5.4 Required carbon prices after Government take

Section 5.2 above referred to the fact that revenues from a carbon trading regime would have to be at least roughly equal to the costs per tonne avoided to ensure that a CO2 transport and injection project is economically viable. The analysis in Section 5.3 showed the effect of fiscal relief on the costs of CO2 transport and storage assuming that the costs of CO2 transport and injection could be deducted in full against the revenues from sales of natural gas. In this section, as in Section 5.2, we estimate minimum required carbon prices. However, in this section we now include the effects of the fiscal terms.

We continue to make the simplifying assumption that a carbon trading regime provides revenues and that these would be treated in the same way as gas and liquids revenues. That is, they would be subject to royalties, taxes, profit sharing and so on. From the point of view of establishing a minimum carbon price taking the fiscal terms into account, this is a conservative assumption. In practice, it might be that a carbon trading regime has a different treatment in the fiscal terms. For instance, it might be that such regimes affect some components of the fiscal terms and not others. If so, the required minimum carbon prices taking the fiscal terms into account would be lower than we calculate in this section.

If we include both (a) the potential revenues from a carbon price together with (b) the costs of CO2 transport and storage, then the minimum required price to justify a commercial project can be significantly different from those stated in Section 5.2.

Table 13 shows a simplified single-year hypothetical analysis5 of the combined incremental effect of (a) potential revenue from a carbon trading regime and (b) the costs of a CO2 transport and injection project for a simple fiscal regime with terms similar to the Thailand I fiscal terms. The regime consists of a 12.5% royalty on gross revenue and income tax at 50% of taxable income. The table shows the minimum price of CO2 required to justify implementing a CO2 transport and injection project. We assume that the fiscal terms for oil and gas also apply to the revenues from a carbon price and the costs of transport and injection.

Table 13 shows that the costs of CO2 transport and injection assumed are US$60 million. Therefore, ignoring fiscal effects, the revenue required to justify transport and injection would be US$60 million. Assuming that 3 Mt are injected, the minimum price of CO2 required to make transport and injection economically viable after royalty and tax is US$22.86 per tonne injected.

However, if the effects of the fiscal terms are ignored, the price required is only US$20 per tonne injected (US$60 million divided by 3 Mt). This is approximately 10% less than the minimum price calculated after Government take.

In this example, the reason that the price of CO2 must be higher after the illustrative fiscal terms are taken into account is that royalties are applied only to gross revenue and are independent of costs. In general, any component of the fiscal terms that does not take into account both revenues and costs as they are received and spent will lead to a required carbon price that is different to the price calculated before Government take. This is a feature of all fiscal regimes in South-East Asia.

Table 13 – Illustration of the effect of fiscal terms on the required price of CO2

We have carried out analyses of the required minimum carbon price taking into account effect of the fiscal terms for the APEC economies examined in this report. The results are provided in Table 14. The table also shows the required minima ignoring the fiscal terms. It indicates that the required minimum prices after taking the effects of Government take into account are significantly higher than the corresponding minima obtained by excluding Government take. The average minimum price after the effects of Government take is approximately US$35 per tonne injected compared to approximately US$20 per tonne injected ignoring the effects of Government take. In other words, the effect of Government take could be to increase the required price of CO2 on average by 75%.

These analyses refer only to the required minimum prices of CO2 in any future carbon trading regime. They ignore the effects of additional revenues (if any) from enhanced oil or natural gas recovery. The minimum prices are those prices that make zero the net present value of the incremental CO2 transport and injection project.

In general, CO2 transport and injection is not explicitly recognised in South-East Asian fiscal regimes and the analysis above is preliminary and indicative based on the general assumptions that (a) revenues from any CO2 price and (b) costs of CO2 transport and injection will be subject to the same fiscal terms that apply to existing natural gas developments. This may or may not be the case.

In practice, across South-East Asia in the economies considered in this report, the fiscal treatment of CO2 transport and injection projects is not yet clear. The analyses above are intended merely to illustrate that the way in which CO2 transport and injection is treated in the fiscal terms can have a significant effect on the economics of such projects.

Table 14 – Required minimum prices of CO2 before and after Government take

(vi) For CO2 transport and injection projects, the volume of CO2-e avoided is roughly the same as the volume of CO2-e injected.

(vii) The table shows the approximate minimum prices per tonne of CO2-e avoided required to ensure that the net present values of the CO2 transport and injection projects at least zero.

5 This analysis shows the incremental effect of a CO2 transport and injection project in one year only. In practice, a complete analysis for the whole of project life would be required.