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Analysis: Australia's reliance on gasoline imports set to rise as sulfur limit falls

Singapore — Australia's plans to tighten the sulfur and aromatics specifications of its automotive gasoline amid hamstrung capacity at domestic refineries is likely to increase reliance on imports in coming years and prove a bright spot for Asian gasoline suppliers.

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This likely rise in Australia's demand for imported gasoline will not only open up a larger window of opportunity for suppliers in South Korea and Japan, but could also prompt other suppliers in the region -- and in Europe -- to view Australia as an alternative outlet.

Australia's shift towards cleaner fuels has been ongoing since a review launched in October 2015 spurred the federal government to announce plans to tighten sulfur and aromatics limits parallel to Euro 5 specifications. The review was taken a step further in March this year when timelines for the changes were rolled out.

The Australian Department of the Environment and Energy announced all domestically consumed gasoline will contain a maximum 10 ppm sulfur from July 1, 2027, down from the current maximum of 150 ppm for 91 RON gasoline and 50 ppm for the 95 RON and 98 RON grades.

In addition, the aromatic content of the nation's gasoline will be reduced from 42% to 35% from January 1, 2022 and could be lowered further by 2027 after another government review of the aromatic content by that date.

However, the specification changes are likely to put Australia's domestic refiners under pressure as they grapple with two major challenges: Inadequate alkylation unit capacity and the economic unviability of refinery upgrades.

The first challenge, in particular, is crucial if domestic refiners want to produce premium high RON gasoline.

While reformates have traditionally been used as blendstocks to raise octane grades, their high aromatic content will likely see usage dissipate in favor of more viable non-aromatic high RON components like alkylate, an S&P Global Platts Analytics report showed Monday.

However, Australia's steadily falling alkylation to CDU ratio as a result of the closure of domestic refineries in recent years will curb the amount of alkylate that can be produced domestically.

This could in turn crimp the ability of domestic refiners to produce enough high RON gasoline to cater for domestic consumption, industry sources said. Over the past eight years, Australia's alkylation capacity has fallen 44%.

"Australia has strong demand for premium gasoline -- in 2018, 35% of Australia's gasoline demand was 95 RON or higher. With the current refining capabilities, it will be a struggle for domestic refiners to keep up with the high RON demand and at the same time keeping aromatics content in the fuel low enough to abide by the new regulations," Platts Analytics light ends analyst Anthony Tso said.

Domestic refiners could opt to upgrade or expand current units, although this was likely to be prohibitively expensive.

EXPENSIVE SOLUTIONS

Refiners may need to invest up to $1 billion to be able to produce fuels compliant with the specification changes in 2022 and 2027, according to the Australian Institute of Petroleum.

"Without a practical plan, I personally do not think that these refinery upgrades will be feasible -- it could be cheaper to seek gasoline elsewhere," one gasoline trader said.

Australia's domestic refiners could also opt to raise imports to cover shortfalls in domestic supply instead, which would be a welcome sight for Asian gasoline market participants looking for additional export destinations.

The country's reliance on gasoline imports has been increasing in recent years as demand outpaces domestic production capacity. The country imported 4.66 million barrels of automobile gasoline in March, up 49.3% year on year, latest data from the Australian Department of the Environment and Energy showed.

The sharp uptrend is expected to continue, with Australian imports of refined products expected to climb steadily to 675,000 b/d in the fiscal year 2019-20 (July-June) from 645,000 b/d in fiscal 2017-18, the Australian Department of Industry, Innovation and Science said in its Resources and Energy quarterly report in March.

Based on the report, Australia's imports of refined products will account for around 66% of total consumption of refined products by fiscal 2022-23, up from 62% in fiscal 2017-18.

Industry sources were also quick to point out that the uptick in imports seen in 2014 and 2015 followed the closures of Caltex Australia's 135,000 b/d refinery at Kurnell in Sydney and BP's 102,000 b/d Bulwer Island refinery in Brisbane on the country's populous eastern seaboard.

"We saw an uptick in flows towards Australia in the past when their refineries shut. We could see the same if their [supply/demand] gap widens again. Although they have been diversifying their import sources, it is still a good thing overall [for the gasoline market]," another market source said.

"While I doubt the Australian government will allow more refineries to close and for imports to rise too quickly, something has to change in order for refiners to be able to cater to the new specifications," a third market source said.

--Mark Tan, mark.tan@spglobal.com

--Edited by Wendy Wells, wendy.wells@spglobal.com