Effects of fiscal terms

Even though some Governments in South-East Asia are considering how CO2 transport and injection might be treated in the fiscal and contractual terms for natural gas extraction, to our knowledge no firm fiscal or contractual arrangements are in place.

The fiscal terms for natural gas production across South-East Asia are such that Governments receive a significant share of the net cash flow from each project. We refer to this as Government take. Government take consists of royalties, income and other taxes, Government profit sharing, domestic oil supply obligations and so on. It is typically well over 50% of the net cash flow from a natural gas development.

In the absence of any additional revenue through a carbon price or enhanced recovery and if the costs of CO2 transport and injection are to be treated in the same way as the costs of natural gas extraction, then the high Government take implies that the fiscal relief on such costs would be considerable. Our illustrative analyses suggest that such relief might be between 40% and 90% of the costs. This would make CO2 transport and storage significantly cheaper and thereby more attractive. This is shown in the table below.

However, enhanced recovery as a result of CO2 transport and storage would provide additional revenues for the gas developments. A carbon trading regime might also provide additional revenues. In these circumstances, the fiscal terms in South-East Asia might adversely affect CO2 transport and storage. For instance, our illustrative analyses show that under conservative assumptions, the average minimum CO2 price required to make a CO2 transport and injection project commercial would need to be almost twice the average minimum price required if there was no Government take.

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

The analyses suggest that taking the fiscal terms into account, many transport and injection projects could be economically viable at carbon prices less than US$60 per tonne.