Oz tax plan threatens CBM projects
Release Date: 2010-05-12
Australia's new 40% "resources super profits tax" will make it even tougher for the country's fledgling coalbed methane (CBM) sector to compete with established gas suppliers and may lead to cancelled projects.The tax - effectively twice that of other resource-heavy nations such as Canada and Brazil - threatens to jack up operating costs and shrink margins to the point that at least some of the half-dozen or so projects huddled along Australia's eastern seaboard may never go ahead.
CBM wells produce gas at lower rates than conventional wells but typically cost 10% to 30% more to develop and operate, making them a hard sell even before the tax was announced by Prime Minister Kevin Rudd.
"The CBM projects in Queensland are the ones that really stand out as being impacted by this tax," UBS energy analyst Gordon Ramsay told Reuters.
"This is an additional level of taxation for those projects that wasn't thought of when companies like ConocoPhillips and Petronas took big stakes in the area."
The likes of Santos, Origin Energy, Arrow Energy, Eastern Star Gas and even Shell and Malaysia's Petronas could be big losers under the tax and are now understandably re-calculating the economics of proceeding with their projects.
None of the company's contacted by Reuters were ready to scrap their projects because of the tax but all said they would have to work out the implications.
Santos managing director David Knox said its CBM investment decision would be pushed back by six months, and Origin warned its project would also face delays.
The implications for this sector of the industry are profound: lower rates of return and the real threat of delays or cancellations.
Investors have wiped about 7% off the value of Origin and 6% off Santos shares alone since the tax was announced last week.
Deutsche Bank analyst John Hirjee noted that none of the projects have final investment go-aheads and few have pre-sold any gas.
By contrast, Chevron, ExxonMobil and Shell have locked in over 80% of sales from their Gorgon liquefied natural gas development, off Western Australia, with start up scheduled in four years.
Woodside Petroleum, as operator of Australia's Northwest Shelf offshore LNG fields, has progressively expanded production only after signing up new orders.
"This is an embryonic industry... and I believe they need different arrangements than those companies that might have been well established for 30, 40 or 50 years," the premier of Queensland state, Anna Bligh, said.
Even before the tax, analysts were doubtful any of the projects could generate adequate returns to justify the billions of dollars of upfront spending needed to bring them on stream.
"Unlike the LNG projects off Western Australia that also have condensate as an income stream, these CBM projects have no associated liquids apart from water," said Ramsay.
Origin is warning of delays to its Australian Pacific LNG project (APLNG) because of tax implications, with chief executive Grant King predicting capital expenditure will balloon well beyond the current A$35 billion ($32 billion) estimate.
Origin and 50-50 project partner ConocoPhillips want to make a final investment decision by the end of the year with the aim of producing gas in 2014.
All up, CBM developers have promised to unlock over 18,000 petajoules of gas embedded in Australian coal deposits, equivalent to one-fifth of Australia's total LNG exports last year.
The projects were all based on paying a 10% royalty to Queensland state and corporate tax at 30%. The new mining tax will be set at 40%, effectively replacing the royalty system, and be only partly offset by tax breaks on exploration and development costs.
"There is undoubtedly more uncertainty on the value of proposed CBM to LNG projects," Citigroup said in a report.
The tax rate for Origin and ConocoPhillips would climb to 44% from 41% under the new regime, according to estimates by analysts.
Least at risk of being delayed or dropped is an LNG project planned by the UK's BG Group . It signed Australia's biggest ever LNG supply deal with China National Offshore Oil Corporation in March, all but securing development of a A$10 billion to A$15 billion project.
Still, a BG Group spokesman said BG was weighing the implications of the tax on the bottom line.
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