LNG INDUSTRY REACTION TO GREEN PAPER ON EMISSIONS

UNCLAS SECTION 01 OF 03 CANBERRA 000819

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ENRG ETRD SENV AS
SUBJECT: LNG INDUSTRY REACTION TO GREEN PAPER ON EMISSIONS
TRADING

REF: A. CANBERRA 719

B. CANBERRA 757

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1. (SBU) Summary: Australia's extensive and growing Liquefied
Natural Gas (LNG) industry is up in arms about the
Government's plan to create an emissions trading scheme (ETS)
because the Government's discussion paper (aka green paper)
on emissions trading (reftel A) failed to indicate whether
LNG is an emissions intensive trade exposed (EITE) industry.
The paper set a lower threshold of 1500 tons of CO2
equivalent emitted per million dollars (A$) of revenue to
determine who will get free permits to protect against trade
exposure. Because large LNG players claim they will fall
below this cut-off, LNG companies have expressed concerns
about losing LNG projects in Australia. The Australian
government has indicated that it recognizes this may be an
issue to resolve, and further talks between GOA and the LNG
industry will try to set out exactly where LNG should fall
under the scheme. End summary.

WHAT IS AT RISK?
--------------


2. (SBU) The Australian LNG industry is concerned because the
GOA green paper does not initially address LNG as an industry
that should receive some protection against being exposed
under a carbon scheme to a world price and lower
competitiveness. They argue that billions of dollars worth
of planned investments are in danger because being forced to
pay for carbon emissions would make Australia less
competitive as an investment destination. The green paper
acknowledges that "significant further analysis" is required
to address industries that request EITE assistance. The LNG
industry has estimated that nearly A$60 billion of investment
could be deferred or sent elsewhere if Australia's emissions
trading system does not protect LNG as a trade exposed,
emissions-intensive industry with access to free permits.

LNG INDUSTRY REACTION TO GREEN PAPER
--------------


3. (SBU) On July 29 Econoff spoke with Damien Dwyer of the
Australian Petroleum Production and Exploration Association
(APPEA) about the LNG sector's reaction to the green paper.
According to Dwyer, major LNG players feel the potential loss
of A$60 billion in investment is a concern for the whole
industry. Dwyer pointed out that the boom-bust LNG cycle in
Australia is driven by world prices, unaffected by domestic
measures that distort pricing like the ETS, and therefore
investment may flee to countries with less stringent
emissions policies. Although LNG might be profitable now,
Dwyer said, there is a concern that the use of revenue as a
denominator discriminates against the booming LNG sector and
will fail to provide the protection needed to maintain
expansion plans in Australia when costs rise and revenues
fall. Dwyer said APPEA is working to ensure that LNG will be
recognized as a trade exposed industry regardless of the
actual emissions intensity of the companies and processes
involved. The best possible outcome, Dwyer believes, is no
net increase in operating costs for LNG under an emissions
trading scheme. Despite the relatively positive spin in the
press that LNG will be accommodated in some way, Dwyer said
is uncertain whether the government's decision will mirror
industry's desired outcome.


4. (SBU) APPEA's goal of eliminating net increases in
Q4. (SBU) APPEA's goal of eliminating net increases in
operating costs under the ETS may be stymied by the
government's willingness to challenge the hugely profitable
sector. Department of Climate Change Assistant Secretary
Barry Sterland told Econoff on August 5 that the paper had
achieved its aim of "making clear that there will be costs
associated with this." Sterland said the government was
concerned about "pork-barreling" in setting up the scheme and
that the White Paper on the system's design will likely try
and prevent special consideration of any sector or process.
How that plays with the range of industries, including LNG,
that face higher costs under the scheme remains to be seen.


5. (SBU) John Torkington from the Chevron Corporation told
Econoff on July 30 that the green paper's recommendations if
implemented "would effectively double the operating cost of
LNG projects." Torkington refrained from commenting further

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because "without trajectories and anticipated emissions
prices, it is very hard to be more specific about how this
might impact the industry in the longer term." Those
trajectories and costs should become clearer when the
government releases in October data from modeling undertaken
by Treasury. According to Torkington, Chevron supports an
ETS within Australia, but he feels that the country should
understand "international competitors do not face similar
costs on their emissions." On August 11 Torkington told
Econoff that if the government's goal was to provide some
form of business certainty, they had erred in using the most
volatile measure, revenue, as a deciding factor in whether a
process would be assessed as trade-exposed. This, combined
with the fact that the GOA has decided to close off any
possibility of being added to the EITE list after the scheme
goes into effect, has driven suspicions that Canberra
believes the big players will not walk away from the huge gas
finds (Gorgon is believed to hold one quarter of all the gas
found off Australia to date) and will grudgingly accept the
costs of the ETS in order to stay in the market.


6. (SBU) The Rudd Government, and the Carpenter state
government in WA, may be right. Torkington told us that even
though Chevron has other options for investment, the fear
that the GOA might void their tenancy rights over gas they
paid hundreds of millions to find is a powerful incentive to
remain. The fear that competitors might gain access to gas
fields like Gorgon or Wheatstone if left undeveloped because
of ETS costs may well in the end drive LNG players to grit
their teeth and go along after getting whatever level of
special compensation they can wring from Canberra.


7. (SBU) BP's Ian Singleton, Manager for the large Browse
project, said BP was concerned about emissions trading costs,
but was also concerned about Browse partners like Woodside's
Don Voelte pressing ahead so aggressively. Singleton said
that the big players were in position to pay ETS costs as
long as profits were high, and that "we have to be where the
gas is". BP is equally concerned with their refinery sector
in Australia, which they see as more at risk of being
off-shored rapidly (reftel B).

GOVERNMENT SHIFT?
--------------


8. (SBU) Two major events have dominated the public debate
concerning government and LNG industry relations: Opposition
Shadow Treasurer Malcolm Turnbull's visit to LNG facilities
in Western Australia, and Prime Minister Rudd's direct
response saying he was open to further consideration on the
question of protecting the LNG industry during his July visit
to the Northern Territory. Dwyer suggested that the media
reports may have gone "a little too far" as
government-industry consulting still must take place. Given
the size and importance of LNG as an export product for
Australia, it is likely that the GOA is considering some
flexibility in how they accommodate the industry. To spur
that on, sources tell us that the major industry players,
including Exxon Mobil, Chevron, BP, and Woodside are writing
to Rudd to argue against a number of elements in the scheme,
including EITE status. That this letter is going to Rudd,
rather than Climate Minister Wong, indicates how seriously
Qrather than Climate Minister Wong, indicates how seriously
the companies involved take this issue.


9. (SBU) Comment: Even if big players are carping loudly
while preparing to go along in 2010, their complaints have
had some effect. Sterland refused to be drawn out on
possible changes to the plan during a meeting with Econoff on
August 5, but the Western Australia Government's Emissions
Trading manager Amy Lomas told us that she has heard that DCC
is reconsidering the formula for determining EITE status and
may move away from the revenue calculation. Western
Australia is frustrated that Canberra has not listened to
their concerns about possible impacts of the ETS on core
industries in the state. This view was backed up by WA
Department of Premier and Cabinet Environment Direct Rosh
Ireland. The challenge of being heard has not been helped by
the decision to call a snap election in the state, which has
placed the government in caretaker mode. This has delayed
the approval of draft submissions to Canberra on the ETS
until after the elections in September. End Comment.


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MCCALLUM