SYDNEY (Dow Jones)
A green light for two Australian liquefied natural gas projects worth over A$20 billion is imminent, now that the government in Canberra has excluded coal seam gas from its proposed resources tax.
The changes announced by Prime Minister Julia Gillard Friday are significant as analysts and industry officials had warned the nascent coal seam gas sector would be at a hefty competitive disadvantage to conventional LNG projects in Western Australia state unless they were subject to the same tax regime.
A joint venture between Santos Ltd. (STO.AU) and Malaysia's Petroliam Nasional Bhd. in Queensland state, and a standalone project of BG Group PLC (BG.LN), had been preparing to sign off on their investments in Queensland state when the previous administration of Kevin Rudd unveiled the contentious resource "super-profits" tax, or RSPT, on May 2.
The RSPT triggered concerns in the coal seam gas industry that investments would be delayed as companies took another look at their business case. Up to that point, both projects had only been awaiting environmental approval before going ahead.
Now, with the tax controversy cooling and both projects recently receiving environmental approval from the Queensland state government, all that's needed to make a final investment decision is a nod from Australia's federal government. That's expected within a couple of months for both projects.
Many analysts had argued that Queensland's coal seam gas-to-LNG sector, if subject to the RSPT in its original form, would struggle to compete with the LNG industry in Western Australia.
The Western Australian projects are offshore resources that are subject to the more attractive petroleum resource rent tax, or PRRT, which kicks in at a higher rate than the RSPT.
"That's not consistent and that's not fair," Wood Mackenzie Analyst Craig McMahon said in May.
Gillard announced Friday that coal seam gas will now be treated under the PRRT, too.
The change will be particularly helpful for Santos, which was poised to sign a customer and sell down a stake in its project at the time the tax was flagged in May. China Petroleum & Chemical Corp. (SNP), known as Sinopec, has already said it's talking to Santos and analysts believe Korean and Japanese buyers could also be circling.
Selling down an interest of at least 9%, and possibly up to 20%, in the project would give Santos much-need capital to fund its share of the development without having to conduct another equity raising or borrow more money.
Two other proposed coal seam gas-to-LNG projects in Queensland will also benefit. Origin Energy Ltd. (ORG.AU) and ConocoPhillips (COP) haven't found a customer for their gas and Royal Dutch Shell PLC (RDSB) has a A$3.44 billion takeover offer for Arrow Energy Ltd. (AOE.AU) pending, with Arrow's gas supposed to feed its proposed LNG project.
Arrow shares rose 1.3% to A$4.86 Friday, while Santos and Origin were up 1.3% and 0.8% at A$12.49 and A$14.73, respectively.
The head of Shell's Australian operations, Ann Pickard, has previously described the PRRT as "a good profits-based tax."
Coal seam gas is currently subject to state royalty payments so each project will still pay more tax despite a switch to the PRRT is better than a switch to the RSPT.
Under the existing royalty regime, about 8% of revenues are paid to the state on top of the current 30% corporate tax rate.
The RSPT would have charged 40% on profits above the long term bond rate, or around 6%, but the PRRT charges 40% on profits on the long term bond rate plus 5%, or around 11%.
Citigroup Analyst Marie Miyashiro said this month that even under the PRRT, with an 11% allowance rate, the net present value of Origin's share of its LNG joint venture with ConocoPhillips falls by about 14% from the current royalty regime, compared to 17% slide under the RSPT.
Under the PRRT, Origin and ConocoPhillips' project would require a long-term oil price of US$38 a barrel to break even, Miyashiro said.
JPMorgan Energy Analyst Benjamin Wilson said the coal seam gas projects will probably view conversion to the PRRT as "an acceptable worst-case scenario."
Wilson reckons BG will be the first project to make a final investment decision.
"We think that Santos is well positioned to secure additional customers and proceed to FID shortly after BG," he says.
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