Battlelines drawn as resource tax clouds APPEA meet

TAXI drivers have long had a reputation as bellwethers of public opinion.

In which case, cabbie reaction in Brisbane last week to Prime Minister Kevin Rudd’s planned resource super profits tax could spell big trouble, even in his home state.

“Rudd’s got to go,” was regularly proffered by Brisbane’s cabbies as they ferried 2,400 oil and gas executives to and from the industry’s flagship annual gathering, the Australian Petroleum Production and Exploration Association conference.

Cabbies may not be foolproof political barometers, but there is certainly keen recognition in Brisbane that Queensland’s economic future depends on its resources sector, and the fledgling coal seam gas-to-LNG industry in particular.

Taxation, therefore, dominated discussion at the APPEA conference, particularly the sincerity of the government’s offer of consultation before implementation, and the extent of any changes it might adopt.

Changing landscape

Prior to news of the new tax this month, the conference was to be a showcase for Queensland’s emergence as an LNG rival to Western Australia and the Northern Territory.

More than $180 billion in new LNG investment is under way or planned in WA and the NT, which together host 90 per cent of the nation’s known conventional gas reserves, or about 100 trillion cubic feet.

The Woodside-operated North West Shelf project in WA and Conoco-Phillips’ Bayu-Undan project off Darwin also account for all Australian LNG output.

Yet the advent of viable coal seam gas extraction methods has dramatically altered the landscape, with Queensland’s coal fields now estimated to host at least 250tcf of recoverable gas.

Queensland has consequently focused on becoming the world’s first producer of LNG from coal seam gas, with at least four major consortia currently planning CSG-based LNG at Gladstone.

According to the Queensland government, stage one of these projects alone will require $40 billion in initial investment and generate 18,000 jobs. Including potential expansions, the total prospective investment totals over $100 billion.

The lead proponents of all four projects – BG Group, Santos, Conoco-Phillips and Shell – are targeting a final investment decision by the end of the year, making the timing of the Rudd government’s tax plans especially critical.

Risks aplenty

Just as the nation’s miners have been unanimous in condemning the tax plan, conference delegates denounced the proposal as ill conceived and badly timed.

At the very least, they predicted billions of dollars in planned investment would be deferred indefinitely while industry evaluates the likely impact of the tax on projects.

And at worst, changing the rules mid-stream would irreparably damage Australia’s reputation as a safe investment destination, resulting in Australian projects losing funding to rival opportunities elsewhere.

Fresh from taking up her Perth-based role as the head of Shell’s extensive upstream business in Australia, Ann Pickard was blunt in highlighting the risks.

“We all tend to stop when there is above-ground uncertainty,” she said. “We’re pretty good at below ground risk, but we hate above-ground risk. So anything that raises uncertainty makes us nervous.”

Chevron’s Roy Krzywosinski, the man heading its $43 billion Gorgon LNG project on Barrow Island, echoed that view.

“Fiscal stability is paramount because you don’t want moving goalposts,” he said. “These LNG projects are big, they’re complex and they’ve got lots of moving parts. All the stars and moons have to align before they can move forward.”

Origin Energy boss Grant King said uncertainty about the specifics of the tax was especially damaging to the CSG sector’s ability to compete for project funding. Origin is a partner in Conoco-Phillips proposed $35 billion Australia-Pacific LNG coal seam gas venture in Gladstone.

“At the end of the day we compete against other projects, and particularly other countries, and we are at a competitive disadvantage while this uncertainty persists,” he said.

PRRT or RSPT?

The key issue for Queensland is that its fledgling onshore CSG industry does not enjoy the protection provided by the existing, but far less onerous, Petroleum Resource Rent Tax regime, which governs the offshore oil and gas industry.

Despite the Rudd government’s claims that the super profits tax is broadly similar to the PRRT, it is substantially different in a number of key areas.

Unlike the RSPT, the PRRT was never applied retrospectively to existing projects such as the North West Shelf.

While both include a 40 per cent headline tax on profits, the PRRT does not kick in until project returns exceed the long-term bond market rate (currently around 6 per cent) plus an uplift factor of 5 per cent. The uplift factor for exploration costs is even higher, at 15 per cent.

All capital spending and other costs can also be recovered before PRRT is payable and are deductible in the year that expenditure occurs.

In comparison, the RSPT kicks in at the long-term bond rate, while capital investment must be depreciated over a longer and still undetermined period.

“Under PRRT you get all your investment back before you start paying tax, which is exactly how it works in virtually every other sphere of taxation,” APPEA chairman Eric Streitberg said. “This tax starts taking cash away immediately, which is completely the wrong way to encourage investment in high-capital, long-life projects.”

He also railed against the RSPT’s proposed refund of 40 per cent of losses incurred should a project fail.

“We have never called on governments to underwrite our failures, nor do we think it appropriate to for taxpayers to bail out dud projects,” Mr Streitberg said.

Ms Pickard said the government should simply extend the PRRT if it wanted to implement a super profits tax that worked for everyone.

“To me the PRRT is working pretty well, and if you’ve got a tax that’s working pretty well, why mess around with it?” she said. “Anything that models itself after the PRRT is something that is going to make us happier.”

To that end, the Queensland government has already requested that the RSPT threshold be lifted to 11 per cent, in line with the PRRT, in recognition of the CSG industry’s infancy.

And a deal for the CSG sector does look likely. Though he ruled out “carve-outs” for specific sectors, Resources Minister Martin Ferguson said the government was determined to implement a “competitively neutral” fiscal regime “that will get coal seam methane ... off the ground.”

A special deal for CSG may be welcomed in Queensland and shore up hometown support for Mr Rudd, but few others will welcome changes that do not apply to all projects.

In particular, conventional LNG producers will see it as subsidising their main rivals for project funding and customers, while miners will see it as arbitrarily favouring one industry over another.

According to research by Wood Mackenzie, CSG projects would be hardest hit by the new regime initially, but conventional LNG projects would be far worse off if the government pursued its stated intention to eventually shift all projects onto the RSPT over time.

Wood Mackenzie found that, while the tax would cut the real value of CSG projects by around 14 per cent, the value of conventional LNG ventures would be slashed by almost a third if moved to the RSPT.

It is no coincidence that Woodside boss Don Voelte told reporters in Sydney this week that the company’s $13 billion Pluto LNG project, due to start production this year, simply would not have proceeded under the RSPT.

APPEA’s Eric Streitberg said such distortions demonstrated why any changes should apply universally.

“Then you are not trying to pick and choose between projects,” he said.

It is a position backed by David Knox, head of conventional gas and CSG producer Santos.

“We will not be seeking special deals, we will be seeking a tax basis that works for us and the rest of the industry,” he said.

As company executives trek to Canberra to brief the government’s RSPT consultation committee, their hopes rest on the government’s sincerity about listening to their concerns.