FUEL SECURITY BILL 2021 Explanatory Memorandum

Commonwealth of Australia Explanatory Memoranda

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FUEL SECURITY BILL 2021

2019-2020-2021 THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA HOUSE OF REPRESENTATIVES FUEL SECURITY BILL 2021 EXPLANATORY MEMORANDUM (Circulated by authority of the Minister for Energy and Emissions Reduction, the Honourable Angus Taylor MP)

FUEL SECURITY BILL 2021

TABLE OF CONTENTS OUTLINE 3 FINANCIAL IMPACT STATEMENT 4 REGULATION IMPACT STATEMENT 4 CONSULTATION 4 STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS 5 Overview of the Bill 5 Human rights implications 6 Conclusion 15 NOTES ON CLAUSES 17 Part 1 - Preliminary 17 Part 2 - Minimum stockholding obligation 25 Part 3 - Fuel security services payment 53 Part 4 - Compliance and enforcement 77 Part 5 - Other matters 95

GLOSSARY Abbreviation Definition Bill Fuel Security Bill 2021 Crimes Act Crimes Act 1914 Criminal Code Criminal Code Act 1995 Department The Department responsible for administering the Bill, once enacted (presently, the Department of Industry, Science, Energy and Resources) FQS Act Fuel Quality Standards Act 2000 FSSP Fuel Security Services Payment IEA International Energy Agency International Energy Agreement Agreement on an International Energy Program done at Paris on 18 November 1974, as in force for Australia from time to time Minister The Minister with responsibility for administering the Bill, once enacted (presently, the Minister for Energy and Emissions Reduction) MSO Minimum Stockholding Obligation NGER Act National Greenhouse and Energy Reporting Act 2007 OPC Office of Parliamentary Counsel POFR Act Petroleum and Other Fuels Reporting Act 2017 POFR Rules Petroleum and Other Fuels Reporting Rules 2017 PGPA Act Public Governance, Performance and Accountability Act 2013 PGPA Rule Public Governance, Performance and Accountability Rule 2014 Regulatory Powers Act Regulatory Powers (Standard Provisions) Act 2014 1

FUEL SECURITY BILL 2021

FUEL SECURITY BILL 2021 OUTLINE The Fuel Security Bill 2021 (the Bill) implements two measures in the Australian Government's Fuel Security Package announced in the 2020-21 and 2021-22 Budgets. The Bill:  establishes a minimum stockholding obligation (MSO) to ensure industry holds minimum quantities of key transport fuels to guarantee a baseline level of stocks at all times; and  enables a production payment for refinery operators (referred to as a fuel security services payment (FSSP)) to provide an adjustable cent per litre payment to refineries in return for a commitment to continue refining until at least 30 June 2027. Both fuel stocks and refining capability support Australia's fuel security. Refined fuel stocks have the ability to mitigate impacts from small, localised scale disruptions as well as short term disruptions in supply. Refineries have the capacity to supply fuels for critical services during major and extended disruptions (including times of no import to Australia). Together, these will act to buffer Australia against local and global supply disruptions. Minimum Stockholding Obligation Part 2 of the Bill establishes a national level obligation for corporate entities that undertake certain activities (generally, importing and refining) in relation to certain transport fuels to hold a minimum quantity of those fuels nationally. The Minister will set a national consumption day target, and each entity will have a specific obligation determined by reference to the national target and their historical operations. The major transport fuels are gasoline, diesel and kerosene. Gasoline and kerosene MSOs will be set at the average of the 2018 and 2019 calendar years (pre-COVID-19) levels, and the diesel MSO will be increased by 40% on pre-COVID-19 levels from mid-2024. The MSO will not start before 1 July 2022. Fuel Security Services Payment Part 3 of the Bill establishes payment of an ongoing FSSP (i.e. a bounty) for the production of gasoline, diesel and kerosene. The payment recognises the essential contribution refineries in Australia make to the security of 3

FUEL SECURITY BILL 2021 Australia's fuel supplies. The payment is designed to cover refineries' downside risk. Eligible refiners will receive the FSSP when they commit to continuing to refine FSSP products until at least 30 June 2027. The payment rate will be set as a function of refinery market conditions based on independent and verifiable markers. The FSSP will provide up to 1.8 cents per litre when refinery margins fall to the point where refineries are making losses. No payments will be made when refineries make profits. Payments of the FSSP will be made to refinery operators on a quarterly basis in arrears, and will be subject to requirements to be prescribed in the Rules, which will be made by the Minister. The Bill also provides for recovery of amounts of the FSSP paid to refinery operators should the refining at the commitment refinery cease before the end of the commitment period. FINANCIAL IMPACT STATEMENT The measures of the Bill are expected to have a financial impact on the Consolidated Revenue Fund of up to $2,098 million. The provisions enabling the FSSP are estimated to have a financial impact of $2,047 million over 9 years from 2021-22. In addition, $50.7 million over four years from 2021-22 will be provided for the Department to administer the MSO. REGULATION IMPACT STATEMENT The Regulation Impact Statement (RIS) has been prepared in accordance with the Australian Government Guide to Regulation and is included at the end of this Explanatory Memorandum (reference numbers: 42904 and 20489). CONSULTATION In January 2021, the Department consulted on the framework of policy options that were considered in developing the Government's Fuel Security package. Consultation was undertaken with the key fuel industry participants, fuel users and industry representative bodies in the fuel sector, as well as with Commonwealth departments and agencies. In April 2021, the Department also undertook targeted consultation on the Exposure Draft of the Bill to identify any issues that could impact on an entity's ability to comply with the provisions in the Bill.

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 Fuel Security Bill 2021 (the Bill) This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011. Overview of the Bill The Fuel Security Bill 2021 (Bill) implements two measures in the Australian Government's Fuel Security Package announced in the 2020-21 and 2021-22 Budgets. The Bill:  establishes a minimum stockholding obligation (MSO) to ensure industry holds minimum quantities of key transport fuels to guarantee a baseline level of stocks at all times; and  enables a production payment for refinery operators (referred to as a fuel security services payment (FSSP)) to provide an adjustable cent per litre payment to refineries in return for a commitment to continue refining until at least 30 June 2027. Both fuel stocks and refining capability support Australia's fuel security. Refined fuel stocks have the ability to mitigate impacts from small, localised scale disruptions as well as short term disruptions in supply. Refineries have the capacity to supply fuels for critical services during major and extended disruptions (including times of no import to Australia). Together, these will act to buffer Australia against local and global supply disruptions. Minimum Stockholding Obligation Part 2 of the Bill establishes a national level obligation for corporate entities that undertake certain activities (generally, importing and refining) in relation to certain transport fuels to hold a minimum quantity of those fuels nationally. The Minister will set a national consumption day target, and each entity will have a specific obligation determined by reference to the national target and their historical operations. The major transport fuels are gasoline, 5

FUEL SECURITY BILL 2021 diesel and kerosene. Gasoline and kerosene MSOs will be set at the average of the 2018 and 2019 calendar years (pre-COVID-19) levels, and the diesel MSO will be increased by 40% on pre-COVID-19 levels from mid-2024. The MSO will not start before 1 July 2022. Fuel Security Services Payment Part 3 of the Bill establishes payment of an ongoing FSSP (i.e. a bounty) for the production of gasoline, diesel and kerosene. The payment recognises the essential contribution refineries in Australia make to the security of Australia's fuel supplies. Eligible refiners will receive the FSSP when they commit to continuing to refine FSSP products until at least 30 June 2027. The payment rate will be set as a function of refinery market conditions based on independent and verifiable markers. The FSSP will provide up to 1.8 cents per litre when refinery margins fall to the point where refineries are making losses. No payments will be made when refiners make profits. Payments of the FSSP will be made to refinery operators on a quarterly basis in arrears, and will be subject to requirements to be prescribed in the Rules, which will be made by the Minister. The Bill also provides for recovery of amounts of the FSSP paid to refinery operators should they withdraw from their domestic refining commitment early. Applicants are required to be constitutional corporations (paragraph 40(2)(a)). Human rights implications This Bill engages, or may engage, the following rights:  the right to an adequate standard of living and to continuous improvement of living conditions - Article 11 of the International Covenant on Economic, Social and Cultural Rights (ICESCR)  the right to privacy - Article 17 of the International Covenant on Civil and Political Rights (ICCPR)  the right to reputation - Article 17 of the ICCPR  the right to freedom of expression - Article 19 of the ICCPR  the right to a fair trial - Article 14 of the ICCPR  the right to presumption of innocence - Article 14(2) of the ICCPR  the right not to incriminate oneself - Article 14(3)(g) of the ICCPR

The Bill will primarily regulate entities rather than individuals As noted at paragraph 1.11 of the Parliamentary Joint Committee on Human Rights - Guide to Human Rights, published in June 2015, which is a freely available document that outlines the key human rights that form part of the Parliamentary Joint Committee on Human Rights' mandate (available at https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Human_ Rights/Guidance_Notes_and_Resources): "Under the UN human rights treaties, human rights belong to individuals and groups of individuals. The treaties do not confer rights on companies or other incorporated bodies." While the Bill purports to place various obligations on "persons", generally it uses that term to denote a body corporate refinery operator or fuel importer (see the definition of "person" under sections 2B and 2C of the Acts Interpretation Act 1901). Specifically, the classes of "persons" that will be regulated under the Bill include:  "constitutional corporations" as defined under clause 5 together with paragraph 40(2)(a);  "regulated entities" as defined under clause 5 (e.g. constitutional corporations, other bodies corporate, trusts (predominantly where the trustees are all constitutional corporations)); and  "Australian controlling corporations" as defined under clause 5 together with paragraph 8(2)(a). As such, there are very few provisions of the Bill that regulate and consequently limit the human rights of individuals. Right to an adequate standard of living - Article 11 ICESCR Despite the fact the Bill does not generally regulate the conduct of individuals, it nevertheless engages positively with the right to an adequate standard of living and to continuous improvement of living conditions. This is achieved by alleviating the risks to fuel supply currently borne by Government and consumers. 7

FUEL SECURITY BILL 2021 The Bill will, via the FSSP scheme, support domestic refiners to convert crude oil to key transport fuel products thereby supporting fuel- dependent and critical industries as well as Australian households. The Bill will also, via the MSO scheme, ensure that domestic fuel stocks can be maintained to meet liquid fuel needs and increase Australia's resilience during any future disruptions to the supply chain. Ensuring both the ongoing commercial viability of domestic fuel refiners, and access to minimum local holdings of key transport fuels would offer protection during extreme disruptions to fuel supply to Australia. The proposed reforms are therefore likely to ensure the availability and accessibility of the energy resources that are essential to the realisation of the right to an adequate standard of living. They will also help to fulfil Australia's obligation under Article 2.1 of the ICESCR to take reasonable measures within its available resources to progressively secure broader enjoyment of this right. Right to freedom of expression - Article 19 ICCPR Division 7 of Part 2 (Minimum Stockholding Obligation) of the Bill also engages the right to freedom of expression in Article 19 of the ICCPR. Under those provisions of the Bill, regulated entities will be subject to various auditing requirements. Specifically, the Secretary could require an independent registered greenhouse and energy auditor to undertake audits of entities' compliance with the MSO obligations under the Bill. Further, Ministerial rules will prescribe the manner in which such audits must be carried out, the form of audit report, the nature of the matter to be included in such reports, and auditors' use or disclosure of information obtained in the course of conducting audits under Part 2 of the Bill. This therefore engages the right to freedom of expression by establishing measures that may restrict the communication or publication of certain information collected in the conduct of such audits. However, the limitations on freedom of expression that may be imposed by these measures are reasonable and proportionate, as they will ensure that audits are conducted consistently with international standards and are of

sufficient quality and vigour to provide a meaningful assessment of the accuracy of data reported by entities. The veracity and accuracy of such data will be crucial to the integrity of the proposed MSO scheme. Article 19(3) of the ICCPR permits restrictions on the freedom of expression as provided by law and necessary to protect the rights of others and national security or public order, and this would extend to the right to protection of sensitive commercial-in-confidence information. Given the above, the restrictions are considered compatible with Article 19 of the ICCPR because they will promote the integrity of the MSO scheme and ensure businesses' commercial-in-confidence information is sufficiently protected when used by the Department to assess their compliance with the obligations under Part 2 of the Bill. Right to privacy - Article 17 ICCPR While noting that the Bill will primarily regulate the conduct of entities that are unlikely to be individuals, out of an abundance of caution, consideration has been given to the possibility that the Bill engages the right to privacy of individuals. Under Parts 2 (Minimum Stockholding Obligation) and 3 (Fuel Security Services Payment) of the Bill, regulated entities will be subject to various mandatory notice, advice, reporting, auditing and notification obligations. While the nature of the information required to be provided under these clauses (and anticipated to be required under rules made under the Bill) will almost solely relate to refinery operations, fuel production volumes, imports of fuel stocks and other matters relating to the business of refining and importing fuel, it is nevertheless possible some personal information about identifiable individuals may be collected under the Bill. However, any such collection of personal information - to the extent that it occurs - will be limited to what is necessary to ensure the functional operation of the legislative scheme, including its enforcement, so that the intended benefits of the scheme can be realised. 9

FUEL SECURITY BILL 2021 In many cases, entities' reporting obligations are proposed to be satisfied by meeting existing obligations to report specified information under the POFR Act. Relevantly, the related Fuel Security (Consequential and Transitional Provisions) Bill 2021 (Consequential Provisions Bill) will make amendments to the definition of "protected information" (which includes personal information) under section 5 of that Act to ensure that information collected under the established regime is used appropriately and not used or disclosed for other purposes unrelated to the administration of that Act or the Bill. Further, existing Part 4 (Secrecy and Disclosure) of the POFR Act will continue to place appropriate prohibitions and limitations on the manner in which "protected information" may be used and disclosed, including the significant limitation that an entrusted person under the POFR Act may only make a record of, use or disclose protected information if the record is made, or the information is used or disclosed, in the course of exercising powers, or performing functions or duties, as an entrusted person. The Consequential Provisions Bill will insert an advisory note that the powers, functions and duties of entrusted persons are not limited to those conferred or imposed by the POFR Act. This will remove any doubt that information reported by regulated entities under the POFR Act may also be used and disclosed for the limited purpose of administering the MSO and FSSP schemes under the Bill. Therefore, while the Bill may engage and limit the right to privacy, given the objects of the proposed fuel security reforms, the fact that the vast majority (if not all) regulated entities will not be individuals, and the protections proposed with respect to the handling of information reported under existing POFR laws, it is clear that any such limitation will be reasonable, necessary and proportionate. Right to fair trial - Article 14 ICCPR In all cases (except in the unlikely event an individual meets paragraph (e) or (f) of the definition of "regulated entity" under clause 5), the civil penalty provisions that will be established under the Bill apply in relation to entities that are not individuals. Further, in a majority of cases, the entities subject to the proposed civil penalty provisions are large, sophisticated multinational corporations. Applicants for the FSSP are required to be constitutional corporations (paragraph 40(2)(a)).

Also, with the exception of clause 63 (Requirement for person to assist with applications for civil penalty orders) there will be no offences or other criminal penalty provisions that that apply to an individual under the Bill. Therefore, it is unlikely the Bill engages any criminal process human rights. However, out of an abundance of caution, consideration has been given to whether the Bill unjustifiably limits the right of individuals under Article 14 of the ICCPR. For example, there is potential for the civil penalty provisions of this Bill to be regarded as "criminal" for the purposes of human rights law. However, the civil penalties provisions in the Bill relate to contraventions of requirements that operate in a regulatory context - that is, regulation of refinery operators and importers of fuel to ensure compliance with the proposed MSO scheme and various reporting obligations under both the MSO and FSSP aspects of the Bill - and will not apply to the general public. Civil penalties for Part 3 Clauses 47 and 48 will establish civil penalties for contraventions of the obligations on refinery operators to provide a report or to notify the Secretary of specified matters within specified timeframes. These provisions will make a refinery operator liable for a civil penalty of up to 250 penalty units for a single contravention. Applying penalty unit values current as at 1 April 2021, this equates to a maximum potential financial penalty $277,500 for a body corporate. An option to issue an infringement notice will also be available under subclause 66(1) for an amount determined in accordance with clause 67. Failure to comply with the FSSP reporting obligations under the Bill would likely result in inaccurate and misleading data that leads to errors in calculating payments of the FSSP. This has the potential to seriously undermine the integrity of the FSSP scheme. Considering the sophisticated corporate character of the entities subject to the obligations and the national good to be promoted by the FSSP measures in the Bill, the maximum penalties under clauses 47 and 48 are a reasonable and appropriate deterrence to non-compliance. They are also consistent with penalties 11

FUEL SECURITY BILL 2021 applicable under the analogous reporting provisions of the POFR Act (see section 11). Further, the penalty amounts are maximum amounts and it would be open to the courts to impose lesser amounts in appropriate circumstances. Similarly, clause 49 will establish a civil penalty offence provision for providing false or misleading information, or omitting information in relation to a material particular, which provision or omission results in payment of the FSSP to which the entity is not entitled. Under this clause a maximum civil penalty of 300 penalty units will apply. Applying penalty unit values current as at 1 April 2021, this equates to a maximum potential financial penalty of $333,000 for a body corporate for a single contravention. This maximum penalty reflects the increase in the level of culpability from a mere failure to report or notify events under clauses 47 and 48 of the Bill to engaging in conduct that is intentionally misleading (given the penalty would not apply in circumstances where a defence of mistake of fact is established), and is an appropriate maximum penalty given the large and sophisticated multinational fuel refinery corporations that are to be regulated under the Bill. Significant maximum penalties have been specified to provide a strong deterrent to non-compliance, particularly for the sophisticated multinational corporate entities to which they are directed. False or misleading reporting, is likely to result in inaccurate and misleading data that leads to errors in calculating payments of the FSSP. This has the potential to seriously undermine the integrity of the FSSP scheme. Again, the penalty units provided in subclause 49(1) are maximum amounts. It would be open to a court to impose a civil penalty for a lesser amount if it considered it appropriate. Similarly, it would be open to the Secretary (or other infringement officer) to issue an infringement notice under clause 66 for an amount determined in accordance with clause 67.

The proposed inclusion of a civil penalty also provides an additional enforcement option in lieu of the criminal offence provisions that would otherwise apply under the Criminal Code Act 1995 (see Chapter 7). Civil penalties for Part 2 For a breach of the MSO under clause 7 (which requires regulated entities to hold a minimum level of key transport fuels on designated obligation days), the total maximum civil penalty will be worked out using a formula provided under clause 64. The applicable number of penalty units will be calculated using a multiplier (i.e. 2 for a body corporate, otherwise 0.2) multiplied by the designated quantity of stocks multiplied by the total number of obligation days that the regulated entity is non-compliant. This clause seeks to ensure that smaller entities are not disproportionately exposed to higher than appropriate civil penalties. Therefore the maximum penalty will be directly related to an entity's MSO amount (per product) and the period for which they are non-compliant. The applicable multiplier will differ if the regulated entity is a body corporate (2 penalty units). Otherwise, the default multiplier is 0.2 penalty units. It is intended the setting of the civil penalty amounts will reflect the seriousness of the contravening conduct and the risk that the conduct may pose to Australia's security of fuel supplies, and will only be directed at regulated entities (i.e. refiners and importers of fuel products) in a specific regulatory context. Under subclause 33(5) of the Bill, contravention of the requirement that an entity arrange for an independent auditor to conduct an audit to determine whether the entity is complying with the MSO under clause 7 could attract a maximum civil penalty of 1000 penalty units. Further, as advised in the note to subclause 33(5), an entity could be liable for an additional civil penalty for each day the entity fails to comply. As noted above, the proposed civil penalties under the Bill operate in a specific regulatory context and will not apply to the general public. Rather, only a regulated entity could contravene subclause 33(5). If a regulated entity failed to comply with a direction to carry out a compliance audit - given that 13

FUEL SECURITY BILL 2021 such a direction may only be given where the Secretary has reasonable grounds to suspect that an entity has contravened, is contravening, or is proposing to contravene their MSO - it is likely to result in an increased risk of compromised domestic fuel security. Accordingly, the maximum penalty amount that may be imposed by a court as a civil penalty is appropriate and proportionate as it reflects both the seriousness of contravening a direction given by the Secretary and the risk to fuel security posed by non-compliance with an entity's MSO. This particular civil penalty provision is also analogous to, and consistent with the maximum penalty applying under, section 73 of the NGER Act which obliges corporate entities to comply with a requirement of the Clean Energy Regulator to conduct a compliance audit to check compliance with that Act. In light of the above, while substantial maximum penalties may apply under the civil penalty provisions of the Bill, they are not "criminal" in nature in the context of international human rights law, given the narrow class of primarily corporate entities subject to the provisions, the specific regulatory context in which they apply, and the need to ensure compliance with entities' MSO and FSSP obligations to promote the national fuel security policy objectives of the Bill. Therefore, to the extent that the Bill engages and limits the criminal process rights under Article 14 of the ICCPR, such limitations are reasonable, necessary and proportionate. Right to presumption of innocence - Article 14(2) ICCPR and Right to reputation - Article 17 ICCPR As noted above, the civil penalty provisions that will be established under the Bill will, in the vast majority of cases, apply in relation to entities that are not individuals. However, noting the Bill will empower the Secretary to publicise certain contraventions (see clause 68), for completeness, consideration has been given to whether the Bill unreasonably limits the right to presumption of innocence of individuals or otherwise limits the right to reputation.

Clause 68 of the Bill will provide that the Secretary may publicise instances in which an entity has received an infringement notice under Part 5 of the Regulatory Powers Act, the name of the "person" (i.e. entity), the provision alleged to have been contravened, the nature of the conduct constituting the alleged contravention, and whether the entity has paid the infringement penalty. This clause is intended to discourage sophisticated corporate entities that hold the greatest quantity of fuel stocks from contravening provisions in the Bill. While the infringement notice would not constitute a finding of guilt, the possibility of publication of information is a necessary and effective deterrence to fuel market participants of non-compliance with the obligations under the Bill. Therefore, to the extent that the Bill engages and limits the rights of individuals to presumption of innocence, or to reputation, such limitation is proportionate and reasonable. Right not to incriminate oneself - Article 14(3)(g) ICCPR While noting the matters referred to above regarding the fact the Bill will primarily regulate entities that are not individuals, for completeness consideration has been given to whether the obligations established under the Bill to report, notify, advise, provide further information or notify certain matters potentially engage the right not to incriminate oneself. It is noted that any obligation to "report" is intended to only relate to information relevant to the MSO and FSSP schemes and it is not the policy intention that the relevant clauses would abrogate ordinary common law privileges, such as the privileges against self-incrimination, self-exposure to a civil penalty and legal professional privilege. Accordingly, the Bill does not limit the right of individuals not to incriminate oneself. Conclusion The Bill is compatible with human rights because it considerably promotes the protection of the rights to an adequate standard of living and to continuous improvement of living conditions. While there are very few provisions of the Bill that regulate or engage the human rights of individuals, to the extent that it may limit human rights, those limitations are reasonable, necessary and proportionate. 15

FUEL SECURITY BILL 2021

PART 1 - PRELIMINARY FUEL SECURITY BILL 2021 NOTES ON CLAUSES Part 1 - Preliminary Clause 1: Short title 1. This clause provides for the Bill, when enacted, to be cited as the Fuel Security Act 2021. Clause 2: Commencement 2. The table in this clause sets out the commencement date for when the Bill's provisions commence. 3. The whole of the Bill will commence on the day after it receives Royal Assent. However, the Fuel Security (Consequential and Transitional Provisions) Bill 2021 includes transitional provisions to ensure that the MSO does not apply before 1 July 2022 and that applications for the FSSP cannot be made until rules are made concerning application requirements. Clause 3: Objects of this Act 4. Clause 3 sets out the four objects of the Bill. 5. The first object is to improve fuel security and confidence in Australia's fuel supplies. a. The current Australian fuel market operates on a near just-in- time basis with continuity of supply contingent on normal operation of global supply chains. The efficient operation of this market helps keep operational costs down, but makes it less prepared for more significant disruptions to the supply chain. b. Implementing an MSO for fuel stocks will protect fuel consumers and the Australian economy through ensuring ongoing fuel availability in the event of supply disruptions. Government, industry and consumers will all benefit from greater certainty of stocks held in Australia at any point in time. MSO's are common in the international community, with many Organisation for Economic Co-operation and Development (OECD) member countries placing a floor on 17

FUEL SECURITY BILL 2021 stocks to ensure continuity of supply during periods of disruption. 6. The second object of the Bill is to support sovereign capability to maintain fuel supplies. a. By the end of 2021, Australia will have two major oil refineries. Requiring corporate entities that undertake certain activities (generally, importing and refining) to maintain a minimum level of fuel stocks, coupled with an enforceable commitment for ongoing production from remaining refineries, will ensure Australia's fuel needs can be met by enabling critical services to continue for an extended period of time where there is major supply disruption. b. The MSO and FSSP provisions under Parts 2 and 3 of the Bill respectively, are directed to meet these ends. Requiring the holding of minimum quantities of stocks of certain fuels in Australia and providing a production payment to domestic fuel refiners to continue operating for a minimum commitment period, enhances fuel security and promotes confidence in Australia's fuel supplies. 7. The third object of the Bill is to contribute to meeting Australia's obligations under the International Energy Agreement. a. The International Energy Agreement, which governs the mechanisms of the treaty and the stockholding obligation. Australia has been a party to the Agreement since 1979. As such, Australia is required to maintain fuel stocks equivalent to 90 days of the previous year's average daily net oil imports. Establishing an MSO would contribute towards complying with the stockholding obligation under the Agreement. The IEA may agree to release stocks to the global market by declaring a collective action in the event of a supply disruption of global significance. 8. The fourth object of the Bill is to assist in preventing disruptions in fuel supplies to and throughout Australia. a. Implementation of the MSO will provide assurance to fuel consumers that if there was a fuel supply disruption fuel would be available in Australia to minimise any impact.

PART 1 - PRELIMINARY Further, providing a production payment to oil refiners ensures major transport fuels can continue to be refined domestically, and reduces risks associated with any disruption to the supply of such fuels to Australia from overseas. Clause 4: Simplified outline of this Act 9. Clause 4 provides a simplified outline of the Bill to help readers understand the substantive provisions. This simplified outline should not be taken as complete and readers should rely on the substantive provisions in the Bill. Clause 5: Definitions 10. Clause 5 defines key terms found within the Bill. Certain key terms of this Bill are outlined below. 11. Clause 5 includes "signpost" definitions that refer readers to the clauses in which terms are substantively defined. For example, the definition of the term "hold" directs readers to clause 19, where the term is defined to mean holding stocks of an MSO product. 12. Some terms adopt and apply the definitions provided in other Acts. For example, the term "subsidiary" has the same meaning as it does in the Corporations Act 2001 as in force from time to time. 13. "advice window" - this term, defined in subclause 16(4), refers to a period a regulated entity must provide notice of their quantity of stocks or any matters that would impact their capacity to hold the amount of stocks required. The specified period would be determined by the rules. 14. "affected entity" - this term is relevant to clauses 33 and clauses 34 and defines an entity that is subject to be, or is being, audited. 15. "approved form" - this term refers to the form approved by the Secretary, for the purposes of a provision of the Bill or the rules, in accordance with clause 81. 16. "audit team leader" - this term refers to a registered greenhouse and energy auditor appointed for the purposes of clause 33 and clause 34. 17. "audit team member" - this term refers to a person that would be assisting the audit team leader for the purposes of clause 33 and clause 34. 19

FUEL SECURITY BILL 2021 18. "Australia" - it is intended that geographical references to Australia throughout the Bill will exclude the external Territories. This reflects the policy intent that minimum fuel storage obligations and minimum domestic refining commitments are intended to be located in areas that are least at risk of disruption across the Australia's domestic fuel supply chain and therefore exclude external Territories. 19. "Australian controlling corporation" - this term refers the reader to the definition in clause 8(2)(a). 20. "Australian port" - this term is intended to mean a port located in Australia, other than in an external Territory. See also, the definition of "Australia" referred to at paragraph 18 above. 21. "civil penalty provision" - this term adopts the definition of "civil penalty provision" provided under the Regulatory Powers Act, which is currently set out in section 4 and subsection 79(2) of that Act. The term 'civil penalty' appears directly underneath each civil penalty provision in the Bill. 22. "commitment period" - this term refers to the period for which a refinery operator commits to refine FSSP fuel at a specified refinery in Australia in consideration for receipt of the FSSP payable throughout that period. As noted below regarding paragraph 40(3)(b), the commitment period is to be specified in a notice to the refinery operator granting an application for the FSSP. The Minister may also vary a commitment period under subclause 41(2). 23. "committed refinery" - this term refers to the refinery in Australia at which a refinery operator commits to refine FSSP fuel in consideration for receipt of the applicable FSSP payable throughout the commitment period. As noted regarding paragraph 40(3)(a), the committed refinery is to be specified in a notice to the refinery operator granting an application for the FSSP. 24. "constitutional corporation" - this term is intended to mean a corporation to which paragraph 51(xx) of the Constitution applies. It includes both foreign corporations which have been formed outside of the limits of the Commonwealth and trading or financial corporations formed within the limits of the Commonwealth.

