Australia's Emergency Fuel Storage Costs

Auxiliary
Report
Final Australia's Emergency Liquid

Fuel Stockholding Update 2013: Oil
Storage Options & Costs
Prepared for the Department of Industry, Canberra
22 October 2013
This report was produced using data, forecasts and price

information current at the time of writing (2013). It should be
noted that these inputs are likely to change over time and users
of this report should refer to report updates where available or
consider the age of the report when reviewing the results
presented.
Hale & Twomey Limited is an energy consultancy specialising in strategic issues
affecting the energy sector. With a comprehensive knowledge of local and
international energy markets, we provide strategic advice, comprehensive analysis
and services across the entire sector.
Hale & Twomey prides itself on being able to analyse and interpret the detail, then
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adding work.
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Australia, New Zealand, Africa and Asia.
Aurecons multidisciplinary oil and gas team specialises in inspection, assessment,

design, construction supervision and project management of oil terminals. Recent
projects include the detailed design of five new sites, adding 350 m 3 to Australias
storage of diesel, petrol and bitumen in 26 new tanks.
Authorship
This document was written by:
Ian Twomey Phone: +64 4 471 1109 or +64 21 688 409, e-mail:
ian@haletwomey.co.nz
Tim Labett Phone: +64 4 439 0268 or +64 21 436 146, e-mail:
tim.labett@aurecongroup.com
Please phone or e-mail for further information.
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Executive Summary
Facilities for emergency liquid fuel storage are usually large scale in order to hold the
volumes required to provide a reasonable level of supply security. This report updates
work done in the National Energy Security Assessment (NESA) Identified Issues:
Australia's International Energy Oil Obligation (2012 Report) on the options and costs
for large scale emergency stock holdings including the facility cost, the stock cost and
the operational costs to keep the facility and stock in an appropriate state of
readiness.
Emergency stocks can be held in above ground storage terminals, permanent floating
storage facilities, or underground caverns (either natural or constructed). This report
investigates four options for storage in detail; three above ground scenarios and one
permanent floating storage facility. Permanent floating storage refers to a purpose
built facility, not oil tankers moored together. Underground caverns are not
investigated in detail in this report.
Scenari Facility Size Stock

o (million
litres)
1 Above ground expansion of existing 200 Product

terminal
2 Above ground dedicated terminal 480 Crude
3 Above ground dedicated terminal 500 Product
4 Permanent floating storage 1,000 Crude
The sizes for scenarios 2, 3 and 4 are set where the benefits of economies of scale
have been captured smaller terminals will cost more per litre of storage, whereas
larger terminals will have a similar cost per litre
Figure 1 shows the capital costs for each facility per cubic metre (000 litres). The cost
of the stock makes up over 60% of the total cost. In terms of facility cost, there is not
much difference in the cost per unit of storage between the larger tank farms and
permanent floating storage. The smaller expansion terminal is more expensive as it
is not large enough to capture all the scale benefits.
Hale & Twomey: Final Australia's Emergency Liquid Fuel Stockholding Update 2013: Oil Storage Options &
Costs
Figure 1: Capital investment per unit storage
These capital costs are lower per unit cost than a normal commercial terminal
development. This is due to the large scale involved, and because many of the
features of a commercial terminal such as tank wagon loading gantries are not
required. These estimates do not include related infrastructure such as jetties, wharf
lines and links into utilities (e.g. roads, power and water). In order to keep these costs
down, the facilities should be located relatively close to existing infrastructure (e.g.
use existing jetties, etc.).
Figure 2 shows the annual cost per storage unit (m3) assuming a 7% rate of return on
the capital, together with the land and operational costs. Providing a return on the
capital required to build the storage facility and buy the stock makes up
approximately 85% of the total cost (as shown in the red and green components in
Figure 2). Product storage is more expensive as the cost of purchasing the product is
about 10% more than crude along with higher operational costs to keep product to
specification (to maintain quality).
Figure 2: Emergency storage costs per year (@ 7% return on capital)
The charts highlight that emergency stocks are a very capital intensive investment. In
order to provide emergency stocks at the lowest possible ongoing cost they need to
be implemented in a way where the return expected on the capital is as low as
possible.
Costs
The size of the facilities investigated in this report is substantial. Previous industry
consultation has noted there has not been construction of storage facilities on this
scale in Australia since refinery construction in the 1950s.
Costs
Table of Contents
Executive Summary....................................................................................i
Glossary.................................................................................................... 1
1.0 Introduction.....................................................................................2
2.0 Background.....................................................................................4
3.0 Methodology....................................................................................6
3.1 Scope of Work.................................................................................................... 6
3.2 Expert storage facility cost estimate..................................................................6
3.3 Approach............................................................................................................ 7
4.0 Physical storage overview................................................................8
4.1 Physical stockholding......................................................................................... 8
4.2 Types of physical storage...................................................................................9
4.3 Cost components of emergency storage..........................................................10
4.4 Storing crude versus product...........................................................................10
4.5 Location selection............................................................................................11
5.0 Storage facility costing - establishment...........................................13
5.1 Construction cost above ground storage.......................................................13
5.2 Construction cost permanent floating storage...............................................14
5.3 Oil stock........................................................................................................... 16
5.4 Construction timing.......................................................................................... 16
5.5 Return requirements for capital investment.....................................................17
6.0 Storage facility costing: on-going costs...........................................18
6.1 Operations and maintenance costs..................................................................18
6.2 Turnover costs..................................................................................................18
6.3 Land costs........................................................................................................ 19
6.4 Management and administration......................................................................19
7.0 Cost summary................................................................................20
Appendix 1: Physical storage costs and details (Aurecon report)...............22
Appendix 2: Cavern storage.......................................................................6
Costs
Appendix 3: Comparison with IEA storage work...........................................7
Associated Reports....................................................................................9
Costs
Glossary
Annual cost The cost of stockholding in a specific year - covering all costs
including a return component for the capital invested in
storage facilities and stock, land rental and storage facility
operating costs.
bbl Barrel (measure of petroleum volume = 159 litres).
Collective action Actions undertaken by the International Energy Agency to
respond to oil market disruptions. Responses include the joint
release of oil stocks, demand restraint, fuel switching and
surge production.
Commingled stocks Where emergency stocks are held in the same facilities (and
possibly the same tanks) as commercial stocks.
Commercial stocks Stocks held by commercial operators to manage their
business, including managing normal supply chain disruption.
Cubic metre (m3) Unit of storage equalling 1,000 litres
Emergency stocks Stocks held by countries specifically to manage major supply
chain disruption either globally or locally if outside the control
of commercial companies.
IEP Agreement International Energy Program Agreement (the Treaty).
Import mix The mix between crude and the various product groups in a
countrys petroleum imports.
kt One thousand tonnes.
Mega-Float Commercial name of permanent floating storage facility
designed and promoted by Japanese companies.
Operating cost The costs involved in holding emergency stock including the
storage facility maintenance and operational costs, insurance
and product quality maintenance.
Stock out Where normal market demand is not fully met such that there
is disruption to the customer supply.
Costs
1.0 Introduction
This report updates the work on emergency liquid fuel storage from the National
Energy Security Assessment (NESA) Identified Issues: Australias International Energy
Oil Obligation report (2012 Report) produced by Hale & Twomey (H&T) for the then
Department of Resources, Energy and Tourism in 2012. In developing four options that
Australia could use to hold emergency stock, the report included calculations on the
cost of building storage facilities and holding physical stock, both crude and product,
in Australia.
The 2012 report and a follow up report, Stock on the Water Analysis (2013), found
that within Australia, the options for emergency physical storage are expensive, and
that:
Australia and New Zealand have no such facilities [i.e. large storage capacity]
in-country or any nearer than Singapore which is an 8-14 day voyage from the
manufacturing locations in Australia and a 16 day voyage from New Zealand.
Australia [and New Zealand] can also be characterised as concentrated demand

