Santos Seeks Tax Clarity Before Gas Project Proceeds

Santos Ltd., Australia’s third-largest oil and gas company, is seeking clarity on the country’s proposed 40 percent tax on resource profits in order to proceed this year with a project in Queensland.

“We will take the time to assess the impact of the proposed new tax” on its liquefied natural gas venture, Chief Executive Officer David Knox said in Brisbane today. “I have also said that we will take a final investment decision this year. To enable that, it will be important that we get greater clarity on the tax regime we can expect.”

Santos, Origin Energy Ltd., BG Group Plc and Royal Dutch Shell plan to advance with projects in Queensland that may cost as much as A$80 billion ($69 billion). The companies intend to convert coal-seam gas to liquid form for export to Asia. BHP Billiton and Rio Tinto Group said they would review Australian projects after the government announced the tax plan May 2.

Knox said Santos is “very close” to announcing a customer for its Gladstone LNG venture. “The new tax has not been helpful in moving this forward,” he told reporters at the Australian Petroleum Production and Exploration Association conference. “The key challenge is the uncertainty.”

The oil and gas producer is prepared to sell a stake of more than 9 percent in the venture as part of a fuel-supply agreement, he said.

‘Risky’ Tax

Santos fell 3.6 percent to A$12.35 in Sydney trading, compared with a 1.7 percent drop in the benchmark S&P/ASX 200 Index.

The company, based in Adelaide, said earlier this month it aims to make a development decision on its LNG project some time this year, as opposed to its previous mid-year target. Imposing new taxes on the resources industry is “risky and unnecessary” at a time when those companies are set to underpin Australia’s economic growth, Santos said May 6.

The LNG venture with Petroliam Nasional Bhd., or Petronas, has created an average of a job a day for the past 18 months and is expected to generate “billions of dollars of investment,” Knox said.

Asian demand is a “game changer” for Australia’s natural gas industry, Knox said today. Gas will give Australia an advantage as the nation challenges Qatar as the world’s largest producer of LNG, he said. That’s provided gas projects don’t get delayed because of uncertainty over tax, he said.

The tax proposal has increased speculation that Queensland LNG developers may combine their ventures in some way.

Consolidation ‘Sensible’

While consolidation among the proposed Queensland LNG projects “is a sensible thing to do,” the opportunity to do this may have passed, Knox said. Collaboration, should Santos expand its venture beyond two processing units, remains possible, he said.

Operators of the four most advanced LNG projects in Queensland state could benefit from some form of consolidation, Fitch Ratings said today. Collaboration may reduce risks to the projects, Fitch said in a report. The LNG operators may gain by sharing infrastructure, including pipelines and jetties. The four ventures are planned for Curtis Island, adjacent to Gladstone Port in central Queensland.

Opposition leader Tony Abbott said at the conference it is “insane” of the government to propose introducing a tax on resource project profits. Prime Minister Kevin Rudd’s Labor government has held no “serious consultation” with the resources industry on the plan, Liberal Party leader Abbott said.

The country’s economy depends on the resources industry and the proposed tax is a “dagger aimed the heart” of Australia’s prosperity, he said.

“You would think that any sane government would do anything it humanly could to encourage the resource sector to expand,” Abbott said. “But no, that’s not what the current government has done.”

Australia has “room for negotiation about the finer detail” of the tax proposal, Energy Minister Martin Ferguson said at the conference earlier this week. Returns exceeding the rate on long-term Australian government bonds would be taxed as “super profits” under the plan. Treasurer Wayne Swan has said the government is committed to introducing the tax at a rate of 40 percent.

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