PART 1 - PRELIMINARY 25. "designated" - this term refers to clause 13, which sets outs the method for determining when a quantity of stocks of an MSO product is "designated" for an entity. 26. "feedstock" - this term refers to feedstocks as meeting the criteria stipulated in subclause 25(3). 27. "FSSP" - this is an acronym for the term Fuel Security Services Payment. 28. "FSSP fuel" - this term specifies the categories of transport fuels which an applicant for fuel security services payment is required to refine in Australia to potentially qualify for the FSSP. It includes classes of gasoline, diesel and kerosene fuels, which meet any requirements prescribed by the rules. It is intended the rules will further prescribe various sub-categories of those primary transport fuels, which will align with various sub-categories of fuel referred to under the POFR Rules (see, particularly, column 3, items 5-7 of the Table in clause 1 of Schedule 1). Paragraph (d) of the definition, which permits further categories of fuel to be prescribed by the rules, is intended to provide flexibility to add new kinds of fuels as new technologies emerge in future. 29. "hold" - this term refers to clause 19 of the Bill, which defines the term "hold" in the context of when an entity holds stocks of an MSO product. 30. "import" - this term would refer to when an entity imports an MSO product that is produced overseas. Paragraph (a) captures the central step where the owner of a product produced overseas enters that product for home consumption. Such products may be directly entered for home consumption or "warehoused" under the Customs Act 1901 before being entered for home consumption at a later date. Paragraph (b) provides flexibility for the rules to include other related acts of importation, such as entry for warehousing, if this becomes necessary in the future or is needed to address any schemes to avoid the imposition of the MSO. 31. "International Energy Agreement" - this term is intended to mean the Agreement on an International Energy Program at the specified time and place. 21

FUEL SECURITY BILL 2021 32. "margin" - this term refers to subclause 43(6), which defines the "margin" sufficient to ensure that refineries operating in Australia do not make a loss over the commitment period as the excess (expressed in cents per litre) of a defined sale price of FSSP fuels and fuel oils refined by refinery operators over the costs of feedstock and transport in relation to FSSP fuels. 33. "MSO" - this is an acronym for the term Minimum Stockholding Obligation. 34. "MSO activity" - this term is intended to encompass an activity that relates to an MSO product. This would mean refining a product or importing a product or a covered activity within the meaning of the POFR Act and the definition of "import" in the Bill. 35. "MSO product" - this term refers to the major transport fuels, which are gasoline, diesel and kerosene. There is scope for additional products to be prescribed by the rules at a later point in time. Gasoline is commonly known as petrol, and kerosene is commonly known as jet fuel, however the terms gasoline and kerosene have been adopted to align with existing industry reporting. 36. "notice window" - this term refers to a period that the Secretary must provide written notice of an entity's MSO. The specified period would be determined by the rules. 37. "obligation day" - this term refers to a day within set periods that would be prescribed by the rules for the MSO to be complied with. Further consultation with industry will determine an appropriate period and frequency for an obligation day. 38. "offence against this Act" - it is intended an offence against the Bill, once enacted, includes an offence against Chapter 7 of the Criminal Code in the Criminal Code Act 1995 that relates to the Bill. These offenses relate to the proper administration of government and includes the provision of false or misleading information. 39. "regulated entity" - this term is defined in the same way as in the POFR Act. It generally captures constitutional corporations, trusts involving constitutional corporations and entities in a Territory. 40. "responsible person" - this term refers to the person who is designated under subclauses 72(1) and (2), as being responsible for specified classes of decision made under the Bill.

PART 1 - PRELIMINARY 41. "reviewable decision" - this term refers to a decision that is designated under subclauses 72(1) and (2) as being subject to merits review under the Bill. 42. "rules" - this term refers to rules made under clause 84. 43. "Secretary" - this term refers to the Secretary of the Department that will be responsible for administering the Bill (presently, the Department of Industry, Science, Energy and Resources). Delegation of functions and powers of the Secretary is provided for in the Bill, such as by clause 83. 44. "stored in Australia" - this term refers to when an entity is considered to be holding an MSO product. See also clause 21. 45. "subject to the minimum stockholding obligation" - this term is intended to refer to an entity that has triggered the MSO or an entity that has assumed another entity's MSO. See also clause 9. 46. "subsidiary" - this term has the same meaning as the definition of that term under section 6 together with section 46 of the Corporations Act 2001 as in force from time to time. See also clause 8. 47. "temporary reduction period" - this term refers to the notice that specifies the reduced quantity of stocks an entity must hold on the obligation days for the duration specified in the notice. See also subclause 18(3). 23

FUEL SECURITY BILL 2021

PART 2 - MINIMUM STOCKHOLDING OBLIGATION Part 2 - Minimum stockholding obligation Division 1--Introduction to this Part Clause 6: Simplified outline of this Part 48. Clause 6 provides a simplified outline of Part 2 of the Bill to help readers understand the substantive provisions. This simplified outline should not be taken as complete and readers should rely on the substantive provisions in the Bill. 49. While the MSO is established in primary legislation, there are a range of accompanying requirements that will be set out in enabling rules. This will build in flexibility and enable the legislative framework to more easily adapt to changing market conditions and to Australia's fuel security needs. 50. The accompanying requirements to be set in rules include MSO product threshold volumes to trigger the MSO, specified minimum volumes of MSO product, specified days when an entity must hold the minimum volumes and reporting requirements. Division 2--Minimum stockholding obligation Clause 7: Minimum stockholding obligation 51. Clause 7 imposes an MSO on an entity that meets the criteria listed in subclause 10(1). The regulated entity must hold a minimum level of an MSO product (broadly, gasoline, kerosene and diesel) on an obligation day prescribed by the rules. There is a civil penalty associated with being non-compliant with the MSO, with details provided in subclause 64(1). 52. The minimum levels of MSO product/s that each entity is required to hold will be determined in accordance with the rules, and must be set with regard to the target number of days set by the Minister under subclause 14(1). The rules will provide the mechanism for converting historic importing and refining quantities for each entity into a quantity in megalitres for each MSO product. It is likely that this figure will be based on the previous years' importing and refining quantities and adjusted for specific circumstances. Therefore, the quantities are likely to be different for each MSO product the regulated entity refines or imports and the entity needs to comply with clause 7 for each MSO product for which they are subject to the 25

FUEL SECURITY BILL 2021 MSO. For example, an entity subject to the MSO for gasoline and diesel would need to hold both a certain quantity of gasoline and a certain quantity of diesel. They would not have to hold any kerosene. 53. Obligation days will be set at a particular frequency (e.g. every Friday, fortnightly or monthly) as determined by the rules. It will be possible for regulated entities to hold less than the required quantity of stock for other days, as long as stocks are above the minimum on the set obligation day. Flexibility has been built in for rules to specify the obligation day frequency to allow for appropriate variations to be made to account for changes in fuel security requirements. Initially, the rules will be made following industry consultation, which will occur before the MSO comes into force. Clause 8: Additional responsibility of Australian controlling corporation 54. Subclause 8(1) requires an Australian controlling corporation that has a qualifying subsidiary subject to the MSO to ensure that subsidiary complies with clause 7. 55. Although the MSO is intended to sit with the regulated entity in the first instance, this clause ensures the MSO is also understood and enforced by the Australian controlling corporation of the entity. 56. The MSO is expected to apply to the major fuel participants with the most sophisticated operations and largest fuel stocks. By compelling the Australian controlling corporation to ensure compliance, any incentive to split into smaller subsidiaries to avoid the MSO or payment of penalties is reduced. Civil penalties also provide a strong deterrent to discourage Australian controlling corporations from establishing smaller subsidiaries that would affect the implementation of this Bill. The number of penalty units are determined by the formula provided in subclause 64(2). 57. Subclause 8(2) provides the substantive definition of an Australian controlling corporation and excludes entities that are a subsidiary of another body corporate. 58. The Australian controlling corporation is defined consistently with the use of that term in the NGER Act. The Australian controlling corporation generally is the Australian parent company incorporated in Australia who controls the regulated entity subject to the MSO

PART 2 - MINIMUM STOCKHOLDING OBLIGATION directly or through another subsidiary. Paragraph 8(2)(b) deals with certain situations of overlap that would otherwise result in two controlling corporations. 59. Clause 65 ensures that both the Australian controlling corporation and the related regulated entity are not both required to pay a civil penalty for any breach of clause 7. In circumstances where there is both an Australian controlling corporation and a regulated entity obligated under clause 7, the obligation to pay a civil penalty will only fall on one entity (clause 65). It is intended that proceedings against a regulated entity for a breach of clause 7 will be pursued in the first instance ahead of proceedings against the Australian controlling corporation if in breach of clause 8. Division 3--Entities subject to the minimum stockholding obligation Clause 9: Entities subject to the minimum stockholding obligation 60. Subclause 9(1) provides the overarching conditions which, if satisfied, mean an entity will be subject to the MSO. An entity will be captured by the MSO scheme if the Secretary has provided a notice to the entity that the MSO has been triggered in relation to an MSO product (clause 10), the entity has not stopped operating (i.e. conducting the activity of refining or importing the MSO product) and the entity is not exempt from the MSO in relation to the MSO product (clauses 11 and 12). 61. Subclause 9(2) covers circumstances where entities have split, merged or been acquired. The Secretary will need to make a determination under clause 37 regarding the MSO product quantity that will be transferred between entities. This aims to ensure baseline stock levels are not significantly impacted when mergers and/or acquisitions occur, to protect domestic fuel security. 62. It is possible that regulated entities who are already subject to the MSO under subclause 9(1) also become subject to the obligation under subclause 9(2), as they satisfy both conditions. Although both subclauses apply to that entity, the entity will only be required to hold the specified quantity of product as determined by clause 10, 15, 18 or 37. 27

FUEL SECURITY BILL 2021 Clause 10: Triggering the minimum stockholding obligation 63. Subclause 10(1) provides the detail on how the Secretary triggers the MSO for regulated entities. 64. An entity is subject to the MSO when: a. it undertakes certain activities (broadly, refining and importing) of an MSO product (initially, gasoline, kerosene and diesel); and b. it meets certain volume thresholds for each MSO product. These threshold levels will be prescribed by the rules, allowing them to be adjusted more easily to ensure the MSO provisions of the Bill only regulate entities that could significantly impact domestic stock levels. What levels significantly impact domestic stock levels will depend on the changing fuel market and security context so this is a matter appropriately dealt with in rules. 65. The Bill also allows for additional activities and MSO products to be added in rules in the future. 66. Once an entity has triggered the MSO, the Secretary is required to advise the entity in writing that they are subject to the MSO and specify the required quantities of MSO product required to be held. Entities can apply for review of the trigger or quantity decisions (subclauses 10(1) and (2), and clauses 72 and 73). 67. When the Secretary specifies required quantities of MSO product under subclause 10(2), this provides the exact quantity of product a regulated entity must hold on particular days called an "obligation day". 68. These obligation days will be set at a particular frequency (e.g. every Friday, fortnightly or monthly) as determined by the rules. It will be possible for regulated entities to hold less than the required quantity of stock for other days, as long as stocks are above the minimum on the set obligation day. 69. Subclause 10(3) provides that the Secretary will determine the quantity of MSO product to be held for regulated entities in accordance with the rules. It is anticipated that the rules will specify a formula to be used, with quantities based on each entity's actual annual import and production volumes. From time to time variations

PART 2 - MINIMUM STOCKHOLDING OBLIGATION may be required to the formula to ensure smaller entities are not disproportionately affected by the MSO. 70. Subclause 10(4) clarifies that regulated entities can only be required to hold specified quantities of stocks of an MSO product for obligation days occurring from the notice date (at the earliest) to the day before another notice is given to the entity under clause 15. It is expected that quantities will be revised each year under clause 15. 71. The note to subclause 10(4) clarifies that if a regulated entity receives a temporary reduction under clause 18, the initial quantity is suspended. However, the notice in this clause would recommence after the temporary reduction period has ended. Clause 11: Ceasing to be subject to minimum stockholding obligation 72. Subclause 11(1) provides that entities leaving the market permanently (and therefore no longer undertaking MSO activities in relation to any MSO products) will not continue to be subject to the MSO for any of those products. 73. Subclause 11(2) provides that an entity ceases to be subject to the MSO for a specific product if the Secretary makes a determination under clause 37 that the full MSO for that product has been assumed by another entity. In these circumstances, it is possible that the entity will cease to be subject to the MSO for one product (e.g. gasoline), but still be subject to the MSO for a different product (e.g. diesel). This provision also allows entities to exit the MSO scheme altogether by selling their company, while retaining Australia's domestic fuel stocks. If the original entity starts to refine or import an MSO product at a later date (and meets the trigger requirements under clause 10) they would be re-captured by the MSO. Clause 12: Exemptions 74. Clause 12 provides that an entity is not subject to the MSO if they are exempt under the rules. 75. The exemption mechanism is to be prescribed by the rules as it allows an administratively efficient way to factor in unforeseen circumstances when entities should not be regulated under the MSO scheme. It would be impractical to amend the primary legislation 29

FUEL SECURITY BILL 2021 each time an entity is exempted. It is not intended that exemptions will be a significant part of the legislative framework given the flexibility provided under clauses 17 and 18 to reduce quantities of stocks of MSO product required to be held, and the volume threshold for coverage prescribed under subparagraph 10(1)(b)(ii) in specific circumstances. The need for any exemptions would be carefully considered along with any potential impacts on competition in relevant markets. Division 4--Designated quantity of MSO product Clause 13: Designated quantity of MSO product 76. Clause 13 provides regulated entities with a framework to determine the total designated quantity of stocks of an MSO product they are required to hold on each obligation day. 77. Once an entity triggers the MSO for an MSO product (clause 10), the Secretary will notify the entity of the minimum quantity of stocks of the product they are required to hold in megalitres. As per clause 10, the regulated entity must hold at least this quantity of MSO product on particular days called an "obligation day". These quantities are likely to be different for each MSO product the regulated entity refines or imports. Further detail regarding the calculation of this quantity can be found under clause 15. 78. The Secretary will notify an entity of their MSO for each MSO product: a. when the MSO is first triggered for an entity in relation to the product (clause 10); b. at least 3 months before the start of the next compliance period, which is likely to be each financial year (clause 15); c. in response to an application for a temporary reduction in quantity of stocks of an MSO product by a regulated entity (noting the request may not be granted - see clause 18); and d. in the event of a merger or acquisition, or if an entity splits into a number of different entities (clause 37). 79. Subclause 13(1) is the main case where there has been no assumption of an entity's MSO by another during a period. Generally, there will

PART 2 - MINIMUM STOCKHOLDING OBLIGATION be an intial clause 10 notice for the first year and a clause 15 notice for each subsequent year. 80. Subclause 13(2) recognises the possibility that the amount in a notice is varied by a determination under clause 37. This could be where an entity has assumed all or part of another's MSO and the quantity is increased. It could also be where someone else has acquired some of their MSO such that their MSO is decreased. 81. Subclause 13(3) covers the possibility that the rules deem a notice issued to one entity to also be issued to a second entity (or to more than one entity) under a clause 37 determination. For instance, a new entrant may acquire part of a business and the clause 37 determination would deem the original notice to the selling business also to be issued to the new entrant with an proportion of the required quantities. The original selling business would still have a reduced MSO under subclause 13(2). Clause 14: Target number of days for stockholding 82. Clause 14 provides that the Minister must set the target cover days of each MSO product for each MSO activity via a notifiable instrument. Rules will then prescribe the calculation to convert the national target number of days of each MSO product to the actual quantities required to be held by each regulated entity subject to the MSO. 83. Subclause 14(3) provides that in setting a target number of days, the Minister must consider Australia's obligations under the International Energy Agreement as well as the objects of the Bill and any other relevant matters, such as national security considerations. An object of this Bill is to ensure the MSO can contribute towards meeting Australia's compliance under the International Energy Agreement (paragraph 3(1)(c)). However, this structure recognises that an MSO is not the only mechanism available to Australia to comply with its international obligations. 84. Subclause 14(2) provides that the target number of days set by the Minister may differ for different MSO activities and MSO products. It is anticipated that for importers of MSO products, the target days will relate to average daily imports of products. It is anticipated that for refiners of MSO products, the target will relate to average daily 31

FUEL SECURITY BILL 2021 production of products. This data will generally be provided by the POFR Act. 85. Further, it is anticipated that gasoline, kerosene and diesel target days will initially be set at pre-COVID-19 average levels, with diesel target days to be increased by 40% on pre-COVID-19 levels by 1 July 2024. The increase in diesel target days is due to the fact that Australia's transport, mining, agriculture, and critical emergency services rely heavily on diesel. 86. Subclause 14(4) provides that any rules prescribed by subclauses 10(3), 15(3) and 16(3) (determining the quantity of stocks of MSO product/s required to be held by a regulated entity) must have regard to the target number of days determined by the Minister under subclause 14(1). This requirement ensures the Minister's target number of days is taken into account when determining the rules for the quantities required for each entity. However, this consideration does not prevent the rules from providing circumstances where an entity or class of entities has an MSO equivalent to less than the target number of days, such as for a new entrant. 87. Each entity will have a specific obligation for each MSO product, determined by reference to the national target and their historical operations, as well as any mitigating circumstances prescribed under the rules. These circumstances are left flexible ensure they can be adjusted as required, for example to ensure smaller entities are not disproportionately affected by the MSO. Clause 15: Notice of quantity of MSO product 88. Clause 15 is expected to be the most common way the Secretary advises a regulated entity of the exact minimum quantity of stocks of each MSO product they are required to hold over a specific period of time (compliance period). Although a compliance period has not been specified in the Bill, the corresponding "notice window" frequency will be set in the rules to allow for any adjustments in future fuel security requirements. It is likely that the notice window will initially occur yearly, and be set so that the compliance period aligns with a financial year.

PART 2 - MINIMUM STOCKHOLDING OBLIGATION 89. The Secretary must provide written notice to the regulated entity of the quantity of MSO product (determined in accordance with the rules) they must hold on the obligation days. The notice must be given to the entity within the "notice window", which will be prescribed in the rules. 90. The notice of quantity remains in force for obligation days occurring from the day the notice comes into force (i.e. at least 3 months after the day the notice is given) and the day before a subsequent notice regarding the product comes into force (subclause 15(4)). This ensures an entity is advised at least 3 months in advance of the compliance period the amount of stock they will be required to hold on particular days called an "obligation day". This deadline is included to ensure regulated entities have sufficient time to prepare and vary any stock levels as required to meet the upcoming MSO compliance period. 91. These obligation days will be set at a particular frequency (e.g. every Friday, fortnightly or monthly) as determined by the rules. It will be possible for regulated entities to hold less than the required quantity of stock for other days, as long as stocks are above the minimum on the obligation day. 92. The Secretary must determine the quantity of MSO product/s for each entity in accordance with the rules. The rules will provide the mechanism for converting historic importing and refining quantities for each entity into a quantity in megalitres for each MSO product. It is likely that this figure will be based on the previous years' importing and refining quantities and adjusted for specific circumstances. A note to subclause 15(3), refers the reader to subclause 14(4), advising that the quantity must be set having regard to the target number of days set by the Minister under subclause 14(1). The intention is for the rules to apply formulas to factual information rather than confer broad discretions on the Secretary. Entities can apply for a review of the decision (subclause 15(2)). 93. In addition to the quantity of stocks of MSO product each regulated entity is required to hold, the Secretary's notice must include an explanation for the specified quantity, and provide a starting date for the MSO requirement (subclauses 15(4) and (5)). 33

FUEL SECURITY BILL 2021 By providing an explanation for the determined quantity of MSO product required to be held, it will help the regulated entity determine their own quantities in future and explain any variations in expected quantity from the amount advised to the Secretary under clause 16. 94. To avoid any confusion, a note under this subclause states that the Secretary's notice will be suspended if there is an approved temporary reduction in effect. The notice would then recommence after the temporary reduction period has ended. Clause 16: Entity's advice about expected designated quantity 95. Clause 16 aims to ensure regulated entities are engaged with their stockholdings of MSO products for the purposes of meeting their MSO, by providing their own calculation of quantities required in accordance with the rules (subclause 14(4)). It also provides an opportunity for regulated entities to pre-empt the Secretary's own determination of quantity (clause 15) if they believe it should be a different amount. Paragraph 16(1)(b) allows entities to notify the Secretary of any difficulties that may prevent them from holding their designated amount of an MSO product within a particular timeframe. 96. Subclause 16(3) provides that the entity must calculate their expected quantity using the same formula that the Secretary would use, which will be set in the rules. Accordingly, if the capacity of an entity to hold stocks is to be relevant to the quantity, this would be prescribed by the rules. The Secretary will not have any residual discretion to apply a lesser amount outside of those rules. Clauses 17 and 18 provide further opportunities to vary quantities if this is necessary. 97. Subclause 16(2) provides that irrespective of a regulated entity's decision to cease undertaking an MSO activity, that entity will still be responsible for providing a written notice to the Secretary of their expected designated quantity. This is to ensure that in the event an entity does not cease operations as expected, or the Secretary has not yet been notified of an intention to cease operations, all parties are aware of the expected MSO. 98. Subclause 16(4) states the advice window will be prescribed in the rules, and the advice must be provided before the start of the

PART 2 - MINIMUM STOCKHOLDING OBLIGATION Secretary's notice window. The changing nature of these arrangements means this detail is appropriately dealt with in rules. 99. Any obligation to provide this information is intended to only relate to information relevant to the MSO scheme and there is no intention that the provisions override ordinary common law privileges, such as the privileges against self-incrimination, self-exposure to a civil penalty and legal professional privilege. Clause 17: Application to temporarily reduce quantity of stocks of MSO product 100. There may be circumstances where regulated entities need to temporarily reduce their MSO. Subclause 17(1) allows them to apply to the Secretary, and subclause 17(2) sets out the details required in the application. 101. Temporary reductions will only be allowed in particular circumstances that will be prescribed by the rules. These circumstances may change over time, and would take into account any competitive impacts that could result from such reductions. It is possible that entities may need to apply for a second temporary reduction if the issues associated with the first period are not resolved. Temporary reductions could be appropriate in circumstances of a location specific event instead of a suspension of the full obligation for an entity, that has risen as result of a matter outside of the control of the entitiy. Clause 18: Secretary's decision on temporary reduction application 102. Subclause 18(1) gives the Secretary the authority to reduce a regulated entity's MSO quantity for any/all MSO products if the entity requests the reduction in accordance with the rules (clause 17). 103. In considering the request, the Secretary can: a. grant the application by reducing the quantity to the requested amount; b. grant the application by reducing the quantity by a different (lesser) amount than what was requested; or c. refuse the application. 35

FUEL SECURITY BILL 2021 104. For example, the request may be to halve an MSO for a period, but the Secretary could decide to apply 70% of the MSO instead of half. The Secretary cannot increase the MSO under this provision. 105. Any decision made by the Secretary must be provided to the regulated entity in writing. The notice must include the quantity of MSO product required to be held by that entity, reasons for the decision and the time period that the temporary reduction (if any) applies. Entities can apply for a review of the decision (subclause 18(5)) 106. The temporary reduction period can be backdated to ensure the entity, who may have been non-compliant due to situations outside their control, will not be penalised for a breach of their MSO under clause 7. 107. Subclause 18(4) clarifies that only one notice of quantity issued by the Secretary is active at any point in time (under clause 10, 15 or 18). 108. Rules made for subclause 18(6) will provide for specific circumstances when regulated entities will be considered for a temporary reduction of their MSO. Consultation with industry will be key to ensure appropriate settings. Flexibility has been maintained to allow the list to be amended in case unexpected circumstances arise where amendments need to be made. The rules may also make provision in relation to the appropriate length of the temporary reduction period. Division 5--Holding stocks of an MSO product 109. Fuel market participants use a variety of arrangements for holding and accessing fuel. These provisions are intended to ensure MSO products are only counted once and not double counted. Clause 19: When an entity holds stocks of an MSO product 110. Clause 19 stipulates that clauses 22, 23, 24 or 25 define when stocks are being held for the purposes of meeting the MSO, and that stocks are excluded from being counted under clause 20.

