Fossil fuel myths we didn’t know we had

The fossil fuel narrative in this article tackles the myths that tend to give a degree of social licence to new coal mines and gasfields. In outline the myth-breaking narrative is:
– Australia does not need to open any new coal mines or gasfields for its own use
– The output from all new coal mines and gasfields will be exported
– Royalty, subsidy, and tax figures show just how little benefit Australia receives from fossil fuel exports
– Fossil fuel exports cause immense climate damage despite flying under the carbon reduction target radar

It’s largely the prerogative of state and territory governments to approve or reject proposals for any specific new fossil fuel extraction project. They also can and do institute bans or moratoriums on certain types of projects, such as fracking or, in Victoria’s case, any new on-shore gas extraction, despite the current federal government taking a dim view of such ‘anti-development’ moves.

Environmental Justice Australia has drafted model No More Bad Investments (NMBI) legislation (downloadable from this page) which state/territory governments could implement in order to ban new climate-damaging projects. Since the model legislation includes immediate bans on ALL new coal, oil, and gas extraction, it is worth taking a look at the facts and financial figures. What impact would that have on federal and state coffers? And would we be able to ‘keep the light on’?

The first fact to emerge is that ALL the coal and gas extracted from ALL new coal mines and gas wells in Australia will be exported (or an equivalent amount from existing mines and wells would be freed up for export).

It’s no secret that Australia exports a lot of coal and gas, or that all the coal from the proposed Adani Carmichael mine would be exported to India if it were to go ahead. But the public might assume that most of the coal and gas from all the myriad of other proposed new extraction projects is for use within Australia. If it were acknowledged up front that the output from all those new projects is intended for export, surely that would remove a lot of the social licence for new extraction projects.

Australia already exports roughly twice as much ‘energy’ as we use within Australia, and consumption (demand) within Australia has been close to flat over the last decade, as shown by the following figure in the 2017 Australian Energy Update published by the Department of Environment and Energy.

But what about the so-called ‘east coast gas shortage’? There are a number of major new gasfields being proposed, including several potentially enormous gasfields in NT, Santos’s proposed Narrabri gasfield, the new Dory gasfield off the Gippsland coast, and the recently approved exploration licence for gas off the coast of NSW. All these are being justified by claims that they will ease the supposed east coast gas shortage. Even if there were indeed a slight gas shortage four big new projects seems like overkill. Or is the ‘gas shortage’ just a Trojan Horse for extracting more gas for export?

This summer there were no reports of power failures due to gas shortages despite considerably more gas-powered generation being in the fuel mix reported by NEMWatch on heatwave days.

As the above graph from the AEMO 2016 gas forecast shows, residential, commercial, and industrial gas demand are flat-ish or even falling slightly. Demand for gas-fired electricity generation has been falling since 2014 when gas prices increased. The only demand that is actually rising – and rising dramatically – is the demand for Liquefied Natural Gas (LNG) exports.

Our states and territory governments certainly don’t need to approve new coal or gas extraction projects in order to ‘keep the lights on’ within Australia. Some sort of gas reserve legislation might be useful to ensure gas exports don’t leave us short, but we don’t need to approve any new gasfields.

If all new coal and gas extraction projects are slated for export, why do state and territory governments even consider allowing new fossil fuel extraction projects despite the climate imperative of keeping fossil fuels in the ground, and despite often fierce community opposition? Could it be the dollars in state revenue?

The public relations machines of fossil fuel companies would have us believe that new hospitals, better education, and all sorts of other good things are reliant on the prosperity that comes from us allowing them to sell off our fossil fuel ‘resources’. Let’s look at the figures.

State royalties and subsidies
According to Table 4 in the mining operations spreadsheet published by the Australian Bureau of Statistics, in 2014-15 Australia-wide coal royalties were $2.8 billion and petroleum (oil plus gas) royalties were $1.9 billion. In that year, coal subsidies were $769 million and oil and gas subsidies were $68 million. Thus, for ALL the coal, oil, and gas extracted from existing projects in Australia that year, the financial benefit to society amounted to around $3.8 billion, enough for maybe two major new hospitals.

But climate campaigners are calling for a ban on all NEW fossil fuel extraction projects, and it is the new projects that receive the heaviest subsidies from state governments. Over the six years from 2010-11 to 2015-16, Queensland received an average of $1.94 billion/year in coal royalties. But if you subtract the $1.27 billion/year in subsidies the Queensland coal transport sector received over the six years from 2008-09 to 2013-14, Queensland’s ‘gain’ from its numerous coal mines was only around $670 million/year.

South Australia receives much of its gas for electricity generation and household use via the Moomba pipeline from the Cooper Basin in the north-east corner of the state. 2014-15 gas and oil sales value totalled around $1.56 billion, but SA received just $105.3 million in oil and gas royalties. Separate figures are not given for the gas royalties, but gas sales amounted to only about 20% of the total oil and gas value, so the share of royalties received from the gas industry might have been as low as $20-25 million.

