A domestic gas price cap extension and potential upstream tax changes add to the growing pressures facing new Australian LNG investment, writes Tom Major
Australia's LNG sector faces growing fiscal, regulatory and legal pressures that leading producers say could threaten investment in the sector.
Australia's federal budget for the 2023-24 financial year starting on 1 July is due to be announced on 9 May, putting the prospect of changes to the government's petroleum resource rent tax (PRRT) front and centre for some. The PRRT is a profit-based tax on offshore upstream gas projects that allows for deductions for the cost of exploration and development. Volatile commodity prices make fiscal stability and predictability critical to investment in the sector, Australian independent Woodside Energy's chief executive Meg O'Neill says.
Revenue from the PRRT is predicted to peak at A$2.6bn ($1.7bn) in 2023, before declining to about A$2bn from 2024. Future investment in offshore LNG developments is limited, financial services group Macquarie says, leading the government to rely on increasing taxation for existing projects.
Any changes to the PRRT are likely to build on a 2018 Australian Senate inquiry that recommended reforms to tax deduction rules for gas companies. The findings were consistent with the 2017 Callaghan report by Australia's treasury department, which found that gas transfer pricing arrangements for calculating the PRRT required updating for integrated LNG projects. Australia's Labor government has come under pressure from tax commentators and lobbyists, which say not enough tax has been raised from the record-high profits reported by gas giants for the past financial year, leading it to restart a review of PRRT arrangements that the previous coalition government had begun.
Australia's LNG export revenue is forecast to jump to A$91bn in 2022-23, a figure that has increased pressure on the government to raise taxes as Australian consumers face higher energy prices. The resource-rich country is grappling with an energy shortfall, as power prices have risen after several coal-fired power plants closed in recent years and with global demand for LNG exports booming.
Capping inflation
The government in December imposed a 12-month price cap of A$12/GJ ($7.90/GJ) on domestic gas prices in east Australia, a measure that it now proposes maintaining until 1 July 2025, as part of Canberra's push to contain inflation. The country's latest consumer price index data for January-March show a 12-month increase in domestic gas prices of 26.2pc — the largest ever recorded by Australia's Bureau of Statistics.
The price cap may force producers to ensure there are sufficient domestic supplies before exporting additional volumes. Some export figures have fallen in recent months since the initial December price cap was introduced. Australian competition regulator ACCC last month slashed its forecast domestic gas shortfall for the remainder of 2023 to 3PJ from 30PJ.Upstream industry association Appea says the extended cap contradicts ACCC recommendations to encourage new supplies.
The extended price cap represents another significant change in Australia's energy policy since the May 2022 election of the Labor government. The ruling party has committed to cutting Australia's greenhouse gas emissions by 43pc by 2030 from 2005 levels, partly through a strengthened safeguard mechanism that will affect fossil fuel projects. Industry participants have warned this could restrict new gas supplies for LNG plants and domestic users. Climate-related legal challenges against LNG developments are also growing. Woodside's Scarborough gas project will face greater scrutiny over its emissions impact on the World Heritage-listed Great Barrier Reef, after the Federal Court this month dismissed the company's attempt to have a legal challenge dismissed.