PART 2 - MINIMUM STOCKHOLDING OBLIGATION Clause 20: Excluded stocks 111. Subclause 20(1) stipulates the circumstances where holding an MSO product cannot be counted towards an entity's MSO. If stocks are being used exclusively for the Australian Defence Force or armed forces of a foreign country, then these stocks do not improve domestic security and confidence in domestic fuel supplies as they have already been allocated for other purposes (and do not contribute to meeting Australia's obligations under the International Energy Agreement). 112. Stocks that are being used for private or household domestic purposes are also excluded as it would be challenging to monitor for compliance purposes. Further, it is unlikely that stocks stored and used for private or household domestic purposes are large enough to affect fuel security. Rules may prescribe circumstances where stocks can be included if they are considered appropriate. Currently, stocks held privately may include stocks held at industrial or mining facilities for use in the operation of that facility, however it may be appropriate for these stocks to count towards an entity's MSO. In addition, the rules will be able to allow certain storage purposes to be excluded from being counted towards an entity's MSO, such as where the entity imports fuel directly and stores it for subsequent use in its operations. 113. Stocks stored in service stations, retail stores, personal vehicles, road tankers, rail tank cars, fuel stored for powering ships and pipelines (except in circumstances provided in the rules) have been excluded from counting towards an entity's MSO. These stocks have been excluded due to the regulatory burden accounting for these stocks would place along the supply chain. Obtaining data at the frequency required to keep these figures up-to-date is unfeasible, and the turnover at each point within the supply-chain is extremely fast. 114. It is possible that some stocks in pipelines could be included for the purposes of the MSO through the rules, such as stocks connected to a wharf, or refinery to a terminal. These are circumstances where the pipelines are being used as extra storage capacity and are easily added to the normal operation and supply chains for those companies. 37

FUEL SECURITY BILL 2021 However, companies would need to ensure accurate data could be obtained before this will be considered. 115. Subclause 20(2) states that stocks of MSO product are excluded if they do not meet the fuel quality standards prescribed by the rules. Stored MSO product must meet the prescribed standards, such as those developed under in the FQS Act, to ensure they can be used in critical emergency circumstances. Clause 21: Stocks that are stored in Australia 116. Clause 21 sets out the conditions where an MSO product stored in Australia is counted towards an entity's MSO. The geographical meaning of Australia is intended to exclude external territories, such as Christmas Island, Norfolk Island and Cocos Island, as holding fuel stocks in these locations would not necessarily enhance Australia's fuel security. Broadly, stocks are considered to be stored in Australia under limited conditions, if they are on land, or if they are on a vessel in an Australian port, waiting to enter an Australian port or travelling between two Australian ports. The definition is deliberately narrow to ensure we are only counting stocks that can reasonably be considered to improve fuel security in the unlikely event of no imports. 117. Subparagraph 21(b)(iv) provides for the rules to prescribe additional circumstances where the storage of an MSO product would be taken to fall within the meaning of stored in Australia. For example, the definition could be broadened to include stocks in the exclusive economic zone (EEZ) for the purposes of the MSO. However, regulated entities would need to ensure accurate data could be obtained for these stocks, and reported with regular frequency, before inclusion of the EEZ will be considered. Clause 22: Holder of stocks: entity owns stocks and no other entity is the holder 118. Clause 22 prescribes that a regulated entity is considered to be holding an MSO product to be counted towards their MSO if: a. the entity owns the stocks; b. stocks are stored in Australia;

PART 2 - MINIMUM STOCKHOLDING OBLIGATION c. stocks are not being counted towards another entity's MSO (under clause 23 or 24); and d. rules have determined the entity is the legal owner of the stocks or that the entity owns a proportion of the stocks. 119. Subclause 22(2) clarifies that the rules may allow for circumstances when more than one entity is the legal owner of the same stocks of an MSO product for the purposes of clause 19. The rules will specify the conditions for when entities are considered to be holders of the stocks, or the holder of a proportion of stocks. 120. The subclause provides for scenarios such as joint ventures where uncertainties could arise regarding which entity is the holder of an MSO product. It is intended that each particle of MSO product in Australia can only be counted once for the purposes of the MSO. It is not intended to capture the effects of mortgages and other security interests. 121. Rules will be used to prescribe a method that determines how MSO products can be counted towards an entity's MSO if more than one entity owns the stock. Creating rules allows flexibility to consult with industry on these circumstances and adjust this method in future if required if new ownership arrangements are adopted by the industry. The complexity and changing nature of these arrangements means these details are appropriately dealt with in rules. 122. Subclause 22(3) prescribes that entities may engage in alternative arrangements to identify which entity holds stocks for the purposes of the MSO, other than the example provided in this subclause. Clause 23: Holder of stocks: entity entitled to take ownership of stocks and no other entity is the holder 123. Clause 23 permits a regulated entity to count stock towards their own MSO if they have legally enforceable arrangements in place to take ownership of the stock. Conditions listed in this clause would satisfy the criteria of holding stocks of an MSO product to contribute towards an entity's MSO. This clause provides for situations where one entity (entity 2) owns and is currently storing the stock, however a legally enforceable arrangement (such as a contract) was in place between the entities so that a different entity (entity 1) could take 39

FUEL SECURITY BILL 2021 ownership of the stock/s. In this situation, entity 1 can count the stock/s towards their MSO. This clause prevents double-counting of stocks, as stocks can only be accounted for once. The legally enforceable arrangement could include a requirement for partial payment for the stocks (see clause 26). In the example above, this may provide further assurance to entity 2 that if entity 1 is able to count the stock towards their MSO, the stock will be paid for (and collected). 124. Rules may prescribe any requirements of legally enforceable arrangements to provide clarity to regulated entities and the Secretary if required. It is intended that the rules will help avoid incorporating any arrangements, such as security interests in the stocks, that are not intended to make to holder of the security a holder of the stocks under this clause. Clause 24: Holder of stocks: stocks held, reserved or quarantined for entity and no other entity is the holder 125. Clause 24 captures any arrangements used by the liquid fuel market participants to account for stocks, without limiting the market to deliver innovative stockholding accounting solutions into the future. 126. The overarching objective is to ensure stocks that are held in Australia are only counted towards the MSO once. This clause permits regulated entities to seek third-party arrangements to cover any shortfall in their MSO, including with entities that are not regulated. 127. There is no requirement in this clause to own or take ownership of any stock being counted towards an entity's MSO. As long as there is proof, through a legally enforceable arrangement, that the stocks are being held, reserved or quarantined in Australia and are not being counted by other regulated entities, they can be considered to be stocks of an MSO product by any regulated entity. Clause 25: Taking feedstocks at refinery into account 128. Clause 25 provides that feedstocks that are stored at a refinery can be included as if they are stocks of an MSO product. The purpose of this clause is to take into account the unique fuel security benefits refiners

PART 2 - MINIMUM STOCKHOLDING OBLIGATION can provide. Refinery crude oil stocks can be converted into any MSO product (gasoline, kerosene and diesel) as directed. In order to maintain comparable levels of fuel security if refineries were to close, importers would have to hold higher levels of finished product. 129. Rules will determine the quantity of conversion and the manner that feedstocks would be counted as an MSO product. It is possible that a cap will be set on the amount of crude that can be included, and the amount could also be set at zero. When setting the detail about how feedstocks can be counted as MSO product, the yields for each MSO product at each refinery are expected to be taken into account. Industry will also be consulted on the draft rules for the feedstock inclusion at refineries. 130. Subclause 25(1) outlines the conditions that feedstock would need to adhere to if they are being counted towards an MSO product. 131. Subclause 25(2) specifies that a refining entity can be deemed to hold the feedstock as MSO product to meet its own MSO, or the refining entity may be able to hold crude stock as MSO product on behalf of another regulated entity. 132. Subclause 25(3) specifies that rules determine the requirements of feedstock to be included as MSO product including for crude oil, other feedstock or unfinished refinery product. Clause 26: Rules in relation to legally enforceable arrangements 133. Clause 26 allows rules to specify any detail that may be required to ensure legally enforceable arrangements are accounted for accurately and effectively while meeting fuel security objectives. This could include the nature of arrangements, whether entities holding stocks will need to be accredited fuel storage providers for the purposes of the MSO, and any requirement to register accounting arrangements with the Secretary. This clause has been left broad in case other conditions need to be specified in the rules once consultation with industry has occurred. It is possible that the nature of these arrangements may change over time to account for ease of accounting for the MSO. To allow flexibility and innovation within the market, these details are appropriately dealt with in rules. 41

FUEL SECURITY BILL 2021 Division 6--Suspension of minimum stockholding obligation Clause 27: Suspension by Minister 134. Clause 27 provides that the Minister has the power to temporarily suspend the MSO of a specified MSO product via a legislative instrument for a specified period of time. It is possible for the Minister to suspend the MSO for all MSO products. The legislative instrument would be disallowable in accordance with the usual procedures. 135. The Minister must be satisfied that the suspension is necessary to prevent or alleviate the possibility that the MSO product supply has been, or will be, disrupted (subclause 27(1)). Rules may also specify other requirements for the Minister to consider, including in relation to the likely period of the suspension or other impacts of the suspension on the market. 136. Subclause 27(2) specifies that during a temporary suspension period, entities are not required to hold the minimum amounts of stock prescribed by the Secretary. This allows the specified MSO product to be released to the market to prevent or alleviate any disruptions. 137. A note is provided under subclause 27(2), which states that clauses 15 and 16 are still in effect during a temporary suspension of the MSO. If a temporary suspension is applied for a single MSO product, entities would still be required to hold the specified minimum quantities of any other MSO products. For example, if the Minister suspends the MSO for diesel, regulated entities would still be required to hold quantities of gasoline and kerosene if they had been directed to by the Secretary under clauses 10, 15, 18 or 37. 138. In practice, it is likely that the notice window provided in clause 15 would remain in effect for longer than the duration of the Minister's temporary suspension. Therefore, an entity's MSO would resume when the suspension is lifted. 139. It is recognised that entities may require a transition period after a suspension to rebuild stocks to reach compliance with their MSO after a temporary suspension has occurred. This could be addressed through a longer suspension period being applied, or through an application to temporarily reduce the required quantity of stocks for the MSO under clause 17.

PART 2 - MINIMUM STOCKHOLDING OBLIGATION 140. Subclause 27(3) states that a temporary suspension must not be greater than 6 months. However, the Minister would have the ability to make another legislative instrument to suspend the MSO (before the first instrument expires) to continue to prevent or alleviate an ongoing disruption. Each temporary suspension period cannot exceed 6 months. 141. Subclause 27(4) provides that in potential or actual fuel disruptions, the Minister must consider suspending the MSO at the request of an Energy Minister. The policy intent behind this subclause is to align the MSO with the Liquid Fuel Emergency Act 1984 and to allow an Energy Minister of a state or territory jurisdiction to request a suspension of the MSO. It is envisaged this may happen during a localised fuel disruption event, allowing fuel stocks to be released within a particular jurisdiction. Clause 28: Application for suspension by Secretary 142. There may be circumstances where regulated entities need to temporarily suspend their MSO. Subclause 28(1) allows them to apply to the Secretary, and subclause 28(2) states that any details required in the application will be set out in rules. 143. Rules will provide for specific circumstances when regulated entities can request a suspension of their MSO and details that may need to be set out in the application. The circumstances are not meant to be exhaustive, however consultation with industry will be key to ensure appropriate settings. Flexibility has been maintained to allow the list to be amended in case unexpected circumstances arise where amendments need to be made. A potential circumstance could be an event outside of the entity's control (such as a natural disaster or unexpected equipment failure) which destroyed stocks that were intended to be used to meet the MSO. Clause 29: Secretary's decision on suspension application 144. If a regulated entity applies for a suspension of their MSO, subclause 29(1) sets out the Secretary's options. The Secretary must choose to: a. grant the application to the entity; 43

FUEL SECURITY BILL 2021 b. grant the application and extend the suspension to a class of entities; or c. refuse the application. 145. Subclause 29(3) allows the Secretary, rather than the Minister, to suspend the MSO for a class of entities (including the initial applicant) if it is evident that the application from one entity affects a broader group. This will allow faster response times in the event of a localised supply disruption that may not trigger the Minister's powers. 146. Any decision made by the Secretary must be provided to the affected entities in writing, including the initial applicant. The notice must include reasons for the decision and the time period that the suspension (if granted) applies. Entities can apply for a review of the decision (subclauses 29(7) and 29(8)). 147. Subclause 29(4) lists information on matters that may be addressed in the rules regarding the Secretary's decision to suspend the MSO. Rules are intended to define when the Secretary should act under this provision and focus the provision on genuine situations where suspension is necessary. These would generally be associated with fuel security, noting that a process for temporary reductions in quantity is also available under clauses 17 and 18. 148. Subclause 29(5) clarifies that for the suspension period provided in the notice by the Secretary, any entity covered by the suspension would not be required to hold the minimum quantity of stocks prescribed under clause 7. 149. Subclause 29(6) states that the suspension period provided by the Secretary cannot exceed 3 months. However, further suspensions can be granted if any regulated entity (not necessarily the entity that put in the original application) puts in another application. This will allow for suspensions to be extended for a maximum of 3 months for each application to cover any disruption periods. This can be done for a single entity or class of entities. Practically, there is no limit to the number of extensions the Secretary can issue.

PART 2 - MINIMUM STOCKHOLDING OBLIGATION Division 7--Other duties Clause 30: Notice of MSO activity in relation to MSO product 150. Clause 30 outlines circumstances an entity must give the Secretary written notice. 151. Paragraph 30(1)(a) provides that an entity that is not currently captured by the MSO, but expects to start an MSO activity for an MSO product which triggers the MSO, is required to notify the Secretary in writing of that entity's intention to undertake an MSO activity. This clause requires potentially regulated entities to engage with the MSO and self-identify whether they will be captured under the scheme. This will capture new entrants to the fuel market and allows the Secretary to provide any education and guidance materials to the entity in advance of advising the entity of their MSO. 152. Paragraph 30(1)(b) provides that an entity that is already regulated by the MSO must notify the Secretary in writing if they intend to start a different MSO activity that should be captured under the MSO. Alternatively, the regulated entity must notify the Secretary in writing if they cease some (but not all) MSO activities that have been captured by the MSO. This clause aims to cover a situation where a regulated entity changes their operational structure but remains regulated. Clauses relating to triggering the MSO or ceasing to operate (clause 10 and clause 31) are limited in their scope. The intention is for the Secretary to maintain a good understanding of regulated entities operations to ensure confidence in Australia's fuel security. 153. Paragraph 30(1)(c) allows for rules to prescribe additional circumstances where notice must be given. This could be necessary to deal with possible mergers or acquistions that could lead to the application of clause 37. 154. Subclause 30(2) details the information a written notice to the Secretary must contain. Rules may prescribe requirements to be included in the notice, including whether the notice should be in an approved form (clause 81). Delegating any requirements to the rules allows the information captured to be refined over time to ensure only information that is necessary is captured. 45

FUEL SECURITY BILL 2021 155. Any obligation to "report" is intended to only relate to information relevant to the scheme and there is no intention in the provisions to override ordinary common law privileges, such as the privileges against self-incrimination, self-exposure to a civil penalty and legal professional privilege. Clause 31: Notice of intention to cease all MSO activities in relation to MSO product 156. Clause 31 provides that a regulated entity is required to let the Secretary know in writing if the entity decides to permanently or indefinitely cease all MSO activities and therefore will no longer be required to hold any fuel stocks for the purposes of the MSO. Rules will determine any information or requirements that the written notification should contain. The changing nature of these requirements means these details are appropriately dealt with in rules. 157. Once an entity has made the decision to permanently or indefinitely cease all MSO activities, they are required to notify the Secretary in writing. The Secretary will then make a decision about the cessation of MSO activities under clause 32. If the regulated entity resumes an MSO activity at a later date, this clause ensures the entity will be captured by the MSO again. These requirements ensure the Secretary maintains an accurate understanding of the current MSO product levels within Australia to provide confidence in Australia's fuel security. 158. Any obligation to provide this information is intended to only relate to information relevant to the scheme and there is no intention in the provisions to override ordinary common law privileges, such as the privileges against self-incrimination, self-exposure to a civil penalty and legal professional privilege. Clause 32: Secretary's decision about cessation of all MSO activities in relation to MSO product 159. Subclause 32(1) provides that the Secretary must be confident an entity that has advised of their intention to cease operations (clause 31) is legitimately ceasing their operations for all MSO activities. The Secretary can request further information to support the entity's

PART 2 - MINIMUM STOCKHOLDING OBLIGATION claim (clause 78). This subclause aims to deter entities from claiming they are ceasing all MSO activities for the purpose of avoiding the MSO. 160. Subclause 32(2) aims to set a deadline of 30 days for the Secretary to make a decision, where possible, with an ultimate deadline of 45 days to make a decision (see subclause 32(4). This deadline starts from the date the notice is provided under clause 31. 161. Subclause 32(3) states that the Secretary must provide their decision in writing, and reasons must be provided to the entity if the Secretary decides they are not satisfied with the entity ceasing operations. The entity must also be advised of their right to have the decision reviewed under clause 72. Subclause 32(3) also allows the Secretary to backdate their decision if they are satisfied that the entity has ceased operations. In a situation where an entity ceases operations abruptly and did not have time to notify the Secretary when it happened, this clause allows the Secretary to backdate the decision to the actual closure date, avoiding unnecessary civil penalties for non- compliance. 162. Subclause 32(4) states that if the regulated entity has not been notified of the Secretary's decision before the 45-day deadline, the Secretary has deemed that they are not satisfied that the entity has permanently or indefinitely ceased operations, and will therefore remain subject to the MSO. Clause 33: Compliance audits 163. Clause 33 provides that the Secretary can require the entity to appoint an independent auditor if the Secretary believes the entity is, or will become, non-compliant with the MSO. The Secretary would set out the requirement in writing to the regulated entity. 164. Subclause 33(2) sets out that approved audit team leaders are registered greenhouse and energy auditors. The Secretary has the ability to allow the entity to choose an audit team leader of their choice, or prescribe a specific or range of team leaders that the regulated entity may choose from. The entity must then arrange for the audit team leader to carry out an audit of their compliance with the MSO (clause 7). The entity must also arrange for the audit team 47

FUEL SECURITY BILL 2021 leader to provide a written report detailing the results of their audit findings, and ensure the audit report is provided to the Secretary on or before a time specified in the Secretary's written notice. 165. Subclause 33(3) specifies the details that are required to be provided within the Secretary's written notice to the entity, including the type of audit to be carried out, the matters to be covered in the audit and the form of the audit report and specific detail it should contain. 166. Subclause 33(4) provides that the regulated entity that has been required to undertake an audit must provide the audit team leader (or any audit team members) access to reasonable facilities and assistance needed to carry out their duties. This clause also states that there is a civil penalty associated with non-compliance. 167. Subclause 33(5) states that failure to comply with the written notice provided by the Secretary is subject to a civil penalty. 168. A note under subclause 33(5) states that under section 93 of the Regulatory Powers Act, an entity can be liable for an additional civil penalty for each day the entity fails to comply. 169. This clause is equivalent to section 73 of the NGER Act and is drafted consistently with that section. The use of registered national greenhouse and energy auditors recognises the significant skills this category of auditors have with energy auditing relevant to the production and use of MSO products. Clause 34: Other audits 170. Subclause 34(1) provides the Secretary with the ability to appoint an independent greenhouse and energy auditor to conduct audits on compliance with the Bill or associated rules. The audits can apply to an entity subject to the MSO or the Australian controlling corporation (if there is one). 171. Subclause 34(2) requires the Secretary to notify the affected entity in writing about the Secretary's decision to audit that company. The clause also specifies the detail that must be included in the notice including the audit team leader, the period the audit needs to be conducted in, the type of audit to be carried out, and matters to be covered by the audit. The notice must be provided to the entity within a reasonable timeframe before the audit is expected to be undertaken.

PART 2 - MINIMUM STOCKHOLDING OBLIGATION This is intended to give the entity enough time to ensure facilitation of the audit. 172. Subclause 34(3) provides that the regulated entity that has been required to undertake an audit must provide the audit team leader or any audit team members access to reasonable facilities and assistance needed to carry out their duties. This clause also states that there is a civil penalty associated with non-compliance. 173. Subclause 34(4) provides that if the Secretary has appointed an audit team leader and advised the entity of the details for the audit, the entity must arrange for the audit team leader to carry out the audit. This is to ensure the entity can arrange a mutually convenient time for the audit team leader or audit team members to conduct the audit. This clause also states that there is a civil penalty associated with non-compliance. 174. This clause is equivalent to section 74 of the NGER Act and is drafted consistently with that section. Clause 35: Conduct of audits 175. Subclause 35(1) provides that rules will set out any requirements and overarching conditions that registered auditors are expected to comply with. 176. Subclause 35(2) provides that rules may prescribe different requirements for audits and audit reports as required. 177. Subclause 35(3) specifies that the independent greenhouse and energy auditors must comply with any requirements specified in the rules. 178. The prescription of these matters by legislative instrument is consistent with section 75 of the NGER Act. It is expected that similar requirements would apply to these audits. Clause 36: MSO compliance plan 179. Clause 36 provides that an entity that has triggered the MSO must have a written plan that includes information that is required by the rules and other matters that the Secretary requests under subclause 36(2). 49

FUEL SECURITY BILL 2021 180. The intent behind this clause is to ensure entities are engaging with the MSO and have a plan towards reaching compliance, even if they do not have the required storage capacity to meet their initial MSO. It is anticipated that the MSO compliance plan would contain information such as storage volumes, anticipated major infrastructure builds, upgrades or refurbishments and any changes to business as usual practice to meet minimum quantities of stock. It is also expected that the entities will have a plan to reach compliance in the event they themselves do not have the necessary storage volumes, such as contracting with other entities. 181. Furthermore, the intention for an MSO compliance plan is to provide a reference that the MSO can be audited against. 182. Although regulated entities are not required to provide the compliance plan to the Secretary for approval, it needs to be available within a reasonable timeframe if the Secretary does request it. Failure to comply with such a request would be a civil penalty provision with a maximum penalty of 50 penalty units for a single contravention by an individual. Division 8--Assumption or division of minimum stockholding obligation Clause 37: Determination of assumption or division of minimum stockholding obligation 183. Clause 37 gives effect to the assumption or division circumstances from clause 9. 184. Subclause 37(1) specifies that an entity's MSO can be wholly or partly assumed by another entity (or entities), and that the Secretary can make a determination to this effect. This determination can be made at the discretion of the Secretary, either by request from an affected entity or on the Secretary's own initiative (subclause 37(2)). 185. Subclause 37(3) requires the Secretary to contact the affected entities to allow them to provide any reasons or circumstances that should be taken into account before the Secretary sets the MSO for each entity via a determination. 186. Once a determination is made, it must be provided to the entities and outline the effect it will have on any other notices in force regarding

PART 2 - MINIMUM STOCKHOLDING OBLIGATION their MSO (under clause 10, 15 or 18), and their right to review (under paragraph 72(1)(h)). 187. If the Secretary has refused the request to make a determination, the affected entity must be provided written notice explaining the reasons for the decision and the right to review. 188. Subclauses 37(7) and (8) ensure that rules can provide the details on how the MSO liability is apportioned in the event of a relevant event. These may result in a new entity becoming subject to the MSO and an original notice (such as a clause 10 notice) being deemed to be given to both the original entity and the new entity (with the original quantity apportioned between the entities). It is important that a wide range of possible circmstances can be accommodated by the rules to ensure that the MSO is fairly adjusted. 189. It is possible that dividing one entity's (entity 1's) MSO between multiple entities (possibly including entity 1) drops some or all affected entities below the initial trigger threshold for the MSO (subparagraph 10(2)(b)(ii)). If this occurs, it is still the intention that a MSO will continue to apply to all entities involved in the division process. This provides greater oversight of Australia's domestic fuel stocks, and ensures regulated entities cannot split into a number of smaller subsidiaries to avoid the MSO. The only way out of the MSO is under clause 11, by ceasing all activities relating to the MSO, or if another entity assumes the MSO in full. In special circumstances, it may be possible for the Minister to make rules providing for exemptions under clause 12. 51

FUEL SECURITY BILL 2021

PART 3 - FUEL SECURITY SERVICES PAYMENT Part 3 - Fuel security services payment Division 1--Introduction to this Part Clause 38: Simplified outline of this Part 190. Clause 38 provides a simplified outline of Part 3 of the Bill to help readers understand the substantive provisions. This simplified outline should not be taken as complete and readers should rely on the substantive provisions in the Bill. 191. In addition to the overarching legislative framework in Part 3, a range of matters that support the implementation of the FSSP will be prescribed in the rules. The rules will prescribe matters that are purely administrative in nature, such as application and reporting requirements, or that require frequent updating, such as the FSSP cent per litre rate. Division 2--Fuel security services payment Clause 39: Application for fuel security services payment 192. Clause 39 establishes a process for refinery operators to apply in writing to the Minister to receive the FSSP. Refiners can apply for a payment in relation to a refinery in Australia at which the operator refines FSSP fuel. 193. The application for the payment must be made in the approved form (if any) and in accordance with any requirements prescribed in the rules. The rules are likely to include matters such as the manner of lodgement, and the information required to enable the Minister to make a decision on the application. 194. Subclause 39(2) provides that the application must include the applicant's consent to the repayment obligations in clause 50 to ensure there is no uncertainty about the applicant's voluntary agreement to the minimum commitment period requirements in exchange for payment of the FSSP. 195. Further, subclause 39(4) provides that rules may empower the Minister to require an application to be accompanied by a security in relation to the person's ability to meet any repayment obligations arising under clause 50. It is anticipated such security may include a guarantee from the owner of the refinery or a parent company that it would meet any liabilities. 53

FUEL SECURITY BILL 2021 Clause 40: Decision on application 196. Subclause 40(1) provides that the Minister must decide whether to grant or refuse an application for the FSSP, provided all information needed to assess the application (including any further information sought by the Minister under clause 78) has been received. The provisions are intended to operate so the Minister must grant an application if the applicant meets the eligibility criteria. 197. The Minister must grant an application for the FSSP if the following threshold criteria are met: a. the applicant is a constitutional corporation as defined under clause 5 of the Bill; b. the applicant refines "FSSP fuel" as defined under clause 5 of the Bill at a refinery in Australia; c. the refining of FSSP fuel meets any requirements prescribed by the rules. It is envisaged such requirements (if any) would be technical in nature and may include the following: i. the refinery operator must transform crude oil and other domestic and imported feedstocks at a refinery in Australia; ii. any blendstock component of FSSP fuels that are not transformed in the refinery process will not be counted in volumes of FSSP fuel; and iii. FSSP fuel must comply with any applicable fuel quality standards, or standards as varied, made by the Minister under the FQS Act as in force from time to time; and d. the applicant satisfies any other requirements prescribed by the rules relating to the application. It is expected any further requirements would be administrative in nature and likely relate to the form and content of the application. 198. The Minister is required to notify the applicant in writing of the decision and specify details of both the committed refinery, where the refining must take place to qualify for the payment, and the applicable commitment period (clause 41).

PART 3 - FUEL SECURITY SERVICES PAYMENT 199. The Minister's decision about the duration of a person's commitment period is reviewable under clause 72. The note to clause 41(3) advises that clause 73 applies to a reviewable decision regarding a person's commitment period. Therefore, the Minister is required to notify the person of the reasons for the decision and the rights to seek review. 200. Similarly, under subclause 40(4), if the Minister decides to refuse an application for the FSSP, the Minister is required to provide to the applicant a written notice of the decision. The note to clause 40(4), reiterates that any decision of the Minister to refuse an application is reviewable under clause 72, while clause 73 requires notification of the reasons for the decision and the rights to seek review. 201. Subclause 40(5) requires the Minister to take reasonable steps to make a decision on an application within 60 days after the application was made, or within 60 days after receiving any further information the Minister has requested in relation to the FSSP application under clause 78. Clause 41: Commitment period 202. Clause 41 sets out requirements in relation to determining the commitment period in relation to the FSSP application. The commitment period is the period of time for which the refinery operator commits to continue refining FSSP fuel at a specified refinery in Australia. The commitment period aims to ensure refinery operators continue to produce key transport fuels in Australia in exchange for the FSSP and therefore maintain sovereign refining capability. 203. Under this clause, the minimum commitment period the Minister is permitted to approve is to 30 June 2027 (paragraph 41(1)(b)), and is to be determined in accordance with any other requirements prescribed in the rules (paragraph 41(1)(a)). It is intended that applicants could choose a longer period up to 30 June 2030. 204. While the minimum commitment period that must be approved by the Minister upon the grant of an application for the FSSP is to 30 June 2027, the refinery operator may apply to the Minister to terminate or vary the commitment period (subclause 41(2)). In this case, the 55

FUEL SECURITY BILL 2021 period as varied or terminated could end before 30 June 2027, or be requested to be extended to 30 June 2030. 205. However any change to the commitment period must not be inconsistent with any requirements prescribed by the rules (subclause 41(3)). The rules would likely include only limited circumstances such as: a. a material adverse change in circumstances where the continued operation of a refinery would be uneconomic or commercially unviable (e.g. the refinery continuously recording significant losses); or b. a force majeure event occurs which means the refinery cannot continue refining (e.g. damage to the committed refinery as a result of a natural disaster); or c. where a refinery operator ceases operating for convenience but has agreed to repay a portion of the FSSP already paid to them under Part 3 of the Bill. 206. Payment of the FSSP would cease after any termination of the commitment period, or from any varied end date. 207. Under subclause 41(4) the Minister is required to advise the person of a decision to refuse an application to vary or terminate a commitment period. The note to subclause 41(4) advises that a decision to refuse an application is a reviewable decision under clause 72, while clause 73 requires notification of the reasons for the decision and the rights to seek review. Clause 42: Payability of fuel security services payment 208. Clause 42 describes the circumstances in which the FSSP is, and is not, payable to a refinery operator for which an application has been granted under clause 40. 209. Subject to any other requirements under Part 3 of the Bill and any rules made for the purpose of that Part, the FSSP would be paid to the refinery operator on a quarterly-basis in arrears throughout the operator's commitment period. 210. Subclause 42(2) provides that the FSSP is not payable to a refinery operator for a quarter if:

PART 3 - FUEL SECURITY SERVICES PAYMENT a. the operator fails to refine FSSP fuel at the committed refinery during that quarter. Payments are made on a cents per litre basis for FSSP fuels, so a refinery will not receive payments if they do not produce any eligible fuel. b. the amount of the payment, as calculated in accordance with clause 43 of the Bill, would be nil. This is likely to be in situations where the refinery is operating at a profit, without the FSSP. c. in any circumstances prescribed by the rules relating to any of the matters referred to in subclause 40(2). These matters are likely be limited to circumstances where the refinery operator does not continue to meet one or more of the eligibility requirements for grant of an application for the FSSP, such as a failure to refine FSSP fuel in accordance with any requirements relating to the refining that may be prescribed by the rules. In other words, the refinery operator fails to qualify for the FSSP for the quarter. 211. The intention is for payments to be made for FSSP fuels refined from 1 July 2021, even if applications are not approved until after that date. Clause 43: Amount of fuel security services payment 212. Clauses 43 and 44 are central to determining the rate of the FSSP payable. The process required by these clauses is as follows. a. Immediately after commencement, the Minister will determine a cent per litre margin that is likely to be the margin needed to be achieved by refineries to ensure committed refineries do not make a loss over the period to 30 June 2027. This is the collar margin. b. The policy intent is for eligible refiners to receive a cent per litre payment when actual refining margins are below the collar margin, subject to the 1.8 cents per litre cap. c. The cent per litre payment rate will be either prescribed in the rules or worked out using a method prescribed in the rules, made by the Minister. It is anticipated the initial rules will prescribe a method which will be in place for an extended 57

FUEL SECURITY BILL 2021 period of time, and which will be used to set quarterly cents per litre payments. d. In making these rules the Minister must have regard to the determination of the margin, the principle for the payments in paragraph 43(5)(b) and guidelines made by the Minister. e. The Minister's publicly available guidelines will either: i. set out the formula and approach used to determine the number of cents per litre payment in the rules, or ii. explain the approach to working out the method and the chosen components of the method or formula in the rules. f. The formula would use certain pre-determined and variable inputs, such as individual refinery product yield, fuel and feedstocks prices and transport costs to determine a cents per litre rate for a quarter. g. Because of variable components of the formula, the cents per litre payment will be calculated at the end of each quarter and apply to the volumes of FSSP fuels refined during that quarter. h. The payment rate may vary each quarter. In some instances it may be zero, but will be capped at a maximum of 1.8 cents per litre. The policy intent is to limit the downside risk for refiners and make payments only when required to maintain the ongoing refining of key transport fuels. This will ensure that tax payers are not paying profits to shareholders. Calculation of the FSSP amount 213. Clause 43 sets out the manner of calculating the amount of the FSSP payable to eligible refinery operators. 214. Subclause 43(1) establishes the method (method statement) for calculating the amount of the FSSP payable for each quarter. a. First, for each FSSP fuel refined at a committed refinery during a quarter, the number of litres of fuel refined is multiplied by the number of cents per litre prescribed, or worked out using a method prescribed, by the rules for that fuel.

