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Tax Change May Hurt Australian Coal-Seam Gas Projects

Australia’s plan to impose a 40 percent tax on the profits of resource companies may hurt returns from Queensland’s liquefied natural gas projects and hamper talks with potential customers, analysts said.

“There is undoubtedly more uncertainty on the value” of ventures aiming to convert coal-seam gas to LNG, Citigroup said in a report. The effective tax rate for the Australia Pacific LNG project, planned by Origin Energy Ltd. and ConocoPhillips, may climb to an average of 44 percent under the proposed tax change, compared with 41 percent without it, Citigroup said.

Origin and Santos Ltd. are among energy companies planning coal-seam gas-to-LNG projects in Queensland to tap Asian demand for cleaner-burning fuel. Origin and Santos have said they are in negotiations with possible fuel buyers and intend to make final investment decisions on the developments this year.

Santos fell 4.6 percent to A$13.20 in Sydney trading, the biggest slump in almost five months, while Origin declined 1.5 percent to A$16.13. The S&P/ASX 200 Index fell 0.5 percent.

“Companies’ anticipated rates of return could fall to levels below what would be acceptable for some investors,” Tim Schroeders, who helps manage about $1.1 billion at Pengana Capital Ltd. in Melbourne, said in a Bloomberg Television interview today. The tax “could have a very vast, company-changing impact,” he said.

The Australian tax revision may make the coal-seam gas ventures’ negotiations with potential customers more difficult and stall investment decisions, according to Citigroup’s May 2 report.

‘Attractive Fundamentals’

“This could reduce the profitability of these projects,” said John Young, an analyst at Wilson HTM Investment Group in Melbourne, who covers oil and gas companies including Australian coal-seam gas producer Arrow Energy Ltd. “One would expect that they may not be quite as attractive as they might have been. But you would still have attractive fundamentals. I don’t see it as being catastrophic for the industry.”

BG Group Plc, the U.K.’s third-largest natural gas producer, has said it expects to approve its Queensland coal-seam gas project this year. Royal Dutch Shell Plc and PetroChina Co. have agreed to acquire Arrow for A$3.5 billion ($3.2 billion.) Shell has also proposed an LNG development on the Queensland coast.

Santos, Australia’s third-largest oil and gas producer, has said this year that it may sell a 9 percent stake in its venture as part of a fuel-supply accord and that it remains in talks with possible Asian LNG customers. The Adelaide-based company owns 60 percent of the development, while Malaysia’s Petroliam Nasional Bhd. has 40 percent. Santos has already agreed to sell LNG to Petronas, as the Kuala Lumpur-based company is known.

Origin is studying the “very complex” tax proposal, the Sydney-based company said in an e-mail. Santos spokesman Matthew Doman didn’t immediately return calls seeking comment.

LNG Economics

A projected increase in Asian demand for Australian gas will help to make the ventures profitable, analysts said.

“I don’t think the tax is going to be such that it kills the economics” of the Santos project, Andrew Williams, an analyst at Credit Suisse in Melbourne, said by phone today. “I still think the economics will stack up. I think for Santos it’s more a case of how do they get the next customers in, how do they get certainty into their financing” and whether the company meets a goal of approving the first phase of the venture by mid-2010.

Australia announced plans yesterday for a so-called super tax of 40 percent on resource profits starting in 2012, intended to raise A$12 billion in its first two years.

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