APPEA: FMG Highlights Gas Reservation Flaws
The Australian Petroleum Production & Exploration Association has welcomed comments in a report released by Fortescue Metals Group that highlight the negative impacts of a domestic gas reservation policy.
APPEA’s Chief Executive, David Byers, said the Deloitte Access Economics report released by FMG today provides yet more support for the case against gas reservation.
“Earlier this month, WA’s independent Economic Regulation Authority called for the domestic gas reservation policy to be rescinded because the economic costs it imposed far outweighed any perceived benefits,” said Byers.
And now, FMG, one of the key members of the Domgas Alliance, has commissioned a report that acknowledges that gas reservation:
- Places a simultaneous tax on domestic gas production and a subsidy on domestic gas consumption;
- Increases the capital cost requirement for LNG producers and reduces the incentive for ongoing investment; and
- May act as a barrier to entry for new LNG players.
The DAE report commissioned by FMG instead argues for a more rigorous application of the existing retention lease system. In reality, it argues that the current system should be allowed to operate as it is intended – that is, companies should be required to develop offshore resources when it is commercially viable to do so.
Byers said the current retention lease framework already incorporates a rigorous approach to testing commerciality.
Buyers added that the retention lease system provides the means by which governments can test the commerciality of a resource and if found to be commercial, require development.
“Importantly, the system also recognizes that oil and gas companies incur significant costs up-front in exploration, which is a high commercial risk activity with no guarantee of success. The industry’s history in Australia shows that only one in 14 wells drilled has led to production,” said Buyers.
“The retention lease framework is an important part of the Government’s overall acreage management system that is designed to provide the incentives for identifying and developing Australia’s oil and gas resources. We should be wary about calls to fix something that isn’t broken,” he added.
Press Release, May 29, 2014