PART 3 - FUEL SECURITY SERVICES PAYMENT b. A prescribed method would be a formula using certain pre- determined and variable inputs such as individual refinery product yield, fuel and feedstocks prices and transport costs. c. The next step is to add up the total amounts worked out under the first step for each FSSP fuel refined at the committed refinery during the relevant quarter. 215. For example, if for a quarter ending 31 March a refinery operator produced: a. 1,000,000L of an FSSP fuel (i.e. Type A) and the rules prescribe that 0.81 cents per litre is payable (or 0.81 cents per litre is the amount worked out using a prescribed method), the amount payable to the operator for the quarter is 1,000,000L x $0.0081 = $8,100; and b. 500,000L of another FSSP fuel (i.e. Type B) and the rules prescribe that 0.81 cents per litre is payable (or 0.81 cents per litre is the amount worked out using a prescribed method), the amount payable to the operator for the quarter is 500,000L x $0.0081 = $4,050; c. The total amount of the FSSP payable to the refinery operator for the quarter would be $8,100 + $4,050= $12,150. Rules to determine the cent per litre payment rate 216. Subclause 43(2) provides that the number of cents per litre payable for an FSSP fuel cannot be greater than 1.8. The cents per litre payment rate is capped and limited by the amount of special appropriation agreed to by the Government. See also clause 58. 217. Further, if market conditions necessitate, subclause 43(2) permits the payment rate to be 0 cents per litre. This is intended to prevent payment of the FSSP being made for a quarter when market conditions improve and the refinery margin is such that a refinery operator does not require the FSSP for that period. 218. To ensure appropriate support is provided to refinery operators and avoid overpayments, the payment rate will be adjusted in response to changes in market conditions, including during an FSSP period. In practice, the cents per litre rate will be calculated at the end of each quarter and will apply to volumes of FSSP fuel that have been refined 59

FUEL SECURITY BILL 2021 during that quarter. It would be impractical to require amendments to the primary legislation if the rate needed to be adjusted. The method for determining the rate will be subject to a milestone report after two years to ensure it is still appropriate for Australian market conditions. 219. The use of rules made by the Minister is necessary to provide an appropriate level of support over time while still giving an appropriate degree of Parliamentary oversight given the rules will be subject to disallowance. 220. Subclause 43(3) provides that the rules may establish the manner for determining the number of litres of FSSP fuel refined at a committed refinery. This will ensure the fuel is genuinely refined at the refinery and any blending will be appropriately taken into account. Guidelines to set out the matters necessary to consider when making rules 221. Subclause 43(4) empowers the Minister to make, by notifiable instrument, guidelines in relation to the prescribing of: a. the number of cents per litre for an FSSP fuel; or b. a method for working out, the number of cents per litre for an FSSP fuel. 222. The Minister is required to take such guidelines into account when prescribing the number of cents per litre, or the method to be used to work out the number of cents per litre, under the rules. 223. While the guidelines are likely to be of long-term public interest, they will not be of legislative character as they will not determine the law or alter the content of the law. Rather, they will set out an approach to the calculation method, or matters that must be included in any calculation method prescribed in the rules, for determining the cents per litre payment for an FSSP fuel, and provide the flexibility needed to adjust the prescribed rate of payment based on changes in market conditions. The legislative rules will determine the actual quantity of FSSP payable (cents per litre or method) and are appropriately a disallowable legislative instrument. 224. The guidelines will be made publicly available via registration as a notifiable instrument on the Federal Register of Legislation, and the

PART 3 - FUEL SECURITY SERVICES PAYMENT Minister is required to take such guidelines into account in making rules for the purposes of subclause 43(1). Key considerations when making rules 225. Subclause 43(5) specifies that the Minister must have regard to the following matters when prescribing any rules and/or making guidelines under clause 43: a. the determination made by the Minister under clause 44 of the Bill. i. This will be a determination made by the Minister of the margin sufficient to ensure refineries operating in Australia do not make a loss over the minimum commitment period to 30 June 2027. This consideration will be mandatory in relation to the payment of the FSSP up until 30 June 2030. After that point only paragraph 43(5)(b) will be a mandatory consideration. ii. The intent of this requirement is to provide assurance that any changes to the rules and guidelines, made under this clause, should be consistent with the margin agreed at the beginning of the commitment period as the amount sufficient to ensure committed refiners do not make a loss. b. the principle that (subject to the 1.8 cent per litre cap) the FSSP paid to a refinery operator, for quarters ending in their commitment period, should be guided by the margin that is sufficient to ensure that the committed refinery does not make a loss. This reflects the intent that the margin is a collar - providing for payments when margins fall to the point at which the refinery starts making losses - but not providing payments when the refinery is making profits. Effectively, the FSSP aims to bring the refinery back to the point where it is not making a loss, but not provide profits to refineries. 226. By taking the matters required by subclause 43(5) and giving effect to the object of the Bill, the rules are intended to deliver an appropriate level of support over each refineries commitment period. 61

FUEL SECURITY BILL 2021 227. Subclause 43(6) defines the term "margin" as the excess of the sale price of FSSP fuels and fuel oils refined by the refineries over the costs of feedstock and transport in relation to FSSP fuels, expressed in cents per litre. It is likely that transport costs will be considered with regard to the differential between transporting FSSP fuels compared to transporting feedstocks. 228. Subclause 43(7) provides the matters the Minister must consider when determining the margin sufficient to ensure refineries operating in Australia do not make a loss, for the purpose of paragraph 43(6) and clause 44. Specifically, the Minister must consider any government payments and benefits other than the FSSP (i.e. a refinery's cash flows), the costs of operating the refinery and capital expenditure in relation to the period, and any other matters the Minister considers relevant. The clause also permits the Minister to rely on estimates or other indicators of a matter, if appropriate. Clause 44: Determination of margin needed to ensure refineries do not make a loss 229. Clause 44 establishes a requirement that the Minister must, make a written determination of the estimated number of cents per litre that is likely to be the margin sufficient to ensure that refineries do not make a loss over the relevant period of time. The period of time for which the margin is assessed is the period until 30 June 2027. The Minister must make the determination within one month of commencement of the Bill. 230. The intention is to enable the Minister to fix the boundaries of the FSSP payments through a 'cap' and 'collar', in particular the amount at which the FSSP payments will be zero cents per litre. For example, the Minister may determine that the margin required by refiners to not make a loss is 6 cents per litre. This would be the point at which, if a refinery is at that margin, the refinery does not receive FSSP (the collar). In practice, as the margin falls below this point, the FSSP cent per litre payment would increase proportionally until it reaches the cap of 1.8 cents per litre. 231. The clause also seeks to ensure the boundaries are fixed before making any rules to set the cents per litre payment amount, or the

PART 3 - FUEL SECURITY SERVICES PAYMENT method for calculating the cents per litre payment, and before refineries enter into a commitment period. This will provide refineries with certainty about the commitment they are entering into. 232. Subclause 44(4) provides that the determination cannot be varied, and nor can it be revoked before 1 July 2030. This will give refineries assurance that what is required to reach the margin sufficient to ensure they do not make a loss, cannot be changed throughout their commitment period. In addition, the Minister must have regard to this determination when amending guidelines and the method for calculating the cents per litre payment. 233. The determination will apply equally to existing refineries operating in Australia (i.e. that have not announced closure) and will be provided to each applicant for the FSSP. Natural justice and judicial review rights will apply. As a preliminary step to making the disallowable legislative rules, merits review is not appropriate. Subclause 44(4) would not prevent the remaking of a determination affected by jurisdictional error, as may be the result of a judicial review. 234. If a new refinery subsequently commences operating in Australia, a clause 44 determination would not need to be made, but the same considerations would be relevant to the application of the principle in paragraph 43(5)(b) to that refinery and its commitment period. 235. Subclause 44(5) is a declaratory provision included to assist readers, as the determination will be a factual assessment of the refining margins of the refineries and as such not a legislative instrument within the meaning of subsection 8(1) of the Legislation Act 2003. It then becomes a consideration relevant to the future making of legislative rules. It is the legislative rules which determine the rate of the FSSP and are a disallowable legislative instrument. Clause 45: Payment of fuel security services payment 236. Clause 45 provides that fuel security services payment is payable by the Secretary in accordance with any applicable rules. This appropriately delegates the details of the administrative mechanics associated with processing payments to delegated legislation. 63

FUEL SECURITY BILL 2021 Clause 46: Publication of information 237. Clause 46 requires the Secretary to publish on the Department's website the total amount of the FSSP paid for each financial year and any other information that may be required by the rules. This helps ensure public transparency about the payments and access to the appropriation.

PART 3 - FUEL SECURITY SERVICES PAYMENT Division 3--Reporting and notification obligations Clause 47: Reporting during commitment period 238. Clause 47 obliges refinery operators receiving the FSSP to report to the Secretary in accordance with the rules. Reported information will be used throughout a refinery operator's commitment period to determine: a. a refinery operator's quarterly eligibility for the FSSP; and b. if a refinery operator is obliged to repay any amount of the FSSP. 239. Reported information is therefore crucial to the administration and integrity of the FSSP scheme. 240. Under subclauses 47(2) and (3) reports are required to be provided in the approved form (see clause 81 of the Bill), include the information required by the rules (which may include information to satisfy the Secretary that the person continues to meet the FSSP eligibility criteria under subclause 40(2) of the Bill) and be provided in the timeframe required by the rules. 241. It is anticipated refinery operators will be required, under the rules, to report matters relating to the quantities and kinds of FSSP fuels produced by committed refineries in each quarter of their commitment period. Such information will be necessary to calculate any FSSP payable for a quarter. In addition, the rules may require the submission of quarterly certified independent audit reports on the refinery production values reported under the POFR Act. This will help to ensure the reported data can be independently examined and verified for each reporting period. 242. To reduce the regulatory burden on refinery operators to the extent possible, it is intended relevant fuel data will be drawn from reports refiners are already obliged to submit under the POFR Act and POFR Rules, rather than requiring them to separately report these matters under both the POFR laws and the Bill. Accordingly, it is intended that reporting requirements likely to be prescribed in rules made under clause 47 will largely be met by satisfying POFR Act reporting requirements, including alignment of quarterly reporting timeframes. 243. Further, the reporting obligation under subclause 47(1) is analogous to the reporting obligation under section 11 of the POFR Act. Failure 65

FUEL SECURITY BILL 2021 to report as required under the POFR Act is a civil penalty offence. Similarly, under subclause 47(1) failure to report as required is a civil penalty offence with an equivalent maximum penalty of 250 penalty units. 244. Applying penalty unit values current as at 1 April 2021, this equates to a maximum potential financial penalty of $55,500 for an individual and $277,500 for a body corporate for a single contravention. An option to issue an infringement notice is also available under subclause 66(1) for an amount determined in accordance with clause 67. 245. Significant maximum penalties have been specified to provide a strong deterrent to non-compliance, particularly for sophisticated multinational corporate entities. Non-reporting, and non-compliant reporting under the Bill, could result in inaccurate and misleading data that leads to errors in calculating payments of the FSSP. This has the potential to seriously undermine the integrity of the FSSP scheme. 246. The penalty units provided in subclause 47(1) are maximum amounts. It would be open to a court to impose a civil penalty for a lesser amount if appropriate in the circumstances. 247. Any obligation to "report" is intended to only relate to information relevant to the FSSP scheme and there is no intention in the provisions to override ordinary common law privileges, such as the privileges against self-incrimination, self-exposure to a civil penalty and legal professional privilege. Clause 48: Notification of events during commitment period 248. Clause 48 requires refinery operators to notify the Secretary of certain matters relating to their ongoing eligibility to receive the FSSP (e.g. whether they continue to operate a committed refinery, whether they have ceased to refine FSSP fuel (either temporarily or permanently)). 249. Notifications are required within specified timeframes (see clause 48(3)) to ensure the Department receives timely advice about potential disruptions or threats to the domestic supply of major transport fuels, and does not pay the FSSP to a refinery operator who

PART 3 - FUEL SECURITY SERVICES PAYMENT is not eligible (e.g. because they have ceased to refine FSSP fuel, or have ceased to operate a committed refinery). 250. Subclause 48(2) requires notifications to be provided in the approved form (see clause 81), set out details of the event to which the notice relates and be in accordance with any other requirements prescribed by the rules. It is appropriate for these kinds of administrative details to be dealt with under the rules. 251. The clause also establishes a civil penalty provision for failure to notify the specified matters as required, with a maximum pecuniary penalty of 250 penalty units. 252. Applying penalty unit values current as at 1 April 2021, this equates to a maximum potential financial penalty of $55,500 for an individual and $277,500 for a body corporate for a single contravention. An option to issue an infringement notice is also available under subclause 66(1) for an amount determined in accordance with clause 67. 253. Significant maximum penalties have been specified to provide a strong deterrent to non-compliance, particularly for sophisticated multinational corporate entities. Non-notification, and non-compliant notification, could result in inaccurate and misleading data that leads to errors in calculating payments of the FSSP. This has the potential to seriously undermine the integrity of the FSSP scheme. 254. The penalty units provided in subclause 48(1) are maximum amounts. It would be open to a court to impose a civil penalty for a lesser amount if appropriate in the circumstances. 255. The obligation to notify is not intended to override ordinary common law privileges, such as the privileges against self-incrimination, self- exposure to a civil penalty and legal professional privilege. Clause 49: False or misleading information 256. Clause 49 establishes a civil penalty offence provision for providing false or misleading information, or omitting information in relation to a material particular, which provision or omission results in payment of the FSSP to which the person is not entitled in: a. an application under clause 39 (Application for fuel security services payment); 67

FUEL SECURITY BILL 2021 b. a report given under clause 47 (Reporting during commitment period); or c. a notice given under clause 48 (Notification of events during commitment period). 257. Under this clause a maximum civil penalty of 300 penalty units applies. Applying penalty unit values current as at 1 April 2021, this equates to a maximum potential financial penalty of $66,600 for an individual and $333,000 for a body corporate for a single contravention. 258. This maximum penalty reflects the increase in the level of culpability from a mere failure to report or notify events under clauses 47 and 48 of the Bill. In these cases the person is engaging in conduct that is intentionally misleading (given the penalty would not apply in circumstances where a defence of mistake of fact is established). It is an appropriate maximum penalty given the large and sophisticated multinational fuel refinery corporations that will be regulated under the Bill. 259. Significant maximum penalties have been specified to provide a strong deterrent to non-compliance. False or misleading reporting is likely to result in inaccurate data that leads to errors in calculating payments of the FSSP. This has the potential to seriously undermine the integrity of the FSSP scheme. 260. The penalty units provided in clause 49 are maximum amounts. It will be open to a court to impose a civil penalty for a lesser amount if appropriate in the circumstances. Similarly, it will be open to the Secretary (or other infringement officer) to issue an infringement notice under clause 66 for an amount determined in accordance with clause 67. 261. The proposed inclusion of a civil penalty also provides an additional enforcement option in lieu of the criminal offence provisions that would otherwise apply under the Criminal Code (see, particularly, Chapter 7).

PART 3 - FUEL SECURITY SERVICES PAYMENT Division 4--Repayment obligations Clause 50: Repayment if committed refinery ceases refining FSSP fuel Repayment 262. Clause 50 establishes the obligation to repay the FSSP where a committed refinery permanently stops refining FSSP fuel before the end of the refinery operator's commitment period. 263. Ordinarily, cessation of refining FSSP fuel for 120 days will be taken to be a permanent cessation of refinery operations, thereby triggering the FSSP repayment obligation (subclause 50(1)). 264. Generally, where there has been a permanent cessation of refining FSSP fuel, the total amount of the FSSP will be required to be repaid (paragraph 50(2)(a)) unless paragraph 50(2)(b) applies. This reflects the policy intent that the FSSP is only payable to refinery operators who commit to refining FSSP fuel in Australia for a minimum defined period, to ensure the continued supply of such fuels to critical users and local fuel-dependent industries. 265. However, under paragraph 50(2)(b), the rules will be able to prescribe circumstances in which less than the total amount of the FSSP is repayable. (See clause 51 of the Bill. Under that clause, the rules may also prescribe circumstances in which the repayment obligation does not apply at all.) 266. Subclause 50(3) gives effect to the policy intent that the obligation to repay applies whether or not the person continues to own or operate the committed refinery at the time FSSP fuel ceases to be refined. For example, if a refinery operator sells a committed refinery during their commitment period, and the subsequent owner permanently ceases to refine FSSP fuel at the refinery, the obligation to repay would remain with the first operator that gave the commitment. It would be a matter for the first refinery operator whether to, for example, request early termination of their commitment period, or seek an indemnification from the purchaser of the committed refinery to cover any repayment obligations that may arise during the remainder of the commitment period. 69

FUEL SECURITY BILL 2021 When amount is due and payable 267. Subclause 50(4) stipulates that repayments of the FSSP are due and payable 60 days after the later of: a. the permanent cessation period of 120 days; or b. such further period of cessation as may be extended by the Secretary under clause 52. Amount is a debt due to the Commonwealth 268. Subclauses 50(5)-(6) establish the powers of the Secretary in relation to the recovery, waiver, and writing-off of debts arising under clause 50. 269. These provisions also permit the Secretary to enter into arrangements to facilitate repayment of debts by instalments, so long as such arrangements accord with any requirements which may be prescribed in the rules made under paragraph 50(6)(c) of the Bill. It is intended the rules will set out the circumstance in which waiver of a debt will be appropriate, to ensure the waiver power is not unfettered. 270. Further, the Secretary, as the accountable authority under the PGPA Act, is required under: a. section 19 of the PGPA Act to keep the responsible Minister informed when making significant decisions, such as potentially waiving large debts under the Bill; and b. rule 11 of the PGPA reles (as in force as at 1 May 2021) to pursue recovery of each debt for which the Secretary is responsible, unless the Secretary considers it is not economical to pursue recovery of the debt; or is satisfied that the debt is not legally recoverable; or the debt has been written off as authorised by an Act. Clause 51: Rules in relation to repayment obligation 271. Subclause 51(1) provides that the obligation to repay the FSSP under clause 50(1) does not apply in any particular circumstances that may be specified in the rules. It is anticipated that such circumstances will be limited to matters like: a) a material adverse change in circumstances where the continued operation of a refinery would be uneconomic or

PART 3 - FUEL SECURITY SERVICES PAYMENT commercially unviable over a period (e.g. the refinery continuously recording significant losses); or b) a force majeure event occurs which means the refinery cannot continue refining (e.g. damage to the committed refinery as a result of a natural disaster). 272. The legislative rules will prescribe events considered to be material adverse change and force majeure circumstances and are appropriate for a disallowable legislative instrument. The detail of these rules will be settled in consultation with refineries and need to take into account a range of thresholds and technical details, while still ensuring that the intent of the commitment period is upheld in all but extreme circumstances. 273. Where less than the total amount of the FSSP is repayable under paragraph 50(2)(b), subclause 51(2) enables the rules to establish both the circumstances in which that applies and a method for calculating the lesser amount of the FSSP that must be repaid in the relevant circumstances. It is envisaged that this form of repayment of the FSSP would be applied in circumstances where the refinery operator voluntarily chooses to cease refining FSSP fuel. The method for calculating the repayable amount would be based on the remaining proportion of the commitment period to be delivered. This recognises the contribution made by refiners to Australia's fuel security during the commitment period, and ensures that funds are repaid appropriately. 274. Subclauses 51(4) and (5) ensure that refinery operators are not unfairly disadvantaged by any changes to the rules made following the commencement of their commitment period regarding: a. the circumstances in which the repayment obligation under clause 50 does not apply; or b. the method for calculating the repayable amount in certain circumstances, which is intended to be based on the proportion of the commitment to be delivered. 275. As such subclauses 51(4) and (5) have the effect that, unless each committed refinery operator agrees to the changes, the rules cannot otherwise be changed to: 71

FUEL SECURITY BILL 2021 a. remove or limit circumstances in which the repayment obligation does not apply under the rules; or b. increase the reduced payment amount that would otherwise apply in the circumstances specified in the rules. 276. This restriction on unilateral changes is appropriate to provide investment certainty to refineries. Refineries will make a significant commercial commitment under the legislation and this provides them with sufficient certainty to make that commitment. It does not impact Parliament's overall responsibility for the legislation or disallowance of any rules that are made. Clause 52: Secretary may extend period of cessation 277. Clause 52 empowers the Secretary to formally extend the 120 day period referred to in paragraph 50(1)(b) following receipt of a written application for an extension, and in the circumstances (if any) specified in the rules. This provision will provide the Secretary with flexibility to delay the FSSP repayment obligation being triggered if the cessation of refining FSSP fuel is not permanent, despite continuing for 120 days or more. This could be in circumstances where the refinery intends to continue its refining activities, but for operational reasons cannot refine FSSP fuels for a longer period of time. 278. Subclause 52(2) provides that the Secretary must advise the person in writing of a decision to refuse an application to extend the period. The note to subclause 52(2) advises that a decision to refuse an application is a reviewable decision under clause 72, while clause 73 requires notification of the reasons for the decision and the rights to seek review. Clause 53: Secretary must notify person of amount payable under section 50 279. Clause 53 establishes administrative requirements regarding the Secretary's obligation to notify a refinery operator of the amount of the FSSP needing to be repaid under clause 50 and the due date for payment.

