Q+A-How a carbon tax may impact Australia's LNG industry

PERTH, March 24 Thu Mar 24, 2011 4:17am EDT

PERTH, March 24 (Reuters) - Australia's government plans to introduce a fixed price on carbon pollution from mid 2012 ahead of a full emissions trading scheme three to five years later, as part of its efforts to fight climate change.

The nation's burgeoning 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 to ensure LNG projects are internationally competitive.

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

WHAT WILL AUSTRALIA'S CARBON PRICE BE?

Although the government has proposed a carbon tax, it has not set the price, and the details of the price and compensation will be worked out by a multi-party climate committee.

Australia's top climate adviser said last week that the carbon price should be set at between A$20 and A$30 ($20.26 and $30.39) a tonne, a recommendation in line with mining industry and analyst forecasts.

HOW WILL THE CARBON TAX IMPACT THE LNG INDUSTRY?

Since a carbon price has not been fixed, analysts have not yet been able to determine the exact cost of the tax on LNG projects. Some of Australia's LNG producers are among Australia's top carbon polluters and a price on carbon would affect their rate of return.

A report by JP Morgan analyst Garry Sherriff found that it would have a "modest" impact on the earnings per share of Australian oil and gas companies Woodside Petroleum and Santos from 2013 through 2015.

Under a best case scenario of a carbon price of A$20 per tonne with 70 percent of emissions exempt from the tax, Woodside's earnings per share could fall less than 2 percent per year from 2013 through 2015, Sherriff said.

Woodside is the operator of Australia's North West Shelf Venture, which produces 16.5 million tonnes per annum of LNG, and is scheduled to start-up another LNG project, Pluto LNG later this year.

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

At a cost of A$20 per tonne, the carbon tax could add a cost of hundreds of millions of dollars over time across the industry, according to one analyst estimate.

WILL THE TAX FREEZE ANY PROJECTS OR CREATE DELAYS?

Most analysts believe that a carbon tax would not be a "dealbreaker" for Australian LNG projects given an anticipated moderate impact on the rate of return.

But some analysts say that the uncertainty created by a carbon tax proposal without specifics could deter some investors.

"The magnitude of this cost can't be determined yet. This uncertainty alone may be the undoing of the more marginal planned Australian LNG projects, as it can't yet be accounted for in their project economics," said Nelly Mikaiel, a gas and LNG consultant for FACTS Global energy in Honolulu.

Projects with already thin margins may also be delayed or cancelled, depending on the carbon price, analysts said.

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. Coal seam gas projects are expected to require more drilling and water pumping than some other projects.

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 off-setting their carbon emissions. Chevron plans to sequester some of the carbon it emits at its Gorgon projects, while Woodside's Pluto LNG will be off-setting its carbon emissions over 50 years by planting millions of trees at a cost of A$100 million.

WHAT IS THE INDUSTRY POSITION ON THE CARBON TAX?

Australian Petroleum Production & Exploration Association (APPEA) has said the LNG industry should not be charged a proposed carbon tax because a tax could spur a switch to dirtier fossil fuels such as coal and fuel oil.

Under the industry's proposal , producers would be given permits for 100 percent of their carbon emissions, effectively exempting the industry from the tax as compensation for its role in helping LNG-consuming nations reduce their carbon footprint.

Woodside, Australia's largest LNG producer, has also advocated full exemption arguing that cleaner-burning LNG helps lower greenhouse gases.

WILL THE INDUSTRY GET ANY EXEMPTION FROM THE TAX?

The government's last attempt at a carbon pricing plan, the Carbon Pollution Reduction Scheme (CPRS), may serve as a model for how much relief to provide larger emitters, including LNG projects.

Under the CPRS plan, which was dropped by former prime minister Kevin Rudd after two failed attempts to bring it in, LNG projects were partially exempt from the tax and analysts say that LNG projects are likely to get similar exemptions under the new carbon pricing plan.

JP Morgan estimates that under a best case scenario, Woodside would be eligible for free permits for 70 percent of its emissions.

($1 = 0.987 Australian dollars) (Editing by Ed Davies)

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