centres that are spread around the country but isolated from each other. Unlike
North America or Europe there is no pipeline network linking these centres (or
barge trade as in Europe). The road distances are also substantial meaning road
transport cannot be relied upon to manage disruption. With few internal links,
this limits the attractiveness of storing oil on land in all likelihood it will not be
where it will be required.1
The current petroleum storage facilities in Australia are used by commercial operators
to either supply the market, or export Australian production. Therefore if Australia is to
store significant quantities of emergency stock in-country, new dedicated storage
facilities will be required. The aim of this auxiliary report is to investigate the cost of
storage options within Australia in more detail, both for above ground (tank farm) and
permanent floating storage.
For above ground storage, new cost estimates specifically relating to emergency
storage have been developed. Analysis by the International Energy Agency (IEA)
showed that the cost of emergency storage terminals should be significantly cheaper
(per volume stored) than a normal operating terminal.
Permanent floating storage is a purpose built facility for storing petroleum on water,
not normal oil tankers moored for a period. This report investigates permanent
floating storage through a literature review.
Cavern space (either natural or constructed) is used for emergency fuel storage in
some countries, including Germany, South Korea, the United States and Singapore
this report provides some general information on the development of storage caverns
but does not investigate this for Australia, as this option is outside this papers terms
of reference.
1 Hale & Twomey; Stock on the Water Analysis report (2013), pg13
Costs
Information on holding stock in another country may be found in several other Hale &
Twomey reports, including the auxiliary report Australias Emergency Liquid Fuel
Stockholding Update 2013: Ticket Markets, and the Main Report 2013.
The size of the facilities investigated in this report are substantial and during the
consultation for the 2012 Report, industry noted there has not been construction of
storage facilities on this scale in Australia since refinery construction in the 1950s.
Industry also noted there is little excess storage capacity in the existing system,
although depending on the outcome of planned refinery conversions, this could be
improved slightly.. The extent and availability of assets which may not have justified
upgrading in the past but which could be brought into service for emergency stock, is
not known at this stage.
Costs
2.0 Background
Australia is a member of the IEA where, as a signatory to the Agreement on an
International Energy Program (the IEP Agreement), it benefits from the coordination
of crude oil and petroleum product supply in the event of a major disruption to
international oil markets. Under the IEP Agreement, member countries accepted a
treaty commitment to hold crude oil and petroleum product stocks equivalent to a
minimum of 90 days of the previous year's daily net import demand, and participate
in collective actions2 initiated by the IEA during a liquid fuel emergency.
In the last few years Australia has not achieved the minimum inventory obligation set
by the IEA. With local production of crude and condensate falling and petroleum
demand increasing, the commercial stocks held by market participants are no longer
sufficient to cover the minimum commitment which is based on 90 days of daily net
imports.
The IEA includes 28 member countries and was founded in response to the 1973/4 oil
crisis. The majority of members are in Europe as shown in Figure 3. Australia, Japan,
New Zealand and the Republic of Korea (South Korea) are the only IEA members in the
Asia-Pacific region.
Figure 3: IEA membership map
The majority of IEA member governments hold emergency stocks, although there are
a wide variety of approaches to holding physical stock and obtaining storage facilities.
Some governments have developed and own storage facilities; others lease storage
from the market and leave it to private providers to own and manage the facility. In
this case, storage facilities are normally secured through a tender process (which is
applicable for both existing and new facilities).
With regard to physical stock, most governments own the oil even if the storage is
leased, unless they devolve the obligation to hold stock to the petroleum industry
operating within the country. Even where industry is responsible for holding stock,
there is usually some approved central structure (e.g. stock agency) to ensure the
facilities and stock are developed and held in the most efficient way.
2 IEA collective actions cover a range of options including the joint release of stock as
an initial response to market disruption. Other responses include voluntary demand
restraint, fuel switching and surge production. The actions chosen are tailored to each
situation, involve widespread consultation and co-operation and can be instigated
rapidly.
Costs
Some IEA countries fund emergency stock from the general government budget,
particularly non-European countries. However, many of these countries established
reserves over a long period when petroleum prices were at lower levels. Direct funding
via a consumer levy is common in Europe, and most IEA countries tax petroleum in
some way. The levy provides an annual income stream to the government or stock
agency. Large upfront costs associated with initial fuel purchases are funded by loans
to the stock agency, which are repaid through the levy income.
This Report does not examine stock ownership and management options, or funding
mechanisms which are covered in the Main Report 2013. It is a factual and technical
paper (with costings based on an engineering analysis) to enhance and provide more
detailed estimates for the work completed in 2012 by Hale & Twomey.
Costs
3.0 Methodology
This report follows the requirements as laid out in the scope of work (3.1). The task
included obtaining an estimate from a suitable expert to provide engineering costings
for storage facilities. The 2012 Report used engineering cost estimates developed for
smaller scale terminals in New Zealand, adjusted to take account of the increased
scale and Australian costs and conditions. The new engineering estimates are
expected to be more accurate as they have been developed specifically for large
dedicated emergency storage, based on conceptual engineering designs and
associated itemised costings derived from actual Australian tank construction.
Engineering consultancy Aurecon was engaged to provide these estimates (3.2).
3.1 Scope of Work
This report required the extraction of relevant material (updated as required) from the
2012 Report; the re-organisation of topics into a logical hierarchy, expansion or
elucidation of identified sections or issues; and new work including expert technical
input, as noted below.
There are three main options to store large quantities of fuel:
i. Underground rock caverns;
ii. Tank farms (land); and
iii. Storage on water: (a) permanent tanker storage; (b) stock on water (in transit,
de facto storage).
This report examines storage issues in Australia in relation to ii. Tank farms, and iii. (a)
Permanent tanker storage. Three or four generic (but based on real-world situation)
scenarios are focused on, and the following requirements are addressed:
Updated costs for tank farm construction, including storage for sole emergency
purposes, and storage for both emergency and commercial operations,
including estimates for associated infrastructure such as pipelines;
Updated costs for augmented facilities (added to existing), greenfield facilities
(new build), and identification and consideration of possible site specific and
other factors such as costs associated with geotechnics;
Discussion of options and costs obtained from available information for
permanent off-shore tanker storage, including possible suitable locations, and
associated infrastructure required; and
Updated costs should be able to be factored into modelling as required.
3.2 Expert storage facility cost estimate
Engineering consultancy Aurecon was engaged to deliver new above ground storage
facility cost estimates.3. Aurecon is currently involved in terminal design and
construction in Australia for commercial clients. The scale of emergency storage
3 See Appendix 1: Aurecon; Australias Emergency Liquid Fuel Storage. Terminal

