After prices of coal and iron ore had dipped dramatically in the past few months, another major Australian export item is at the risk of falling commodity prices: liquefied natural gas (LNG).
India's Petronet LNG Ltd. is about to embark on a fund-raising campaign to gather funds that will support the expansion plans on its Dahej liquefied natural gas (LNG) terminal in the state of Gujarat.
LNG stakeholders warned on Tuesday that the booming LNG sector may suffer if the federal government pushes through with a proposal to cut tax breaks since it would make the industry the most uncompetitive in the world, threaten billions of investments in the pipeline and cause the loss of thousands of jobs.
The Treasury business tax working group is studying the possibility of removing concessions granted to some Australian industries in a bid to lower the 30 per cent company tax rate. Among the concessions under scrutiny are depreciation rules for LNG producers.
In its submission to the business tax working group, the Australian Petroleum Production and Exploration Association (APPEA) said cutting the tax breaks would make the local industry uncompetitive vis-à-vis foreign rivals such as Russia, Indonesia and the U.S. The APPEA also warned that up to 12,000 full-time jobs are at the risk of being wiped out and $27 billion worth of LNG investments would be lost by the Australian economy is one of the seven LNG projects underway would cancel.
"Any changes that tilt the incidence of the company tax system against the capital intensive and infrastructure sectors of the economy will fundamentally impact on the ability of Australia to create sustainable taxation revenue streams for future generations of Australians," Brisbane Times quoted the APPEA submission.
APPEA pointed out that even if the federal government would cut the company tax rate by 2 per cent, it would not be sufficient to make up for the lost tax breaks. The association was supported by other groups in battling cutting the tax breaks.
The Institute of Chartered Accountants estimated that based on a modeling research, the Australian economy would lose $1.18 billion due to the planned cut on depreciation rules. The Association of Mining and Exploration Companies said removing deductions for mining exploration would add uncertainty to the resource sector already reeling from the low commodity prices, weaker demand and high Australian dollar.
Another worry for LNG producers is the growing clamor from Asian utilities for the end of the decades-long pricing regime for natural gas in the region with the aim of encouraging cheaper supplies.
Leading the call to maneouver away from oil-indexed pricing for LNG deals is Kwon Young-sik, head of Korea Gas Corporation's LNG procurement department. Kogas is influential in the LNG industry because it is the world's largest buyer of LNG by volume.
Kogas agreed earlier this year to purchase 3.5 million tonnes of LNG from the proposed Sabine Pass export plant in Louisiana of Cheniere Energy. However, the deal was not linked to oil prices but on the monthly Henry Hub gas price in the U.S. which fell to a decade-low in April below $2 per million British thermal units or lower than the $16-$17 per mmBTu that Japan pays for its LNG imports.
Japanese utilities are also asking for the historically low U.S. domestic gas prices to be factored in long-term supply contracts which would affect the profitability of Australian LNG projects still in the blueprint stage, The Wall Street Journal (TWSJ) reports.
Gundi Royle, analyst of Moelis & Co., estimates that if the Henry Hub price would comprise 30 per cent of the index, the current Australian LNG price of $16 per mmBTu and a Henry Hub price of $3, the Australian LNG price could go down to $12.10 per mmBTu.
"We think the pain is greatest for new projects unless they can re-engineer their projects with materially, say 20 per cent, lower costs," TWSJ quoted Ms Royle.
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