PART 3 - FUEL SECURITY SERVICES PAYMENT 280. Subclause 53(2) requires such notification to be provided within 30 days of: a. the end of the 120 day cessation period referred to in paragraph 50(1)(b); or b. the end of any later period that may have been notified by the Secretary under clause 52. Clause 54: Repayment in other circumstances 281. The primary purpose of clause 54 is to require repayment of amounts of the FSSP that have been paid when it was not payable (including, but not limited to, administrative error, errors in reporting, or because of false or misleading conduct), or overpaid. 282. Subclause 54(2) clarifies that if the FSSP was not payable a person must repay the whole of the amount, while if a person has received more than the correct amount, the person must repay only the amount exceeding the correct amount payable. 283. Subclause 54(3) stipulates that the amount repayable under the provision is due and payable on the day that the amount was either overpaid or paid in error. 284. Subclause 54(4) provides that an amount repayable under clause 54 is a debt due to the Commonwealth, which may be recovered by the Secretary in a federal or federal circuit court of Australia or a court of a State or Territory with relevant jurisdiction. This ensures that jurisdiction is conferred as widely as appropriate, so that disputes may be resolved in the lowest level of court appropriate. To encourage efficiency in dealing with related matters, the same provision is mirrored in other analogous provisions throughout the Bill (see, for example, paragraph 61(3)(e), and subclauses 62(3), 69(3) and 70(3)). Clause 55: Secretary must notify person of amount repayable under section 54 285. Clause 55 establishes administrative requirements regarding the Secretary's obligation to notify a refinery operator of the amount of the FSSP needing to be repaid under clause 54 and the due date for payment. 73

FUEL SECURITY BILL 2021 286. Subclause 55(2) requires such notification to be provided within 30 days after the Secretary becomes aware that the person is required to repay the amount. Division 5--Other matters Clause 56: Defeasibility of statutory rights 287. Clause 56 is a standard clause that reflects the inherent ability of Parliament to amend its own legislation, known as parliamentary sovereignty. It makes clear the defeasible nature of the framework. However, it is not intended that the FSSP scheme will be terminated before 30 June 2030 as it is an important mechanism to achieve the objects of the Bill and provide investment certainty for maintaining refining capacity in Australia. Clause 57: Uniformity 288. Clause 57 is a standard clause that reflects the need for a bounty to be uniform throughout the Commonwealth. Clause 58: Appropriation 289. Clause 58 establishes a special appropriation provision in the Bill to provide the authority to draw money from the consolidated revenue fund. The appropriations will be limited by time and amount, with the maximum amount of up to $2,047 million to be appropriated for the refining of fuels in period to 30 June 2030. The amount of special appropriation of $2,047 million is based on a worst-case scenario if refiners are paid the highest amount over the commitment period, which is unlikely. For example, this would assume COVID-19 economic conditions on an ongoing basis until 2030. 290. If the $2,047 million cap is reached before the 30 June 2030, no further payments of the FSSP may be drawn from the special appropriation and will need to be supported by another appropriation. 291. Appropriations of this nature have previously been used in Commonwealth legislation providing for a bounty to be paid in relation to the production of goods. It reflects that fact that movements in market conditions during a year are likely to have a

PART 3 - FUEL SECURITY SERVICES PAYMENT material impact on the amount that would need to be appropriated in any one year. 292. The cap of no more than 1.8 cents per litre being payable provides a further substantive constraint on the extent of the appropriation. 75

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PART 4 - COMPLIANCE AND ENFORCEMENT Part 4 - Compliance and enforcement Clause 59: Simplified outline of this Part 293. Clause 59 provides a simplified outline of Part 4 of the Bill to help readers understand the substantive provisions. This simplified outline should not be taken as complete and readers should rely on the substantive provisions in the Bill. Clause 60: Monitoring powers 294. It is critical to the ongoing reliability of the proposed MSO and FSSP schemes that the information provided, reported and notified to the Department in accordance with obligations under the Bill can be reviewed, audited and verified. The fuel information collected by the Department would be used to assess refinery operators' and importers' obligations under Part 2 of the Bill regarding the MSO, as well as refinery operators' entitlement to payment of the FSSP and any repayment obligations. As a result, the submission of incorrect information could have serious economic and financial consequences and threaten the integrity of the proposed legislative scheme. It is therefore crucial that the Department has the power to monitor compliance with reporting and notification obligations under the Bill. 295. As noted in the OPC's Drafting Direction No. 3.5A - Regulatory powers, the purpose of the Regulatory Powers Act is to create standard provisions to deal with monitoring, investigation and enforcement, and those matters should not usually be dealt with by creating stand-alone schemes in new legislation. Instead, the Regulatory Powers Act should be triggered. The document is available at: https://www.opc.gov.au/drafting-resources/drafting- directions. Provisions and information subject to monitoring 296. Accordingly, clause 60 applies the monitoring powers in Part 2 of the Regulatory Powers Act to the following matters under the Bill: a. information given by persons in compliance or purported compliance with obligations (e.g. reporting, advising, informing and notification obligations); b. civil penalty provisions; and 77

FUEL SECURITY BILL 2021 c. offences under the Crimes Act or Criminal Code that relate to the Bill (this is to ensure that the full range of monitoring powers can be used not only in relation to a contravention of those provisions, but also in relation to ancillary offences (such as attempts, aiding and abetting and conspiracy)). 297. Part 2 of the Regulatory Powers Act provides monitoring powers to persons appointed under clause 80 of the Bill to enable them to conduct compliance monitoring activities such as: a. entering premises with the consent of occupiers or under warrant; b. inspecting documents located in an entered premises; c. securing things in entered premises for up to 24 hours; and d. asking questions of occupants in an entered premises. Related provisions 298. Subclause 60(3) also applies the abovementioned monitoring powers under Part 2 of the Regulatory Powers Act to certain "related provisions"; namely the reporting obligations under the POFR Act and civil penalty and offence provisions under the FQS Act. This extension of monitoring powers is appropriate because an authorised person exercising monitoring powers under the Bill will also potentially exercise monitoring powers under the POFR and FQS Acts, as those laws regulate the same kinds of entities as the Bill and form part of a common overarching regulatory framework for the fuel industry in Australia. Therefore, it is intended to permit an authorised person who enters a premises to exercise monitoring powers in relation to the Bill to also be permitted to secure evidence of a breach of the related POFR and/or FQS Acts. Authorised applicant, authorised person, issuing officer, relevant chief executive and relevant court 299. Paragraph 60(4)(e) provides that each of the following is a relevant court for the purpose of Part 2 of the Regulatory Powers Act as applied in relation to the Bill: a. the Federal Court of Australia; b. the Federal Circuit Court of Australia;

PART 4 - COMPLIANCE AND ENFORCEMENT c. a court of a State or Territory that has jurisdiction in relation to the matter. 300. This ensures that jurisdiction is conferred as widely as appropriate, so that disputes may be resolved in the lowest level of court appropriate. To encourage efficiency in dealing with related matters, the same provision is mirrored in other analogous provisions throughout the Bill (see, for example, paragraph 61(3)(e), and subclauses 62(3), 69(3) and 70(3)). 301. Consistently with guidance provided under OPC's Drafting Direction No. 3.5A, paragraphs 60(4)(a)-(d) provides that, for the purpose of Part 2 of the Regulatory Powers Act as applied for the purposes of the Bill, the Secretary is an authorised applicant, a person appointed under clause 80 is an authorised person; a magistrate is an issuing officer; and the Secretary (as head of the Department) is the relevant chief executive. 302. Powers and functions under, or incidental to, Part 2 of the Regulatory Powers Act are also able to be delegated by the Secretary to an SES employee (or acting SES employee) in the Department under subclauses 60(5)-(7). Additional monitoring power 303. Subclauses 60(8) and (9) adds an additional monitoring power to those which ordinarily apply under Part 2 of the Regulatory Powers Act, to permit authorised persons to take, test and analyse samples of any fuel or fuel additives on premises entered for monitoring purposes. This is important to verify that the fuels meet relevant standards for the MSO and FSSP. Equivalent powers exist in paragraph 41(1)(b) of the FQS Act. Person assisting 304. Subclause 60(10) permits an authorised person to be assisted by other persons in exercising powers or performing functions or duties under Part 2 of the Regulatory Powers Act, but only if it is necessary or reasonable to do so (per paragraph 23(1)(a) of the Regulatory Powers Act). The assisting person will be required to act under the direction of the authorised person and any valid actions of the person assisting 79

FUEL SECURITY BILL 2021 would be taken to be those of the authorised person. The intent of this provision is that a person assisting an authorised person does not themselves exercise any powers or functions delegated or conferred under the Bill but operates under direction and it is the authorised person who would be exercising the monitoring powers under the Bill. 305. In the case of the MSO and FSSP schemes, it is necessary and reasonable for an authorised person exercising monitoring powers to be assisted by another person, for example, for administrative or practical assistance with evidential material on the premises. A person assisting an authorised person will be undertaking (at the direction of an authorised person) tasks such as assisting to make copies of voluminous records or documents and carrying evidential material seized from the premises. Clause 61: Investigation powers Provisions subject to investigation 306. For the reasons noted above in relation to clause 60 of the Bill, clause 61 applies the investigation powers in Part 3 of the Regulatory Powers Act to the following matters under the Bill: a. a civil penalty provision; and b. an offence provision of the Crimes Act or the Criminal Code that relates to the Bill (this is to ensure that the full range of monitoring powers can be used not only in relation to a contravention of those provisions, but also in relation to ancillary offences (such as attempts, aiding and abetting and conspiracy)). 307. This allows the standardised framework provided under the Regulatory Powers Act to be adopted and applied for gathering evidential material relating to contraventions of the abovementioned offence provisions and civil penalty provisions. Related provisions 308. Subclause 61(2) also applies the investigation powers under Part 3 of the Regulatory Powers Act to certain "related provisions"; namely the reporting obligations under the POFR Act and civil penalty and

PART 4 - COMPLIANCE AND ENFORCEMENT offence provisions under the FQS Act. This extension of investigation powers is appropriate because an authorised person exercising investigation powers under the Bill would also potentially exercise investigation powers under the POFR and FQS Acts, as those laws regulate the same kinds of entities as the Bill and form part of a common overarching regulatory framework for the fuel industry in Australia. Therefore, it is intended to permit an authorised person who enters a premises to exercise investigation powers in relation to the Bill to also be permitted to secure evidence of a breach of the related POFR and/or FQS Acts. Authorised applicant, authorised person, issuing officer, relevant chief executive and relevant court 309. Paragraph 61(3)(e) provides that each of the following is a relevant court for the purpose of Part 3 of the Regulatory Powers Act as applied in relation to the Bill: a. the Federal Court of Australia; b. the Federal Circuit Court of Australia; c. a court of a State or Territory that has jurisdiction in relation to the matter. 310. This ensures that jurisdiction is conferred as widely as appropriate, so that disputes may be resolved in the lowest level of court appropriate. To encourage efficiency in dealing with related matters, the same provision is mirrored in other analogous provisions throughout the Bill (see, for example, paragraph 60(4)(e), and subclauses 62(3), 69(3) and 70(3)). 311. Consistently with guidance provided under OPC's Drafting Direction No. 3.5A, paragraphs 61(3)(a)-(d) provide that, for the purpose of Part 3 of the Regulatory Powers Act as applied for the purposes of the Bill, the Secretary is an authorised applicant, a person appointed under clause 80 is an authorised person; a magistrate is an issuing officer; and the Secretary (as head of the Department) is the relevant chief executive. 312. Powers and functions under, or incidental to, Part 3 of the Regulatory Powers Act would also be able to be delegated by the Secretary to 81

FUEL SECURITY BILL 2021 SES (or acting SES) employees in the Department under subclauses 61(4)-(6) of the Bill. Additional investigation power 313. Subclauses 61(7) and (8) adds an additional investigation power to those which ordinarily apply under Part 3 of the Regulatory Powers Act, to permit authorised persons to take, test and analyse samples of any fuel or fuel additives on premises entered for investigation purposes. This is important to verify that the fuels meet relevant standards for the MSO and FSSP. Equivalent powers exist in paragraph 44(1)(b) of the FQS Act. Person assisting 314. Subclause 61(9) permits an authorised person to be assisted by other persons in exercising powers or performing functions or duties under Part 3 of the Regulatory Powers Act, but only if it is necessary or reasonable to do so (per paragraph 53(1)(a) of the Regulatory Powers Act). The assisting person will be required to act under the direction of the authorised person and any valid actions of the person assisting would be taken to be those of the authorised person. The intent of this provision is that a person assisting an authorised person does not themselves exercise any powers or functions delegated or conferred under the Bill but operates under direction and it is the authorised person who would be exercising the investigatory powers under the Bill. 315. In the case of the MSO and FSSP schemes, it is necessary and reasonable for an authorised person exercising investigation powers to be assisted by another person, for example, for administrative or practical assistance with evidential material on the premises. It is envisaged that a person assisting an authorised person would be undertaking (at the direction of an authorised person) tasks such as assisting to make copies of voluminous records or documents and carrying evidential material seized from the premises (which may include samples of any fuel or fuel additives on the premises).

PART 4 - COMPLIANCE AND ENFORCEMENT Clause 62: Civil penalty provisions Enforceable civil penalty provisions 316. As noted above, and in OPC's Drafting Direction No. 3.5A - Regulatory powers, the purpose of the Regulatory Powers Act is to create standard provisions to deal with monitoring, investigation and enforcement, and those matters should not usually be dealt with by creating stand-alone schemes in new legislation. Instead, the Regulatory Powers Act should be triggered. 317. To that end, clause 62 provides that the standard provisions of Part 4 of the Regulatory Powers Act - which Part provides a range of provisions governing the application for, and enforcement of, civil penalty orders - apply to the enforcement of civil penalties under the Bill, including: a. clause 7 - minimum stockholding obligation; b. subclause 8(1) - additional responsibility of Australian controlling corporation; c. subclause 30(1) - notice of MSO activity in relation to MSO product; d. subclause 31(1) - notice of intention to cease all MSO activities in relation to MSO product; e. subclauses 33(4) and (5) - compliance audits; f. subclauses 34(3) and (4) - other audits; g. subclause 36(1) - MSO compliance plan; h. subclause 47(1) - reporting during commitment period; i. subclause 48(1) - notification of events during commitment period; j. clause 49 - false or misleading information; and k. subclause 78(3) - further information about applications and notices. 318. It is the policy intent that provisions of generic application under Part 4 of the Regulatory Powers Act, regarding continuing civil penalty provisions, mistake of fact, and state of mind, would apply in relation to civil penalty provisions under the Bill. 83

FUEL SECURITY BILL 2021 Authorised applicant 319. Subclause 62(2) provides that the Secretary, and SES employees (or acting SES employees) in the Department with responsibilities in relation to the Bill, are authorised applicants for the purposes of Part 4 of the Regulatory Powers Act. It is intended the standard time limit that applies under subsection 82(2) of the Regulatory Powers Act for seeking orders for contraventions of civil penalty provisions (that is, 6 years) would apply. Relevant court 320. Subclause 62(3) provides that for the purposes of Part 4 of the Regulatory Powers Act the relevant court to make an application for imposition of a civil penalty is: a. the Federal Court of Australia; or b. the Federal Circuit Court of Australia; or c. any state or territory court which has jurisdiction. 321. This would ensure that jurisdiction is conferred as widely as appropriate, so that disputes may be resolved in the lowest level of court appropriate. To encourage efficiency in dealing with related matters, the same provision is mirrored in other analogous provisions throughout the Bill (see, for example, paragraphs 60(4)(e) and 61(3)(e), and subclauses 69(3) and 70(3)). Liability of Crown 322. To avoid any doubt, subclause 62(4) clarifies that the Commonwealth is not liable to a pecuniary penalty under the Bill. Clause 63: Requirement for person to assist with applications for civil penalty orders 323. Subclause 63(1) establishes an offence for failing to comply with a written requirement of the Secretary to provide all reasonable assistance in connection with an application for a civil penalty order (whether or not the application has been made). The policy justification for including this requirement is to ensure that where the Secretary suspects or believes that the person can give information relevant to the application, they are strongly encouraged to do so, or

PART 4 - COMPLIANCE AND ENFORCEMENT risk offending this provision. A maximum penalty of 10 penalty units would apply to a contravention of subclause 63(1). 324. The provision also makes it clear that a lawyer for the person suspected of contravening the civil penalty provision cannot be required to assist under subclause 63(1), and nor does the provision override legal professional privilege or the privilege against self- incrimination. 325. Further limitations include that the Secretary can only require a person to assist it if it appears to the Secretary that: a. the person is unlikely to have contravened the relevant civil penalty provision or committed an offence constituted by the same, or substantially the same, conduct; and b. the person can give information relevant to the application. Clause 64: Determining pecuniary penalty for contravention of minimum stockholding obligation 326. Clause 64 provides the formula setting out the maximum pecuniary penalty for contravention of clause 7 of the Bill. This clause seeks to ensure that smaller entities are not disproportionately exposed to higher than appropriate civil penalties. Therefore the maximum penalty will be directly related to an entity's MSO for each specified MSO product and the period for which they were non-compliant. This means that bigger stockholders will be potentially subject to larger civil penalties. 327. The number of penalty units in this clause is worked out using the applicable multiplier multiplied by the designated quantity of stocks in megalitres multiplied by the number of non-compliant days for the obligation day. 328. The applicable multiplier has been determined to be 2 penalty units by estimating the cost of compliance per megalitre and rounding to the nearest penalty value. 329. The designated quantity of stocks has been determined as applying for an entity's total MSO for a product as the maximum possible penalty to deter a worst case offence, including repeat offences. 85

FUEL SECURITY BILL 2021 330. The number of non-compliant days for the obligation day refers to each day of non-compliance an entity contravenes their quantity of stocks on an obligation day. 331. Subclause 64(3) provides that despite paragraph 82(5)(a) of the Regulatory Powers Act, an entity's pecuniary penalty under section 82 of the Regulatory Powers Act for a contravention of clause 7 of this Bill must not be greater than the amount worked out under subclause 64(1). This would apply whether the entity is a body corporate or not. 332. Subclause 64(4) provides despite paragraph 82(5)(a) of the Regulatory Powers Act, an entity's pecuniary penalty under section 82 of that Act for a contravention of subclause 8(1) of this Bill must not be greater than the amount worked out in subclause 64(2). 333. Subclause 64(5) provides that for the purposes of subsection 82(6) of the Regulatory Powers Act, matters in subclause 64(6) are relevant matters that a court must take into account in determining the pecuniary penalty that an entity must pay for contravening the civil penalty provision in clause 7, or subclause 8(1). 334. Subclause 64(6) provides the matter which a court must consider when determining the pecuniary penalty for a contravention of clause 7 or subclause 8(1). The matter is the difference between the regulated entity's quantity of MSO products held on the obligation day and the designated quantity of MSO products applying to the regulated entity on the obligation day. This makes the extent of non- compliance in terms of the shortfall in amount of litres held a key consideration in setting the penalty amount. Accordingly, a person holding no quantities of fuels could be expected to receive a penalty closer to the maximum penalty, and a person with a small shortfall would receive a much smaller penalty. 335. Under subsection 82(6) of the Regulatory Powers Act in determining the pecuniary penalty, the court must also take into account all relevant matters, including: a. the nature and extent of the contravention; and b. the nature and extent of any loss or damage suffered because of the contravention; and c. the circumstances in which the contravention took place; and

PART 4 - COMPLIANCE AND ENFORCEMENT d. whether the person has previously been found by a court (including a court in a foreign country) to have engaged in any similar conduct. 336. These considerations will operate alongside the additional principle in subclause 64(6). In particular, repeat breaches are more serious than once off breaches. The reasons behind what led to the shortfall could also be considered and whether or not the MSO compliance plan was being effectively implemented. Clause 65: Civil penalties for contravention of minimum stockholding obligation 337. Clause 65 provides that civil penalties can only be ordered against a regulated entity or an Australian controlling corporation that has an entity subject to the MSO. A civil penalty order against an Australian controlling corporation would generally be paused in priority of pursuing a penalty for the regulated entity for contravention of clause 7 of this Bill. This is to ensure that both the controlling corporation and entity obligated under clause 7 are not both required to pay a civil penalty. 338. Subclause 65(2) provides that proceedings against an Australian controlling corporation may be resumed if the proceeding against the regulated entity did not result in an order being made. 339. Subclause 65(3) clarifies that a relevant court prescribed by this Bill cannot issue a civil penalty against a regulated entity in relation to contravention of clause 7 of this Bill if a penalty order has already been ordered against the entity's Australian controlling corporation in contravening subclause 8(1). 340. Subclause 65(4) clarifies that a relevant court prescribed by this Bill cannot issue a civil penalty against the Australian controlling corporation in relation to contravention of subclause 8(1) of this Bill if a penalty order has already been ordered against the entity of the Australian controlling corporation subject to the MSO. 87

FUEL SECURITY BILL 2021 Clause 66: Infringement notices 341. Clause 66 empowers the Secretary and SES employees (or acting SES employees) in the Department with responsibilities in relation to the Bill to issue an infringement notice for a civil penalty provision in accordance with Part 5 of the Regulatory Powers Act. 342. Where the Secretary or an SES employee believed on reasonable grounds that a regulated entity had contravened their obligations under any of the civil penalty provisions included in the Bill, then the Secretary or an SES employee could choose to issue the regulated entity with an infringement notice as an alternative to seeking enforcement of a civil penalty order. 343. Part 5 of the Regulatory Powers Act provides a range of conditions and limitations on the Secretary's power to issue infringement notices. A non-exhaustive list of some of the relevant limitations includes: a. infringement notices must be given within twelve months of the alleged contravention (one year from when a required obligation is alleged to have not been met); b. infringement notices must contain certain information to be valid (see section 104 of the Regulatory Powers Act); c. an extension to the time to pay an infringement notice may be granted by the Secretary; d. an infringement notice may be withdrawn by the Secretary; and e. where an infringement notice is paid, any liability of the regulated entity for the alleged contravention of a civil penalty provision would be discharged. Infringement officer 344. Subclause 66(2) provides that the Secretary, and SES employees (or acting SES employees) in the Department with responsibilities in relation to the Bill, are infringement officers for the purposes of Part 5 of the Regulatory Powers Act as that Part applies in relation to civil penalty provisions under the Bill.

PART 4 - COMPLIANCE AND ENFORCEMENT Relevant chief executive 345. The Secretary is also the relevant chief executive for the purposes of Part 5 of the Regulatory Powers Act. This means that the Secretary can issue, withdraw or provide an extension to the time required to pay an infringement notice. 346. Further, the Secretary is able to delegate their powers under Part 5 of the Regulatory Powers Act to another infringement officer (i.e. SES employee (or acting SES employee) in the Department with responsibilities in relation to the Bill). Single infringement notice may deal with more than one contravention 347. Subclause 66(6) provides that, despite subsection 103(3) of the Regulatory Powers Act, a single infringement notice may be given to a person in respect of multiple alleged contraventions of one or more civil penalty provisions under the Bill. However, only one amount may be required to be paid regarding the same conduct. Additional matters to be included in infringement notices 348. Subclause 66(7) provides that, in addition to the matters provided under subsection 104(1) of the Regulatory Powers Act, an infringement notice issued under the Bill must also state that the giving of the notice and the payment of the amount payable under the notice may be publicised under clause 68 of the Bill. Clause 67: Penalties in infringement notices 349. Clause 67 provides that despite subsections 104(2) and 104(3) of the Regulatory Powers Act, the amount an infringement notice issued under that Act relating to paragraph 104(1)(f), the civil penalty is the following: a. One-fifth of the maximum penalty for a single alleged contravention of the provision by the person that a court could impose; b. The sum of the one-fifth maximum penalty amount for each alleged contravention of the provision by the person that a court could impose. 89

FUEL SECURITY BILL 2021 350. Subclause 67(2) clarifies that despite the provisions in subclause 67(1), the Secretary may provide a notice in accordance with the Rules that could prescribe a civil penalty lower than the amount specified in subclause 67(1). Clause 68: Secretary may publicise certain contraventions 351. Clause 68 provides that the Secretary can publicise instances where an entity has received an infringement notice under Part 5 of the Regulatory Powers Act. It is intended that information regarding infringement notices will be published on the Department's website, and may include details such as the "person's" (i.e. entity's) name, the provision alleged to have been contravened and the nature of the alleged conduct. This clause intends to discourage entities with the most sophisticated operations and hold the most fuel stocks from contravening provisions in the Bill. While the infringement notice does not constitute a finding of guilt, it is expected that publicising infringement notices will provide a deterrence to fuel market participants of intending to be non-compliant with this Bill. Clause 69: Enforceable undertakings 352. As noted above, and in OPC's Drafting Direction No. 3.5A Regulatory powers, the purpose of the Regulatory Powers Act is to create standard provisions to deal with monitoring, investigation and enforcement, and those matters should not usually be dealt with by creating stand-alone schemes in new legislation. Instead, the Regulatory Powers Act should be triggered. 353. Accordingly, clause 69 provides that the provisions of clause 7 (minimum stockholding obligation) and subclause 8(1) (additional responsibility of Australian controlling corporation) of the Bill are enforceable under Part 6 of the Regulatory Powers Act, which provides a framework for accepting and enforcing undertakings in relation to compliance with provisions. Authorised person 354. Subclause 69(2) provides that the Secretary, and SES employees (or acting SES employees) in the Department with responsibilities in

PART 4 - COMPLIANCE AND ENFORCEMENT relation to the Bill, are authorised persons for the purposes of exercising powers under Part 6 of the Regulatory Powers Act to accept and enforce enforceable undertakings with respect to the provisions referred to in subclause 69(1) of the Bill. Relevant court 355. Subclause 69(3) provides that for the purposes of Part 6 of the Regulatory Powers Act the relevant court to make an application for enforcement of an enforceable undertaking is: a. the Federal Court of Australia; or b. the Federal Circuit Court of Australia; or c. any state or territory court which has jurisdiction. 356. This would ensure that jurisdiction is conferred as widely as appropriate, so that disputes may be resolved in the lowest level of court appropriate. To encourage efficiency in dealing with related matters, the same provision is mirrored in other analogous provisions throughout the Bill (see, for example, paragraphs 60(4)(e) and 61(3)(e), and subclauses 62(3) and 70(3)). Other undertakings 357. Subclause 69(4) provides that the Secretary, and SES employees (or acting SES employees) in the Department with responsibilities for the Act, may accept an undertaking for a regulated entity to hold a specified quantity that is more than the designated quantity for their MSO. The undertaking must be expressed to be an undertaking under this subclause. 358. Subclause 69(5) provides that the power in subclause 69(4) is an additional power of the Secretary/SES employee (or acting SES employees) under subsection 114(1) of the Regulatory Powers Act. 359. Subclause 69(6) provides that Part 6 of the Regulatory Powers Act, other than subsection 114(1), applies to an undertaking in subclause 69(4) as if it were an undertaking accepted under subsection 114(1) of the Regulatory Powers Act. 91

FUEL SECURITY BILL 2021 Enforceable undertaking may be published on Department's website 360. Subclause 69(7) provides that an authorised person (that is, the Secretary or SES employee with responsibilities under the Bill) may publish an undertaking given in relation to a provision referred to in subclause 69(1) of the Bill on the Department's website. Clause 70: Injunctions 361. As noted above, and in OPC's Drafting Direction No. 3.5A Regulatory powers, the purpose of the Regulatory Powers Act is to create standard provisions to deal with monitoring, investigation and enforcement, and those matters should not usually be dealt with by creating stand-alone schemes in new legislation. Instead, the Regulatory Powers Act should be triggered. 362. To that end, subclause 70(1) provides that the following provisions of the Bill are enforceable under Part 7 of the Regulatory Powers Act, which Part creates a framework for using injunctions to enforce provisions: a. clause 7 (minimum stockholding obligation); b. subclause 8(1) (additional responsibility of Australian controlling corporation); c. clause 16 (entity's advice about expected designated quantity); d. clause 47 (reporting during commitment period). Authorised person 363. Under Part 7 of the Regulatory Powers Act, an authorised person may apply for an injunction. Subclause 70(2) provides that the Secretary, and SES employees (or acting SES employees) in the Department with responsibilities in relation to the Bill, are authorised persons for the purposes of exercising powers under Part 7 of the Regulatory Powers Act.

