24 July Fuel Quality Review Marsden Jacob. Dear Sir or Madam

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1 IOR ENERGY PTY LTD ABN: Byron Street Bulimba Brisbane 4171 Australia Telephone: (61) Facsimile: (61) mail@ior.com.au 24 July 2015 Fuel Quality Review Marsden Jacob By fuelqualityreview@marsdenjoacob.com.au Dear Sir or Madam Fuel Quality Review: Effect on the Eromanga Refinery This letter contains a submission by IOR Energy Pty Ltd ( IOR ) to the Fuel Quality Review, explaining the effects of the Fuel Quality Standards Act, 2000 ( the Act ) on the Eromanga Refinery, located in Eromanga, western Queensland. We do not comment on the extent to which the Fuel Quality Standards Act meets its objectives, however in the attached note, we set out our experience as the owner and operator of the Eromanga Refinery in complying with the Act. To do so, we operate under a specific approval in terms of the Act. In recent years, IOR has investigated the possibility of developing other small scale regional refineries in remote areas, however in the absence of an approval in terms of the Act the capital cost of the equipment to meet the sulphur limits is generally prohibitive. We believe that small regional refineries provide numerous benefits to remote areas and balance of payments. The main products produced at our refinery are grades of petroleum solvents which are supplied to various industrial markets in the eastern States. The refinery also produces a diesel fraction that is used as a preferred fuel in underground mining applications because of its excellent emission characteristics. However this generally requires approval of higher sulphur and lower density limits in terms of the Act to secure an end market for the diesel upon which the overall refinery viability depends. We trust that this information is helpful to you and we will gladly provide any further information or clarification that you may require. Yours faithfully Ross Mackenzie General Manager

2 Implications of Fuel Quality Standards Act, 2000 on the Eromanga Refinery, located in Eromanga, western Queensland. 1. Overview The Eromanga refinery was built by IOR over 30 years ago, located close to the source of available crude oil supplies at that time. The Refinery has been traditionally supplied by a major oil field through a dedicated pipeline and augmented by additional crude oil trucked in from other oilfields. The refinery is solely dependent on locally produced Cooper Basin crude oils not all of which are available to the Refinery because of oil quality or commercial considerations. Since the Eromanga Refinery located 1000km from the coast, it does not have the option of importing crude oil, and so the availability of an adequate local oil supply is critical to the Refinery viability. The capacity of the refinery is 1,250 barrels per day (i.e. approx. 18 million litres per quarter) although crude supplies in recent years have been insufficient for the Refinery to operate at full capacity at all times. The refinery produces diesel and a range of industrial solvents. 2. Fuel Quality of Eromanga Production IOR currently holds an approval in terms of the Fuel Quality Standards Act (the Approval), in respect of supplies by IOR of: 1. Automotive diesel containing a minimum density of 790 kg/m3 and a maximum sulphur content of 125 mg/kg under contract to commercial users for use in underground mining applications until 31 December 2016: and 2. Automotive diesel containing a minimum density of 800 kg/m3 and a maximum sulphur content of 50 mg/kg under contract to commercial users through IOR s outlets until 31 December The fuel distributed in terms of the above approval is undertaken through Regulated Persons in terms of the approval and not generally available to the public. Over the years, IOR has invested substantial amounts of money for a private company in improving its fuel quality, in particular over $4.5million in research attempting to develop a viable desulphuring technology appropriate for small scale refining. A pilot plant using an oxidative desulphurisation process was abandoned despite initial promise. Since then, IOR pursued an alternative process using absorptive desulphurisation. After extensive lab trialling using various commercial catalysts, pilot plant testing to date has achieved no better than 40 ppm maximum sulphur. However the additional capital costs required to implement the process as developed to date, 1