Concept Design and Cost Estimate. 19 July, 2013
Costs
facilities is expected to be significantly larger than normal operating terminals and
thus requires development of specific concepts with larger tank sizes to provide the
optimum tank size cost to storage capacity. Costs for three different concepts have
been developed.
1. An expansion of an existing tank farm adding approximately 200 million litres of

product storage.
2. A dedicated strategic crude oil storage terminal of approximately 480 million

litres.
3. A dedicated strategic product storage terminal of approximately 500 million litres

(storing ~ 60% diesel, 40% petrol).
These three concepts have been chosen so that the likely range of options for
emergency storage are considered (large dedicated facilities that could hold either
crude or product) along with large expansion of existing product terminals (if the
stocks were to be dispersed around the country). Smaller terminal expansion is not
included as emergency storage facilities are expected to be reasonably large. Product
storage does not include jet fuel due to its quality requirements making long term
storage more difficult.
For the large terminals, an approximate volume of 500 million litres has been selected,
as above this point, costs are expected to increase proportionally with volume
increase (i.e. this terminal size has captured the scale benefits).
The cost estimates are for the storage tanks and the immediate related infrastructure
including tank foundation and compounds, piping, pumps, fire protection and
electrical and control equipment. Related infrastructure that may be required
depending on the site chosen such as connecting pipeline, jetties, wharflines and
connections to utilities (roads, power, water) is not included.
3.3 Approach
While more detailed engineering estimates have been developed for above ground
storage, permanent floating storage has been investigated using a desk top study,
researching available public information. Permanent floating storage facilities are
specifically designed for the long term storage of petroleum on water. Storing oil using
temporarily moored ships is not assessed as it would be unlikely to get approval as an
acceptable long term storage option.
Following development of the storage facility costs (for both above ground storage
and permanent floating storage), other costs such as stock, operational costs and
maintenance have been updated to provide fully built up costs for emergency storage.
The 2012 Report built up likely stock costs from an international crude benchmark
price (dated Brent of USD115/bbl). This report changes the methodology and uses
Australias actual import costs for crude and product in the 2011/12 year to establish
the cost of stock.
The IEA has recently reviewed costs for emergency storage4. These costs are
compared in Appendix 3.
4 IEA- SEQ (2013)20-Costs and Benefits of Stockholding Final Report.
Costs
All the new work has been done in Australian dollars reflecting Australian conditions.
Costs
4.0 Physical storage overview
This section reviews the use of stocks in the petroleum supply chain and then looks
specifically at emergency stocks including the types of storage facilities, costs
involved, stock type and location decisions. Issues relating to oil purchase, ownership,
stocks management, and emergency release strategies, are covered in the Main
Report as part of the stockholding options evaluation.
4.1 Physical stockholding
Stocks are an integral part of the petroleum supply chain. Producers, refiners and
marketers all need to hold stock to manage their operations; to build stock to sell in
cargo sized quantities, to receive economic cargo quantities, to manage production
variation and to manage demand variation. Stocks held as a result of business
decisions are referred to as commercial stock. Currently all stock held in Australia is
commercial stock.
Companies will be expected to hold sufficient commercial stock to manage the

variation and any expected disruption to their supply chains. If commercial stocks are
not sufficient, a company risks stock outs with the associated impact on its business
reputation.
Emergency stocks are those stocks held separately from companies commercial
stock decisions. These stocks are specifically held to manage major global disruption
to the petroleum supply chain or major disruption to domestic supply chains outside
the control of the commercial companies (e.g. major natural disaster).
Emergency stocks are normally held in separate facilities from commercial stocks
although depending on how the emergency stock strategy is established, the stocks
can be commingled, either within the same facility but in separate tanks or if
managed carefully even within the same tanks.
The majority of IEA countries holding emergency stocks hold them separately in
dedicated facilities. These countries include Germany, Japan, Korea and the United
States among many others. Countries which require their commercial companies to
hold minimum quantities of stock usually have some of their emergency stocks
commingled with commercial stock. Examples include France, Japan, Netherlands and
the United Kingdom. As can be seen by the inclusion of Japan in both groups,
countries can use a combination of approaches for emergency stockholding.
The advantage of holding emergency stocks in-country means that the stocks will be
available even if international supply chains are disrupted (they may still need to be
shipped domestically) and there is very little time delay before the stocks can be
made available to the market.
Costs
4.2 Types of physical storage
Emergency stocks can be held in different types of storage. These include:
Underground storage (either rock or

salt cavern).
Picture: Jurong Rock Cavern, Singapore
(Source: Jurong International)
Permanent Floating Storage

