Will gas royalties save the NT? Read the fine print.

5232 gas wellhead Wikipedia OKBy SHAUNA MOUNSEY

 

The Labor Government has given fracking the green light in hope of stimulating an onshore gas industry, but will this actually make us money? Or will Territory taxpayers foot the bill for gas companies to frack?

 

With an anticipated loss of about $2b in GST over the next four years, the NT Government has been forced to explore other sources of revenue. But does the environmental risk of using fracking technology outweigh the economic benefit?

 

Onshore gas is not new to the Northern Territory, it has been mined here for many years using conventional methods.

 

However, the industry has failed to pay significant dividends.

 

In the last financial year, the Territory’s largest onshore gas company, Central Petroleum, paid just over $3m in royalties.  This is an insignificant amount compared with $165m in royalties from the NT’s mineral sector.

 

The government touts the potential of the onshore gas industry  to provide vast royalty revenue, but actual royalties received to date from the industry have been significantly less than the 10% of the gross petroleum value as claimed by the government.

 

The reduced amount is attributed to poorly drafted legislation and lack of clear guidelines, which allows companies to deduct “broad” production costs.

 

Coupled with fluctuating commodity prices, the amount of royalties payable to the Government may even result in a zero or a “negative” payment.

 

Alice Springs News Online emailed a spokesperson for the Treasurer, Lesley Major, last week: “Please tell me what the current formula for gas royalties is.”

 

She replied: “Petroleum and gas royalty is calculated at 10% of the product’s gross value at the wellhead (the point of extraction)”.

 

To most people that would mean a pretty good earner from gas, fracked or otherwise, for the government and by extension the taxpayer.

 

The problem is, this could not be further from the truth. A system of allowable deductions for the gas companies reduces the actual average royalty payments to around 3% and can conceivably go down to 0%.

 

discussion paper released in November 2017 for public comment by the Department of Treasury and Finance spells out very clearly how this works.

 

All the costs for processing, refining and transporting are deducted from the “wellhead price”.  This is known as a “net-back” method and when applied, has the potential to make the royalty payment to the government zero.

 

This “net-back” method can be administratively complex, and requires guidelines and agreements between the Territory and the individual producer, says the paper.

 

“Under current arrangements, producers are able to deduct the costs of running the petroleum [or gas] from the well into processing facilities, processing, storage, pipeline tariffs, the costs of transporting the petroleum to the refinery or the first point of sale, and depreciation of field production assets.

 

“A key drawback of the net-back approach arises if the scope of deductible costs is too broad as it can technically result in a negative value of the petroleum. This is at odds with a value-based scheme and the concept that petroleum has an inherent value.

 

“Although the Territory imposes a 10% royalty, the actual petroleum royalty received by the Territory since 2010 is less than 4% on the value of the petroleum at its first point of sale, and has averaged about 2%,” says the discussion paper.

 

Both the previous CLP and Labor governments have been aware of these shortfalls in revenue, but due to the complexity of the problem it was put into the too hard basket.

 

The Scientific Inquiry into Hydraulic Fracturing report – the fracking report – mentioned the discussion paper by blithely stating the Territory receives 10% of gross value at the well head without acknowledging the downstream deductions.

 

The report made no recommendations to improve the royalty scheme.

 

Ms Major has confirmed to the Alice Springs News Online that the government “will not change the manner in which royalty is calculated”.

 

The onshore gas industry has the ability to create a few specialised jobs, but far fewerwhen compared to the NT’s small- to medium-sized businesses.  Ironically a gas company, intending to frack, will pay less in licence fees to the government compared to a small café.

 

At present the application fee for a petroleum production licence is only $2,627, but it costs the government thousands in salaries to pay technical experts to assess these applications.

 

Essentially the government loses money on every application assessed and will only recoup its costs via payment of royalties, provided they are not zero.

 

Regulating onshore gas is high risk and comes at crippling cost.

 

Fortunately, the Labor Government has agreed to implement a full cost recovery model, but implementation may take years, as it requires considerable legislative amendments and departmental restructuring.

 

Hopefully the Territory Government learnt its lesson from the 2009 Montara oil spill where oil spewed from an offshore well for 74 days devastating fisheries in neighbouring Timor and Indonesia.

 

The Territory Government had failed to appropriately regulate offshore petroleum activities in its territorial waters due to gross under-resourcing.

