Kwinana refining its future

The looming closure of BP’s Kwinana oil refinery will provide a revealing test of Western Australia’s economic flexibility.

The 65-year-old facility will stop processing crude oil by March 2021, although parts of the plant will live on as a storage hub for fuel.

Its shutdown is perhaps the sharpest sign yet that WA will not be immune to an accelerating international trend away from fossil fuels.

But as one refinery closes, others are working to open.

Business News research has found 11 projects in the Kwinana region under construction or likely, with a further seven in planning.

On the list are a suite of battery minerals developments, three power projects, and longer term, the Westport outer harbour (see table).

While BP battled a pandemic-affected oil price, new proponents have their own set of challenges to navigate, including labour costs, red tape and energy prices.

Their results will give an indication of the state’s potential in value-adding manufacturing and in green energy. 

Mannkal Economic Education Foundation executive director Andrew Pickford, an energy researcher specialising in state agreements, said it had been expected the refinery might continue operating towards the end of the decade.

That was evidenced by a 2016 move to extend BP’s state agreement by 30 years, which would otherwise have expired in 2020.

Ultimately, the low oil price environment had been a critical blow for a refinery that had long been sub-economic, Mr Pickford said.

While Kwinana had potential strengths with economical land and a skilled workforce, a downstream battery industry would face headwinds from high costs and regulation, he said.

And it would compete for workers and capital against mining, oil and gas.

Manufacturing was worth $12.9 billion to the state’s economy in the 2020 financial year, more than double the level of agriculture, according to state government statistics.

Much of the activity is around Kwinana.

While the refinery’s closure means 650 employees looking for work, manufacturing jobs across the state have fallen.

Full-time manufacturing jobs in recent months were at levels lower than in the 1980s (although lower still in 2017), according to Australian Bureau of Statistics data.

BP has been supporting workers to find alternative jobs.

“BP’s initial focus was on those at early career stage and we are pleased to see our apprentices and graduates receiving and accepting offers from local employers,” a spokesperson said.

“We are also working with the Kwinana Industries Council, South Metro TAFE, and a number of external training providers on measures that will help with career transitioning.”

Australian Workers Union WA state secretary Brad Gandy said BP’s workers had been very critical of the closure, and it would impact on local small businesses.

Mr Gandy said BP had not consulted with the union ahead of the decision.

He questioned the company’s decision not to put the refinery on the market.

Mid West oil producer Triangle Energy, which sold its crude into the refinery, will be affected.

Triangle chief executive Rob Towner told Business News the company had very little time to plan for the change.

Since then, however, Triangle had been in promising discussions with BP, potentially for refining in Singapore, he said.

There could be a further impact on businesses in Kwinana, where BP uses products from nearby factories and other businesses use BP’s products.

There are about 150 such synergies in Kwinana, which are generally touted as part of the area’s competitive advantage.

But there is some cause for optimism.

A BP spokesperson told Business News the company was exploring uses beyond an import terminal.

That could be a multi-use clean energy hub producing lower carbon fuels like sustainable aviation and marine fuels, and waste-to-energy solutions such as renewable diesel, she said.

Fully charged

Perhaps the most symbolic proposed project is by Synergy, which announced last year it would build and operate a 200 megawatt hour battery in Kwinana.

That would be housed at the decommissioned Kwinana Power Station, which had previously produced coal-fired electricity. 

The Synergy site has grid connections and is near some of the state’s biggest energy users.

It has the space, too, with the battery expected to cover an area equal to 20 tennis courts.

A proponent is likely to be selected in the March quarter.

While the government has not put a figure on the cost, Tesla reportedly built the Hornsdale battery in South Australia for a capital cost of $90 million, with 129MWh of storage.

A battery would be a fitting project for an area hoping to restyle itself as Lithium Valley.

That renewal has not been without its own challenges, however.

Tianqi Lithium was forced to pause completion of two lithium hydroxide processing trains in late 2019 when the company’s Chinese parent hit financial trouble.

The project will get a fresh injection of capital following ASX-listed IGO’s planned acquisition of a 49 per cent stake in Tianqi’s local operations.

BloombergNEF estimated in December the refinery’s capital cost per tonne of capacity was about 10 times a comparable project by Ganfeng in China.