Picture: Shirashima National Oil
Stockpiling Base, Japan
(Source: Vietnam study originally from
JOGMEC website)
Above ground storage (tank farms)

Picture: Oiltanking storage facility,
Netherlands (Source: Oiltanking.com)
For large volume, long term storage, underground storage (especially salt caverns) is
generally regarded as the cheapest form, although natural cavern storage is
dependent on the geology of the country. Due to product quality issues, underground
storage is usually only used for crude oil.
Floating storage can be (i) temporary, particularly where the market incentive to store
oil is greater than the cost of chartering a ship, or (ii) permanent, where purpose-built
facilities are developed to hold stock.
Holding oil in storage tanks (above ground storage) is the most common form of
petroleum storage and the only method currently used in Australia to hold petroleum
stocks. Emergency stock held as product is stored in tanks as it needs to be readily
accessible for regular turn over and replacement to maintain quality.
This report reviews both above ground storage and permanent floating storage for
applicability to Australia. There are some comments on the costs of underground
storage facilities in Appendix 2.
Costs
4.3 Cost components of emergency storage
The cost of holding emergency stocks includes both capital costs and ongoing
operating costs.
i. Capital costs include:
the storage facility cost (including related infrastructure);

stock cost; and
land cost (if land purchased)5.
ii. Ongoing operating costs include:
maintenance of the storage facility;

land leasing cost (if land leased);
operating cost for the facility;
product quality monitoring and turnover cost to ensure the integrity of
the product is maintained; and
management and administration.
The specific costs are detailed in Section 5. Costs associated with stock release are
not included in the calculation of holding costs.
4.4 Storing crude versus product
The decision on whether to store crude or product depends on a number of factors.

There are advantages and disadvantages to both.
Table 1: Crude versus product storage
Advantage Disadvantages
Crude More storage options Needs to be refined before

(including underground and useful to the local market
floating) (therefore dependent on
Storage cost is usually refining system)
cheaper Contributes less towards IEA
Stock cost is cheaper target as refinery loss taken
Does not need to be turned into account
over to maintain quality Needs to be located near a
Produces all products when refinery if to be used without
refined the need for shipping
Product Can be used directly (and Typically uses more
immediately) in an expensive above ground
emergency storage
Can be close to existing Stock cost is more
facilities to link in with expensive (by USD10-
existing networks 15/bbl)
Contributes more to IEA Needs to be monitored for
target than equivalent quality and turned over from
volumes of crude (by 11%) time to time
Provides security for Security of supply only for
5 While the land cost is derived from a capital cost, the analysis in this report converts
it to a lease cost and is therefore shown as an operating cost.
Costs
domestic refining the type of product held,
disruptions and possibly which may not match the
domestic infrastructure disrupted supply
disruption
Australias refining industry is under competitive pressure. Of the seven refineries

operational in 2010, several are, or might be, converted to import terminals: Clyde
Refinery in 2012; Kurnell Refinery in 2014; and Geelong Refinery is currently on the
market and may be converted to an import terminal if a suitable purchaser cannot be
found.
Investment in dedicated emergency storage facilities is a long term investment due to

the substantial capital investment required and the long life of the asset (30 to 40
years). If a crude storage terminal is developed near to an existing refinery, over time
a decision could be made to shut the refinery. Crude could still be stored in the facility
and shipped to another refinery in an emergency although this would add time to the
response (that time should be available given normal commercial stock levels).
However if all Australian refineries were to close the crude would then need to be sent
offshore for processing. This would reduce the strategic value of holding stock in
Australia although the stock would still contribute in a global response to a disruption
event (additional crude released to market).
Most IEA countries have oil refineries6 so either have all crude or a mix of crude and
product for emergency stocks. Some countries relate the emergency stock
requirement to the import mix, in which case it would be adjusted if the import mix
changes.
For decisions on emergency stock holding type in Australia, the forward expectation of
refining capacity should be taken into account, possibly by designing any storage
terminals so that they could be switched from crude to product at a later date if all
refinery capacity were to close.
Permanent floating storage has a similar issue as it is designed to hold crude. If

Australia no longer had refineries, the crude would need to be sold offshore in an
emergency. In theory, a facility could be dismantled and transported to a different
location but as there are so few of these facilities in operation there is no guarantee
that a buyer could be found. It is not known if these facilities could be converted to
product. If they could be, the cost of product quality maintenance and turnover would
be much higher than for a land based facility. This is because product would need to
be shipped in and out when turning over product to maintain quality. There may also
need to be some design changes to the storage units in order to hold product.
If the announced refinery closures proceed, Australias import mix is forecast to shift
from the current 40% product imports to the 60-70% range7 in the next five years.
Given this trend any emergency stock held within Australia should be weighted
towards product to match the import dependence.
6 The exception is Luxembourg.

7 High end of range if Geelong were to close; based on H&T supply/demand model.
Costs
4.5 Location selection
The location for holding emergency stock is dependent on supply side issues (suitable
locations for the storage facilities) and demand side issues (where it can best meet
market demand). In countries where there is substantial internal infrastructure for
transfer of petroleum, a location can suit both the supply and demand requirement
(e.g. salt cavern storage in the United States which links into the pipeline network
distributing crude oil around the country).
Australia does not have any significant internal distribution infrastructure (apart from
the Sydney -Newcastle product pipeline). It has a network of coastal terminals with
internal distribution mainly by road (there is some point to point demand delivered by
rail) from the nearest coastal terminal. Any significant transport of petroleum around
the country is by ship as this is the only means to move large volumes of stock (for
example a medium range (MR) oil tanker can carry more than 1,000 truck transport
movements). Therefore, any sites chosen as storage terminals will be reliant on
shipping to supply any market other than the market in their immediate vicinity.
Crude
Crude is more flexible in storage location choice. If there is a location where a floating
storage facility is feasible, it would not necessarily need to be near a refinery as the
crude would be shipped in and shipped out should it be required in the refining
system. Storage tanks on land also do not have to be near a refinery, although if they
are not, the associated infrastructure (jetties, pipeline and utilities) needs to be
developed purely for the emergency storage facility. One option to avoid this is to
develop the emergency storage facilities near crude oil or condensate producing
facilities, although this may means the crude produced in the location would be type
stored in the facility (unless the location has the ability to import crude as well as the
export facilities).
Product
The value in storing product is that it can immediately be used in the market, thus
providing security for both international and domestic disruption. To provide this
security it needs to be in a location where it can meet significant demand with the
resources available for distribution internally (trucking) and be on specification.
Product stored for long periods needs to be replaced with fresh stock (turned over)
from time to time to maintain product quality. To do this, all or a portion of the stock
held is sold into the market with an equivalent volume purchased to replace it. This
process is much more straightforward and less costly if the product stock is stored
relatively close to existing product storage. The frequency of turnover depends on the
product and its quality. Experience from European stock agencies is that product stock
can remain in specification for many years without turnover. In practice the quality of
the stock is monitored and if key specifications start deteriorating it should be turned
over.
Given the potential security benefits and the need to maintain quality, product
storage should be in or close to a major demand centre. Arguably having emergency
storage in each State would provide the best supply security to all of Australia.
Costs
5.0 Storage facility costing - establishment
5.1 Construction cost above ground storage
The detailed cost build for the three storage facility options is included in Appendix 1.
Table 2 shows the total cost and the cost per cubic metre (m 3).
Table 2: Cost estimates for storage facilities
No. Option Cost estimate Cost per m3