 

Consequently, the Commonwealth Government no longer trusted the Territory Government and assumed regulation of all offshore petroleum activities.

 

Legacy liability issues are another financial risk to the NT Government.

 

The fracking report has identified the need to collect sufficient bonds from gas companies to cover decommissioning costs for any future abandoned wells.

 

However, the government has a track record of incorrectly calculating mining bonds or failing to secure bonds at all.

 

This left the Territory with multimillion-dollar liabilities for a number of legacy mines, including the infamous Rum Jungle.

 

Overall the implementation of all the 135 fracking report recommendations will require a significant outlay from the government and the first item on the agenda should be the Strategic Regional Environmental and Baseline Assessment (SREBA).

 

This assessment will provide the baseline information on the Territory’s environmental values, including its water reserves.

 

The Fracking Report has recommended SREBA is completed before approving any further production activities, but it will require substantial resources (both funds and personnel).

 

The fracking report has proposed the Northern Territory and Federal Governments as well as the industry should fund the SREBA, but the cost allocation has yet to be determined.

 

The first fracking activities are scheduled to occur in the coming months, but is the government ready or is this going to be another activity that contributes to the Territory’s public debt?

 

Let’s hope the exorbitant amount of public funds spent to date on all the inquires will prompt the Labor Government into making carefully considered decisions that will secure a good return on investment for the Territory.

 

Failure to do so will likely have catastrophic economic and environmental consequences, and a decision that has divided Territorians would have been for nothing.

 

[ED – SHAUNA MOUNSEY is a freelance journalist.]

 

PHOTO: A gas wellhead. After the drilling is finished and the gas begins to flow, there is no further need for highly skilled and well paid crews except for occasional checks. This puts into perspective claims of a major boost to the NT’s economy from the controversial industry.

 

 

 

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8 Comments (starting with the most recent)

NB: If you want to reply to a previous comment, start your comment with this notation: @n where n is the number of the comment you want to reply to.
  1. Ian Rennie
    Posted May 5, 2018 at 2:17 pm

    The South Australian people thought that they would benefit from their gas, but just check it out, it goes overseas and the people of South Oz pay foreigners for their gas at a higher price than the people far away in another country get it for. And that is just what the Territorians will be doing and as for the NT economy, Crikey, what a joke! Wake up Aussie, wake up, wake up!

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  2. Mark Fraser
    Posted May 4, 2018 at 10:52 am

    @ Alex Nelson, I would say the original concept of using our own onshore gas such as it was from the Amadeus Basin, was the right thing to do, and did contribute to development.
    However, I’d say there was not enough done in developing downstream industries to create the secondary layer of economic benefits to have fully capitalized on the resource.
    It was the right thing to do back then and still remains the right thing to do today.
    Why we decided to switch from NT owned onshore gas to Federally owned offshore gas, is something I have yet to get my head around.
    I do understand the original fields were depleting (that happens all over the world), but there was more than enough time to explore and bring online new fields, why didn’t this happen?
    I always felt the offsore gas from ENI’s Black-Tip field should have been tagged for export alongside CoP and Inpex terminals in Darwin.

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  3. Fran Morey
    Posted May 1, 2018 at 5:57 pm

    When are the residents of the Northern Territory going to get the gas produced in the Northern Territory piped to their houses, instead of having to buy gas produced interstate and supplied in bottles? The Northern Territory Government, regardless of its political affiliation, seems to prefer to sell everything it can to anyone and anywhere else – rather than to the Northern Territory residents.

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  4. Posted May 1, 2018 at 2:58 pm

