Q+A-Australia's carbon tax and the LNG industry

PERTH Mon Jul 11, 2011 10:50am BST

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PERTH Jul 11 (Reuters) - Australia's government unveiled plans for a carbon tax on Sunday as its tries to cut carbon emissions, but the plans have not been warmly received by the LNG industry, which argues the tax will make the industry less internationally competitive.

The nation's liquefied natural gas (LNG) export industry, which has about $200 billion projects on the drawing board, has said it should be exempt from the tax.

Here are some questions and answers on how carbon policy could affect Australia's LNG projects.

WHAT ARE THE DETAILS OF AUSTRALIA'S TAX PRICE SCHEME?

Prime Minister Julia Gillard's government has proposed an initial carbon tax of A$23($24.74) per tonne from next year, rising by 2.5 percent a year, moving to a market-based trading scheme in 2015.

The plan could lead to the largest emissions-trading scheme outside Europe as Australia tries to cut its emissions by 159 million tonnes by 2020, or by 5 percent based on 2000 levels.

WILL THE INDUSTRY GET ANY TAX EXEMPTION?

Yes. Australian LNG producers will receive a supplementary allocation of emissions permits for 50 percent effective assistance on the tax.

HOW WILL THE CARBON TAX IMPACT THE LNG INDUSTRY?

Although carbon tax will hurt LNG producers' profit margins, many industry analysts feel the impacts will be minor to moderate. The tax will add one more layer to mounting costs for Australian LNG producers, however.

"The carbon tax is an added cost at a time when the industry is facing delays and potential cost overruns with projects," Gordon Ramsay, an industry analyst with UBS in Melbourne said.

Australian LNG projects are already considered to be some of the world's most costly and have gained a reputation for running over budget.

Most recently, Woodside delayed the first LNG shipments from its Pluto LNG project to March 2012, a year behind the original target, and costs are seen rising by A$900 million to A$14.9 billion as a design fault and weather-related issues delayed the project.

"Given the relatively thin margins of current LNG projects, this will further dilute the value and returns of LNG projects in Australia," Neil Beveridge, a senior analyst at Bernstein Research, said in a note Monday.

Still, since the bulk of the costs for an LNG project are capital expenditure and operating costs are comparatively low, so while the carbon tax could be a significant part of the operating cost, it would be a small portion of the project overall.

Santos will likely be the most impacted by the tax, followed by Woodside , Beveridge said. A 10 percent increase in gas prices would likely neutralize any impact to Santos.

In a statement Sunday, Santos said it would face "significant annual costs on LNG production which would not be recoverable from our customers."

Santos is currently building the 7.8 million tonne per annum (mtpa) Gladstone LNG project in Queensland, Australia. Woodside is the operator of Australia's North West Shelf Venture, which produces 16.5 mtpa of LNG.

WILL THE TAX FREEZE ANY PROJECTS OR CREATE DELAYS?

Although the carbon tax will erode the profit margins of some LNG projects, no major projects will become uneconomic as a result of the tax, LNG industry experts said.

However, some in the industry say the carbon tax may be the final blow to some marginally profitable projects.

WHAT IS THE INDUSTRY POSITION ON THE CARBON TAX?

The Australian Petroleum Production & Exploration Association (APPEA) says the proposal will not do enough to protect the competitiveness of Australia's growing gas export industry.

Charging LNG producers the proposed carbon tax will not provide enough incentives for a switch to the cleaner burning fuel, according to APPEA.

"The export gas industry rejects the politically motivated label of 'big polluter' when for every tonne of emissions produced in liquefying natural gas, up to 9.5 tonnes are removed from the atmosphere when substituted for coal in customer countries," Belinda Robinson, CEO of APPEA, said on Sunday.

The proposal would also give Australia's competitors in LNG production-- Qatar, Malaysia, and Indonesia-- an edge over Australia, which is already suffering from a high cost environment.

WILL THE IMPACT BE UNIFORM ACROSS PROJECTS?

No. Each LNG project will have a different level of carbon emissions based on the gas used for the project as well as the amount of energy used to extract, cool, and transport the gas.

Some projects in the Browse Basin off Western Australia have as much as 10 percent carbon dioxide by volume, which is extracted at the same time as the gas, analysts said.

Coal seam gas projects in Australia's eastern state of Queensland may produce more greenhouse gas due to the amount of energy required to extract the gas.

LNG's liquefaction for transport in LNG "trains," which refrigerate the gas until it liquefies at minus 164 degrees Celsius, will also determine greenhouse gas emissions as some LNG trains are more energy and carbon-efficient than others.

Some projects are limiting or offsetting carbon emissions. Chevron plans to sequester some of the carbon it emits at its Gorgon projects, while Woodside's Pluto LNG will be offsetting its carbon emissions over 50 years by planting millions of trees at a cost of A$100 million. ($1=0.930 Australian Dollars) (Reporting by Rebekah Kebede)

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