Tianqi’s refinery had been at the vanguard of WA’s venture into downstream lithium processing, yet also was representative of the sector’s woes when prices dived.

Nearby, the planned Covalent Lithium refinery was delayed by the low-price environment, too.

Wesfarmers, which owns 50 per cent of the project, is understood to be planning a final investment decision this year, after securing development approval.

Completion of BHP’s nickel sulphate expansion at its nickel refinery was delayed by a year, with process commissioning to get under way early in 2021.

The company has pursued approvals to increase capacity at the refinery from 82,500 tonnes per annum to 90,000tpa.

It’s likely that all three will be in production in the near term, possibly joined by Ecograf’s graphite project and FYI Resources’ high-purity alumina plant, both in the battery supply chain.

That will be the genuine start of a Lithium Valley in Kwinana.

Nonetheless, the challenges showcase some of the hurdles to chasing downstream manufacturing opportunities that WA often encounters.

“Lithium in the past couple of years has shown, it’s hard to capture value, hard to make it work, and it’s very (capital) intensive,” Mannkal’s Mr Pickford said.

Proponents of value-adding battery manufacturing in WA have cited a desire to capture a larger part of what they say will become a $1-trillion-plus industry globally.

The big numbers are alluring, but competitiveness is key.

Some reports on the sector have called for major intervention, including a reservation scheme for local mining production, royalty rates to encourage domestic manufacturing, and even government equity stakes in miners.

Those moves have big drawbacks, however, mostly because they erode the benefits of competition and draw resources from more valuable industries.

“Providing particular firms or activities with a high degree of assistance confers a large competitive advantage,” the Productivity Commission said in its 2019 Trade Assistance Review. 

“This can be highly distortionary (in the relevant industry and economy-wide), as it redirects scarce resources (financing, labour or equipment) away from other more productive activities that are not receiving the same level of assistance from government.”

A further challenge is that subsidising businesses can lead to a race to the bottom across jurisdictions.

The US state of Georgia secured a $US1.6 billion investment from SK Innovation in 2019 for a battery manufacturing plant.

Local media reported the project was supported with $US300 million of subsidies, largely tax credits and waivers.

For now, most of the downstream value in battery making flows through China, South Korea and Japan, according to a 2018 Chamber of Commerce and Industry of WA report.

CCI said dominance was down to first mover advantage building an ecosystem, lower costs of brownfield expansion, a skilled workforce, intellectual property, large markets, low manufacturing costs, and a facilitative industry policy.

Japan produced about $100 billion of electronics equipment in the 10 months to October 2020, implying the country has a much larger pool of workers and industry with skills transferable into the high-value end of battery manufacturing.

And while battery manufacturing is high value, it is also low margin.

“The global lithium-ion battery supply chain is complex, dominated by large multinational chemical and manufacturing companies, exhibits ferocious low margin competition among these players at many stages of the supply chain, is primarily concentrated in low-cost jurisdictions, and is strategically located to efficiently service large global markets,” CCI said.

The Future Battery Industries Cooperative Research Centre is tasked with building a path for WA and Australia to move downstream.

Chief executive Stedman Ellis told Business News Kwinana had characteristics that would lend themselves to supporting the battery industry.

“It’s got the opportunity to be part of the future in Kwinana,” Mr Ellis said.

“Kwinana is on the cusp of capability to produce purified battery chemicals.”

Kwinana’s strengths were in the proximity to raw materials, political stability, traceability, and the national free trade agreements with countries in North America and Asia.

Research led by FBICRC would help generate intellectual property for local use, he said.

Mr Ellis said the organisation would research how investment into battery production had been attracted in other regions.

Colocation of the battery industry in other jurisdictions had been largely opportunistic, he said.

In China, refineries were located near cathode precursor material producers, although further downstream manufacturing did not need to be located nearby, FBICRC’s research indicated.

In the US, Panasonic and Tesla were colocating at the downstream end of the supply chain.

Energy

Avertas. Photo: Matt Mckenzie

Two waste-to-energy projects are under construction in the region, with Avertas Energy commencing installation of a boiler and mechanical equipment.

Separately, the Future Energy Exports Cooperative Research Centre is working to finance a $70 million Micro LNG research plant in Kwinana.