    @ Mark Fraser (Posted April 30, 2018 at 8:58 am): Your comments ring a bell.
    Consider these quotes: “In the interests of Northern development, it seems vital that gas from Mereenie should first be utilised to exploit the astonishing industrial potential of the Territory only awaiting the advent of cheap power, before any interstate claims on the gas are recognised.
    “No company would be prepared to undertake the cost of full exploitation of such a vast field of natural gas without some assurance of a long range and continuous demand. This demand exists – within the Northern Territory.
    “The provision of cheap power through the Northern Territory must result in rapid development. And besides bringing large-scale mining operations into early production, a pipeline from Mereenie could well transform Darwin from a ‘Public Service Town’ into a thriving manufacturing centre for South-east Asian markets.
    “For natural gas is not only a source of cheap power. It is a raw material from which fertilisers, plastics and synthetic fibres are manufactured.
    “A pipeline would give Darwin a manufacturing potential backed by heavy industries and, most important, provide fertilisers for a high rainfall region where the economic development of low fertility soils demands extensive use of fertilisers whose import costs are prohibitively expensive.
    “Above all, it would mean cheaper power and low-cost domestic gas for the man in the street, and produce an agricultural as well as an industrial revolution in the Northern Territory from Alice Springs to Darwin – and beyond.
    “And now is the time for long-range, constructive planning to decide how this tremendous reservoir of natural gas could best be utilised in the rapid development of the North. It can be done.”
    Thus wrote local editor Paddy Ethell in November 1964, the year following the discovery of natural gas reserves in Central Australia.
    Of course, 20 years later construction of the gas pipeline from Mereenie to Darwin did commence, and the project was completed in 1987. How was the Territory’s future envisioned 30 years ago?
    “The Amadeus Basin to Darwin natural gas pipeline was the first chapter in the Territory’s unfolding energy story, Chief Minister Steve Hatton said last week.
    “Mr Hatton was speaking at an official unveiling ceremony in Darwin to commemorate the completion of the pipeline. He told about 400 guests at the Darwin City Gate Gas Station the Territory was shedding the energy shackles of the past and stepping into a high-tech, gas-powered future.
    “The use of gas would enable electricity costs to be stabilised and more flexible pricing arrangements to be introduced. Predictable pricing will allow energy-intensive industries to plan for the future, Mr Hatton said.
    “An assured and realistic supply of energy will mean that the Territory will be able to produce manufactured goods at a competitive price and fulfil yet another of its ambitions – to become a major trading partner in South-East Asia.”
    History clearly shows that, when it comes to natural gas exploitation, the rhetoric far exceeds the reality; and there is good reason to be wary of contemporary visions of great promise from the mining and energy sectors.
    Shauna Mounsey is clearly well-grounded as evinced by her excellent article, and I appreciate her viewpoint very much.

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  5. Ginnia
    Posted April 30, 2018 at 4:28 pm

    Also remember, all gas wells eventually deteriate and fail. With the mining industry’s record of just leaving a mess behind when they abandon a mine, can the NT actually afford to all but give our gas away?

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  6. Shauna Mounsey
    Posted April 30, 2018 at 2:32 pm

    The purpose is to stimulate a discussion to ensure that the Territory makes money from its industries.
    I have worked in the resources sector as a lawyer and a scientist for more 10 years and I have considerable insight into the benefits and the drawbacks of the industry.
    The government has to strike the balance between building the economy and ensuring that it gets a good return on investment for its effort.
    This is not an easy task and the Territory has missed out on millions of dollars in royalties in the past from the resources sector as a whole.
    I will not name the companies, but I’m sure you can google the topic you will find some interesting results.
    Hopefully with all these inquires and the Treasury Discussion papers the Government will finally gather enough information to create a royalty scheme that is fair and equitable to both the resources industry and Territorians.

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  7. Mark Fraser
    Posted April 30, 2018 at 8:58 am

    If the economic case argument is that every industry must be able to single-handedly lift the entire NT economy out of the doldrums to justify its existence, then every single industry in NT would fail that test and therefore not deserve to exist.
    What a bogus nonsensical argument to be making … an economy is made up of a collective of diverse and often complementary symbiotic industries.
    Natural gas is a raw product which has more downstream uses in manufacturing than in energy generation.
    The simple fact is you will repeatedly rely on countless day to day use items today, tomorrow, and the next … which were manufactured using natural gas as either … energy, intense heat source, chemical raw feed-stock ingredient.
    Natural gas is used extensively in the production of structural steels, bricks and cement essential for our construction industry, and natural gas is also the key raw feed-stock ingredient for the industrial scale manufacture of ammonia through the Haber–Bosch process, for cleaners and fertilisers.
    There are about 180 million tons of ammonia fertiliser manufactured globally each year, but in NT we pay exorbitant freight costs to import what we need, when we should be able to manufacture more than enough gas to not only meet all our needs, but be a global exporter of fertiliser as just one of many downstream value added industries made possible by our shale gas industry.
    The limit of the economic benefits from NT natural gas industry will be measured by the ability of the NT Government to attract investors to setup the countless downstream manufacturing operations which will provide countless jobs into the future.

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  8. Richard Bentley
    Posted April 29, 2018 at 8:13 pm

    Seems that if all the checks and balances are put in place it won’t be worth doing. What a shame!

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