PART 4 - COMPLIANCE AND ENFORCEMENT Relevant court 364. Subclause 70(3) provides that for the purposes of Part 7 of the Regulatory Powers Act the relevant court to make an application for, and assist in enforcement of, an injunction is: a. the Federal Court of Australia; or b. the Federal Circuit Court of Australia; or c. any state or territory court which has jurisdiction. 365. This would ensure that jurisdiction is conferred as widely as appropriate, so that disputes may be resolved in the lowest level of court appropriate. To encourage efficiency in dealing with related matters, the same provision is mirrored in other analogous provisions throughout the Bill (see, for example, paragraphs 60(4)(e) and 61(3)(e), and subclauses 62(3) and 69(3)). Consent injunctions 366. Subclause 70(4) provides that whether or not a relevant court is satisfied that section 121 of the Regulatory Powers Act applies (which relates to the circumstances in which injunctions may be granted under Part 7 of the Regulatory Powers Act), the court may grant an injunction under Part 7 of that Act by consent of all the parties to proceedings brought under subclause 70(1) of the Bill. 93

FUEL SECURITY BILL 2021

PART 5--OTHER MATTERS Part 5 - Other matters Division 1--Introduction to this Part Clause 71: Simplified outline of this Part 367. Clause 71 provides a simplified outline of Part 5 of the Bill to help readers understand the substantive provisions. This simplified outline should not be taken as complete and readers should rely on the substantive provisions in the Bill. Division 2--Review of decisions Clause 72: Reviewable decisions 368. Clause 72 sets out the classes of decisions made under the Bill affecting the rights and interests of individuals that are subject to merits review: both by internal reconsideration and, as required, by the Administrative Appeals Tribunal. Decisions for which the Secretary is responsible person 369. Subclause 72(1) lists the classes of decisions of the Secretary under Parts 2 and 3 of the Bill which are proposed to be reviewable. These primarily relate to decisions regarding the MSO provisions under Part 2, but also include decisions to refuse applications seeking to extend the period of cessation for the purposes of the FSSP repayment obligations in Part 3. The Secretary is the responsible person for each of those decisions. Decisions for which the Minister is responsible person 370. Subclause 72(2) lists the classes of decisions of the Minister under Part 3 of the Bill which are proposed to be reviewable. These include decisions about whether to grant an application for the FSSP, and decisions about the duration, variation and termination of an FSSP commitment period. The Minister is the responsible person for each of those decisions. Clause 73: Notice of reasons and review rights 371. Clause 73 requires that if a responsible person (as defined under clause 72) is required to notify a person of a reviewable decision (as defined under clause 72), then they must also notify the person of the 95

FUEL SECURITY BILL 2021 reasons for the decision and the rights to seek review of the decision (which may include applying for reconsideration under clause 74, or applying for review by the Administrative Appeals Tribunal under clause 77). Clause 74: Applications for reconsideration of decisions made by delegates 372. Clause 74 establishes the administrative requirements for making an application for reconsideration of a reviewable decision made by a delegate of a responsible person (i.e. the Secretary or the Minister). 373. The clause permits a person whose interests have been affected by a reviewable decision to seek reconsideration by the responsible person of a decision originally made by a delegate of that responsible person, provided that the application: a. is made in the approved form (if any); b. sets out the reasons for the application; c. is accompanied by any applicable application fee (as may be prescribed by the rules); and d. is made either within 28 days of receiving notice of the original decision, or such further time as may be extended by the responsible person. Clause 75: Reconsideration by responsible person 374. Clause 75 sets out the steps that the responsible person (i.e. the Secretary or the Minister, as applicable), or their delegate, must take after receiving an application to reconsider a reviewable decision (the original decision) under clause 74. 375. The responsible person must either personally reconsider the original decision or assign it to another delegate who was not involved in making the original decision and is at least the same designation as the original decision-maker, for reconsideration (subclause 75(5)). 376. Under subclause 75(1), upon reconsideration of the original decision, the responsible person (or delegate) is required to either affirm, vary or revoke the original decision. Under clause 76 (see below), the reconsideration decision must be made within 90 days of receiving the reconsideration application. Further, the reconsideration decision

PART 5--OTHER MATTERS of the responsible person has effect as if it had been made under the provision under which the original decision was made (subclause 75(2)). 377. The responsible person is required to give written notice of their reconsideration decision to the applicant and, within 28 days of making that decision, provide written reasons for the decision (subclauses 75(3) and (4)). Clause 76: Deadline for reconsideration 378. Clause 76 provides that a reconsideration decision must be made and notified to the applicant within 90 days of receiving the reconsideration application. Otherwise, the reconsideration decision is to be taken to have affirmed the original decision, which may trigger an application for review by the Administrative Appeals Tribunal (see below). Clause 77: Review by the Administrative Appeals Tribunal 379. Clause 77 provides that an application may be made to the Administrative Appeals Tribunal for a review of either: a. a reconsideration decision of a responsible person, which affirms or varies the original decision made by a delegate of the responsible person; or b. a reviewable decision made by the responsible person at first instance (i.e. not by a delegate of the responsible person). 380. This is intended to clarify that the Administrative Appeals Tribunal can only review a responsible person's decision, and not a decision of the responsible person's delegate. Division 3--Other matters Clause 78: Further information about applications, notices and advice 381. Clause 78 provides that a decision maker (i.e. the Secretary or Minister, as applicable) may request an entity to provide further information in respect of either: a. an application made by the entity under Part 2 or 3 of the Bill (e.g. an application to temporarily reduce quantity of stocks of MSO product under clause 17, or an application by a refinery 97

FUEL SECURITY BILL 2021 operator for fuel security services payment under clause 39, etc.); or b. a requirement for the entity to notify or advise specified information under a provision of Part 2 or 3 of the Bill (e.g. a requirement for a regulated entity to notify MSO activity in relation to MSO product under clause 30, or a requirement for a person to notify specified events during an FSSP commitment period under clause 48). 382. Subclause 78(2) provides that if the further information is requested in relation to an application made by an entity under Part 2 or 3 of the Bill and the entity does not provide the further information within the specified timeframe, the decision-maker may either refuse to consider the application, or refuse to take any further action in relation to the application. This reflects the policy intent that a non-response would be akin to an application lapsing or being taken to have been withdrawn by the applicant. 383. Subclause 78(3) establishes a civil penalty provision for a failure to comply with a request for further information which relates to an MSO under Part 2 or 3 of the Bill to notify or advise specified matters. A maximum penalty of 50 penalty units would apply. Applying penalty unit values current as at 1 April 2021, this equates to a maximum potential financial penalty of $11,100 for an individual and $55,500 for a body corporate for a single contravention. An option to issue an infringement notice would also be available under subclause 66(1) for an amount determined in accordance with clause 67. 384. Any obligation to "report" is intended to only relate to information relevant to the scheme and there is no intention in the provisions to override ordinary common law privileges, such as the privileges against self-incrimination, self-exposure to a civil penalty and legal professional privilege. Clause 79: Treatment of trusts 385. Clause 79 extends the application of the obligations, offences and civil penalty provisions under the Bill to trusts.

PART 5--OTHER MATTERS 386. Where there is a single trustee the obligations would apply to that trustee, while offences (and civil penalty provisions) that would otherwise be taken to have been committed by the trust would instead be taken to have been committed by the single trustee. 387. Where there is more than one trustee, the obligations would apply to each and every trustee, but be able to discharged by any one of the trustees; while offences and civil penalty provisions that would otherwise be taken to have been committed by the trust would instead be taken to have been committed by each trustee involved in, or directly or indirectly knowingly concerned in, or a party to, the relevant act or omission constituting the offence or civil penalty provision. 388. It should also be noted that clause 5 provides that an offence against the Bill includes an offence against Chapter 7 of the Criminal Code that relates to the Bill. 389. The application of the Bill is proposed to be extended to trusts because a small number of businesses active in the fuel market are known to operate aspects of their business through a trust structure. This clause would ensure that these businesses are subject to the obligations under the Bill as required. Clause 80: Appointment of authorised persons 390. Clause 80 empowers the Secretary to appoint certain classes of person to be authorised persons for the purpose of exercising monitoring and investigation powers Part 4 of the Bill (together with Parts 2 and 3 of the Regulatory Powers Act), including: a. Departmental employees; b. consultants and contractors engaged by the Department to perform services in relation to the Bill; and c. Australian Federal Police members and special members. 391. However, the Secretary can appoint someone as an authorised person where satisfied that the proposed appointee has the knowledge or experience necessary to operate effectively and appropriately in this role. It is envisioned that relevant factors for the Secretary's consideration will include any training or experience as an inspector 99

FUEL SECURITY BILL 2021 or auditor, experience in fuel or fuel-related markets and any experience exercising monitoring and investigation powers. 392. The Secretary is able to issue directions to authorised persons about how they use the monitoring powers. Such a direction would not be a legislative instrument within the meaning of subsection 8(1) of the Legislation Act 2003 and subclause 80(4) is merely declaratory of this and intended to assist readers. 393. The Secretary could engage consultants and contractors as authorised persons as the necessary expertise to monitor and investigate the matters referred to under clauses 60 and 61 of the Bill may not be available within the Department. 394. Authorised persons would need skills and experience in one or more of auditing, finance, engineering, geology and the fuel market to be effective. It is envisioned that the Department may need to engage more than one contractor or consultant in the future as different issues may require different skills and experience. It is envisioned that if a consultant or contractor was engaged by the Secretary as an authorised person that: a. the authorised person would be subject to a contractual relationship with the Department; b. the authorised person would maintain the appropriate professional qualification/s and membership/s associated with their relevant expertise; c. the authorised person would be sufficiently senior and experienced to perform the functions they are expected to perform; and d. the Secretary would issue directions to ensure the authorised person used their powers appropriately. For example, a requirement that the contracted auditor not use, record or disclose protected information they obtain through their position except in accordance with their role and function as an auditor would be expected to be a common condition. Clause 81: Approved forms 395. Clause 81 provides that the Secretary may approve a form for the purpose of a provision of the Bill or rules. Under the Bill, the

PART 5--OTHER MATTERS following clauses specify that certain matters must be set out in accordance with any approved form: a. clause 16 - advice regarding expected designated quantity of an MSO product; b. clause 47 - reports provided during the FSSP commitment period; c. clause 48 - notices of specified events during the FSSP commitment period; d. clause 74 - applications for reconsideration of a reviewable decision; and e. other clauses that allow rules to be made regarding requirements (e.g. clause 17). Clause 82: Delegation by Minister 396. Clause 82 allows for the delegation of any or all of the Minister's powers and functions under Parts 3 (Fuel security services payment) and 5 (Miscellaneous) of the Bill, and under any rules made under either of those Parts of the Bill, to the Secretary, or an SES employee or an acting SES employee in the Department. 397. It is appropriate for the Minister to be able to delegate certain powers and functions to ensure the fuel security services payment scheme can be administered effectively and efficiently, as it would not be practical for the Minister to personally administer the entire scheme. The power of delegation would apply to the following powers, in addition to any further powers under the rules: a. to make a decision whether to grant or refuse an application for fuel security services payment (clause 40); b. to require further information in connection with an application for the FSSP (clause 78); c. to determine a person's commitment period (subclause 41(1)); d. to vary a person's commitment period by shortening or lengthening it (subclause 41(2)); e. to terminate a person's commitment period (subclause 42(2)); and f. to make a determination under clause 44. 101

FUEL SECURITY BILL 2021 398. However, it is intended that the Minister's powers to make, via notifiable instrument, guidelines under subclause 43(4) and rules under clause 84, would not be delegable. 399. The approach taken to delegations is based on the degree of discretion involved in the decisions, the nature of the decisions and the potential impacts on refinery operators. Given these matters, it is appropriate that the Minister's powers and functions under Parts 3 and 5 of the Bill are limited to the Secretary and SES level due to the significant nature of the decisions that underpin the operation of the FSSP scheme, the degree of discretion involved and the consequential impacts on the refinery operators. 400. Further, subclause 82(3) makes it clear that, where a delegate is carrying out delegated powers or functions under the Bill, the employee must comply with any written directions the Minister makes. Clause 83: Delegation by Secretary 401. Clause 83 allows the Secretary to delegate in writing, to an SES employee or an acting SES employee of the Department, all or any of the Secretary's functions or powers under the Bill or the rules. Further, the Secretary could issue directions to his or her delegate and the delegate must comply with these directions when they exercise the delegation. The ability to delegate to these senior public servants is appropriate to the prompt and effective administration of the legislation. Clause 84: Rules 402. Clause 84 allows the Minister to make, by legislative instrument, rules where permitted directly, or by implication, in the Bill. 403. This provision would empower the Minister to make rules covering matters such as: a. requirements for fuels that meet the definition of an "FSSP fuel"; b. requirements regarding the form of applications for various matters under the Bill; c. requirements applying to the refining of FSSP fuel;

PART 5--OTHER MATTERS d. requirements providing the fuel quality standards to apply to the definition of holding an MSO product; e. the period for the MSO; f. the period for an obligation day; g. the period for an advice window and notice window; h. allowing for additional MSO activities and MSO products to be prescribed in the future; i. the method and calculation for feedstocks to be counted towards MSO products; j. the MSO product/s threshold that would trigger the MSO; k. the target cover days and the formula for each entity to calculate their MSO; l. determining, varying or terminating a commitment period under Part 3 of the Bill; m. circumstances in which fuel security services payment is not payable to a person in relation to a quarter; n. the number of cents per litre payable for an FSSP fuel refined at a committed refinery in a quarter; o. FSSP reporting requirements; p. circumstances in which the FSSP repayment obligations do not apply. 404. Dealing with these matters in rules rather than regulations accords with the OPC's Drafting Direction No. 3.8 - Subordinate legislation (the Drafting Direction), which notes considerations and standard wording for the drafting of legislation dealing with matters of subordinate legislation. That Drafting Direction states that "OPC's starting point is that subordinate instruments should be made in the form of legislative instruments (as distinct from regulations) unless there is good reason not to do so." The document is available at https://www.opc.gov.au/drafting-resources/drafting-directions%20. 405. Consistent with the Drafting Direction, the approach of dealing with these matters in rules (rather than regulations) has a number of advantages including: a. it facilitates the use of a single type of legislative instrument (or a reduced number of types of instruments) being needed for the Bill; and 103

FUEL SECURITY BILL 2021 b. it enables the number and content of the legislative instruments under the Bill to be rationalised; and c. it simplifies the language and structure of the provisions in the Bill that provide the authority for the legislative instruments; and d. it shortens the Bill. 406. Due to these advantages, the Drafting Direction states that drafters should adopt this approach where appropriate with new Acts. 407. The Drafting Direction states that matters such as compliance and enforcement, the imposition of taxes, setting amounts to be appropriated, and amendments to the text of an Act, should be included in regulations unless there is a strong justification otherwise. The Bill does not enable rules to provide for any of these matters. This is clarified by the subclause 84(2) that specifically prevents rules from including these types of matters. 408. This clause also clarifies that the rules made under the clause are a legislative instrument for the purposes of the Legislation Act 2003. Under that Act, legislative instruments and their explanatory statements must be tabled in both Houses of the Parliament within 6 sitting days of the date of registration of the instrument on the Federal Register of Legislation. Once tabled, the rules will be subject to the same level of parliamentary scrutiny as regulations (including consideration by the Senate Standing Committee for the Scrutiny of Delegated Legislation), and a motion to disallow the rules may be moved in either House of the Parliament within 15 sitting days of the date the rules are tabled. 409. Subclause 84(3) permits rules made by the Minister to make provision in relation to a matter by applying, adopting or incorporating any matter contained in any other instrument or writing in force either at a specific date or from time to time. The note to subclause 84(3) advises that this provision is intended to displace the general rule under subsection 14(2) of the Legislation Act 2003 that other documents may not be incorporated as in force from time to time and may only be incorporated as in force or existence at a date before or at the same time as the legislation commences.

PART 5--OTHER MATTERS 410. The Department intends to ensure that any incorporated instrument or writing will be made publicly available free of charge, either by publishing on the Department's website, providing a relevant website address or by registering the other instrument or writing on the Federal Register of Legislation, as appropriate. 411. The need to incorporate documents as in force from time to time is necessary because of the interaction of the fuel industry with a range of standards and requirements which are updated over time. It can be important that current industry requirements are applied, rather than superseded documents. 412. Another key potential use of the power will be for the calculation of the cents per litre amounts to paid as fuel security services payments by reference to external benchmarks, such as those indicating the price of crude oil at a point of time in the future. This would not be possible without subclause 84(3). The appropriate use of this power would be able to be considered when rules are made, including through Parliamentary considerations on any motion to disallow the rule and consultation with stakeholders before such rules are made. 105

ATTACHMENT A - REGULATION IMPACT STATEMENT Securing Australia's Domestic Fuel Stocks and Refining Capacity Regulation Impact Statement May 2021 Page 1 of 37

FUEL SECURITY BILL 2021 Disclaimer: The Australian Government as represented by the Department of Industry, Science, Energy and Resources has exercised due care and skill in the preparation and compilation of the information and data in this publication. Notwithstanding, the Commonwealth of Australia, its officers, employees, or agents disclaim any liability, including liability for negligence, loss howsoever caused, damage, injury, expense or cost incurred by any person as a result of accessing, using or relying upon any of the information or data in this publication to the maximum extent permitted by law. No representation expressed or implied is made as to the currency, accuracy, reliability or completeness of the information contained in this publication. The reader should rely on their own inquiries to independently confirm the information and comment on which they intend to act. This publication does not indicate commitment by the Australian Government to a particular course of action. © Commonwealth of Australia 2021 Ownership of intellectual property rights Unless otherwise noted, copyright (and any other intellectual property rights, if any) in this publication is owned by the Commonwealth of Australia. Creative Commons licence Attribution CC BY All material in this publication is licensed under a Creative Commons Attribution 4.0 International Licence, save for content supplied by third parties, logos, any material protected by trademark or otherwise noted in this publication, and the Commonwealth Coat of Arms. Creative Commons Attribution 4.0 International Licence is a standard form licence agreement that allows you to copy, distribute, transmit and adapt this publication provided you attribute the work. A summary of the licence terms is available from https://creativecommons.org/licenses/by/4.0/ The full licence terms are available from https://creativecommons.org/licenses/by/4.0/legalcode Content contained herein should be attributed as Department of Industry, Science, Energy and Resources 2021, Regulation Impact Statement: Securing Australia's Domestic Fuel Stocks and Refining Capacity, May 2021, DISER.

ATTACHMENT A - REGULATION IMPACT STATEMENT Contents Executive Summary ............................................................................................................................ 4 1. What is the problem that Government is trying to solve? .......................................................... 5 1.1 The continuing importance of liquid fuels ......................................................................... 6 1.2 Refinery capability ............................................................................................................. 8 1.3 Domestic stockholdings ................................................................................................. 10 1.4 Historical disruption events ............................................................................................. 11 1.5 Expanding stockholdings ................................................................................................. 12 2 Why is Government action needed? ........................................................................................ 14 2.1 Securing domestic refining capacity ................................................................................ 14 2.2 The need to increase fuel stocks ....................................................................................... 14 3 What policy options are under consideration? ........................................................................ 16 3.1 Maintain the status quo .................................................................................................... 16 3.2 Securing a minimum level of stocks for domestic fuel security ...................................... 16 3.3 Maintaining domestic refining capability ........................................................................ 17 4 What is the likely net benefit of each option? .......................................................................... 19 4.1 Maintain the status quo .................................................................................................... 19 4.2 Minimum stockholding obligation and the Fuel Security Service Payment ..................... 19 5 Who was consulted about these options and how were they consulted? .................................. 28 5.1 Objectives......................................................................................................................... 28 5.2 Fuel Security Service Payment ......................................................................................... 28 5.3 Minimum Stockholding Obligation .................................................................................. 29 5.4 Further consultation.......................................................................................................... 29 6 What is the best option from those considered? ....................................................................... 30 7 How will the chosen option be implemented and evaluated? .................................................. 31 7.1 Challenges ........................................................................................................................ 31 7.2 Implementation ................................................................................................................ 31 7.2.1 Fuel Security Service Payment and Refinery Upgrades ........................................... 31 7.2.2 Minimum Stockholding Obligation .......................................................................... 31 Appendix A: Emergency stockholding approaches in IEA member nations .................................... 33 Appendix B: Demand and Consumption Cover in Australia ............................................................ 35 Appendix C: References ................................................................................................................... 36 Page 3 of 37

FUEL SECURITY BILL 2021 Executive Summary Liquid fuel security is about making sure that Australia has the fuel it needs to meet our economic, environmental, social and national security objectives. For many Australians, fuel security means having the confidence that there will be enough fuel for their journey to work, and ensuring that businesses large and small can keep running day to day. It also means knowing that when things go wrong, there is a plan in place to keep Australia moving. The Fuel Security Package, first announced by the Prime Minister and Minister for Energy and Emissions Reduction on 14 September 2020, is being implemented in 2021 to increase Australia's fuel security, stimulate employment, secure our sovereign refining capacity and keep prices low for fuel users. The Package includes:  Creation of a minimum stockholding obligation (MSO) to safeguard key transport fuels, including increasing diesel stocks by 40 per cent  Investment of $200 million in a competitive grants program to support up to 50 per cent of the costs of construction to assist industry in meeting the additional diesel stockholding obligation.  A Government-funded adjustable production payment for refiners, in recognition of the fuel security benefits domestic refineries provide Australia  A Temporary Refinery Production Payment Program to provide interim support to domestic refiners until such time as the permanent production payment is in place  Co-investing with domestic refiners to undertake the necessary infrastructure upgrades required to provide better quality fuel  A plan to modernise emergency and fuel reporting legislation. The Package ensures Australia is in a position where, under any scenario, fuel is available to those who need it. A sovereign refining capacity helps to maintain our fuel security and shields us from potential shocks in the future. This Regulation Impact Statement (RIS) examines the MSO, permanent production payment and funding for refinery upgrades. The RIS focuses on the impacts of implementing these new measures and the associated regulatory burden. This RIS was prepared and lodged with the Office of Best Practice Regulation for interim assessment as part of the 2020-21 Budget. At the point where the RIS supported the announcement of a decision and enabling legislation, this RIS was finalised and progressed through first and second pass assessment. This RIS does not assess all the measures which form part of the Package. The modernisation of emergency and fuel reporting legislation will require new legislation and will be assessed at a later point. This RIS also does not assess information relating to previous decisions by Government, including Australia's return to full compliance with our International Energy Agency (IEA) obligations by 2026 and previous changes to fuel quality standards.

ATTACHMENT A - REGULATION IMPACT STATEMENT 1. What is the problem that Government is trying to solve? Liquid fuels underpin Australia's economy, particularly in the critical sectors of mining, agriculture and manufacturing. More than half of the total energy Australians use comes from liquid fuels. Growth in liquid fuel demand in Australia is much higher than that of countries with similar economies. Prior to the COVID-19 pandemic, Australia's demand for liquid fuels grew by an average of 1.8 per cent per year over a 10 year period to 2018-19, outstripping population growth. Over the same period, diesel demand grew by 5.0 per cent per year (DISER 2020a). The Australian economy is now experiencing a strong recovery from the COVID-19 downturn, with fuel consumption projected to grow over the coming years. Concurrently over the last decade, the domestic production of liquid fuels has been in decline. Recent announcements of impending closures mean that soon only two domestic refineries will remain, leaving Australia reliant on imports for around 80 per cent of our refined products. While Australia's international supply chains for liquid fuels are diverse, our reliance on the import of refined products for domestic fuel security means that Australia is potentially vulnerable to moderate to severe supply chain disruptions, particularly across the Asia-Pacific region. Sourcing 98 per cent of its energy from liquid fuels, Australia's transport sector represents 69 per cent of Australia's liquid fuel demand. Transport is therefore highly exposed to supply disruptions and has limited alternatives. The mining and agricultural sectors are particularly dependent on the reliable supply of diesel for their operations, representing 10 per cent and 4 per cent of Australia's total liquid fuel demand respectively (Figure 1). Furthermore, some remote regions rely on liquid fuels to generate electricity. 100% 2% 1% 4% 1% 9 0% 1% Proportion of liquid fuel consumption (%) 14% 8 0% 7 0% 60% 27% 5 0% 40% 26% 3 0% 20% 10% 10% 1% 4% 7% 0% Manufacturing Agriculture Mining Transport Other industries Petrol Diesel Aviation turbine fuel LPG Fuel oil Other petroleum products Figure 1: Liquid fuel use per sector as a share of total share of total liquid fuel consumption, 2017 -18 Businesses, both fuel suppliers and large fuel users, manage market risks through long-term contracts or maintaining their own stocks. These mechanisms have worked well and add stability to the market under normal market conditions. However, a major disruption to liquid fuel supply would result in significant impacts to the Australian economy. In the event of a total stoppage of supply, Australia's GDP is estimated to fall over a six- month period by 31.8 per cent, which is equivalent to a reduction of around $225 billion. Page 5 of 37

FUEL SECURITY BILL 2021 Policy consideration of Australia's liquid fuel sector is centred on the appropriate management of future risks and ensuring we are prepared for supply disruptions, should they arise. Improving Australia's fuel security will increase our self-sufficiency during emergencies. This strategy includes reinforcing fuel supply chains, increasing strategic storage capacity, and retaining the refining capability required to maintain critical services to ensure Australia is prepared for future supply disruptions. In a worst case scenario, Australia may not be able to import liquid fuels. Having a domestic refining capability means that, in a large-scale emergency, Australia is able to refine the crude oil that is produced in the country to maintain liquid fuel supply for critical services. The fewer onshore refineries we maintain, the more vulnerable Australia is to supply shortfalls (see Table 1). Proportion of demand that supports critical services (% normal demand) Demand that supports critical services Diesel 16% Petrol 4% Jet 6% Critical services includes: Emergency services, public health care, pharmaceutical and medical; telecommunication, distribution of water and sewerage; food and essential goods; gas, electricity and fuels; domestic agricultural production etc. Fuel Consumption Diesel keeps the country going in an emergency. This is how long Australia days can support critical demand with no imports using domestic crude No refineries 1 Refinery 2 Refineries Diesel 20 125 207 465 (2018-19 levels) Diesel 28 175 290 651 (+ 8 days) Petrol 24 600 indefinitely indefinitely (2018-19 levels) Jet 24 400 indefinitely indefinitely (2018-19 levels) The analysis contained in Table 1 was conducted in mid-2020 when four refineries remained in operation in Australia. There are many underlying assumptions and uncertainties underpinning the analysis, including: the mix of crude oil and condensate refined; the proportion of refined products produced; the amount of flexibility in production levels of refined products; and the order of closure of refineries. Table 1: Refineries' contribution to support demand in a no-imports scenario 1.1 The continuing importance of liquid fuels Projections show that liquid fuels will continue to remain important beyond 2030. Even under modelling of highly unlikely events, diesel demand is expected to remain critical for all sectors of the economy over the next decade.

ATTACHMENT A - REGULATION IMPACT STATEMENT By 2030, the Department of Industry, Science, Energy and Resources' (the Department's) Emissions Projections 2020 report forecasts battery electric vehicle sales to reach 26 per cent of annual new vehicle sales (DISER 2020b). While increased use of electric vehicles can reduce the demand for petrol, it does not yet pose a viable alternative to substantially reduce diesel demand over the medium term. Analysis to date shows that even in countries with high electric vehicle adoption, such as Norway, the correlation with a decrease in diesel demand is not established. Of all the major transport fuels - automotive petrol, automotive diesel and aviation turbine fuel (jet fuel) - diesel is the most important for all Australians, as it underpins the economy (including road and rail freight, mining and agriculture) and critical services, and helps people get through emergencies. For example, diesel is critical to:  Fire and ambulance services: vehicle fuel  Elements of the defence forces: vehicle fuel and some naval capabilities  Distribution of food and medicines - heavy transport fuel, road and rail  Backup electricity generation: hospitals, water supply and sanitation  Large-scale liquid-fuel fired power system generators: ensuring sufficient generation capacity for peak demand, reserve generation for emergency use, and as the only source of electricity smaller remote off-grid communities.  Utilities: water and sewerage, telecommunications, waste, and electricity and gas transmission and distribution services  Public transport: bus, rail, ferry and taxi services fuel if private vehicle use needs to be restricted However, diesel is also the fuel which has the lowest level of consumption cover (see Figure 2). Consumption cover1 is a measure of how long refined products would last if all supply was cut off and demand continued at normal levels. Consumption cover is an appropriate measure of Australia's fuel stocks, as it counts stocks based on how many days they will last under normal demand. Consumption cover does not count fuel held at service stations or in people's vehicles; therefore, actual days of cover may be higher. Over the last decade, the trends in consumption cover of petrol, jet fuel and diesel have been different (see Figure 2). Petrol consumption cover has steadily increased; jet fuel has remained relatively stable; and diesel has increased over the last five years after bottoming out mid-decade. 1 Consumption cover is different to IEA days. IEA days is a measure of our import dependence, and is measured against our obligation under the IEA Treaty to maintain stocks equivalent to 90 days of our annual net imports. Page 7 of 37

FUEL SECURITY BILL 2021 End of month stocks for petrol, jet fuel and diesel (days of consumption cover) 28 23 18 13 8 2019 November November November November November November November November November November 2010 March 2011 March 2012 March 2013 March 2014 March 2015 March 2016 March 2017 March 2018 March July 2010 2011 July 2011 2012 July 2012 2013 July 2013 2014 July 2014 2015 July 2015 2016 July 2016 2017 July 2017 2018 July 2018 2019 July 2019 Petrol Jet Fuel Diesel Figure 2 Month end consumption cover stocks for petrol, jet fuel and diesel in Australia. Source: Australian Petroleum Statistics December 2019 The decade low point of 10 consumption days for diesel stock (November 2012) coincides with the unscheduled outages at both Melbourne refineries which resulted in a significant drop in diesel production and led to some stock outs in Victoria. The low diesel stocks in November 2016 (12 consumption days) coincides with unexpectedly high demand from the agricultural sector due to a bumper crop. Most agricultural fuel is purchased on the spot market. Localised disruption events do not have a large impact on fuel prices, which are based on import parity pricing and are dominated by global oil prices. During the low diesel stock events in 2012 and 2016, there were no reported impacts on the price of fuel. 1.2 Refinery capability Maintaining a domestic refining capability remains strategically valuable for Australia, allowing it to increase its resilience to supply chain shocks. However, Australian refiners are facing increased competition from regional refineries with more modern technologies. Since 30 October 2020, two refiners have announced the closure of their Australian facilities. Without Government intervention, more closures are likely, leaving all Australians vulnerable when our critical services (which include emergency services, utilities, food production and distribution) could be subject to shortages in the event of a severe supply disruption. Global refining capacity has been increasing, with refining centres concentrated in the Middle East, China and India. Forecasts suggest that existing and planned refineries will meet and exceed the world's demand for refined products into the 2030s. The reduction in domestic and international travel in response to the COVID-19 pandemic has exacerbated the global oversupply of refined product by causing a collapse in demand, which is likely to be prolonged (McKinsey 2020).

