A $4 million pre-feasibility study into a new large-scale oil refinery at Karratha in the Pilbara will be announced by Prime Minister Anthony Albanese and West Australian Premier Roger Cook on Tuesday.
It would be built by Western Australian industrial company Perdaman and is slated to create thousands of jobs in a boost to the local economy.
The facility would be the first new large-scale petrol refinery built in Australia since the 1960s and would join the nation's two existing ones in Brisbane and Geelong.
Resources Minister Madeleine King said the refinery would still be reliant on imported crude oil.
There is potential for oil discovery off the WA coast, although it has not yet come to fruition.
"The difference with crude oil, the unrefined product, is that it is storable for much, much longer (than relying on refined fuel)", Ms King told ABC Radio National.
"This (would) make a great difference ... to sovereign capacity - being able to have capacity on the west coast to refine crude oil into this product
The investigation is the first agreement signed under the federal government's $10 million support for feasibility studies into new or existing fuel refining capabilities, announced as part of a $15 billion fuel security package.
The US-led war on Iran, launched in February, has caused global oil prices to skyrocket after the effective closure of one of the world's most important oil corridors.
About one fifth of the world's oil transits through the Strait of Hormuz.
Fuel supplies, refining capability and fertiliser have all been impacted by the ongoing conflict in the Middle East.
The prime minister has recently visited some of Australia's regional partners such as Singapore to secure the nation's fuel supply.
The overwhelmingly majority of Australia's fuel is imported and there is more in reserve than at the beginning of the war.
The government was working to advance Australia's interests to ensure the nation could meet future challenges moving forward, Mr Albanese said.
"The longer war in the Middle East goes on the greater the impact on Australia will be, and my government will continue to do everything we can to shield Australia from the worst effects, and set us up for the future," he said.
Energy Minister Chris Bowen said investing in onshore sovereign fuel refining capability was "sensible and prudent".
"Our government will continue to work hard to ensure fuel supply remains secure now, while working with all states and territories to build a more sovereign and secure energy system for our country for decades to come," he said.
The coalition would support the new oil refinery, but would like it to be paired with further work on fossil fuels.
"We also need to make sure we are opening up alternative fuel supplies here, not just you know oil and and gas, but also alternative fuels like biofuels as well," National senator Bridget McKenzie told the ABC.
Mr Cook said the new refinery would rebuild his state's capacity to produce and distribute its own fuel including diesel for regional communities.
"While many Western Australians remain anxious about our state's fuel security, we are doing everything it can to address these concerns by working with the Commonwealth to provide steady and experienced leadership," he said.
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