Two S&P/ASX 200 Index (ASX: XJO) fuel companies have been targeted by the Federal Government's newly announced Fuel Security Package (FSP).
Both the Ampol Ltd (ASX: ALD) share price and Viva Energy Group Ltd (ASX: VEA) share price will be in focus following the news.
At the time of writing, the Ampol share price is 5% higher, trading at $27.25. The Viva Energy share price is up 5.2%, currently trading at $2.10.
The FSP is designed to protect Australia's two remaining oil refineries and could be worth $2 billion.
If the package passes through Parliament, it will run from 2021 until 2030.
The package comes only months after BP plc and Exxon Mobil Corporation announced they were shutting down their respective Kwinana and Altona refineries. The Kwinana Refinery closure was announced in October 2020, while Altona's was announced in February 2021.
Let's take a closer look at the FSP, as well as Ampol and Viva's reactions to its announcement.
What is the Fuel Security Package?
The FSP may see Ampol and Viva offered up to 1.8 cents per litre of fuel produced at their refineries through a Fuel Security Services Payment.
Through the FSP, the refineries will receive Government support payments if their margin of profit falls to, or becomes lower than, $10.20 per barrel of oil.
The amount of support received by the refineries depends on the amount of lost profit. It's limited to 1.8 cents per litre of fuel, which the companies will receive if their refineries' profit margin is equal to or less than $7.30 per barrel of oil. That would equate to $2.90 of Government funding per barrel of oil.
ABC News reports that if both refineries are paid at the highest rate available for the course of the FSP, it will cost the Federal Government a total of $2 billion.
The Government may also provide grants of up to $125 million to each refinery. The grants would help to pay for upgrades to allow the production of ultra-low sulphur gasoline. It will also provide a variable support payment of up to $108 million each year to help them through times of low incomes.
The FSP legislation is to be introduced to Parliament in the coming weeks, with hopes the FSP will be up and running by 1 July 2021.
Reactions to the FSP
Both ASX 200 fuel companies shared their excitement over the FSP yesterday.
Ampol welcomed the news, saying it would continue operating its Lytton refinery if the funding came to fruition. However, it would only commit to keeping the Lytton refinery open until mid-2027, an operational timeframe that is a condition of receiving FSP funding.
Viva stated it planned to participate in the funding program, saying oil refining was important to Australia's energy security.
ABC News today quoted Prime Minister Scott Morrison as saying:
This is a key plank of our plan to secure Australia's recovery from the pandemic and to prepare against any future crises…
Shoring up our fuel security means protecting 1,250 jobs, giving certainty to key industries, and bolstering our national security.
Energy Minister Angus Taylor added:
Supporting our refineries will ensure we have the sovereign capability needed to prepare for any event, protect families and businesses from higher prices at the bowser, and keep Australia moving as we secure our recovery from COVID-19.
Commentary from management
Viva CEO and managing director Scott Wyatt commented on the FSP, saying:
Today's announcement by the Federal Government provides important and welcome structural support to the refining sector in Australia. The sector has faced several structural headwinds in recent years from challenged trading conditions globally, increased competition from Asian refinery imports, and the significant impacts of demand destruction from the COVID-19 pandemic in 2020. This has seen the number of refineries in Australia reduce from six in 2011, to only two continuing refineries today, leaving the country predominantly reliant on product imports from international refineries for our fuel requirements…
In FY2020, our Geelong operations had a cash-loss of over $200 million, and without the support of the Federal Government continued operations would have not been sustainable. This could have seen the loss of over 700 direct jobs, the loss of the last major manufacturing operations in Geelong, and a significant contributor to the Victorian economy.
Ampol CEO and managing director Matt Halliday also commented:
We are pleased that the governments have recognised the challenges faced by the local refining industry which includes competition from large-scale international refineries and the impacts of COVID-19.
Viva and Ampol share price snapshots
The Ampol share price needs today's good news as it battles a tough 2021 on the ASX. Ampol shares are down 3.4% year-to-date, although they have lifted 7.7% over the last 12 months.
The ASX has been kinder to the Viva Energy share price this year. Currently, it's up 10.85% year to date, as well as 18.3% over the last 12 months.