ATTACHMENT A - REGULATION IMPACT STATEMENT Comparatively, Australian refineries are relatively small, old and less complex than the export- oriented refineries internationally. They also experience higher labour costs than their competitors. In current market conditions and in base case demand scenarios, they do not generate sufficient returns for the owners to invest additional capital in turnarounds and upgrades. Given this, there is a need to reduce our vulnerability to supply disruptions and insure against forecasts suggesting a medium to high probability that all Australian refineries will close within the next 10 years (McKinsey 2020). The prolonged collapse in global demand is holding refining prices down and putting additional pressure on Australia's already struggling refining sector. Australian refiners are also facing expensive infrastructure upgrades in the next decade. In 2018 the former Minister for the Environment regulated improvements to fuel quality standards, to progressively come into effect between 2019 and 2027. The 2027 change to the petrol standard will require refiners to conduct major infrastructure upgrades to deliver ultra-low-sulfur petrol (≤ 10 ppm sulfur). Given the financial hardships refiners are currently faced with, it is unlikely that refiners will be able to justify the cost of the major infrastructure upgrades necessary to supply ultra-low-sulfur petrol. These impending upgrades are placing further pressure on refiners' commercial viability. In 2019, our refineries processed imported and domestic crude oil and provided 47 per cent of refined products in Australia. This domestic refinery production comprised 61 per cent of our petrol, 30 per cent of our diesel and 41 per cent of jet fuels (DISER 2021). As BP and ExxonMobil close their refineries this domestic production will reduce. The remaining refineries are currently running at about 90 per cent capacity. This means there is very little capacity to increase production in response to a surge in demand. While refiners were already under financial pressure, the COVID-19 crisis was the final trigger for the closure of the BP and ExxonMobil refineries. In the current low demand, low margin conditions, both companies assessed that their Australian refineries were not currently financially viable and that no level of Government support would alter these closure decisions. Recent announcements from the remaining refiners, which are both ASX listed, have highlighted significant financial losses. In 2020, Viva Energy reported financial losses from refining of $95.1 million. Given refining profits totalled $117 million in 2019, this was an overall loss of $212 million compared with the previous year. Ampol incurred a refining loss of $76 million in 2020 at their Lytton refinery, which included the cost of bringing forward planned maintenance. As at May 2021, Ampol is conducting a comprehensive review of its Lytton refinery and related supply chains to determine the best operating model over the medium term. The review is expected to be concluded by the second quarter of 2021. The loss of domestic refineries would have further adverse consequences for Australia, including:  the loss of our ability to refine domestic crude oil, if required  putting the petrochemical industry, particularly in Victoria, at risk. Modelling of the supply chain and testing of disruption scenarios showed that refineries have an important strategic role to play in our fuel security. In a country that relies on imports and that has long supply lines, refineries can assist in managing contaminated fuel loads, particularly for jet fuel. Some terminals are able to filter contaminated fuels and, if further refinement is required, Australian refineries can return product to the market quickly. Without domestic refineries, this product would need to be returned to regional refineries in Asia. As noted earlier, domestic refineries can also help in emergencies by ensuring Australia is able to refine the crude oil that is produced in the country, to maintain liquid fuel supply for critical services. Page 9 of 37

FUEL SECURITY BILL 2021 1.3 Domestic stockholdings Australia is heavily reliant on commercial stocks of crude oil and refined products to maintain fuel supplies. The use of commercial stocks provides an effective buffer in the case of minor disruptions, however fuel companies do not hold sufficient stocks to cover moderate to severe disruption events. This means that during a national liquid fuel emergency, resilience depends on sufficient supplies being held by industry, placing Government and consumers at risk. While some major users (such as mining companies and the agricultural sector) hold their own stocks, many users hold limited stocks, expecting that either fuel suppliers will deliver what they need--even in disruptions--or that the Government will step in. Setting a minimum stockholding obligation (MSO) is a common international practice, and will provide industry, users and governments with confidence about the level of risk and redundancy in fuel supply. It will also provide the Government with the ability to make effective decisions in the case of severe shortages. During an emergency, Government relies on the commercial assessments of companies as part of their decision-making process. The MSO adds an extra 'tool' to the Government's response options and gives us greater oversight of actual stock levels. The MSO is becoming more important as the number of domestic refineries reduces. As the country transitions to a market with two domestic refineries, Australia no longer has indefinite protection against supply shortages. As outlined in Table 1, in a situation with no imports, critical diesel demand using domestic crude is supported for a finite time. This table demonstrates how the MSO increases the time Australia can keep the country going in an emergency. If another refinery were to close, the MSO would become even more critical to sustaining Australia's fuel supply, and the Government could consider increasing the MSO to take this into account. In 2018-19 Australia sourced crude oil from 40 countries, with 90 per cent sourced from 10 countries. Australia has about 0.3 per cent of the world's oil production but only 0.2 per cent of proven global reserves with reserves depleting faster than they are being replenished by new discoveries. In 201718, oil exports brought in $5.2 billion to the Australian economy. Our largest crude oil supplier was Malaysia, followed by the United Arab Emirates, Brunei Darussalam, Algeria and Indonesia (DISER 2020c). Australia sourced refined product from 66 countries, with Singapore providing the largest amount, followed by the Republic of Korea and Japan. As with crude, we have a diversity of supply, although the majority of refined product was sourced from a small number of countries (80 per cent of refined product from five countries (DISER 2020c); see Figure 3).

ATTACHMENT A - REGULATION IMPACT STATEMENT Figure 3 Major oil import routes to Australia 1.4 Historical disruption events From 1990 to 2019 there were no major supply disruptions that impacted Australia. However, there were three international events during this period that precipitated the IEA's to call for collective action releases of oil/fuel stocks2. None of these global events directly impacted Australia's fuel supply chains, but they did lead to varying short-lived price impacts in benchmark oil markets. 3 As these types of events are relatively localised, their impacts on global oil and petroleum markets are moderated by the sheer size, diversity and flexibility of the global markets and supply chains. 2 The Iraqi invasion of Kuwait (1990-91); Hurricane Katrina in the US Gulf (2005); and Libyan unrest (2011). 3 $15, $10 and $25 USD/bbl increases respectively. Page 11 of 37

FUEL SECURITY BILL 2021 Disruption scenario modelling suggested that an unprecedented event would need to occur to significantly impact on fuel supply in Australia at the national level. We cannot predict what might happen in the future, hence the need for mechanisms, such as the MSO, that effectively provide insurance against possible future disruptions. 1.5 Expanding stockholdings Fuel stocks on land and en route to Australia are fundamental to normal supply operations and for managing unexpected supply disruptions. Individual fuel supply companies balance supply and demand within their supply chains through a number of means. Petroleum businesses maintain a "pipeline" of supply to meet their contracted volumes and anticipated non-contract sales volumes. These volumes are managed by balancing capacity and throughput in storage facilities/terminals with the fuel coming from refineries and international shipments. Storage capacities can be effectively operated within a range of utilisation rates before increased demand/throughput necessitates more storage capacity being built. For bulk fuel deliveries, more frequent cargoes can offset the need to invest in new storage capacity, delaying new capital and operational expenditures. It is prudent for commercial businesses to maximise the return derived from their assets and to avoid overcapitalising too early. In a competitive market, businesses will naturally seek to minimise their costs to remain competitive and strengthen profitability. There is evidence industry has changed the way it manages storage capacity in the past three decades with lower volumes of commercial refined product stocks relative to total consumption. Figure 4 shows the average month end consumption cover of refined petroleum stocks since 1990. This figure shows a weighted average of all refined fuels. Figure 4 Month end average consumption cover stocks of all refined petroleum products. Between 1990 and 2003 a declining trend in consumption cover stocks is observed before a relatively consistent level of consumption stocks is maintained (albeit at a lower level) through to mid-2017. Since mid-2017 there has been an increase in average consumption cover stocks across the average of refined petroleum products.

ATTACHMENT A - REGULATION IMPACT STATEMENT The recent increase in stocks does not necessarily reflect an improvement in fuel security, Two of the main factors behind the recent increase in consumption cover include mandatory stock reporting (since 2018) and the closure of three domestic refineries between 2012 and 2015. Refinery closures have been accompanied by conversion to import terminals, which hold higher levels of refined product stock than terminals supplied by refineries. Unlike refinery terminals, which receive a continuous supply of product, import terminals need to hold sufficient stock to manage the arrival of shipments, typically every one to two weeks. In the 2020-21 Budget, the Government agreed to implement a regulated fuel security obligation to set a minimum level on fuel stockholdings. It was proposed that the minimum for Australia's jet and petrol stocks be held at a level equivalent to pre-COVID-19 consumption levels, with diesel stocks to increase by 40 per cent by 2024. This reflects the importance of diesel to the economy. It is also the fuel that our refineries have the lowest capacity to produce. The MSO will alleviate the risks to fuel supply currently borne by consumers as the result of Australia's sole reliance on industry to manage disruptions. Page 13 of 37

FUEL SECURITY BILL 2021 2 Why is Government action needed? Government action is required to mitigate the risk of a shortfall in liquid fuel supply in the event of a significant disruption event. It acts effectively as insurance against shocks that would otherwise cause significant economic damage. While businesses are well placed to manage direct risks to their operations, Government is better placed to manage whole of economy risks. Building resilience to such events requires the Government to maintain domestic refining capacity and increase fuel stocks. 2.1 Securing domestic refining capacity Government is well placed to provide the external intervention required to ensure domestic refineries remain viable while refinery market conditions remain poor (due to low refinery margins). This is consistent with the Government's commitment to Australia's liquid fuel security, safeguarding our economy, national security and job creation by supporting the ongoing operations of domestic refiners. Refiners play a unique role in maintaining Australia's fuel security, which can never be delivered by fuel stockholdings alone. Since October 2020, two refiners have announced the closure of their Australian facilities, and the remaining two refiners face a medium to high risk of closure. Without Government intervention these closures become more likely. 2.2 The need to increase fuel stocks There is currently no commercial incentive for entities to hold fuel stocks to cover for low likelihood, high impact events. Individual businesses do not generally mitigate against whole of market risks or take steps to hold stocks that would offer contingency against a significant disruption to a competitor's supply position. While market participants do occasionally trade with each other to alleviate small supply pressures, this is not a viable mechanism to protect consumers in the event of a large scale disruption. One existing lever is the Liquid Fuel Emergency Act 1984 (LFE Act) which empowers the Minister responsible for Energy to issue directions to fuel industry corporations in the lead-up to, and during, a declared national liquid fuel emergency. However, the LFE Act is not intended to be used to manage minor or intermittent supply shortages. Most of the disruptions and resulting shortages that Australia has experienced have been localised at state or territory level. If the market or industry do not resolve the disruption, state and territory governments may become involved. In the event that industry and states or territories are unable to resolve the fuel shortage, the Government can intervene as a last resort to manage the disruption using special emergency powers under the LFE Act. The powers under the LFE Act are intended to be used where the consequences of a disruption are of a national scale or the disruption is beyond the capacity of the fuel supply industry and relevant State and Territory governments to manage without support. Around the world, many other developed nations, including IEA members, China, and non IEA member European Union members have built and maintained fuel stockpiles over a number of years to protect against fuel market disruptions. Appendix A outlines the emergency stockholding approaches in IEA member nations. The Government can improve Australia's fuel security by improving resilience to shocks, reinforcing supply chains and taking steps to minimise supply impacts in emergencies. Based purely on growth in demand prior to 2020, diesel and jet fuel are the key fuels where the market will need to be proactive in managing stock levels, storage capacity and throughput to continue to reliably meet demand growth

ATTACHMENT A - REGULATION IMPACT STATEMENT into the future. While petrol demand is slowly declining, it remains a key transport fuel and careful management of petrol stock levels will remain of ongoing importance. The COVID-19 pandemic has highlighted the limited flexibility in the fuel storage market in Australia. The demand destruction in jet fuel caused by COVID-19-related travel restrictions created a significant oversupply of jet fuel, with inadequate storage available. This resulted in refiners taking measures such as adjusting production to reduce jet fuel supply, reducing refinery operations and bringing forward maintenance schedules. The Government also allowed temporary changes to the diesel standard to enable the refineries to reduce jet fuel production. The size and portfolio of fuel types for potential domestic emergency fuel stockpiles would need to be carefully considered on a cost benefit basis, and be calibrated to the Government's evolving risk assessment processes and risk appetite. Increasing diesel stocks is a priority as it underpins a wide range of economic activity including road and rail freight, mining and agriculture, and is a vital in supporting a number of critical services as outlined earlier. Consumption cover stocks of key fuels in Australia vary by fuel type over time in response to delivery/production schedules and demand trends. Market participants make commercial decisions on what level of contingency they maintain in their supply chains. Fuel consumers do not have visibility of their exposure to shortages of supply or of supplier's actions to ensure secure supplies. Aggregated consumption cover statistics published in the APS Report six weeks in arrears does not assist with understanding business to business risk transfer. Lean commercial operations can be a source of competitive advantage, however there may be increased risks to reliable supply from taking this approach. There is a role for the Government to regulate the minimum level of specific fuel stocks that must be maintained at all times by certain segments of the fuel market. This would provide certainty to fuel consumers and governments that a minimum quantity of fuel is always maintained, in proportion to demand. This could be applied to certain businesses based on their volume of sales, which would be similar to approaches in other counties that have adopted industry stockholding obligations. Page 15 of 37

FUEL SECURITY BILL 2021 3 What policy options are under consideration? The reforms being considered in this RIS seek to improve Australia's fuel security for the medium-term through carefully balancing the risks with the cost of implementation. In light of this mounting pressure on our refining sector, a new market and regulatory framework was developed, and put forward for Government consideration, containing two key elements: 1. The setting of a MSO to establish a floor - a minimum level of held stocks - for different fuel types to provide certainty of oil stocks in Australia. 2. Measures to provide support to refiners, financial or non-financial, to lock in their continued operation until at least 2027. 3.1 Maintain the status quo The Department considered a scenario where there is no Government intervention. Under this scenario there is no MSO established to provide certainty of fuel stocks, and no Government support is provided to refiners. Refiners are left to face the impacts of the COVID-19 crisis on their own, and must assess the commercial viability of undertaking the necessary and significant infrastructure upgrades to meet the improvements to fuel quality standards. The likely benefits of this option are outlined in Section 4. 3.2 Securing a minimum level of stocks for domestic fuel security Through setting a minimum level on stocks on certain fuel types held by importers and refiners, the Government will enhance fuel security and provide consumers and businesses with certainty of key refined fuel stocks in Australia. Increasing our oil stocks will strengthen Australia's resilience in the event of a fuel supply disruption, which is particularly valuable in light of diminishing domestic refining capacity. This mechanism will also help Australia meet our international obligations, in complying with the requirements of the IEA. By setting a legislated industry stockholding obligation, Government will have the ability to adjust Australia's fuels stocks and storage capacity, protecting consumers and the economy from disruptions as part of Australia's strategic capability. The consultation process explored alternative options that are proposed to ensure a market-led approach is adopted. Options for implementation have been listed below. The MSO would be imposed on corporate entities that import and refine petrol, diesel and jet fuel in Australia. It would set an initial requirement to hold a minimum of stocks equivalent to current consumption levels for the three regulated fuels. In mid-2024, the stockholding obligation would be extended to require entities to hold an additional 40 per cent of diesel stocks above the pre- COVID-19 average consumption cover levels. The obligation would be placed on corporate entities that undertake the activities of refining or importing these fuels in Australia if they exceed a minimum threshold. This will avoid directly impacting small businesses, result in the least number of regulated entities needed to capture the majority of fuel supplied to the Australian market, and capture the entities that own or lease the majority of fuel storage capacity. A national level obligation is recommended. This will allow regulated entities to hold eligible stocks anywhere in Australia based on their commercial supply chains and commercial drivers, thereby minimising compliance costs.

ATTACHMENT A - REGULATION IMPACT STATEMENT It would require obligated entities to hold a specified minimum quantity of each major transport fuel across their portfolios nationally, as follows:  Petrol (all grades in aggregate) at pre-COVID-19 average levels, with a consumption cover target set at 24 days for obligated entities.  Aviation fuel at pre-COVID-19 average levels, with a consumption cover target set at 24 days for obligated entities.  Automotive diesel to increase by 40 per cent on pre-COVID-19 average levels (consumption day target to be finalised during consultation on the Rules). The setting of these minimum levels reflects the importance of diesel to our economy. The demand for petrol has flat-lined and is now slowly declining. Jet fuel and diesel demand is increasing, but diesel is the fuel most critical to emergency services. Appendix B outlines the demand of each fuel type over the last decade. Settings in the MSO will hold petrol and jet fuel levels at pre-COVID-19 levels, while diesel levels will be increased by 40 per cent, reflecting the role that diesel plays in supporting critical services. In recognition of the refining capabilities provided by refiners, and the unique fuel security service they provide compared to importers, two exemptions were considered: 1. Allowing refiners to count crude stocks held at their facilities as part of their diesel, petrol and jet fuel stocks. 2. Exempting refiners from the 40 per cent increase in diesel stocks aspect of the obligation. Additionally, a combination of these two exemptions was considered. There are three options under consideration to facilitate an intermediary market: 1. Direct contracting - Under this mechanism, shortfalls or surpluses in own stock positions would be managed through the purchasing or selling stock to third parties through individual contracts. This option would impose the full costs of the obligation on industry and may have pass through costs to consumers (contingent on the Rules developed for the MSO under the Fuel Security Act to be examined at a later stage). 2. Tradeable stockholding certificate - Under this mechanism, entities would be required to hold a number of certificates proportional to their consumption. Their own stock position would be redeemable for certificates, while shortfalls or surpluses would be managed through the buying or selling of certificates on an open market 3. Central balancing book - Under this mechanism, a central entity ensures two elements are in balance. Entities with insufficient stock at the end of a period pay 'interest' on their shortfall (i.e. cost of non-compliance), while stockholders receive an interest return on stock above their obligation. The interest rate is set by a central entity, who may need to hold reserves of stock. The interest rate mechanism would control price as a way to manage volume. 3.3 Maintaining domestic refining capability The Government considered options that would help maintain our sovereign refining capability and minimise the risk of additional refinery closures. Australian oil refiners that manufacture key transport fuels would be eligible to receive this support. A Fuel Security Service Payment (FSSP) was considered and developed as the mechanism to provide support to refiners during periods of low margins, limiting their downside risk and providing the Page 17 of 37

FUEL SECURITY BILL 2021 certainty of returns they need to continue operating in Australia to 2027. This payment recognises the fuel security services which sovereign on-shore refining capability provides all Australians. Through this mechanism, Australian refiners would be entitled to support based on their domestic production of primary transport fuels (automotive petrol, automotive diesel and aviation turbine fuel). The payments would be set as a function of refinery market conditions, ensuring that refiners are receiving payments only while their margins are low. Refiners that manufacture primary transport fuels in Australia would be eligible to receive the FSSP. The inclusion of a repayment mechanism was considered in the design, which would be triggered if companies did not meet their agreed commitment. Four options for the FSSP were considered:  Fixed production payment where refiners benefit from a fixed cent per litre based payment on their production volume of domestically produced eligible transport fuels  Availability support where refiners benefit from a payment to support a target set for availability of fuel supply  Margin support where refiners benefit from support to their margins set against a refinery margin marker  Adjustable production payment where refiners benefit through a cap and collar arrangement set against a refinery margin marker and production payment on a cents per litre basis for eligible fuel product. Alternate mechanisms to the FSSP were also considered:  Discount to refiners on the existing fuel excise - Instead of providing direct support through the FSSP, Government could provide indirect support to refiners through a discount to the fuel excise. This would be a differential excise that involves amending the existing fuel excise to provide a discount to domestic refineries and an increase for importers. This would provide indirect support to refineries - they would receive the benefit of the discounted excise but no direct payments. This would preserve existing fuel tax credits and Government revenue. If fuel tax credits were to apply, on-road fuel consumers are expected to pay more.  Local content obligation - Under this mechanism, the Government would mandate that a certain percentage of total petroleum refined product sold by wholesalers is refined domestically to guarantee local production volume. The Government would also confer greater price setting powers on the remaining domestic refiners. While a FSSP would provide support during periods of low margins and limit refiners' downside risk, these companies still face the infrastructure upgrades necessary to meet the improvements to fuel quality standards. To maintain the fuel security benefits associated with domestic refineries and the delivery of cleaner fuels and the associated health benefits to Australians, there is also a role for Government to incentivise companies to undertake infrastructure upgrades where there is underinvestment by businesses. Funding to undertake infrastructure upgrades will allow refiners to supply better quality fuel and put them on a more equal footing with importers.

ATTACHMENT A - REGULATION IMPACT STATEMENT 4 What is the likely net benefit of each option? The net benefits to all policy options are dependent on the severity and duration of fuel supply disruptions that may occur in the future, as the options are effectively insurance against a highly unpredictable disruption to global fuel markets, with the benefits highly scenario dependent. 4.1 Maintain the status quo An absence of Government intervention is equivalent to a lack of insurance against low likelihood, high impact events in the liquid fuels sector. Australia has not experienced a major fuel shortage or disruption in over 40 years. The market has historically adjusted well and quickly during disruptions--including instances of geopolitical tensions--with only limited impacts felt by fuel users. Australia imports fuel from many countries so when there is a disruption in one region we can rely on other countries more heavily to maintain a constant and affordable supply. Businesses, both fuel suppliers and large fuel users, also manage market risks through long-term contracts or maintaining their own stocks. These mechanisms have worked well and add stability to the market. This is partly why prices of fuel in Australia have remained relatively low compared to other developed countries. However, an absence of Government intervention makes the chance of further refinery closures more likely. It is unlikely that domestic refiners could last through the impacts of COVID-19 and the impending upgrades to meet improvements in fuel quality standards. As outlined in Table 1, Australia would become more and more vulnerable with each refinery closure. Losing our domestic sovereign refining capability forgoes some significant economic activities. A report by ACIL Allen estimated that the total economic contribution in 2018-19 from the four domestic refineries was $3.4 billion, which equates to approximately 0.2 per cent of GDP. Australia is now on the verge of a future where two domestic refineries remain. ACIL Allen's estimates from are for 2018-19, when two of the four refiners reported their facilities were profitable. As detailed earlier, as a consequence of recent financial pressure arising from COVID- 19, Australia's remaining refiners both reported losses in 2020. The closure of Australia's remaining two refiners would also have an adverse effect on adjacent industries. For example, in 2018-19, the LyondellBasell polypropylene plant, which is reliant on Viva's Geelong refinery, employed 2,055 Australians directly and indirectly. Without domestic refineries, these industries would be reliant on imported feedstock, which would adversely impact their commercial viability, and would risk Australian jobs. A lack of onshore refining facilities would also place Australia at greater risk in the event of supply shortfalls. For example, further analysis showed that in the event of a total stoppage of supply, Australia's GDP is estimated to fall over a six-month period by 31.8 per cent, which is equivalent to a reduction of around $225 billion. In situations that do not involve a total stoppage of supply, while we have fared well over the past 40 years, Australia would find itself in a more vulnerable position. The presence of domestic refineries provides competition in the liquid fuel supply market, and further closures would risk price increases for consumers. 4.2 Minimum stockholding obligation and the Fuel Security Service Payment An indicative list of costs and benefits associated with the different policy options considered under these two mechanisms can be found in Table 2. Many policy parameters were considered qualitatively before quantitative analysis was undertaken on viable options. Page 19 of 37

FUEL SECURITY BILL 2021 Table 2 - Indicative list of costs and benefits associated with the different policy options Mechanism Cost Impact Benefit Minimum Stockholding Obligation MSO Metric Options: 1. Disproportionately impacts 1. The net import day option, which aligns with the International 1. Limited and not quantified. importers over refiners and is more Energy Program Treaty metric, is not a suitable approach for 1. Net import days appropriate for the full upstream and measuring domestic fuel security but is rather an indicator of 2. Metric based on fuel downstream oil/petroleum sector. import dependence (imports minus exports). consumption/supply and easily 0. Consumption cover days relatable to maintaining fuel 2. Lower cost than option 3 as the (CCD's) 2. Consumption cover days are an indicator of how long fuels would supply security. Could be applied national requirement level set would last under normal demand. Can be modified to suit entity level to any entity in the supply chain remain appropriate even if aggregate stock minimums and is a measure that can be set in legislation that proportionally to volume fuel demand changes. 2. Absolute volumes does not need to be changed when there are changes in aggregate supplied to the market. Minimum fuel demand. This measure also scales well to different sized consumption day target figure 3. Higher costs due to annual resetting entities and compliance costs are proportional to the entity size. remains relevant even if of the aggregate requirement due to aggregate demand of one or more national level fuel demand changes. 3. Setting absolute volume requirements on regulated entities would fuels changes. initially deliver the same outcome as option 2 however the volume set may not remain appropriate if aggregate demand 3. Limited and inflexible in changes or an entity significantly loses or gains market share. The application to entities and would regulated quantity per entity and nationally would need to be require annual adjustment to changed frequently in subordinate legislation to maintain scale. scale with aggregate demand changes. Target Level Setting: 1. Much higher cost than needed for 1. The most appropriate MSO metric option (CCD's) identified 1. Using an external benchmark the Australian context. 90 net import above aligns with the European Union's oil stockholding beyond using the same metric 1. External regulation days or 61 days of inland directive. The quantum of the EU directive is significant and does not necessarily lead to a net benchmarks e.g. IEA or consumption. reflects the risk analysis and risk appetite of its members. benefit and could result in over EU. Mirroring this benchmark is not appropriate based on analysis insuring against identified risks 2. Considers historical consumption by the Government undertaken between 2018 and 2020. unnecessarily increasing 2. Historical consumption cover representing normal compliance costs. cover stocks commercial levels then adjusted to 2. Basing the quantum of minimum stocks with reference to deliver necessary fuel security historical Australian CCD's for key fuels and calibrating from 2. Basing the target MSO 3. Dynamic based on enhancement to keep costs there to risk analyses and appetite in the Australian context means quantities on the Government's market conditions commensurate with objectives. the balance between fuel security improvements and compliance risk analysis keeps compliance and risk assessments costs can be weighed. Historical average fuel stocks across the costs lower than using an 2018 and 2019 calendar years (normal demand patterns prior to international benchmark target. 3. Similar to option 2 in that dynamic target level setting would likely

Mechanism Cost Impact Benefit become a pseudo historical the impacts of the COVID-19 pandemic) were used as the 3. This approach is impractical as consumption cover approach noting starting point. storage and stocks take time to that significant time is needed to bring online but is similar to build new storage. This means that 3. The impact of a dynamic target level - i.e. one that could go up option 2. stock levels to meet the most or down in magnitude, introduces uncertainty for regulated recent dynamic analyses would not entities that increase costs and could present as a barrier to new be met for 1-2 years if new storage entrants. Planning and construction of new storage capacity takes is needed. a significant period of time and variable targets would disrupt investment decisions and could lead to speculation about upward or downward movements in the target. This could see an underinvestment in stocks and storage when it is needed. Dynamic MSO targets could lead to more efficient fuel stock holding costs. Fuels to be regulated: 1. Limits costs to securing the key fuels 1. Regulating minimum stocks of petrol (aggregate of all grades), 1. Targets the key fuel to maintain used in the Australian economy. diesel and jet fuel will provide certainty of stocks of these fuels at critical services and supplies for 1. Major fuels consumed Avoids unnecessary regulatory any point in time in Australia. These fuels are vital to maintaining an extended period of time - by critical services intervention in commercial decisions critical services and the economy in the event of an extended particularly diesel. on less important fuels. fuel supply disruption. 2. Option 1 plus crude oil 2. No additional benefit to option 1 2. Regulating crude oil stocks in 2. Adding crude oil to the list of regulated fuels does not provide but higher regulatory burden and addition to finished fuels would any additional security unless there is refining capacity in compliance costs - hence lower increase costs to refiners Australia. Refiners will be regulated as part of the MSO to hold net benefit. disproportionately to importers of finished products. To produce these products refiners need fuel. Regulating finished products feedstocks. Regulating crude oil as well is unnecessary. will have an indirect effect on securing crude stock levels without the need to regulate directly. Geographic granularity of 1. Lower cost, lower regulatory burden 1. Allows regulated entities to acquit their fuel stockholding 1. This approach would enable MSO: than option 2. obligation anywhere in Australia. entities to make commercially driven decisions to keep costs to 1. National a minimum or to augment their 2. Would require regulated entities to meet MSOs in defined own supply chains as may be 2. Subnational geographical regions e.g. state and territory level. This would beneficial to their operations. Page 21 of 37

