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Woodside urges carbon caution

Plans to introduce a cap-and-trade scheme for CO2 emissions is facing opposition from energy companies, writes Ian Lewis

GOVERNMENT plans for a cap-and-trade carbon emissions scheme could jeopardise large liquefied natural gas (LNG) projects, energy firms claim. Woodside Energy, which has been lobbying the government on behalf of the LNG industry, says Browse LNG is among the projects under threat.

"Browse is big. It is costly and has higher carbon dioxide (CO2) reservoir content than our other projects. Of all of our LNG portfolio, Browse would be the project most adversely affected by an unfavourable emissions-trading scheme," Don Voelte, Woodside's chief executive, told reporters at a briefing in August. He said uncertainty over how much the proposed emissions scheme would cost the company could hold back the development of Browse and affect timetables for other LNG projects.

His concerns were echoed by the chairman of the world's largest mining company, BHP Billiton. Addressing an industry group in September, Don Argus claimed a carbon tax would provide greater price certainty for power generators than a cap-and-trade scheme.

The government wants its carbon-trading scheme to cover 75% of Australia's emissions from 2010. The largest firms would buy permits for emissions, with initial subsidies for the biggest polluters gradually being phased out. As outlined in a Green Paper, firms producing 1,500-2,000 tonnes of carbon emissions per A$1m ($0.8m) of revenues would need to pay for around 40% of their total emissions, while those producing more than 2,000 tonnes of emissions per A$1m of revenue would initially pay for only 10% of their emissions. But the details of pricing are yet to be decided – prompting companies to lobby hard for a more favourable deal.

Untested waters

Perhaps the biggest problem for prime minister Kevin Rudd is that the country is set to be a pioneers in the development of a cap-and-trade system and has few points of reference. The EU launched its trading scheme in 2005, but administrators there have yet to tackle thorny issues, also pertinent to Australia, such as how to deal with emissions-intensive industries dependent on trade, which must compete with rivals from countries where no scheme is in place. In fact, the EU has yet to decide definitively how to allocate permits fairly at all, with the present system based more on an estimation of need rather than a concrete plan.

This background means it will be difficult to judge the correct price for emissions permits in Australia and there is also the possibility that, if the government misjudges implementation of the system, Australian-based companies could relocate their headquarters to other countries with no, or at least less tough, emissions legislation. The Business Council of Australia (BCA), which represents the chief executives of the country's leading 100 companies, says a scheme that does not deal adequately with the strain placed on emissions-intensive, trade-exposed industries could provoke an exodus.

Economist Ross Garnaut, the government's chief adviser on the scheme, has suggested that carbon emissions should be traded at an initial A$20 a tonne from 2010, rising by 4% above inflation every year until 2013. This figure tallies with the valuation placed on emissions in Australia's fledgling over-the-counter carbon market, which started trading on a small scale in May and has generally produced trades in the A$18-22/t range.

For the longer term, the government has indicated it is considering a range of possibilities, of varying toughness, depending on how much harmony emerges in worldwide efforts to combat global warming. The uncertainty created by such vagueness during the planning stage has drawn complaints from industry, which says it has inadequate information to make long-term decisions. But the lack of a concrete plan also gives the government latitude to address industry's concerns.

Scope for negotiation

Rudd told the National Press Club in August that while industry could not expect the fight against global warming to be cost free, there is scope for negotiation. The BCA has proposed that the government set a carbon price at between $10/t and $20/t, as well as improved compensation to exporting businesses hindered from passing on extra costs to overseas customers.

But the government may feel public support would favour a relatively hard line with polluting energy firms, particularly in light of the high profits made as a result of high oil prices – Woodside, for example, saw a 67% increase in first-half net profit to A$1.016bn compared with the first half of 2007.

There is little chance of Australia's LNG sector collapsing as a result of increased costs imposed by a carbon-trading scheme, given strong global demand for LNG and the country's pre-eminence as an LNG source in the Pacific basin. Australia is the region's best long-term bet for supply, given its gas reserves, its relatively stable political climate and its openness to foreign investment.

Russia's Sakhalin-2 project is set to start shipping in early 2009, following delays, but other suppliers still have their problems: Qatar's moratorium on new LNG projects continues; political issues are preventing development of Iran's potential capacity; traditional LNG exporters such as Brunei and Malaysia are struggling to find new gas reserves; and Indonesia's reputation among buyers has been tarnished by supply problems.

"A specific cost of carbon could potentially disadvantage some projects with significant levels of CO2," says Frank Harris, head of global LNG at energy consultancy Wood Mackenzie. "But you also have to take a wider view: even if Australian LNG becomes more expensive because of carbon legislation, where's the competition to Australia?" But a carbon-trading scheme could, says Harris, result in a change in scheduling for large projects. "Resources where CO2 is a more significant factor may be pushed to the back of the queue, while other projects may be accelerated."

Meanwhile, Australia's LNG industry is facing other problems. Woodside says rising construction costs, labour shortages and fiscal risks could also undermine its plans. The government has proposed to remove a tax exemption on condensate output, which would mean it would be taxed in the same way as crude oil. This would generate revenues for the state of an estimated A$2.5bn over the next four years, but it remains the subject of acrimonious political debate, given that it would probably push up prices for consumers. The opposition Liberal party said it would decide before the end of September whether to oppose the tax. The government has vowed not to backtrack on the issue.

The war of words may be raging, but projects continue to make progress. Woodside's A$12bn, 4.3m tonnes a year (t/y) Pluto project, on the Burrup Peninsula in Western Australia, is under construction and should be ready for commissioning in late 2010. Voelte says Pluto's gas supply has relatively low CO2 levels and so would be less likely to incur heavy extra costs from the carbon scheme.

Browse's future is less certain. A site for the 15m t/y plant is to be selected by year-end, says Woodside. This could involve a gas pipeline from the Browse gasfield to the Kimberley region, or a longer pipeline to the company's existing LNG facilities at Karratha, which sources gas from the North West Shelf. n

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