3 into production at Eromanga is still uneconomic in view of the relatively short remaining useful life of the refinery (due to the naturally declining reserves of the local crude oil on which the refinery is dependent). In any event the results to date are more easily matched through blending. Nevertheless, overall Eromanga diesel has benign emission characteristics compared to other diesel fuels. Two separate independent emission testing programmes supervised by Xstrata in 2010 and and BHP in 2011 confirmed the continuing emissions superiority of Eromanga Underground Mining Fuel (UMF) for use in underground mines compared to other commercial fuels including fuels specially formulated for underground use. Details of these tests have previously been provided to the Department. In 2013, IOR commissioned QUT s International Laboratory for Air Quality and Health to carry out comparative testing of Eromanga Underground Mining Fuel (UMF) along with three commercially available ULS diesel fuels compliant with Australian regulated diesel fuel standards ( QUT report ). The main aim of the testing was to quantify the difference in concentration and characteristics of particulates from the four fuels using a diesel engine set up specifically for underground mining fuel testing. The major report findings were that overall COx, NOx and particle emissions from Eromanga UMF were generally lower than the other fuels at comparable engine load settings. At full load, Eromanga UMF produced significantly lower COx and NOx emissions compared to the other fuels and importantly, produced much lower particulate emissions (65% reduction by particle mass and 40% reduction by number of particles). This is illustrated at full load by the graph below. Fig 1: Particle size distribution as per the QUT report. 2

4 A copy of the QUT report is available on request. Approximately 35-40% of the Eromanga Refinery s current production comprises diesel fuel. The balance of refinery production is made up of various speciality cuts of petroleum products sold into non-vehicle end markets, principally the industrial solvent market where IOR has established a significant market presence. Although vehicle fuel is no longer the major market segment of Eromanga production, the ability to continue its vehicle fuel market is essential for on-going refinery viability. 3. Niche regional refineries IOR has investigated the possibility of developing other small scale refineries in remote areas, but the capital cost of the equipment to remove the sulphur to be able to meet the limits in terms of the Act is generally prohibitive. The Public benefits of IOR s current operations and future niche regional refineries include: Benefits for regional consumers arising out of the presence of an independent refiner and fuel distributor operating in Queensland, SA, NT and NSW. Significant beneficiaries are commercial customers including cattle transporters, long haul freight operators, local Shire Councils, regional mining and pastoral companies; Improved fuel supply security, including power generation in remote Queensland; A unique low emission diesel fuel as proven through independent emission testing and a fuel preferred by major mining companies over other available diesel fuels including those fuels specially formulated for low exhaust emission performance; The Eromanga refinery produces nationally significant quantities of industrial solvent products that are used in brand name products within the paint, paint thinners, timber treatment, car care products and other market sectors. For most of these petroleum products, the only source of Australian production is the Eromanga refinery. The economics of continuing solvent production at the Eromanga refinery depends on viable end markets for the diesel co-products also produced at the Eromanga refinery; Viable economic activity in remote Australia with IOR spending hundreds of thousands of dollars each year purchasing goods and services from local businesses throughout regional and remote Queensland; Well paid employment and technical training opportunities for Australians living in the regions. The Eromanga refinery provides 12 permanent jobs and is one of the major employers in its region; 3

5 Lower impact on environment and infrastructure, by reducing the quantity of crude oil that would otherwise have to be transported to the coast and the diesel fuel that would otherwise have to be brought to the regional areas from the coast; Possible lower emissions from full life cycle from crude oil production to fuel consumption when compared to imported fuels; Improved prices for indigenous crude oil producers within the region by reducing the transportation costs otherwise incurred through sales to major coastal refiners; and Improving national energy security and the balance of payments through reduced imports of crude oil or refined products particularly non-fuel petroleum products such as industrial solvents which IOR supplies to markets in every capital on the eastern seaboard. The closure of several Australian refineries in recent years increases this benefit. 4. Conclusion In the light of the benefits described above, we propose permanent exemptions to the sulphur and density requirements of the Act for the Eromanga refinery and other small scale refineries in remote areas of Australia. 4