Auxiliary Report: Prepared For The Department of Industry, Canberra 22 October 2013

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 translate the
implications into strategic directions for our clients. We provide expertise to a broad range of
companies and government departments. Hale & Twomey has established a strong reputation in
the sector by producing timely, high quality, value-adding work.
Aurecon’s 6,700 personnel provide a broad range of professional services across diverse market
sectors including oil and gas, resources, energy, transport, buildings, and communications. Its
personnel are based across 28 countries, predominantly in Australia, New Zealand, Africa and
Asia.
Aurecon’s 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 m3 to Australia’s 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 terminal 200 Product
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.
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
Hale & Twomey: Final Australia's Emergency Liquid Fuel Stockholding Update 2013: Oil Storage Options & Costs Page 1
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.
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.
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
Hale & Twomey: Final Australia's Emergency Liquid Fuel Stockholding Update 2013: Oil Storage Options & Costs
Appendix 3: Comparison with IEA storage work.............................................................7
Associated Reports...........................................................................................................9
Hale & Twomey: Final Australia's Emergency Liquid Fuel Stockholding Update 2013: Oil Storage Options & 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 country’s
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.
1.0 Introduction
This report updates the work on emergency liquid fuel storage from the National Energy Security
Assessment (NESA) Identified Issues: Australia’s 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 paper’s terms of reference.
Information on holding stock in another country may be found in several other Hale & Twomey
reports, including the auxiliary report Australia’s 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
1 Hale & Twomey; Stock on the Water Analysis report (2013), pg13
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.
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.
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
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.
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.
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 facilities is expected to be significantly larger
than normal operating terminals and thus requires development of specific concepts with larger
3 See Appendix 1: Aurecon; Australia’s Emergency Liquid Fuel Storage. Terminal Concept Design and Cost Estimate.
19 July, 2013
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 Australia’s 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.
All the new work has been done in Australian dollars reflecting Australian conditions.
4 IEA- SEQ (2013)20-Costs and Benefits of Stockholding – Final Report.
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.
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.
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 (including  Needs to be refined before useful to
underground and floating) the local market (therefore
 Storage cost is usually cheaper dependent on refining system)
 Stock cost is cheaper  Contributes less towards IEA target
 Does not need to be turned over to as refinery loss taken into account
maintain quality  Needs to be located near a refinery
 Produces all products when refined if to be used without the need for
shipping
Product  Can be used directly (and  Typically uses more expensive
immediately) in an emergency above ground storage
 Can be close to existing facilities to  Stock cost is more expensive (by
link in with existing networks USD10-15/bbl)
 Contributes more to IEA target than  Needs to be monitored for quality
equivalent volumes of crude (by and turned over from time to time
11%)  Security of supply only for the type
 Provides security for domestic of product held, which may not
refining disruptions and possibly match the disrupted supply
domestic infrastructure disruption
Australia’s 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
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.
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, Australia’s 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.
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
6 The exception is Luxembourg.

7 High end of range if Geelong were to close; based on H&T supply/demand model.
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.
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 (m3).
Table 2: Cost estimates for storage facilities
No. Option Cost estimate Cost per m 3

(AUD millions) storage (AUD)
1 200,000 m3 storage of petrol and diesel (40% 95 475
petrol, 60% diesel) joined to an existing facility
2 480,000 m3 standalone storage of crude oil 194 404
3 500,000 m3 standalone storage of petrol and 195 390

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%.
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.
8 IEA- SEQ (2013)20-Costs and Benefits of Stockholding – Final Report.
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.
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
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.
12 Mitsubishi Research Institute et al.
Table 4: Mega–float storage systems
Key  Large storage vessels linked together and floated on sea

Characteristics  Once in place the facility cannot move unless 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 Australian
and social Offshore Petroleum and Greenhouse Gas Storage Act 2006
Economic  Vietnam-Japan partnership – construction cost estimate of USD395
/Financial 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 facility - power and monitoring
 Environment protection facility (e.g. waste water treatment)
Implementation  Approximately five years including site survey and design
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 Australia’s 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/m 3)
Crude 113.92 716.56
Products 125.15 787.19
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 owner’s return on 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.
13 Mitsubishi Research Institute et al, pg. viii.
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 terminal’s 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.
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.
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.
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 18m 3/hectare (14.7kT). The
volumes to be stored in the new designs are more substantial (between 28-39m 3/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 60,000m3 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.
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).
Table 8: Annual emergency storage costs (AUD millions)
Table 9: Annual emergency storage costs per unit stored (AUD)
Appendix 1: Physical storage costs and details
(Aurecon report)
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 Singapore’s 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/m 3). 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/m 3
more in line with the Singapore cost than the IEA Report estimate 17.
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.
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 Australia’s 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/m 3) 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 m 3)
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.
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/m 3
(~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.
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
Australia’s 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: Australia’s 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
Australia’s Maritime Supply Chain for Petroleum Trade (2013) – public report
Infrastructure - Storage
Australia's Emergency Liquid Fuel Stockholding Update 2013: Oil Storage Options & Costs
(2013)
Australia’s 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.

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Auxiliary Report

Final Australia's Emergency Liquid Fuel

Prepared for the Department of Industry, Canberra

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

Figure 1: Capital investment per unit storage

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

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

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

4.1 Physical stockholding

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

Underground storage (either rock or salt

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

Table 1: Crude versus product storage

4.5 Location selection

6 The exception is Luxembourg.

Table 2: Cost estimates for storage facilities

No. Option Cost estimate Cost per m 3

3 500,000 m3 standalone storage of petrol and 195 390

5.1.1 Cost of related infrastructure

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

5.1.2 Site specific factors influencing cost

5.1.3 Comparison with previous work

Table 3: Storage construction costs comparison with other studies

Estimate This Report 2012 Report IEA 2013 Japan 2012

5.2 Construction cost – permanent floating storage

Key  Large storage vessels linked together and floated on sea

5.2.1 Cost of related infrastructure

5.2.2 Site specific factors influencing cost