Viva Energy: Essential Fuel Supplier with Strong Infrastructure and Long-Term Growth Potential

About REA Group Limited

Viva Energy Group Limited (Viva Energy, the Group, ASX: VEA), has operated in Australia for over 120 years and was formerly known as Shell’s Australian downstream business, which was part of the Shell Group. Today with 1,345 Shell and Liberty service stations across Australia, and a network of pipelines and fuel import terminals, Viva Energy infrastructure stores and supplies a quarter of Australia’s liquid fuel requirements.

The Group’s convenience and fuel network employs 14,000 people, making it one of the top 20 private sector employers nationwide. The convenience and fuel network is the largest in Australia, and includes the Shell, Coles Express, Reddy Express, Liberty, Westside, On The Run (OTR) and Smoke Mart (Gift Box) brands. It also owns and operates the strategically located Geelong Refinery in Victoria.

Essential infrastructure providing energy security for Australia

Viva Energy owns and operates essential infrastructure that plays an important role in providing energy security for Australia, including one of Australia’s only two petroleum refineries. The Group’s refinery in Geelong is Australia’s largest and processes imported crude oil into petroleum products which meet Australian specifications and enhances fuel supply security for the country. The Refinery supplies more than 10 percent of Australia’s total fuel requirements and 50 percent of Victoria’s fuel demand. It is the only manufacturer of bitumen, aviation gasoline (Avgas) for use in piston engine aircraft that service regional communities, aromatic and aliphatic based solvents used by the mining industry and chemicals manufacturers, and polypropylene products that produce the high-quality polymers used in Australian bank notes. It also produces military grade fuel.

The Group’s international import, storage and distribution infrastructure services the energy needs of customers in the aviation, marine, transport, resources, defence, road construction, agriculture and manufacturing industries, as well as wholesalers. This makes these infrastructure assets of national strategic significance because they store, carry and supply 25 percent of Australia’s fuel needs.

Viva Energy provides storage capacity of more than 1,100 million litres of oil and fuel at its depots and terminals, as well as owning the major pipelines servicing Melbourne and Sydney markets. It also has an operating presence at more than 50 airports and airfields across the country.

Australia’s Fuel Security Package

The number of petroleum refineries in Australia has reduced from six in 2011 to just two today. Australia’s two remaining crude oil refineries are the Ampol Lytton Refinery in Brisbane and the Viva Energy Refinery in Geelong.  Intense competition from Asian refinery imports has significantly reduced refining margins in Australia, and the COVID-19 pandemic in 2020 resulted in demand destruction for fuel and therefore refining volume.

In response to these market conditions, Viva Energy worked with the Commonwealth government to develop the Fuel Security Package in 2021. The Fuel Security Package seeks to protect consumers and the Australian economy more broadly from supply disruptions. The Package provides support for national fuel security including a minimum stockholding obligation, and capital grants toward upgrading the Geelong Refinery to produce ultra-low sulphur gasoline and build additional diesel storage capacity. The Package extends to Viva Energy entering into a strategic partnership with the Department of Defence to supply aviation, marine and ground fuel to the Australian Defence Force, both locally and internationally.

The Fuel Security Package is designed to mitigate some of the downside risk to refining margins and provides payments to Viva Energy when margins fall below the long-term break-even level of Geelong’s operations.  Viva Energy has committed to the existing package through to June 2027.

Future growth

Australia relies on liquid fuels for more than half of its final energy demand. While the use of alternative fuels and new vehicle technology is increasing, traditional liquid fuels are likely to play an important role in Australia’s energy mix, at least over the coming decade.

In this context, Viva Energy is a critical player in Australia’s energy needs because 80 percent of Australian fuel requirements are imported. This is likely to remain the case well into the next decade because locally refined fuel is essential to Australian transport as we work through the energy transition.

In the short and medium term, the broadening of Viva Energy’s convenience offers, and the integration of quick service restaurants and electric vehicle recharging facilities, should present consistent growth opportunities in its fast-growing retail segment.

The combined impact of these medium and long-term drivers should support consistent shareholder value accretion in the period ahead.