Supply Chain Review:
DELIVERING AN EFFECTIVE SUPPLY CHAIN

A strong supply chain underpins effective and growing businesses and during 2008 Caltex’s refining, supply and logistics once again provided a foundation for the success of the overall business. A fully integrated supply chain from crude and product purchasing, through to refining, distribution to terminals, and ultimately to customers, ensures safety, reliability and security of supply. Caltex is continually improving and enhancing the processes, logistics and infrastructure of our supply chain.

Occasionally, the balance between supply and market demand shifts unexpectedly and the advantage of having full ownership and visibility across the supply chain provides Caltex with opportunities to effectively manage any impact and implement contingency plans if necessary.

Refining

Caltex’s Kurnell and Lytton refineries refine crude oil into petrol, diesel, jet fuel, base oil for lubricants and many specialty products such as liquid petroleum gas and bitumen. Caltex owns two of the seven refineries in Australia and these two refineries account for almost a third of Australia’s total capacity.

Total production of petrol, diesel and jet was 9.8 billion litres, and average refinery utilisation for the year was 74%, compared with 84% in 2007. Caltex’s refinery production and average utilisation were down in 2008 due to a major planned maintenance shutdown at the Kurnell refinery and unplanned shutdowns at both the Lytton and Kurnell refineries.

Specific actions have been undertaken to address the reliability issues at both Kurnell and Lytton which can be largely attributed to a single process unit at each refinery.

For 2008, the Caltex Refiner Margin (CRM) averaged US$10.27 per barrel compared with US$9.26 per barrel in 2007, bolstered by strong regional diesel and jet demand. This equates to 7.9 Australian cents per litre in 2008 and 7.0 Australian cents per litre in 2007.

Refining in recent years has consumed the majority of Caltex’s capital expenditure, with the introduction of clean fuel technology and asset improvement projects. Going forward, Caltex is focused on building upon its supply chain infrastructure to support its expanding marketing business. Caltex remains, however, cognisant of the need to invest capital to address risk and reliability in refining.

In 2008, a new diesel tank at Kurnell provided additional operating flexibility around diesel production and the refinery is now producing compliant 10 parts per million Australian grade sulfur diesel.

Also at Kurnell, a new crude oil tank increased crude oil storage capacity by around four days of equivalent production at the refinery, enabling higher utilisation during periods of disruption to crude supply and also the import of larger crude cargoes from further afield.

The construction of the second diesel hydrotreater (DHTU2) at Lytton is the key growth initiative for refining, and supports Caltex’s diesel growth strategy. Good progress was made in 2008 and the project remains on target for construction to be completed at the end of March 2009. Costs remain on track to meet the previously advised figure of around $320 million.

supply

Caltex buys crude oil from Australian and international producers to manufacture Australian grade transport fuels and other products at the Kurnell refinery in New South Wales and the Lytton refinery in Queensland.

Caltex procured some 72 million barrels of crude and refinery feedstocks in 2008. Preparations have now been completed for Caltex to conduct ship-to-ship transfer operations of crude oil 100–200 nautical miles off the coast of New South Wales. This capability will enable Caltex to transport crude in larger cargoes, making the transport of crude from further afield such as West Africa more economic. In 2009, Caltex crude traders will be factoring in this capability when making crude purchasing decisions.

Apart from fuels produced by our own refineries, Caltex purchases from other Australian and international refineries approximately 8.5 billion litres per annum of fuel products. The product acquired from this diverse supply chain secures supply to Caltex’s own marketing business and provides efficient supply of approximately 3.8 billion litres per annum to other major oil companies in New South Wales and Queensland.

Australia is a significant net importer of product and this is expected to grow as demand increases. More than one in four litres of fuel consumed in Australia is currently imported.

Caltex’s access to supply of Australian grade fuels from a wide variety of sources within Australia and overseas allows Caltex to be highly responsive when dealing with supply interruptions or when unexpected demand for a product arises.

In August 2008, Caltex was able to respond within days to the sudden increase in demand for diesel in Western Australia brought about by an unplanned disruption to natural gas supplies. Diversion of import cargoes already on the water, plus rapid sourcing of additional supplies via our well established contacts in Asia, allowed key customers in the aluminium and power industries to continue operating.

logistics

Caltex operates 12 storage terminals across Australia. In addition, we have access to product supply at a further 10 terminals. From these 22 terminals located right around Australia, Caltex’s delivery of product to customers is achieved through its own truck fleet and the fleets of approved and accredited third party contractors. Caltex places an absolute priority on safe delivery, employing new technology together with stringent procedures and the maintenance of high standards of driver training and competency to reduce the risk of potential safety and environmental incidents.

During the year, three new biofuels blending and storage facilities at the Banksmeadow terminal in Sydney, the Newcastle terminal and the Lytton terminal in Brisbane were successfully commissioned. The upgraded facilities enable accurate and efficient ratio blending of Bio E10 Unleaded at the loading rack. Banksmeadow now has the capacity for over one million litres of ethanol storage and Lytton terminal now has the capacity for 780,000 litres ethanol storage. Plans are also underway to create further biofuels facilities nationally and to facilitate a wider rollout of Vortex diesel.

A new vapour recovery unit was commissioned at Caltex’s Birkenhead terminal in South Australia in September 2008. This is the first vapour recovery unit at a fuel terminal in South Australia and represents a $2 million environmental initiative resulting in significant emissions reduction at the terminal.

Other projects currently underway include the implementation of a national preventative maintenance program to support reliable operations in our terminals, a control system upgrade for Caltex’s Sydney to Newcastle pipeline and an expansion of tankage and loading gantry capacity at Mackay to facilitate efficient supply to the mining industry in the Bowen Basin.

Procurement of biodiesel and ethanol to meet the growing requirement for fuels made from renewable sources is a priority for Caltex. Caltex is a foundation customer with a long-term supply agreement with the Dalby ethanol plant which was commissioned in December 2008. The plant has the capacity to produce 80 million litres of ethanol per year. The supply of ethanol from this plant to Caltex will make an important contribution to Caltex achieving mandated ethanol targets in 2009.

Future focus

Operational excellence will remain a focus as Caltex continues to enhance and build upon the strengths of the integrated supply chain.

Operational excellence across the supply chain encompasses our interactions with our people, our resellers, our customers and the communities in which we operate. The communities surrounding our facilities are important to our operations and close alliances will continue to be pursued to ensure effective partnerships with these communities.

Caltex has an unwavering commitment to continually provide our customers with safe, secure, reliable and environmentally sound product and services and our employees with a safe and secure working environment and this commitment will continue.