Australia: Tax proposals put CBM timetable in doubt
A proposed new tax on onshore natural-resources production threatens to increase overall costs for the CBM sector, potentially putting it at a disadvantage compared with offshore conventional gas production
JUST AS coal-bed methane (CBM) projects were threatening to make inroads into the liquefied natural gas (LNG) export market, the Australian government has thrown a spanner in the works.
The proposed Resource Super Profits Tax (RSPT) covers onshore mining activities, including CBM, but does not affect most of the offshore gas industry, which is covered by a different regime, the Petroleum Resource Rent Tax (PRRT). The latter covers most offshore projects, although not the North West Shelf region, and it remains unclear how that will be taxed.
The tax could set back the timetable for some of the recent spate of proposed onshore CBM-LNG projects, as they weigh up the possible impact. Five CBM-LNG projects are planned for the Gladstone area of Queensland alone. "Overall this is a negative development for the CBM-LNG projects, just when they were on the verge of going ahead. It gives an advantage to the conventional projects proposed in Western Australia, whose tax status won't change," says Graeme Bethune, chief executive of EnergyQuest, an Adelaide-based consultancy.
The proposal has been condemned by mining companies and their financial advisors, who say the tax could lead to an exodus of firms from Australia. "An RSPT may provide the government with short-term gains, but could result in an overall reduction in resources-generated tax receipts in the longer term," Tim Cox, a partner at PricewaterhouseCoopers in Australia, said of the proposal.
One of the main CBM players, Santos, said in May it would delay taking a final investment decision (FID) on its planned CBM project, while it considers the tax proposals. Its A$7.7bn ($6.9bn) Gladstone LNG project, a 60:40 joint venture with Malaysia's Petronas. Santos previously said it wanted to approve the first phase of Gladstone LNG by mid-2010, with a decision on a second production train to follow a year later. But an FID is now unlikely to be made until the nearer the end of the year. Analysts say those involved in the other Queensland projects will also be reviewing the implications of the proposal on their tax bills.
Shell has said its $3.44bn joint bid with PetroChina for CBM company Arrow Energy will not be affected (PE 5/10 p22). But a large deal in the coal-mining sector has been hit, with Peabody Energy of the US saying in mid-May it was reducing the price of its hostile bid for Macarthur Coal by 6% as a result of the tax proposal.
Offshore producers have the option of switching from the PRRT to the RSPT, but analysts say it is unclear why they would, given it would mean paying higher tax
Companies are now set for a period of uncertainty, as the tax will not be implemented for several months while consultations take place. Indeed, it may not be implemented at all, given hostility to the proposals across the energy and mining sector, and from the opposition Liberal party, which is likely to contest a federal election with the Labour government later this year, or early in 2011.