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Client Update: LNG supplementary assistance

2 October 2012

In brief: The Federal Government has made regulations for the calculation of the 'top up' assistance, in the form of free carbon units, that is to be given in respect of LNG projects. Partner Grant Anderson reports.

Background

Under the Jobs and Competitiveness Program, the production of liquefied natural gas, ie the physical transformation of natural gas into liquefied natural gas (LNG) that has a methane concentration of at least 70 per cent, is a moderately emissions-intensive activity. As such, the production of LNG attracts assistance in the form of free carbon units, for both direct emissions and indirect electricity-related emissions, that commences at 66 per cent of baseline emissions (for the financial year starting 1 July 2012) and decreases by 1.3 per cent per annum. In this Client Update, this assistance is referred to as the 'ordinary allocation'. It is calculated by reference to emissions that are associated with the actual transformation of the natural gas into LNG, ie not by reference to emissions associated with activities upstream of the LNG production facility (the liquefaction plant) such as emissions arising from the extraction of the raw gas from gas fields, the preliminary processing of that raw gas upstream of the liquefaction plant, or the transportation of that gas to the liquefaction plant.

In recognition of the significance of the LNG export industry to the Australian economy, the fact that emissions arising from its combustion are substantially lower than emissions arising from the combustion of coal and the wide dispersion of emissions among LNG projects, the Federal Government committed to ensuring that the assistance provided in respect of LNG projects would not reduce below 50 per cent of the emissions referable to the extraction, transportation, processing and production activities associated with LNG production. In this Client Update, this 'top up' assistance is referred to as the 'LNG supplementary allocation'. Regulations have now been made that specify the manner in which the LNG supplementary allocation is to be applied for and calculated.

Who may apply for assistance?

An application for an LNG supplementary allocation is to be made by the same entity that is able to apply for the ordinary allocation in respect of LNG production. That is, an LNG supplementary allocation can be applied for by:

  • the holder of a liability transfer certificate in respect of the LNG production facility;
  • a participant in a designated joint venture for the LNG production facility; or
  • in the absence of a liability transfer certificate or a designated joint venture, the entity that has operational control over the LNG production facility.

This is a significant change from the exposure draft regulations, which contemplated that an application for an LNG supplementary allocation would be required to be made jointly by the entity that was liable for emissions from the LNG production facility and all other entities that had carbon liability in respect of associated upstream facilities (such as natural gas extraction and transportation activities). This would have given upstream operators a significant bargaining advantage in their negotiations for supplying raw gas, transportation, processing and other services to the LNG producer and, given the number of upstream operators that are often involved in such activities, would unlikely to have been workable in practice.

An application for an LNG supplementary allocation for a financial year can only be made where the LNG production facility has produced LNG during the previous financial year. Because the free carbon units are calculated on the basis of the previous financial year's emissions, but have a vintage of the following financial year, the number of free carbon units is discounted by reference to the carbon unit price of the vintage year.

Calculation of LNG supplementary allocation

An LNG supplementary allocation for an LNG production facility for a financial year is calculated as the amount (if any) by which 50 per cent of the 'final LNG emissions number' exceeds the ordinary allocation for that financial year. The final LNG emissions number is calculated as the 'eligible LNG emissions' for the 'LNG project' for the previous financial year.

For these purposes the 'LNG project' comprises, in addition to the LNG production facility (ie the liquefaction plant),1 all facilities at which the natural gas is extracted, transported or handled prior to its conversion into LNG.2 These facilities are referred to as 'upstream LNG facilities' and include the extraction of raw gas at the gas production field, the processing of that gas (either at the field or at a processing plant en route to the LNG production facility) and the transportation of the raw or processed gas through pipelines to the LNG production facility.

'Eligible LNG emissions' consist of:

  • category A emissions – that is, covered emissions (ie emissions that attract liability under the carbon pricing scheme), emissions from the combustion of liquid fossil fuels (including those covered by the fuel opt-in scheme) and emissions from the production of imported steam, being in each case emissions that are not related to electricity generation; and
  • category B emissions – that is, emissions of the kind referred to above that are related to electricity generation, as well as emissions referable to the production of electricity consumed within the LNG project where that electricity either is generated by electricity generators that are part of a facility within the LNG project or that are connected to such a facility by a dedicated line, or is supplied from an electricity grid.

These emissions include emissions associated with the extraction of the raw gas upstream (including drilling), the transportation and handling (including processing) of that gas, the liquefaction of the natural gas, the consumption of steam, the storage of the LNG and the loading of the LNG for export from the LNG production facility. The reason for categorising eligible LNG emissions as category A emissions or category B emissions is that different methodologies are used to apportion such emissions as between LNG production and other activities (see below).

Because LNG production often entails not just the production of LNG but also the production of saleable by-products such as LPG and condensates, the regulations provide for the apportionment of these emissions as between LNG production and by-product production, with only the former qualifying as 'eligible LNG emissions'.

Footnotes
  1. The LNG production facility might consist of one or more LNG production facilities, whether or not they are co-located.
  2. The details in this Client Update relate only to large LNG facilities, ie those with a maximum productive capacity of at least 500,000tpa of LNG. Special provisions apply to smaller LNG facilities that liquefy natural gas obtained from the gas transmission or distribution system, as opposed to from a gas field.

For further information, please contact:

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