Fuel security: what does the minimum stockholding obligation mean for fuel importers and refiners?

By Sevan Gore and Daphne Schilizzi

From July 2023, certain regulated entities that import or refine fuel in Australia in quantities above a designated threshold will be subject to the minimum stockholding obligation (MSO). We outline who will be subject to the MSO and what you need to do to prepare.

The MSO is established under the Fuel Security Act 2021 (Cth) (Act) and the Fuel Security (Minimum Stockholding Obligation) Rules 2022 (Cth) (Rules) and is enforced principally by the Secretary of the Department of Climate Change, Energy, the Environment and Water (Department). The Act also establishes a bounty called fuel security services payment,^[1] and together with the MSO forms part of the Federal Government’s efforts to strengthen the nation’s fuel security.

Who will be subject to the MSO?

A regulated entity – which includes Australian body corporates, trusts, and foreign entities whose core or routine activities are carried out in, or in connection with, Australia – will generally be subject to the MSO if:

• that entity during 2019, 2022 or any calendar year after, carries out an ‘MSO activity’ (importing into and/or refining in Australia) in relation to an ‘MSO product’ (generally gasoline, diesel or kerosene) in a quantity which exceeds the applicable trigger threshold (currently 200 megalitres for gasoline, 250 megalitres for diesel and 250 megalitres for kerosene); and
• the entity receives a ‘trigger’ notice from the Department triggering the entity’s MSO in relation to the MSO product (Trigger Notice).

Once triggered, an entity will generally continue to be subject to the MSO until the Secretary is satisfied the entity has ceased all MSO activities in relation to MSO products.

I have been issued a Trigger Notice, what are my main obligations?

The principal obligation under the MSO regime is the stockholding requirement which is that an entity must ‘hold’ a certain amount of MSO product (Designated Quantity) on certain dates (Obligations Days) throughout the period of which a Trigger Notice is effective (Effective Period). To give entities some time to transition to the new regime, between 1 July 2023 and 30 June 2024, the Obligation Days will be 4 July 2023 and every second Tuesday during that period. From 1 July 2024 onwards, the Obligation Days will be every Tuesday. In order to be counted towards an entity’s MSO compliance, stocks of MSO products must be ‘held’ by the entity and not be considered excluded stock.

Other obligations under the MSO regime include:

• various reporting obligations, including reporting to the Secretary every year its expected Designated Quantities for the following Effective Period, and if it intends to commence or cease an MSO activity whether temporarily or permanently.
• preparing, keeping updated and supplying to the Secretary an MSO compliance plan, which must meet certain requirements. Entities subject to the MSO must have a compliance plan in place by 4 July 2023 and must make a copy available to the Secretary by 31 July 2023, unless requested earlier.

How will my Designated Quantity be determined?

The amount of MSO product an entity must ‘hold’ on Obligation Days during an Effective Period is determined by using the relevant formula set out in Part 4 of the Rules and the entity’s import/refining volumes for the calendar year preceding the Effective Period. Under the MSO regime, if an entity’s volumes drastically change from year to year, then so too will their Designated Quantities.

What if I fail to comply with my MSO obligations or the Act more generally?

Generally, a failure to comply with the Act attracts monetary penalties, which in the case of a failure to comply with the MSO obligation, will be determined by reference to the amount of stock an entity is required to hold.

Criminal offences may also apply, such as where false or misleading information is provided to the Department, or a person fails to assist the Secretary in its investigations into a breach of the Act. The Department is also able to seek enforceable undertakings and injunctions and publicly name and shame offenders.

Entities also risk being subject to increased monitoring and investigations from the Department, particularly where breaches are not infrequent, or an entity has no clear plan to achieve compliance.

[1] Part 3 of the Act.