5.3 Costs after Government take

In the five economies in South-East Asia discussed in this report, natural gas projects have relatively high fiscal take in the form of royalties, taxes, Government profit sharing and so on. The total revenue the government receives as a percentage of the total net present value (NPV) of a gas discovery development ranges from about 55% to up to almost 100% depending on the fiscal regime and the profitability of projects. Therefore, in the absence of revenues from a carbon trading regime and depending on the treatment of CCS projects, companies implementing CCS for an existing natural gas project in these economies can potentially gain considerable financial advantages in the form of fiscal relief.

For each economy/fiscal regime we carry out fiscal analyses to estimate the economic effect of implementing CO2 transport and storage to an existing natural gas project with a high CO2 content. The purpose of these analyses is to determine the fiscal relief a project can obtain by applying transport and storage in the absence of a carbon trading regime.

We define fiscal relief to be the reduction in Government take caused by increases in costs for a project that is or will be paying significant fiscal imposts to Governments. We assume that no additional revenue is obtained from a carbon price or from enhanced recovery.

In order to illustrate the principle involved, Table 10 below gives a simple hypothetical illustration of the effect of fiscal relief in one year under a simple hypothetical income tax regime with a tax rate of 40%.

Table 10 – Illustration of the effect of tax relief

Item (US$ million) Existing project Existing project with extra costs Incremental effect of extra costs
Revenue 100 100 0
Deductions (costs) 10 20 10
Tax 40% * (100 – 10) = 36 40% * (100 - 20) = 32 -40%*(10) = -4 (tax relief)
Net cash flow after tax = 100-10-36 = 54 = 100-20-32 = 48 = -6

In this example, the extra costs before tax are US$10 million. This reduces taxable income by US$10 million and the project pays US$4 million less tax than before (40% of US$10 million). Therefore the tax relief is US$4 million and the effective after-tax cost is US$6 million.

For the purpose of the analyses of fiscal relief on CO2 transport and storage for the representative sensitivity analyses, we assume a range of hypothetical but representative existing natural gas developments with reserves varying from 100 Bcf to 5,000 Bcf. We assume that natural gas price varies from US$4/GJ to US$10/GJ to reflect the uncertainty in long term natural gas prices in domestic and international gas markets.

Table 11 below shows our estimates of the overall fiscal relief under the fiscal regime in each of the five economies we considered.

Table 11 – Fiscal relief in five economies/fiscal regimes

Economy Fiscal relief
Malaysia 63% – 88%
Indonesia 58% – 76%
Vietnam 41% – 67%
Thailand 38% – 70%
Brunei 49% – 66%

Taking Malaysia as an example, if we apply CO2 transport and storage to an existing natural gas development in Malaysia, under the Malaysian PSC the project will have a fiscal relief of 63% to 88% depending on its profitability. Assuming that the before-tax cost of CO2 transport and storage is US$500 million, the after-tax cost would only be US$500 million × (1 - 63% to 88%) = US$185 million to US$110 million.

The effect of fiscal relief on the representative sensitivity analyses would be to reduce the costs to the levels given in Table 12.

Table 12 – The cost of CO2 transport and injection before and after fiscal relief for the representative cases