(AUD millions) storage (AUD)
1 200,000 m3 storage of petrol and diesel 95 475

(40% petrol, 60% diesel) joined to an
existing facility
2 480,000 m3 standalone storage of crude 194 404
oil
3 500,000 m3 standalone storage of petrol 195 390
and diesel (40% petrol, 60% diesel)
The concept plans used to develop the estimates were specific to emergency storage
for large volumes. They are considerably cheaper per unit stored than a normal
commercial tank farm, where the design would typically involve smaller tanks and a
lot of related distribution equipment (e.g. road tankwagon filling gantry and yard,
more complex pipework and automation, etc.).
The concepts were not developed for a particular site. Site selection can impact the
cost through local construction costs, ground conditions, land availability, distance
from wharf and related utility infrastructure costs (e.g. power, water and road
connections).
5.1.1 Cost of related infrastructure
Site selection for the storage facility is important as it will influence the amount of
spending on supporting infrastructure. In the work the IEA has done on the costs and
benefits of stockholding (IEA report)8 they note, The expense of the necessary
infrastructure (loading platforms, piping) and the jetty if needed can amount to
almost two thirds of the overall construction costs of a storage facility.
These costs have not been included in the base estimate as what is needed depends
on site selection. If a site is selected close to existing facilities then only pipelines
between the facilities will be needed and the existing jetty infrastructure can be used.
The IEA paper gives a jetty cost of between USD25-40 million depending on the size of
a ship, although that cost can be substantially higher if dredging is required to make
the jetty and port suitable for oil tankers. For the 500,000 m3 tank farm (Scenario 3)
above this spend would increase the cost by at least 20%.
8 IEA- SEQ (2013)20-Costs and Benefits of Stockholding Final Report.
Costs
For wharflines, the pipes that connect the terminal to the jetty, Aurecon estimated this
cost to be AUD1.8 million per kilometre. The further the petroleum is pumped can also
affect both the rate it can be transferred and the size of the pumps needed.
Given the high cost of related infrastructure it would make sense to construct these
facilities relatively close to existing facilities (which could be both crude and
condensate producing and/or importing facilities for crude, or import facilities for
product).
5.1.2 Site specific factors influencing cost
The Aurecon report notes a number of site related factors that will influence the cost
estimate. The above estimates assume good ground conditions for tank foundations. If
the land requires ground improvement to be suitable for large storage tanks (e.g.
piling), this would add approximately 10% to the above estimate.
Requirements provided by legislation, and the related risk assessments, have an

impact on the design and therefore the cost. These requirements can vary between
states, and can include, for example, how Australian design codes are interpreted. In
general, the concept designs provided are conservative in relation to legislation and
risk assessment.
5.1.3 Comparison with previous work
These storage facility cost estimates are around 10% lower than the estimates in the
2012 Report. Table 3 shows the updated cost estimate against those in the previous
report, the IEA Report and in Japanese work reviewed covering the permanent floating
storage and other strategic storage options (Japan/Vietnam study) 9. The updated
estimate, while very similar to the Japanese estimate, is still significantly higher than
the IEA cost estimate. This is discussed further in Appendix 3.
Table 3: Storage construction costs comparison with other studies
Estimate This Report 2012 Report IEA 2013 Japan 2012
USD/m3 40410 45511 182-233 397
5.2 Construction cost permanent floating storage
The only nation and IEA member to have developed permanent floating storage
facilities is Japan. Two of their ten national strategic stockpiles are held in floating
facilities. These facilities are purpose built facilities for long term storage. Stocks are
also held in ships from time to time (often held as trading positions) but this is not
considered appropriate for long term emergency storage so not considered in this
report.
9 Mitsubishi Research Institute, Mitsubishi Heavy Industries, JGC Plant Solutions and
Japan Marine Science; Study on the Project for Development of National Strategic Oil
Stockpiling Mega-Floating System in Vietnam, Final Report. Prepared for The Ministry
of Economy, Trade and Industry Japan (February 2012).
10 Converted to US dollars using Jan-July 2013 average AUD/USD exchange rate.
11 Converted to US dollars using Jan-June 2012 average AUD/USD exchange rate.
Costs
The Japanese permanent floating storage facilities are referred to by their developers
as Mega-floats. These are specially built storage vessels (not ships) that are linked
together in a frame and moored to the seabed. They have been promoted by the
Japanese government and the companies involved for use in other areas including
Vietnam. Table 4 provides a summary of the Mega-Float system based on the Vietnam
project development.12
Table 4: Megafloat storage systems
Key Large storage vessels linked together and floated on sea

