Time for Defence to play a bigger role in Australia’s fuel market

Defence can use its market power in fuels to create sustainable alternatives & reduce its vulnerability.

Written by

Ulas Yildirim

The precarious state of Australia’s imports of refined fuels like diesel and jet fuel requires Defence to play a bigger role in Australia’s fuel market to satisfy its ongoing fuel needs. Because in the long run relying solely on the market will place more than Defence’s credibility at risk during a period Defence Minister Richard Marles labelled ‘the toughest strategic environment Australia has encountered in over 70 years’.

As Bioenergy Australia’s Australian Renewables Fuels week approaches, Defence will be keen to highlight the demonstration flights it conducted using sustainable aviation fuels with the RAAF Roulettes late last year.

Sustainable aviation fuels are fuels made through chemical processes that can include using biological material like agricultural waste as feedstock.

Other than providing much lower emissions, sustainable aviation fuel enables Defence to diversify its fuel supply and reduce dependency on extended, vulnerable supply chains. Therefore, while highlighting Defence’s green credentials, the demonstration was a signal to the market that it can operate using sustainable fuels. Without a doubt a commendable effort.

This event, however, was the second of its kind. The first was back in 2012 alongside the US Navy during the Rim of Pacific Exercise in Hawaii. Like all the other fuels Defence currently obtains, the sustainable fuel for the demonstration was also imported because it’s currently not produced in Australia. Even though the majority of the feedstock to produce it was likely obtained here, then shipped to a refinery elsewhere in the world to finally be shipped back to Australia for use.   

In 2012 there were still seven operating fuel refineries in the country. In 2013, John Blackburn published his prescient work rightfully labelling Australia ‘complacent’ when it forecasted refined fuel imports increasing to 43% by 2014. More than ten years on, the trend has only become worse with imports growing to over 90% while the number of refineries has reduced to two (in Brisbane and Geelong) with future projections looking bleaker.  

Relying on efficient markets may look fine to macro-economists but Defence is called upon during crises when markets stop operating. A lack of domestic fuel production will have dire consequences for an institution like Defence whose primary role depends on being able to operate when others can’t. In this vein, uninterrupted access to fuel remains a fundamental requirement for Defence as its capabilities such as its fighter aircraft, the current fleet of ships, submarines, armoured vehicles, tanks and even the newly announced Navy surface fleet will require diesel and jet fuel to operate. So, Defence will need to use either fossil fuels or sustainable alternative fuels for decades to come. In fact, other than the nuclear submarines announced under the AUKUS program the majority of Defence’s capabilities will operate on diesel and jet fuel over the next several decades well beyond 2050.

The Defence Strategic Review recognised fuel security and its fragile state as a major limitation for Defence. More on that later. This is because even a minor disruption that extends the delivery times of fuel by more than a few weeks during a crisis will have direct implications for Defence’s ability to fulfil its primary role.

The current Gaza conflict and the effect that a small group of Houthi rebels have had on large petroleum tanker movement through one of the world’s most important trading routes is instructive. Around 12% of the globe’s sea borne-traded petroleum flows through the Suez Canal and the Red Sea region. Houthi rebel attacks on commercial vessels have meant that several of the major shipping companies are now avoiding the route choosing to go around Africa. The effect of this is that energy movement from this route was halved by December 2023. The disruption has consequently increased shipment journey times from the region to Australia by more than two weeks which already take several weeks on average.

The global supply chain’s tendency to work ‘just in time’ means that even small delays have the ability to cause a domino effect across the globe. In this vein, while most Australian fuel imports are from South Asia small delays in the Red Sea can therefore have a severe impact to shipping in the region.

Defence’s credibility to prevent military adventurism in our region heavily depends on its capabilities to project military power at short notice. Being 90% dependent on imports for its fuel needs puts this credibility clearly in doubt. Defence must therefore be more proactive than taking ten years to provide demand signals to a market already supporting foreign country fuel programs.  

The Government’s strategic review was not blind to this problem and provided another avenue for Defence to adapt to its worsening strategic environment. Along with recommending a restructuring of its major capability acquisitions, the review identified Defence’s exposure to fuel shortages and recommended the establishment of a fuel council. The report was followed by Sir Angus Houston, the former Chief of the Defence Force and one of the review’s co-authors, further stressing in various media appearances that fuel distribution and storage is a ‘real problem’ articulating the challenges associated with most of Defence’s fuel having to travel through the South China Sea before delivery.

Since then, the Jet Zero Council was independently established in June 2023 with two of its objectives being the development of a sustainable aviation fuel industry in Australia and implementing ‘measures to enhance Australia’s aviation fuel security supply chains’. After two meetings it’s too soon to comment on the council’s work. Additionally, a national paraffinic diesel standard has recently been proposed which is seen as a way to incentivise domestic renewable diesel production and distribution if implemented. Defence is involved in both as another participant providing commentary. In parallel, various industry participants have been open in highlighting that they are looking at Defence for leadership and partnerships while select few have invested modest sums for domestic production planned for years in the future. These are encouraging signs but unfortunately without active participation by Defence with clear goals and incentives to influence the fuel market, its growing fuel security issues will remain unresolved.    

Across the Pacific the US provides a contrasting example. A country with few energy security issues, the US military uses various levers such as implementing public private arrangements and providing grants to ensure domestic fuel production. For instance, in 2011, well before the Inflation Reduction Act, the US Navy, the Department of Energy and US Department of Agriculture signed a memorandum of understanding for each to provide $170 million to partner with industry to domestically produce ‘drop-in’ fuels – including sustainable aviation fuel. This was followed by contracts with four independent companies to build biorefineries in the US. More recently the USAF provided a $65 million grant in 2023 to an American startup to produce SAF from direct air capture methods which are largely still in the research and development phase. During the same period, Defence’s only contribution was a $5m grant to an Australian renewable fuel company in 2022 at the direction of the incoming government.  

Arguably, Defence sees this problem outside its remit as a ‘small off taker’ within a large Australian fuel industry. Though a monopoly over the nation’s defence and over 400 million litres of combined diesel and jet fuel consumption per annum in an average year would suggest otherwise. Defence under the large umbrella of the Australian government and with a mandate to operate when others can’t, therefore, has a much bigger say about and a lot more riding on liquid fuel security than many Australian corporations combined. It doesn’t all have to be money up front either. Defence has the need and the clout whereby a mere mention of its name has investors’ tails wagging across the globe. It can use these to support investment in domestic companies and to attract foreign investment to locally produce its fuel needs without taking on risk.    

Defence has a responsibility to be an active participant in Australia’s fuel industry to ensure it has uninterrupted access to its fuel. After years of seeing Australia’s refining sector atrophy to the point where more than 90% of the nation’s refined fuel is imported, Defence must recognise that its exposure to fuel interruptions places the nation’s security at risk and must positively influence Australia’s fuel sector for its long-term fuel needs. Now is the time for Defence to play a bigger role in Australia’s fuel market.