FUEL SECURITY BILL 2021 Mechanism Cost Impact Benefit 2. Higher cost and regulatory burden potentially create a barrier to businesses expanding into new Allows potential economies of than option 1 due to greater marketing areas or the entrance of new fuel supply businesses. scale to be captured, and reduces prescriptiveness of this approach. the risk of barriers to entry and reduced competition. 2. A subnational approach could see standardisation of stock levels in each defined region leading to theoretically equal fuel security distribution across the country. Point in value chain to be 1. Costs would be incurred by the 1. These businesses represent the entry point for the supply of fuel 1. Least number of regulated regulated: largest businesses in the fuel supply into Australia. This ensures that all fuel supplied to the market entities who are the largest 1. Refiner and Importer chain and those with the greatest is accounted for (without double counting input) and with the owners of stocks and storage in storage capacity owned or leased. least number of regulated (directly impacted) entities. the Australian fuel market. Core 2. Wholesaler business relies on bulk stock and 2. MSO regulation would lie on one 2. The point of excise represents a single point in the supply of storage management. side of the point of fuel excise being excisable and excise equivalent fuels into the market which is 3. Retailer payable. Depending on whether the different to that in option 1. This would again avoid double 2. The main benefit of this obligation lies before or after the counting of throughput of fuel in the system to ensure the MSO approach is that excise is a single point of excise will impact the reflects a level of fuel security relative to demand. A potentially point in the supply chain against number and size of the entities larger number of regulated entities (compared to option 1) fall which the MSO could be regulated. If there are a large number into this category. Some of these may be smaller distribution anchored, and the excise system of regulated entities then economies companies which have limited storage and stocks and could face is familiar to fuel market of scale may not be achieved and the need to significantly increase their stocks and storage. There participants. This is also possible higher compliance costs may be is potential to negatively impact these smaller entities to the under option 1, however option 1 incurred than under option 1. point where they could be forced out of the market - reducing has additional benefits. competition. 3. Large number of retailers ranging 3. There are no clear benefits to from large chains to individual 3. Other than the major fuel companies who are vertically integrated, this option over options 1 and 2. independent retail sites. These are the impacts of an MSO on retailers would be significant in terms generally high turnover low storage of costs and in terms of stock management operations. The retail businesses relying on frequent segment of the market does not hold bulk stocks or have access to deliveries, and not bulk storage, to storage to build stocks to the levels expected under the MSO. meet demand. Potentially very high cost to comply, particularly for NOTE: A number of businesses operate in all these market segments. small businesses. Under a national obligation applied at the company level, a large company that is vertically integrated could hold stocks in any part of

Mechanism Cost Impact Benefit their supply chain against the obligation regardless of the specific segment regulated. Included stock locations: 1. Limited costs with this option. 1. The Government has a long time series of historical data of fuel 1. Encompasses stock locations Existing fuel stock reporting stocks held by potentially regulated entities and at the national and quantities that are well 1. On land in Australia arrangements through the POFR level. The basis of the MSO national average stocks of petrol, understood and are consistent (based on stock locations scheme mean that likely regulated diesel and jet fuel uses this historical data for stocks on land (and with long term fuel stock currently reported under entities are already required to report in intercoastal shipping). Using the same basis will ensure that reporting. Aligns with long term POFR). This includes this information to Government. the MSO for petrol, diesel and jet will be relevant to these well historical consumption cover intercoastal shipping of understood fuel stock locations. and net import stock statistics. stocks that have arrived 2. Some marginal additional costs with to an Australian port this option for companies to increase 2. The time series of data on fuel stocks in tankers within Australia's 2. For the purposes of the MSO, previously. rigour of existing reporting of stocks EEZ relates to only the last few years and the early data from there is limited additional, if on water. 2018 and 2019 is somewhat patchy. Expanding the MSO to any, benefit to including stocks 2. Option 1 with the include stocks in the EEZ would not necessarily increase or on tankers with Australia's EEZ. inclusion of stocks on reduce compliance costs, but the actual MSO targets would need The actual minimum stocks to incoming tankers within to encapsulate this larger "boundary" within which stocks can be be held by regulated entities Australia's exclusive counted. As a result, the MSO targets would be commensurately would need to increase to offset economic zone (EEZ). higher. the larger eligible boundary for stocks. This could be beneficial for some regulated entities but detrimental to others. Administration model: The most appropriate administrative 1. Fuel market participants facilitate all actions to achieve 1. Leaves all fuel market model will vary depending on other compliance with the MSO for each fuel type through normal transactional arrangements to 1. Government policy settings, particularly the fuel market practices. A branch or section within a Government market participants. Least Department/Agency intermediary market model (see next department or agency would be responsible for administering regulatory burden on businesses, row for details). the regulatory framework, compliance monitoring and as regulated entities can, at their 2. Independent Market enforcement actions. discretion, create flexible and Operator 1. Least cost administratively to bespoke contracts to suit their government and regulated entities - 2. An independent market operator, like the Clean Energy Regulator, needs and preferences. 0. Private industry body appropriate for a direct contracting would manage the certificate clearing house or a central balancing model. book system. This would facilitate the trade in stock certificates or 2. Potentially the most efficient in allocation of resources by Page 23 of 37

FUEL SECURITY BILL 2021 Mechanism Cost Impact Benefit 2. Higher administrative cost to balancing "credits" and "loans" between market participants who breaking down storage and stocks government and industry as new have excess fuel stocks and those that have insufficient stocks. into liquid and transparent systems need to be set up by both tradeable commodities or through parties - appropriate for a certificate 3. A private industry body would build and manage stocks on behalf setting a transparent interest rate or central balancing book system. of the fuel industry in exchange for a fee proportional to the within the central balancing book. size of each entity's individual obligation. The fee would be High regulatory burden, 3. Most appropriate for a central passed on or absorbed to the extent possible in a competitive particularly for smaller importers. stockholding agency which is market. This option could be mandated by the Government or industry funded. Costs of the body could be created independently. 3. This option could organically are funded by industry to build and form within the fuel market maintain strategic fuel stocks. place if it was considered a commercially viable option. This would also leave all market transaction and fee setting to the market. Intermediary market model: 1.There will be a cost to government 1. Refineries and importers: The difference in obligation between All options to implement and monitor importers and refiners confers a benefit on refiners through the 1. Direct Contracting Jobs: New construction likely to create compliance to ensure obligation greater obligation imposed on importers responsible for the jobs, with the focus probably being in meets legislative requirements. 40% increase in diesel stockholding across market. Importers 1. Tradeable locations where existing fuel Industry will need to bear will be obligated to hold approximately 10-14 consumption certificate scheme infrastructure exists. Fuel security: compliance costs of meeting cover days above pre-obligation average levels to achieve the Potentially a significant increase in fuel obligations including audit and total 40% increase in diesel. 2. Central balancing book security, pending size of stockholding enforcement functions, noting that Economic incidence and impact on competition: With refiners obligation. recording and reporting of stock and importers managing the obligation there is lower variation volumes is a continuation of current in current stockholding across players. Downstream players Additional certainty on the level of practice. Compliance costs will be may be disadvantaged if upstream players hold stock. Refiners fuel stocks available in Australia to be passed on or absorbed to the extent and importers are sophisticated market participants with the used in an emergency. possible in a competitive market, capability to handle the obligation. Economy: Stimulation through major with this to be further assessed infrastructure project. Greater ability to during consultation on the 2. Economic incidence and impact on competition: There is a maintain economic activity during Ministerial Rules. risk that the small number of participants would create disruptions (trucking, agriculture, 2.Cost to government to oversee the inefficiencies in the open market and has potential for mining, etc.) open market for certificates trading competition issues. ensuring that competition and Market participants: Tradeable stockholding has potential market dynamics supports well- for high price volatility of certificates which causes less functioning market operations. predictability for market participants. There would be costs on industry to own stock position redeemable for 3. Economic incidence: The greater burden on market participants certificate and managing shortfalls with a shortfall e.g. obligated entities may deter new entrants

Mechanism Cost Impact Benefit or surpluses through buying or into the market. It may also encourage new market entrants selling of certificates on an open e.g. non-obligated entities which can report stocks with market. Consumer cost impacts Government and earn interest on their reporting. are likely to be similar to direct Market participants: Dependent on adjustments to the interest contracting as it can evolve into a rate, there is likely to be volatility in the market price during tradeable certificates scheme initial implementation as industry adjusts to new requirements. overtime. 3. More active participation in the fuel market will be required from government, with likely higher administrative costs compared to direct contracting. Obligated entities to register with central balancing book regulator, and can either pay or earn interest depending on held stocks. Third parties (non-obligated entities) can report stocks with regulator, earning interest. As the objective is to achieve target volumes across the market, the costs of additional storage and production to meet the obligation is expected to be passed through to consumers. Fuel Security Service Payment Production payment to Government: impact on Budget or Refineries: Jobs: The proposed options seeks to refineries through a market- through revenue option for alternatives a a) Drive competition and create incentives for higher utilisation. minimise the impact on refiners' based mechanism based on to d. Administrative costs associated b) Potential to create inefficiencies in the optimal operations of incentives and provides certainty to the the following options: with calculating refinery margin marker refineries including driving incentive to minimise downtime volumes produced locally. This would a. Fixed production based on external market factors (refined to maximise payment. have the impact of maintaining direct b. Availability product prices, crude prices, freight costs c) Creates advantage for refiners that have better configuration employment and indirect employment c. Margin Support to Australia) and providing production than those that are less well managed. associated with refinery operations. d. Adjustable payments to refiners. Fuel security: The ongoing viability Fuel consumers: production Consumer: Cost pass through to fuel of refiners offer protection during prices if the mechanism is funded through extreme disruptions to fuel supply. Page 25 of 37

FUEL SECURITY BILL 2021 Mechanism Cost Impact Benefit a revenue option. If paid through Options a to d will have minimal impact at the bowser as support Refiners are able to convert crude via consolidated revenue, there kicks in when there is downside pressure on fuel price and payment is to product and can support critical would be limited impact. provided on the basis of supporting refinery viability. industries. Industry: If funding is provided through a revenue option: Economy: Local refineries help keep There are costs with complying with the Under an adjustable production payment mechanism, the net impact is fuel prices low, and support domestic regulatory requirements, including positive when compared to a fixed payment mechanism. When industries such as petrochemicals. If reporting production levels of eligible margins fall, refinery unit support is triggered to make up for the Australia's refineries close, this is fuels. There would also be business costs shortfall in margins to reach breakeven. expected to increase prices for petrol, to support the target set for availability diesel and jet fuel by up to one cent Economic incidence: of supply. per litre. a) Increase competition in supply with fuel importers. ) Proposed competitive disadvantage that could lead to vertical consolidation for fuel importers and retailers i.e. with refiners. For options c and d, due to being tailored to market conditions, the impact of support is reduced. When refinery margins are at a specified level which enables domestic refineries to breakeven (the collar), no FSSP support will be provided. When margins drop below the collar, the level of FSSP will be adjusted to enable refineries to continue to achieve breakeven conditions. Although the level of FSSP will be capped, and not fully cover refinery losses under very low margin conditions, there is a low probability that such conditions will occur. Option 2. Absolute Government: Cost to implement and Fuel consumers: Higher prices for fuel consumers due to price setting local content obligation impose guaranteed local production power conferred to refiners and the limited ability of wholesalers to volume on industry through a certificates access adequate and suitably priced supply. scheme Industry: Price setting power by domestic Market participants: Due to the limited number of domestic refiners in refiners with disadvantage conferred to Australia, there is potential for market power to be exercised by these wholesalers. refiners. A local content obligation would also introduce inefficiencies Consumer: Significant cost increase on for wholesalers especially in regions without a local refiner where they local product due to a low competition are able to buy locally. (with few domestic refiners in the market) and higher transport cost to be factored in i.e. transported from refiners. Option 3: Differential Excise Government: Cost for implementation but Fuel consumers: As discussed below, the cost pass through to Budget neutral as the reduction in revenue consumers of differentiated excise treatment between imported and from the domestic fuel excise imposed on domestic refined fuel is uncertain. Based on import parity pricing, the

Mechanism Cost Impact Benefit the wholesale market for transport fuels is price should increase to reflect the excise rate on imported fuels. offset by the increase in fuel excise for However importers may absorb some of these costs to gain market imported fuel. share. Industry: Cost to industry to comply with Market participants: A differential excise that involves amending the new reporting, disbursement and refund existing fuel excise to provide a discount to domestic refineries and an processes under differential excise for increase for importers. This could provide indirect support to refineries importers and domestic fuel consumers - they would receive the benefit of the discounted excise but no direct that currently access rebates through the payments. This would preserve existing fuel tax credits and government fuel excise regime. revenue. There is a risk that importers may not fully pass through their higher excise costs to fuel consumers, reducing the level of indirect support to domestic refineries. There would be impact on the fuel industry, due to the administrative complexities of applying differentiated excise rates to domestic refined and imported product. The excise would continue to be applied at the terminal gate, so amending the fuel excise would impose only a minor regulatory burden, as the framework is already in place. Implementing this option would require three amending Acts:  An amending Act to amend the Customs Tariff Act 1995  A separate amending Act to amend the Excise Tariff Act 1901  An amending Act to amend the Customs Act 1901 and the Excise Act 1901 and the Fuel Tax Act 2006. There would significant work involved to prevent imported fuels being taxed at the domestic rate once they enter the domestic excise system. A further primary Act would be required if this option also included the establishment of a special account. Page 27 of 37

FUEL SECURITY BILL 2021 5 Who was consulted about these options and how were they consulted? The Department undertook public consultation on the FSSP and the MSO. Formal consultation on these measures commenced on 12 January 2021, with meetings conducted in-person or via video/teleconference, and either as bilateral meetings with individual stakeholders, or as part of a roundtable session. The Department organised consultation sessions with 25 stakeholders representing a broad spectrum of the liquid fuel sector. These stakeholders can be grouped into the following sub-categories:  Refiners  Importers  Consumers  Market entrants  Fuel Sector/Other As at 19 May 2021, over 100 meetings have been conducted, with further meetings scheduled. 5.1 Objectives The main objectives of consulting with fuel sector stakeholders are to:  provide a holistic view of the measures progressed, the Government's policy objectives, and intended outcomes  keep stakeholders fully informed on the proposed implementation pathway and timeframes  give stakeholders the opportunity to identify design settings that are preferable or not preferable  better understand any implications, or direct and indirect impacts to stakeholders flowing from implementing the measures  enable greater involvement and engagement from stakeholders in the policy design process. 5.2 Fuel Security Service Payment Stakeholders were presented with four potential mechanisms: a) Availability payment b) Fixed production payment c) Margin support payment d) Absolute local content obligation. Based on feedback received during consultation, an adjustable production payment (that is, a combination of options b and c) was identified as having the preferred characteristics for the implementation of the FSSP. For example, feedback received indicated that:  refiners valued support which varied to help offset losses/gains in regional refining margins  importers and market entrants are wary of mechanisms which create a competitive imbalance and market distortion (for example, sustaining payment to refiners during high margin times)  a local content obligation should be ruled out on the basis of complexity, and the risk of creating a captive market given the limited number of market participants. Fuel consumer stakeholders were generally more concerned with understanding how funding for the FSSP would be recovered, rather than the detailed designed settings underlying how the FSSP would be made to refiners under the respective options.

5.3 Minimum Stockholding Obligation Key elements of the MSO presented to stakeholders included:  the metric for setting the MSO and relevant target level  the type of stock that should be countable towards the obligation  level of geographic granularity  which entities are accountable for the MSO  types of storage included  an intermediary market mechanism to enable entities to share their obligation efficiently across the market  frequency of reporting. There was general preference for a national level obligation, as setting the obligation at a state and territory level would limit industry autonomy and present greater risk of market distortion. Refiners value being able to count crude towards their stockholding levels, but importers are wary of design settings that would put them at a competitive disadvantage to refiners, despite the different services that refiners and importers provide to the market. With the exception of some consumer stakeholders, there was general concern among stakeholders as to the burden that weekly reporting (as opposed to reporting at less frequent intervals) and maintaining an absolute minimum threshold of stocks (as opposed to an average minimum) would add to their operations. During the COVID-19 pandemic most fuel companies reporting under the POFR scheme agreed to voluntarily report key data on a weekly basis. Regulating weekly reporting places a legal impetus on companies to ensure that they meet their legislated obligations. This requires increased quality assurance and internal clearance processes which in turn increases administrative costs on the business above the already increased costs of reporting weekly on a voluntary basis. An intermediary market to deliver the MSO through a direct contracting approach, a tradeable stockholding certificate scheme and through a central balancing book was discussed with stakeholders. Stakeholders, including some consumers and refiners, viewed the direct contracting approach in a more favourable light on the basis of simplicity, familiarity, and cost-effectiveness, as compared to the other intermediary market mechanism options. Direct contracting allows businesses to develop bespoke contract solutions that meet their needs at least cost. The very large European Union fuel market allows oil stock ticketing for trade between entities that are long or short on required fuel stocks. Tickets are a type of direct contracting between two parties. 5.4 Further consultation The next stage of consultation will focus on the implementation of the FSSP and MSO through legislation. Development of legislation has been informed through video/teleconference with affected entities, with targeted consultation on an exposure draft expected to occur with obligated entities. Consultation will continue to occur after introduction of the legislation to inform the development of associated Ministerial Rules. Page 29 of 37

FUEL SECURITY BILL 2021 6 What is the best option from those considered? Key insights from stakeholder consultations include:  An adjustable payment mechanism (to deliver the FSSP) is expected to have the least distortionary impact and mitigate the risk of over-supporting refineries  Direct contracting is likely to be the simplest mechanism to deliver an intermediary market for the MSO  A national level target for a MSO will minimise the risk of inefficient stockholding behaviour. In addition to these insights, the following principles, which form the market and regulatory framework to enhance Australia's fuel security, were developed to guide the policy development process and helped to form the recommended preferred approach by narrowing down options.  Intervention should minimise market distortion, and seek to maintain a competitive market not only between the two remaining refiners, but also maintain competition with fuel importers.  A common level of support to refiners to maintain competition in the market. As a result, the preferred approach is as follows:  The direct contracting model for the administration of the MSO, with the obligation set upon refiners and importers which minimises market distortion as it sits in the part of the supply chain where there is a consolidated market.  An adjustable production payment, funded out of consolidated revenue, as the mechanism for the FSSP which is triggered only when refiners are operating under low margins to maintain Australia's sovereign refining capability, while avoiding overpayment when margins improve.

7 How will the chosen option be implemented and evaluated? 7.1 Challenges The major implementation challenge of the policy proposal will be establishing fit for purpose legislation, with adequate stakeholder consultation and ensuring the appropriate delivery mechanisms are in place to support the commencement of legislation on 1 July 2021 in relation to the FSSP and MSO. One issue for Government to consider in the longer term will be the ongoing challenge of ensuring sectors do not use the MSO to further justify scaling back business continuity arrangements. For example, if Industry is now holding above commercial stocks levels, sectors may use this as an opportunity to further reduce costs related to emergency contractual arrangements or hold their own supplies. 7.2 Implementation Following Government decision on the Fuel Security Package, the Department will enter a period of regulatory and administrative oversight of the framework. In this phase, it is expected the ongoing costs will primarily relate to staffing and specific regulatory functions with anticipated efficiencies stemming from the consolidation of the regulatory and administrative functions to be delivered by a joint unit within the Department. There will be approximately 40-50 industry participants regulated or impacted by the Fuel Security Framework on an ongoing basis. 7.2.1 Fuel Security Service Payment and Refinery Upgrades Implementation will focus the collection and assurance of production data from refineries, and administering the payment, but will also include the assessment of applications against criteria as set out in the legislative instruments, and making recommendations on whether funding should be disbursed, and determining payment amounts. Activities include:  Verification with reported production under POFR Act  Tracking and acquittal of administered expenditure The Government will also support refiners to undertake the infrastructure investment required to comply with improved fuel quality standards. The program will require refiners to provide a business case for the grant and will incorporate a financial penalty if a refinery leaves before the end of the commitment period. The grants will be delivered by the Business Grants Hub which is a specialised design, management and delivery body with extensive expertise and capability in delivering similar programs. Refineries will continue to report as required under the POFR Act, and will also be required to separately notify certain additional matters prescribed by the legislation. Refineries may also be required to undertake compliance audits regarding POFR reporting. It is expected that refineries will be able to absorb this cost as part of the compliance activities to participate in the scheme. Page 31 of 37

FUEL SECURITY BILL 2021 7.2.2 Minimum Stockholding Obligation Compliance and enforcement activities associated with the MSO include:  Engagement with, and education of, regulated entities on their regulatory requirements  Monitoring compliance: desktop audits on a monthly basis and comprehensive independent audits of regulated entities  Identifying, receiving and assessing allegations of non-compliance;  Identifying and responding to instances of non-compliance including developing, preparing and managing enforcement responses to non-compliance  New reporting requirements, to be determined in consultation with industry with the development of Ministerial Rules  Development of a national inventory and ICT processes for example, additional module of PSIMS to be developed to manage the new data reporting streams, as well as the calculations of the obligation and the compliance functions.

Appendix A: Emergency stockholding approaches in IEA member nations Country Structure of Initial setup costs Ongoing costs stockholding Government Bank loans/ Government Levyon Tax/ Company responsibility budget Bond issues budget industr excise y duty United States Government ✓ ✓ New Government ✓ ✓ Zealand1 Czech Government ✓ ✓ Republic Belgium Government agency ✓ ✓ Estonia Government agency ✓ ✓ Ireland Government agency ✓ ✓ Italy Government agency ✓ ✓ Slovak Government agency ✓ ✓ Republic Japan Government/Industry ✓ ✓ ✓ obligation Republic of Industry ✓ ✓ ✓ Korea obligation/government Poland Industry ✓ ✓ ✓ obligation/government Spain Agency/Industry ✓ ✓ ✓ obligation Finland Agency/Industry ✓ ✓ ✓ obligation Netherlands Agency/Industry ✓ ✓ ✓ obligation Portugal Agency/Industry ✓ ✓ ✓ obligation France Agency/Industry ✓ ✓ ✓ body/Industry obligation Norway Industry obligation ✓ ✓ Luxembourg Industry obligation ✓ ✓ Greece Industry obligation ✓ ✓ Sweden Industry obligation ✓ ✓ Turkey Industry obligation ✓ ✓ United Industry obligation ✓ ✓ Kingdom Austria Industry body/Industry ✓ ✓ obligation Denmark Industry body/Industry  2 obligation Switzerland Industry body/Industry ✓ ✓ obligation Germany Industry body ✓ Hungary Industry body ✓ ✓ 1 To meet IEA requirements, New Zealand Government holds 18 days of emergency oil stocks in the form of ticketed stock above commercial stocks. It will transfer the funding mechanism from general taxation to fuel users through the Petroleum or Engine Fuel Monitoring Levy. 2 Denmark no longer applies a levy to meet the cost of the industry obligation as the body has sufficient resources. Some countries have a shared responsibility for the obligated stockholding. The bolded text identifies which structure and funding arrangement is used to meet the majority of the stockholding. Source: IEA, Energy Security Supply 2014. Page 33 of 37

FUEL SECURITY BILL 2021 SUMMARY OF IEA MEMBER APPROACHES TO COMPLIANCE (2017) Country Public Stocks Industry Tickets Funding Administration Obligation Australia No No Yes Budget Department Japan Yes Yes No Budget & Pass Department Through Korea Yes Yes No Budget & Pass SOE Through Austria Yes Hybrid No Pass Through Private Agency Yes Yes Yes (not used) Levy & Pass Public Agency Finland Through Industry must pay for oil stored in Yes Pass Through Private Agency France public facilities Industry must pay for oil stored in Yes Pass Through Hybrid Agency Germany public facilities Greece No Yes Yes Pass Through Department Hungary Industry pays for Public Stocks No (Seller) Pass Through Private Agency Yes (started in Yes Yes Pass Through SOE & Department Italy 2014) Yes (started in Yes Yes Pass Through Public Agency Luxembourg 2015) Yes Yes Yes (domestic Levy & Pass Public Agency Netherlands only) Through Yes Yes Yes (but not Budget & Pass Public Agency Poland used) Through Yes Yes Yes Levy & Pass Public Agency Portugal Through Yes (paid for by Yes Yes Pass Through Private Agency Spain business) Sweden No Yes Yes Pass Through Public Agency Switzerland No Yes No Levy Private Agency Turkey No Yes No Pass Through Department UK No Yes Yes Consumer Department USA Yes No No Budget Department Canada Net Exporter: No stocks, tickets or industry obligation New Zealand No No Yes Levy Department Belgium Yes No Yes Levy Public Agency Czech Rep. Yes No No Budget Public Agency Denmark Net Exporter: Private agency manages using stocks and tickets, financed by pass through Estonia Yes No No (Seller) Budget SOE Ireland Yes No Yes Levy Public Agency Norway Net Exporter: Industry obligation applies funded by pass through Slovakia Yes No No Pass Through Public Agency

Appendix B: Demand and Consumption Cover in Australia Diesel Stocks, Demand and Consumption Cover in Australia 300 250 200 150 100 50 0 Annual Total Demand (y x 100 = ML) Ave EOM Stocks (y x 10 = kT) Ave EOM Consumption Cover (y/10 = days) Figure 5. Diesel Statistics 2010-11 through 2019-20 Source: Australian Petroleum Statistics December 2020 Jet Fuel Stocks, Demand and Consumption Cover in Australia 100 90 80 70 60 50 40 30 20 10 0 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 Anuual Total Demand (y x 100 = ML) Ave EOM Stocks (y x 10 = kT) Ave EOM Consumption Cover (Days) Figure 6. Jet Fuel Statistics 2010-11 through 2019-20 Source: Australian Petroleum Statistics December 2020 Page 35 of 37

FUEL SECURITY BILL 2021 Petrol stocks, Demand and Consumption Cover in Australia 200 180 160 140 120 100 80 60 40 20 0 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 Annual Total Demand (y x 100 = ML) Ave EOM Stocks (y x 10 = kT) Ave EOM Consumption Cover (Days) Figure 7. Petrol Statistics 2010-11 through 2019-20 Source: Australian Petroleum Statistics December 2020

Appendix C: References DISER 2020a Department of Industry, Science, Energy and Resources (2020) Australian Energy Statistics, Table F. Available at www.energy.gov.au/publications/australian-energy-update-2020 DISER 2020b Department of Industry, Science, Energy and Resources (2020) Australia's emissions projections 2020 Available at www.industry.gov.au/data-and-publications/australias- emissions-projections-2020 DISER 2020c Department of Industry, Science, Energy and Resources (2020) Australian Petroleum Statistics--Issue 286, May 2020 Available at www.energy.gov.au/publications/australian-petroleum-statistics-2020 DISER 2021 Department of Industry, Science, Energy and Resources (2020) Australian Petroleum Statistics--Issue 296, March 2021 Available at www.energy.gov.au/publications/australian-petroleum-statistics-2021 McKinsey 2020 McKinsey 2020, Domestic Refinery Review Synthesis, unpublished Page 37 of 37

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