Characteristic Once in place the facility cannot move unless
s decommissioned, taken apart and towed in pieces to
another location
Needs to have an associated jetty facility for
loading/unloading tankers
Only a small area of land is required to provide support to
the marine infrastructure
Risk of oil leakage is low with containment and spill
protection included in development
Facility can be expanded, dismantled and moved to
another location.
Technology is available in Japan (e.g. Kamigoto and
Shirashima Oil stockpile) and is being promoted for
Vietnam
Location Requires a suitable depth of water (vessels are 20-30m
deep), suitable climate (wind) & oceanography (waves)
Does not need to be near a refinery
Needs to be associated with a deep water port suitable
for oil tankers
Environment Needs to meet all Australian legal requirements such as the
and social Australian Offshore Petroleum and Greenhouse Gas Storage Act
2006
Economic Vietnam-Japan partnership construction cost estimate of
/Financial USD395 million for 1 million m3 (USD395/m3). We
understand this cost excludes the technical expertise and
development cost (may have been part of an aid
package).
Operations and maintenance cost - 2.1% of construction
cost (USD8.3 million/year)
Cost estimate includes storage vessels, anchoring
facilities, berth (jetty) for tankers, reclamation, oil
resistant floating dam, construction and associated work,
pumps and pipelines, and emergency equipment
Technical Mooring facility (for the permanent vessels)

feasibility Oil transfer

Oceanographic and climatic conditions

Breakwater and oil protection wall (primary and

secondary)
Berthing facilities
Onshore et
Institute
12 Mitsubishi Research facility
al. - power and monitoring
Environment protection facility (e.g. waste water
treatment)
Implementati Approximately
Hale & Twomey: Final Australia's five
Emergency Liquid years
Fuel including
Stockholding site2013:
Update survey and design
Oil Storage Options &
Costs
on Timing
We note that Japan stores only crude in these facilities; the turnover requirements for
product would make it difficult to store product in such a facility (difficult due to the
cost of monitoring product quality, the size of the storage units and turnover
requirements).
5.2.1 Cost of related infrastructure
Unlike the above ground storage estimate, the jetty for receiving and loading crude is
an integral part of the facility and has been included in the cost estimate. Associated
utilities have also been included although if the site was a long way from access to
utilities such as water and electricity there would be an additional cost to establish the
connections.
5.2.2 Site specific factors influencing cost
In the case of permanent floating storage the site selection is limited by the type of
marine environment required (sheltered deep water close to land). The actual cost is
likely to be specific to each site to some extent, especially the amount of reclamation
required and if any dredging is needed.
Given the sensitivities of storing petroleum, particularly in a marine environment, we

would expect the planning issues for such a proposal to be significant. No work has
been done on whether Australia has sites that might be suitable for such a facility or if
the concept would have a chance of gaining approval under Australias environmental
regulations.
5.3 Oil stock
The 2012 Report built up likely stock costs from international crude benchmark prices.
This report changes the methodology and uses actual import costs (in Australian
dollars) for crude and product in the 2011/12 year to establish the cost of stock. The
actual import cost includes the premiums for the crudes run by Australian refineries
and the import cost. For product, the average of the cost of petrol, jet fuel and diesel
is used (as they form the majority of product imports this is close to the average of all
products). Again, the import cost reflects the cost of Australian quality product and the
freight cost to get it to Australia. Costs associated with storing the petroleum such as
turnover costs are not included in this cost. The cost will be similar for both above
ground and permanent floating storage.
The oil price is very dynamic and changes daily taking the average cost over a
period for actual imports into Australia is a more appropriate methodology than a
point in time estimate.
Table 5: Cost of stock delivered to Australia
Petroleum Average cost Average cost
(AUD/bbl) (AUD/m3)
Crude 113.92 716.56

Products 125.15 787.19
Costs
5.4 Construction timing
Tank storage facilities take a considerable amount of time to plan, design and
construct. The size of large scale facilities (~500+ million litres) would be expected to
require significant planning time especially in site selection as suitable land is likely to
be difficult to obtain in the most suitable locations (close to existing port facilities near
main demand centres).
There may be some options that will become available with refinery closures and
import terminal conversions. For example, land and tanks that might not be needed as
part of the import terminal could be used for dedicated emergency storage.
Once the decision has been made to construct emergency storage facilities within
Australia the following planning and construction timeline has been estimated by
Aurecon:
Concept design, secure land and easements 6 months

Preliminary design, approvals and design reviews 8 months
Detailed design 8 months
Tendering and letting of construction contracts 3 months
Construction 24 months
TOTAL 49 months = 4.1 years
While these storage facilities are much larger than most storage construction in
Australia over the past few decades, in practical terms, Aurecon advise that there are
a number of contractors capable of constructing the facilities. It would be feasible to
build some facilities concurrently if facilities were built in different states.
Alternatively, there may be cost advantages by staging construction in the same
region so the workforce requirements can be smoothed.
The Japan/Vietnam study gave an implementation time of five years for permanent
floating storage including site survey and design13.
5.5 Return requirements for capital investment
In the 2012 report, for government ownership the upfront capital costs were recovered
by depreciating the storage facility over 40 years and providing options for a 5% and
10% rate of return on the capital invested (note oil stock was not depreciated as it is
assumed to retain its value, like land). The industry ownership cases were assessed at
10% and 15% rate of return.
Through the Department of Industry, advice for providing a return on the capital
invested in projects of this size has been obtained from the Office of Best Practice
Regulation (OBPR). They have advised to use a base case of 7% return with sensitivity
cases of 10% and 3%. They note that these returns take depreciation into account, so
depreciation is not treated separately (for either the facility or the stock).
Storage facilities are long life assets with a storage terminal normally expected to
have a 40-year life. If the facilities are going to have no other purpose than to store
emergency stock, this life needs to be accounted for in the way the owners return on
13 Mitsubishi Research Institute et al, pg. viii.
Costs
investment is secured. If the decision is made to reduce or stop the holding of
emergency stock before the end of the asset life, while the stock can be sold to
recover capital invested there may need to be ongoing payments to the facility owner
for the facility depending on the arrangements set when the investment was made.
Costs
6.0 Storage facility costing: on-going costs
Holding physical stock requires resources to manage both the stock and the facility.
Factors that need to be considered include:
Operating costs;
Maintenance costs;
Product quality management and stock turnover;
Land costs; and
Management and administration.
6.1 Operations and maintenance costs
Based on engineering advice, the 2012 report assumed an annual maintenance cost
for larger terminals (~500 million litres) of 1.5% of the terminals capital cost; an
annual operating cost of AUD1.05 million for product and AUD0.60 million for crude.
This equated to a cost of AUD1.40/bbl/year for product and AUD1.20/bbl/year for
crude. By contrast the IEA paper gives a cost of USD2-3/bbl/year14 for a stand-alone
facility and USD1-2/bbl/year for an add-on facility where these costs can be integrated
with those of an existing facility.
The 2012 report assumed that these facilities would be close enough to an existing
facility such that operating and maintenance costs were add-on. However insurance
was not included in the figures used in the 2012 report, so the operating cost has
been increased to cover this. This increases the cost to AUD1.64/bbl/year for product
and AUD1.52/bbl/year for crude - in line with the IEA paper add-on costs. It should be
noted that these costs will be higher if a facility is built well away from any existing
facility.
An operations and maintenance cost of 2.1% of construction cost is quoted for the
floating storage facilities15. Insurance at 0.2% of cost (for stock and facility) is added
to this estimate.16
6.2 Turnover costs
How often stock needs to be turned over (sold and replaced) to maintain quality is
open to debate. Advice obtained from the New Zealand market was that it may need
to be annual, whereas European stock agencies noted they had kept product stock on
specification without turnover for many years. Taking a balanced position the 2012
report assumed turnover every four years to ensure quality is maintained, giving an
annual turnover cost of USD0.50/bbl/year. There was no turnover cost assumed for
crude as crude can be stored for long periods without turnover.
The IEA paper commented that many stockholding agencies have found that rotation
of product usually does not occur more often than once every six years. They did
acknowledge that often the product held in storage had to be sold at a discount
compared to the purchase of replacement product; this premise was used for the
estimate in the 2012 report.
14 The exchange rate assumption is 1.00USD to 1.05AUD.

