Queensland switches to volume model for CSG royalties

THE Queensland government has decided on a volume-based royalty regime at a rate of 12.5% from the wellhead over a revision of the LNG netback model preferred by the Origin Energy-led Australia Pacific LNG, which exports from Gladstone.
Queensland switches to volume model for CSG royalties Queensland switches to volume model for CSG royalties Queensland switches to volume model for CSG royalties Queensland switches to volume model for CSG royalties Queensland switches to volume model for CSG royalties

APLNG backed revised netback regime

Helen Clark

Editor

The review was conducted by the Office of State Revenue and used LNG and domestic sales data to make its calculations rather than industry benchmark indicators, the prior preferred method.
 
This change works out at almost an additional $100 million per year in revenue for the state, while also offsetting domestic gas bills, with gas now calculated at the wellhead. 
 
The Jay Weatherill-led review first submitted a report late last year and another in early 2020. 
 
Its recommendations will now come into force for five years, beginning October. The regime governs all CSG extraction in the state and will be expanded to cover non-CSG hydrocarbons.
 
Industry originally asked for a ten-year term, then revised that down to seven years.
"The principal benefit of the volume model is its simplicity," the final report said.
 
The volume-based model will see royalties calculated on the volume of gas produced and will include a sliding rate scale and producers' sales revenue, the government said.
 
Weatherill was South Australia's longest serving premier and under his leadership the state massively expanded its renewable energy investments and generation. 
 
Under his leadership, its onshore hydrocarbon regime was also seen as the third-best globally in smaller jurisdictions, according to a Fraser Institute survey of 2017. When he lost office to the Stephen Marshall-led Liberal Party this dropped to tenth place. 
 
The Queensland government report states that APLNG and others including industry lobby body the Australian Petroleum Production and Exploration Association favour a continuation of a more complex yet well understood netback regime.
 
Santos and Senex Energy were in favour of the volume-based regime. 
 
The arguments against the netback regime among others are that it makes dispute resolution more difficult, that revenue to the government will rise but then decline after a four year period and, interestingly, that the 3 million cubic metres of gas flared or vented at each well head is not counted under the royalty regime, though "the gas has a value which is owned by the state and arguably should be subject to royalty," the report said. 
 
Those against the volume regime also argue if all gas is taxed the same way it will disincentivize the development of marginal or less economic fields. 
 
This is disputed and the report suggests it may rather favour the more efficient producers as long as there is a way for this acreage to be transferred to them, rather than sat on. 
 
A revised LNG netback regime could also have given LNG exporters advantages over domestic producers "given the market strength and influence of the LNG projects" meaning fixed deductions would have had to be set at levels that did not disadvantage local producers.
 
The government's modelling on the currently revised and volume-based method all see increasing royalties to 2028 based on a rising Brent oil price, but the volume model is most likely to deliver the highest return.
 
By 2028 under the revised netback model returns would be $184 million lower than current arrangements, the report said.
 
Treasurer Cameron Dick, who recently replaced Jackie Trad, said the new model is designed to support low-priced domestic gas supply.
 
"Queensland's gas industry continues to do the heavy lifting in supplying the gas for domestic markets in Eastern states, while also meeting the needs of international customers," he said.
 
"This review has been crucial in ensuring that oil and gas companies are treated fairly, and that Queenslanders receive their fair share of royalties from this important industry.
 
"The model is transparent, equitable, administratively simpler and locked in for five years."
 
APPEA welcomed the certainty of locking in a regime for five years. Last year former Treasurer Trad threw industry into a loop after she increased the royalty regime from 10% to 12.5% with little prior consultation.