Yet in 2017 the SA government gave $48 million across two rounds of subsidies for new gas projects in the Otway Basin in the state’s south-east and the Cooper Basin. For the Otway Basin this included $6m to Beach Energy and $5.26m to a Beach Energy and Cooper Energy joint venture. The Cooper Basin subsidies included a total of $16.85m for several new joint ventures between Santos and Beach Energy.

One condition of these new subsidies is that the gas from these projects be offered to SA first, which might seem like a wise move from a government that is determined to avoid any future blackouts. But will SA actually need more gas to keep the lights on when it already has many new renewable energy and storage projects coming online over the next few years?

In a Santos media release about the subsidy for a new gas efficiency project in the Cooper Basin, Santos CEO Gallagher said, “If we can make even half that gas available to the market by capturing energy efficiency opportunities, it would be an excellent outcome for both Australian domestic customers and our LNG exports.” That (and other) gas from the subsidised new Cooper Basin projects could just as easily flow via the pipeline from the Cooper Basin to Gladstone on the Queensland coast and be exported from the Santos LNG facility.

What about the proposed Statoil project to drill for oil in the Bight? Offshore projects in Commonwealth waters do not pay state royalties, so SA coffers will receive no royalties from oil in the Bight.

Federal income tax
According to figures found in the corporate transparency data published by the ATO, in 2015-16, the various coal companies owned by Glencore had a total income of $21.6 billion and paid just $44 million in income tax.

At least 22 other major fossil fuel extraction companies paid no income tax in 2015-16 despite together earning an income of $51 billion in that year. Those companies included Santos (income of $3.47 billion) and Beach Energy (income of $589 million), along with international companies like Chevron, Shell, and ExxonMobil. All except a couple of the above 22 companies also paid no tax in 2013-14 and 2014-15.

Federal Petroleum Resource Rent Tax (PRRT)
All onshore and offshore oil and gas extraction projects are required to pay the federal Petroleum Resource Rent Tax (PRRT), but this is intended to be a ‘super profits’ tax payable only after all exploration, establishment, and operational costs have been recovered. This means that any new oil or gas projects are unlikely to pay any PRRT at all for well over a decade.

In the meantime, a generous system of compounding PRRT credits can be used to offset any income tax liability. This might explain why Santos and Beach Energy paid no income tax in 2015-16 even though they both did pay income tax in 2013-14.

One particularly perverse outcome will become apparent if an oil spill occurs as a result of Statoil drilling for oil in the Bight. Statoil will have to pay for the cleanup, but that cost will count as an expense under PRRT rules and will be able to be claimed as a PRRT credit. In effect the taxpayer will cover the cleanup cost, and SA will suffer the environmental damage despite getting nothing in royalties, income tax, or PRRT.

Exploration and production licences
The state revenue from selling licences varies in accordance with the size of the project. SA licence application fees are only a few thousand dollars. Annual exploration licences start at a few thousand dollars and range up to a maximum of $26,000. Annual production licences range from a few thousand up to maximums of $67,600 for onshore projects and $116,325 for offshore projects.

Jobs and local procurement
New fossil fuel extraction projects generate jobs and, in the case of foreign-owned fossil fuel companies, they also inject foreign funds into our economy via wages and local procurement of goods and services. This is a good thing, but we don’t need to rely on new fossil fuel extraction projects to achieve those benefits.

Those benefits also come from new renewable energy projects, like SolarReserve’s solar thermal project at Port Augusta, Neoen’s wind plus battery project at Jamestown, Sanjeev Gupta’s solar and pumped hydro projects at Whyalla, and numerous other climate-safe projects all over Australia.

It’s all about exports
This is turning into an ugly story indeed. No new fossil fuel extraction is needed for use within Australia so new extraction projects simply mean more fossil fuel exports. They will only give state and federal coffers a pittance in extra revenue to fund better education, health care, etc., so state governments are putting our climate, our communities, and our aquifers and farming land at risk for almost no financial benefit. Have our politicians ever looked at the figures, or are they blinded by fossil fuel industry spin?

But it gets worse. Under IPCC carbon accounting conventions, exported fossil fuels don’t ‘count’ against states/territories meeting their carbon reduction targets. Queensland, SA, and Victoria all have targets of net zero emissions by 2050. Even if they meet those targets, any actual climate benefit could be more than wiped out by the climate impacts of the fossil fuels exported from the NEW extraction projects they continue to approve in the meantime.

Take another look at the Australian Energy Balance graphic above. Now imagine that Australia achieves a super-rapid transition to 100% renewable electricity and electrified transport. We might feel incredibly proud of that achievement, and so we should, but our actual climate impact from fossil fuel exports would still be double the climate impact from all the fossil fuels we currently use within Australia. That is a horrible thought.

The least state/territory governments should do – and it would be relatively easy really – is to ban any NEW fossil fuel extraction projects.

Margaret Hender, March 9, 2018

Posted in Phasing out fossil fuels.