15 Mitsubishi Research Institute et al, pg. 33.
16 Insurance cost based on H&T estimate from recent years insurance premiums.
Costs
While acknowledging crude did not need to be turned over, the IEA paper only gave
an average cost for turnover of ~USD0.15/bbl/year rather than a separate one for
crude and product.
This paper continues to separate the cost for crude and product but based on the IEA
paper, reduces the turnover assumption for product to once every five years.
Therefore turnover cost assumptions are:
Crude Nil
Product USD0.40/bbl/year
6.3 Land costs
The 2012 report obtained land costs from 2011 Bureau of Resource and Energy
Economics (BREE) information, and used a capital cost of AUD600,000/hectare. The
recommendation from the Australian Office of Best Practice Regulation was to use a
lease cost taking account of any land remediation at end of contract. We do not have
lease costs available so continue to use the BREE cost but have inflated it by 10% to
reflect a 2013 cost (i.e. AUD 660,000/hectare). This is then converted to a lease cost
based on the return required.
The 2012 report used a storage volume per hectare of land of around 18m3/hectare
(14.7kT). The volumes to be stored in the new designs are more substantial (between
28-39m3/hectare). The earlier estimate was based on a smaller terminal (smaller tanks
will result in less stored per hectare) and the new concepts have been specifically
designed to maximise the storage in a given land area (e.g. choosing 60,000m 3 tanks
rather than 100,000m3 tanks which require a greater area). This was done as land is
often at a premium close to port/jetty facilities.
Aurecon estimates do not include land costs these are added separately as part of
operating costs.
6.4 Management and administration
The level of management and administration costs depends on the strategy used to
implement emergency stock holdings. Therefore they have not been included in this
cost analysis.
Costs
7.0 Cost summary
Table 6 shows the cost estimates for both capital and annual operating costs using the
Aurecon estimates for the storage facility, along with the stock costs covered in the
previous sections. The annual operational costs include terminal operations and
maintenance costs, the land rental, insurance and product turnover costs and are
shown in a separate column. Table 7 shows the same costs per unit stored (for both
m3 and bbls).
Table 6: Capital and annual operational costs for emergency storage options
Table 7: Capital and annual operational costs per unit stored
Table 8 shows the total annual cost for each facility where the annual cost includes a
component providing a recovery on the capital spent along with the annual
operational costs. The recovery factor for the capital uses a 7% return for the base
case with variations shown for 3% and 10%. While emergency storage is a long term
strategic decision, as depreciation is included in the assumed return there is no
specific length of time in this analysis. Table 9 shows the total annual costs per unit
stored (for m3 and bbls).
Costs
Table 8: Annual emergency storage costs (AUD millions)
Table 9: Annual emergency storage costs per unit stored (AUD)
Costs
Appendix 1: Physical storage costs and details (Aurecon
report)
Costs
Costs
Costs
Hale & Twomey: Final Australia's Emergency Liquid Fuel Stockholding Update 2013: Oil Storage Options & Costs Page 1
Costs
Costs
Costs
Costs
Costs
Costs
Appendix 2: Cavern storage
There are two types of cavern storage salt caverns (natural formations) and rock
caverns (natural and constructed). Salt caverns are developed by flushing the salt
deposits from underground deposits leaving a cavern that can then be used to store
oil. Rock caverns require excavation to develop the underground storage facility. The
IEA Report gives the following development costs for cavern storage (initial capital
cost):
Salt caverns USD8-12/bbl (or USD50-75/m3)

Rock caverns USD15-31/bbl (or USD94-195/m3)
It is only worth developing underground storage if the facility is of sufficient size. The
IEA note a minimum storage capacity of 1.5 million m3.
In the Asia Pacific region, Korea has rock cavern storage and Singapore is currently
developing a rock cavern storage facility. In Singapores case the incentive is to free
up land currently used for above ground storage. The publically released cost of
developing the Singapore rock cavern has been given as SGD890 million which works
out as USD75-80/bbl (~USD490/m3). This is two to three times higher than the upper
end of the IEA Report estimate. The Japan/Vietnam study paper on floating storage
gives a construction cost for underground cavern storage of USD466/m3 more in line
with the Singapore cost than the IEA Report estimate17.
Product (petrol, jet fuel and diesel) is not usually stored in underground storage due to
the risks with maintaining product quality.
As well as geology there are a number of other issues to consider when using
underground storage including seepage, construction time, percentage of
unrecoverable liquid and the cost of removing the oil. These issues are beyond the
scope of this report and would require specific investigation, particularly the
applicability to Australian conditions.
Costs
Appendix 3: Comparison with IEA storage work
During 2012 and 2013 the International Energy Agency (IEA) carried out a review of
the Costs and Benefits of Stockholding (IEA-SEQ (2013)20) (IEA Report). Of relevance
to this report, the IEA Report developed costs for storage facilities to hold emergency
stock. Facility costs were developed for above ground facilities (both standalone and
add on to existing facilities), salt caverns and rock caverns.
The costs used in this report are relatively similar to the IEA Report except for the
construction cost of above ground storage, where this report has developed cost
estimates specifically relating to Australias costs and conditions.
Construction cost comparison

