viva then will collect more subsidies this year because of where its margin sits in the price range. The lower the margin, the easier it is to compete, because local costs are closer to the import parity price.
British-listed, Dutch-based commodities trader Vitol owns 40 per cent of Viva, which floated in 2018 after spending $2.9 billion buying Shell’s retail sites in Australia in 2014.
Scott Wyatt, who was also a long-time Shell executive, was awarded a $3.4 million cash bonus at the float.
He is still a major shareholder, as shown by the fact that earlier this year he sold 5 per cent of his holding for $955,653 to help pay personal debt.
Wyatt is said to be preparing to hand the reins to Jevan Bouzo, the former Ernst & Young – now EY – auditor who currently serves as chief operating officer and chief financial officer of Viva.
But for the moment his task is to make best use of the taxpayer dollars to help achieve his aim of creating an energy hub in Geelong, covering petrol, gas and hydrogen, to set the company’s future.
This article was first published in the print edition of The Saturday Paper on Sep 18, 2021 as "Viva la refinery".
A free press is one you pay for. In the short term, the economic fallout from coronavirus has taken about a third of our revenue. We will survive this crisis, but we need the support of readers. Now is the time to subscribe.