BP, Caltex eye downstream joint venture in Australia

BP Australia Ltd. and Caltex Australia Ltd. are in detailed discussions on the potential for a joint venture (JV) to operate their Australian refineries plus the associated downstream oil supply and shipping functions.

The move follows the lead taken earlier this year by Shell Australia Ltd. and Mobil Oil Australia Ltd. to combine their Australian refining operations into a new 50-50 JV, and for the same reason (OGJ, Sept. 14, 1998, p. 32). The companies believe that beneficial efficiencies will be achieved in their Australian refining businesses by the proposed JV. The changes are needed to meet the intense regional and domestic competition in refined products.

Here, the two companies are referring to the relatively cheap importation of refined products from Asia by independent retailers that is undercutting domestically produced refined products and making it hard for Australian refineries to compete.

What's involved

The proposed BP/Caltex JV would achieve lower costs when the refineries in Brisbane (BP's 73,000 b/d Bulwer Island refinery and Caltex's 104,000 b/d Lytton refinery), Sydney (Caltex's 116,700 b/d Kurnell refinery) and Perth (BP's 138,000 b/d Kwinana refinery) are operated as a four-refinery integrated system. This arrangement would allow product specialization at each facility, with an overall gain through economies of scale. There are no plans to close any of the facilities, although there will invariably be some jobs lost in the consolidation of the Brisbane sites and the two supply units.

The proposed JV would operate the refineries, but BP and Caltex would continue to operate all other parts of their businesses independently. This includes all terminal and marketing operations.

BP and Caltex say the discussions are at an early stage (the announcement was made to satisfy stock exchange obligations of the Australian-listed Caltex), and the Australian Competition and Consumer Commission (ACCC) has been advised of the negotiations. The two firms will request that ACCC support the JV as soon as discussions are substantially complete-possibly by late February 1999.

There is some irony in the fact that ACCC has in part been responsible for the intensity of the downstream petroleum competition in Australia by making sure that independent operators gain a foothold in the country by being offered any service stations discarded by Caltex and Ampol Ltd. when those two companies merged to form Australian Petroleum several years ago. Caltex has since bought out the Ampol shareholding.

Competition concerns

For its part, ACCC has responded to the BP/Caltex negotiations announcement by saying the proposal raises substantial competition issues for the oil industry, coming on top of the Shell/Mobil proposal, which is currently before the Commission.

ACCC says the combined effect of both proposals is to reduce the number of Australian refinery operators to two players. This raises concern about the potential effect on competition of the degree of concentration in refining.

ACCC Chairman Allan Fels says that an important source of petroleum products for independents is Australian refineries. He says the level of "independent" imports of gasoline into Australia-particularly to the eastern seaboard-is quite low. Consequently, both proposals (Shell/Mobil and BP/Caltex) will be looked at very carefully.

ACCC is also considering the implications of the proposed worldwide acquisition of Mobil Corp. by Exxon Corp. Although Exxon (Esso in Australia) is no longer involved in retail or wholesale gasoline markets in Australia, the company (with BHP Petroleum Pty. Ltd.) is a crude oil producer in Bass Strait, and this is a major source of supply of oil for Australian refineries.