The IEA Report estimates the construction cost for above ground storage facilities
from 29-37 USD/bbl (180-235USD/m3) for standalone facilities and from 22-33 USD/bbl
(140-210USD/m3) for add-on facilities. The costs are shown graphically below along
with construction costs for caverns.
Source: IEA- SEQ (2013)20-Costs and Benefits of Stockholding Final Report.
Like the estimates in this report the cost estimate assumed a large terminal (about
500,000 m3) specifically developed for emergency storage. They noted that the cost is
significantly less than a small, more complex, distribution terminal as illustrated in the
following chart.
Costs
Source: IEA- SEQ (2013)20-Costs and Benefits of Stockholding Final Report.
The IEA report acknowledged that there are likely to be some differences with
emergency storage facilities in Australia18, two of which impact the construction cost.
The emergency storage estimate for large facilities developed for this report is
AUD390-404/m3 (~USD60/bbl), almost double the IEA estimate. The reasons outlined
by the IEA Report explain some of the difference. These and other factors include:
Higher cost of steel;

Higher labour cost;
If would appear that the IEA Report did not include a contingency (based
on their comment regarding a US based cost estimate that was also twice
as expensive). It is normal practice to include a contingency in this level of
engineering cost estimate; and
The IEA Report also noted on the US based storage terminal estimate that
security was a high cost in the US. Appropriate security fencing is included
in this cost estimate.
We note that the recent Japan/Vietnam Study (on floating emergency storage) gave a
cost estimate for above ground storage of USD397/m3 (USD63/bbl)19. This means that
the estimate developed for Australia is very similar to estimates developed both in
Japan and the United States for above ground storage, giving a degree of confidence
in the figures.
18 IEA- SEQ (2013)20-Costs and Benefits of Stockholding Final Report. pg. 15.
Costs
Associated Reports
The following list includes all the reports produced by Hale & Twomey (H&T) for the
Department of Industry (formerly the Department of Resources, Energy and Tourism,
or RET) relating to Australias International Energy Agency (IEA) Agreement on an
International Energy Program, along with related reports by H&T and other authors.
This report is highlighted.
Main reports
National Energy Security Assessment (NESA) Identified Issues: Australias
International Energy Oil Obligation (2012 Report)
Australia's Emergency Liquid Fuel Stockholding Update 2013: Australia's

International Energy Agency Oil Obligation. Main Report. (Main Report)
Auxiliary reports
Ticket Markets
Australia's Emergency Liquid Fuel Stockholding Update 2013: Ticket Markets (2013)
Stock on the Water/Maritime

Stock on the Water Analysis (2013)20
Australias Maritime Supply Chain for Petroleum Trade (2013) public report
Infrastructure - Storage
Australia's Emergency Liquid Fuel Stockholding Update 2013: Oil Storage Options &
Costs (2013)
Australias Emergency Liquid Fuel Storage. Terminal Concept Design and Cost
Estimate. Aurecon. (2013) (also included in the Appendix of the above report)
Infrastructure Refineries
National Energy Security Assessment (NESA) Identified Issues: Competitive
Pressures on Domestic Refining (2012) public report
20 This report was produced jointly for RET and the New Zealand Ministry of Business,
Innovation and Employment.
Costs

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Final Australia's Emergency Liquid

Prepared for the Department of Industry, Canberra

This report was produced using data, forecasts and price

Aurecons 6,700 personnel provide a broad range of professional services across

Aurecons multidisciplinary oil and gas team specialises in inspection, assessment,

This document was written by:

Please phone or e-mail for further information.

P +64 4 471 1155 F +64 4 471 1158

Scenari Facility Size Stock

1 Above ground expansion of existing 200 Product

Figure 2: Emergency storage costs per year (@ 7% return on capital)

3.1 Scope of Work.................................................................................................... 6

3.2 Expert storage facility cost estimate..................................................................6

4.0 Physical storage overview................................................................8

4.1 Physical stockholding......................................................................................... 8

4.2 Types of physical storage...................................................................................9

4.3 Cost components of emergency storage..........................................................10

4.4 Storing crude versus product...........................................................................10

4.5 Location selection............................................................................................11

5.0 Storage facility costing - establishment...........................................13

5.1 Construction cost above ground storage.......................................................13

5.2 Construction cost permanent floating storage...............................................14

5.3 Oil stock........................................................................................................... 16

5.4 Construction timing.......................................................................................... 16

5.5 Return requirements for capital investment.....................................................17

6.0 Storage facility costing: on-going costs...........................................18

6.1 Operations and maintenance costs..................................................................18

6.2 Turnover costs..................................................................................................18

6.3 Land costs........................................................................................................ 19

6.4 Management and administration......................................................................19

7.0 Cost summary................................................................................20

Appendix 1: Physical storage costs and details (Aurecon report)...............22

Appendix 2: Cavern storage.......................................................................6

Australia [and New Zealand] can also be characterised as concentrated demand

Figure 3: IEA membership map

3.1 Scope of Work

There are three main options to store large quantities of fuel:

i. Underground rock caverns;

ii. Tank farms (land); and

3.2 Expert storage facility cost estimate

3 See Appendix 1: Aurecon; Australias Emergency Liquid Fuel Storage. Terminal

1. An expansion of an existing tank farm adding approximately 200 million litres of

2. A dedicated strategic crude oil storage terminal of approximately 480 million

3. A dedicated strategic product storage terminal of approximately 500 million litres

4 IEA- SEQ (2013)20-Costs and Benefits of Stockholding Final Report.

4.1 Physical stockholding

Companies will be expected to hold sufficient commercial stock to manage the

Emergency stocks can be held in different types of storage. These include:

Underground storage (either rock or

Permanent Floating Storage

Above ground storage (tank farms)

i. Capital costs include:

the storage facility cost (including related infrastructure);

maintenance of the storage facility;

4.4 Storing crude versus product

The decision on whether to store crude or product depends on a number of factors.

Table 1: Crude versus product storage

Crude More storage options Needs to be refined before

Australias refining industry is under competitive pressure. Of the seven refineries

Investment in dedicated emergency storage facilities is a long term investment due to

Permanent floating storage has a similar issue as it is designed to hold crude. If