Chief executive Eric May told Business News design work was largely completed, with a renewable hydrogen operation to be included in the design.

A 2MW electrolyser would produce 800 kilograms of hydrogen daily, which could be sold to fuel stations around Perth.

That would spark research to help reduce the cost of renewable hydrogen to make it competitive with natural gas.

“It’s not going to happen overnight, but in the long term, hydrogen is needed,” Professor May said.

“You can’t have an export industry without a strong domestic program.

“(Hydrogen) is not going to be jumping to LNG levels any time soon, it’s a journey that will be a decade long.”

The proposed financing package will be innovative.

The centre is funded for research projects, rather than capital investment.

However, the research would lock in a revenue stream for a financier to pay the upfront cost of the facility.

Professor May said a final investment decision was intended for mid-2021, with construction to take two years.

Harbouring ambition

Longer term, the $4 billion Westport outer harbour development promises to bring new energy into the region.

In August, the state government committed to spend $97 million to progress a business case for the new port, with construction proposed for 2032.

Kwinana Industries Council director Chris Oughton said the port would bring a huge benefit for local industry.

“We’re looking forward to much more action on the new port,” Mr Oughton said.

“(Government) will want to get cracking on it … let’s just get on with it.”

The existing bulk jetties were operating close to capacity, as was the channel coming into Cockburn Sound, he said, and the rail network was constrained.

The Westport development would bring new rail links into the port and upgrade Anketell Road for freight, which Mr Oughton described as Perth Freight Link 2.0, in place of Roe 8.

The region would need industrial land brought to market, with most available heavy industry zoned land already in use, he said.

Land development and the port project could be managed more effectively through an independent planning authority with a public-private partnership, Mr Oughton said.

“I’m very optimistic and enthusiastic about the future,” he said.

“It’s pretty upbeat actually.”

Heavy industry

Alcoa. Photo: Matt Mckenzie

North of BP is Alcoa’s alumina refinery, which opened in 1963.

The company signed a series of gas deals last year to supply its three WA refineries from 2024, giving some indication the operations have years left.

A spokesperson for Alcoa said the company was continuing to invest in refining operations and was seeking environmental approval for the next two proposed mining areas for the Huntly bauxite mine.

Energy costs will be key.

The Australian Aluminium Council has argued for domestic gas reservation rules and a clear emissions policy nationally.

Coogee. Photo: Matt Mckenzie

Coogee, the chemical manufacturer, is upgrading its storage capacity for caustic soda and liquid fertiliser, while grain cooperative CBH has flagged developing a new fertiliser storage facility.

Quantem, which acquired a liquids storage business from Graincorp, had been planning a $52 million bulk liquid storage facility, although it is unclear the project has been cancelled.

George Weston Foods will soon announce a $70 million feed mill in the Latitude 32 precinct, which Business News understands was recently given development approval.

Managing director Paul Foster said it would be one of Australia’s largest mills when completed, create 200 construction jobs, and contribute $37 million to the local economy annually.

“Kwinana was chosen as the location for the mill due to its power and natural gas services, road access and (proximity) to the port and grain supply network in WA,” Mr Foster said. 

“With suitable sized blocks ready to build on, the site has enabled the quickest path to approval and construction.   

“We anticipate construction to begin in the first quarter of 2021, with commissioning and completion expected sometime in the second half of 2022.”

Adbri announced a $199 million upgrade of its Kwinana cement production site in December, in a plan which would consolidate operations from a nearby Munster plant.

That follows Adbri’s loss of a $70 million contract with Alcoa in July 2020.

Another manufacturer, Doral Fused Materials is located nearby, in East Rockingham,

Doral general manager Brad Snow told Business News demand for fused zirconia and silica flume had been strong.

“There has been some impact on sales from coronavirus, however we are seeing some encouraging signs for 2021,” Mr Snow said. 

“Raw materials for nuclear fuel rod, automotive brakes and glass furnace refractory remain our main fused zirconia markets which are predominately in Europe and Japan, while we are encouraged by the growth in new business in North America.”

The company’s second processing plant has worked toll treating battery minerals.

Mr Snow said the exchange rate was the key factor for WA’s manufacturing competitiveness.