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Coal and gas: where next as major projects face legal delays?

A cocktail of headwinds are coming for coal and gas projects in Australia. Investment may leave for more friendly shores.

gas price Source: Bloomberg

There are headwinds coming for Australia’s coal and gas industry in 2023. Recently reported record annual profits at BP and Shell have been followed by Glencore, which has just reported $34 billion in profit, driven by soaring coal demand.

Australia remains the world’s third-largest exporter of hydrocarbons, with much of production destined for China — where demand is expected to continue to rise as the country exits ‘zero-covid,’ despite the widely anticipated global recession.

But the investment picture may be changing.

Coal and gas: multiple headwinds

The first headwind to consider is the potential for serious windfall taxes on the hydrocarbon industry. Already imposed in much of Europe, the UK, and parts of the US, it’s becoming politically difficult for companies to justify record profits while domestic and business energy bills remain elevated.

Australia also spends up to £11 billion a year on fossil fuel company subsidies, which is again becoming politically difficult to continue.

For context, some offshore gas wells pay no royalties, no petroleum resource rent tax, and are owned by companies paying limited corporation tax. Of course, while carbon taxes are not a new idea, the industry prefers to implement carbon credit schemes — though this presents a problem as the ability to buy these credits appears at least partially responsible for the five-year low in domestic solar and wind investment.

It’s worthing noting that Australia imposed a successful carbon tax between 2012 and 2014, and December’s cap on coal and gas is still leaving prices relatively elevated. Treasurer Jim Chalmers argues the cap protects consumers from the ‘wartime whims of the international market,’ saying that ‘the price of Australian gas for Australian customers should have a connection to the cost of producing it.’

The law limits, for 12 months, the domestic price of gas at AU$12 per gigajoule, and domestic coal to AU$125 per metric ton in coal-heavy New South Wales and Queensland. The government also retains the power to set a ‘reasonable price’ for energy though will factor in an ‘appropriate return on capital’ for fossil fuel producers.

However, AGL thinks Australians will still face steep power bill rises in 2023. And the Greens are bringing serious pressure to bear on the Albanese Labor government to stop all new production of domestic coal and gas, by making it the only condition in return for support for the safeguard mechanism.

Given the political calculation, Labor requires the support of the Greens in the Senate to push through this safeguard mechanism — a key climate policy designed to cut industrial emissions by 4.9% each year to 2030, and which is essential to hit the ambitious climate change projects set by Labor in 2022. And the government wants the policy in place by July.

Project delays and cancellations

Australia already has plans to go net-zero by 2050, and the green energy industry is already booming. Meanwhile, hydrocarbon producers are already suffering from a more hostile investment environment.

For example, environment minister Tanya Plibersek has blocked a proposed open-pit coal mine six miles from the Great Barrier Reef under novel powers granted by the Environmental Protection and Biodiversity Conservation Act. The ministry is also reviewing 18 other coal and gas projects.

Then there’s the decision by former Prime Minister Scott Morrison to block a natural gas exploration license offshore Australia’s east coast — Petroleum Exploration Permit PEP-11. While the Federal Court has now quashed the decision, it highlights that the tide my have been turning for a while.

There’s also Santos' $5.5 billion Barossa venture, which could now be scrapped entirely after a shock court ruling saw Australia’s regulators toughen up requirements for Indigenous consultation. Woodside's flagship $16.5 billion proposed Scarborough gas venture could well be affected by the ruling as well.

This leaves Australian coal and gas developers potentially looking to open up new projects elsewhere — which will likely introduce some volatility in 2023.

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This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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