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RUEHJA/AMEMBASSY JAKARTA 5253
RUEHUL/AMEMBASSY SEOUL 9523
RUEHGP/AMEMBASSY SINGAPORE 1519
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RUEHWL/AMEMBASSY WELLINGTON 5409
RUEHBN/AMCONSUL MELBOURNE 5490
RUEHPT/AMCONSUL PERTH 3764
RUEHDN/AMCONSUL SYDNEY 3691

UNCLAS SECTION 01 OF 03 CANBERRA 000819 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ENRG ETRD SENV AS
SUBJECT: LNG INDUSTRY REACTION TO GREEN PAPER ON EMISSIONS 
TRADING 
 
REF: A. CANBERRA 719 
     ¶B. CANBERRA 757 
 
CANBERRA 00000819  001.2 OF 003 
 
 
¶1. (SBU) Summary: Australia's extensive and growing Liquefied 
Natural Gas (LNG) industry is up in arms about the 
Government's plan to create an emissions trading scheme (ETS) 
because the Government's discussion paper (aka green paper) 
on emissions trading (reftel A) failed to indicate whether 
LNG is an emissions intensive trade exposed (EITE) industry. 
The paper set a lower threshold of 1500 tons of CO2 
equivalent emitted per million dollars (A$) of revenue to 
determine who will get free permits to protect against trade 
exposure.  Because large LNG players claim they will fall 
below this cut-off, LNG companies have expressed concerns 
about losing LNG projects in Australia.  The Australian 
government has indicated that it recognizes this may be an 
issue to resolve, and further talks between GOA and the LNG 
industry will try to set out exactly where LNG should fall 
under the scheme.  End summary. 
 
WHAT IS AT RISK? 
---------------- 
 
¶2. (SBU) The Australian LNG industry is concerned because the 
GOA green paper does not initially address LNG as an industry 
that should receive some protection against being exposed 
under a carbon scheme to a world price and lower 
competitiveness.   They argue that billions of dollars worth 
of planned investments are in danger because being forced to 
pay for carbon emissions would make Australia less 
competitive as an investment destination.   The green paper 
acknowledges that "significant further analysis" is required 
to address industries that request EITE assistance. The LNG 
industry has estimated that nearly A$60 billion of investment 
could be deferred or sent elsewhere if Australia's emissions 
trading system does not protect LNG as a trade exposed, 
emissions-intensive industry with access to free permits. 
 
LNG INDUSTRY REACTION TO GREEN PAPER 
------------------------------------ 
 
¶3. (SBU) On July 29 Econoff spoke with Damien Dwyer of the 
Australian Petroleum Production and Exploration Association 
(APPEA) about the LNG sector's reaction to the green paper. 
According to Dwyer, major LNG players feel the potential loss 
of A$60 billion in investment is a concern for the whole 
industry.  Dwyer pointed out that the boom-bust LNG cycle in 
Australia is driven by world prices, unaffected by domestic 
measures that distort pricing like the ETS, and therefore 
investment may flee to countries with less stringent 
emissions policies.  Although LNG might be profitable now, 
Dwyer said, there is a concern that the use of revenue as a 
denominator discriminates against the booming LNG sector and 
will fail to provide the protection needed to maintain 
expansion plans in Australia when costs rise and revenues 
fall.  Dwyer said APPEA is working to ensure that LNG will be 
recognized as a trade exposed industry regardless of the 
actual emissions intensity of the companies and processes 
involved.  The best possible outcome, Dwyer believes, is no 
net increase in operating costs for LNG under an emissions 
trading scheme.  Despite the relatively positive spin in the 
press that LNG will be accommodated in some way, Dwyer said 
is uncertain whether the government's decision will mirror 
industry's desired outcome. 
 
¶4. (SBU) APPEA's goal of eliminating net increases in 
Q4. (SBU) APPEA's goal of eliminating net increases in 
operating costs under the ETS may be stymied by the 
government's willingness to challenge the hugely profitable 
sector.  Department of Climate Change Assistant Secretary 
Barry Sterland told Econoff on August 5 that the paper had 
achieved its aim of "making clear that there will be costs 
associated with this." Sterland said the government was 
concerned about "pork-barreling" in setting up the scheme and 
that the White Paper on the system's design will likely try 
and prevent special consideration of any sector or process. 
How that plays with the range of industries, including LNG, 
that face higher costs under the scheme remains to be seen. 
 
¶5. (SBU) John Torkington from the Chevron Corporation told 
Econoff on July 30 that the green paper's recommendations if 
implemented "would effectively double the operating cost of 
LNG projects."  Torkington refrained from commenting further 
 
CANBERRA 00000819  002.2 OF 003 
 
 
because "without trajectories and anticipated emissions 
prices, it is very hard to be more specific about how this 
might impact the industry in the longer term."  Those 
trajectories and costs should become clearer when the 
government releases in October data from modeling undertaken 
by Treasury.  According to Torkington, Chevron supports an 
ETS within Australia, but he feels that the country should 
understand "international competitors do not face similar 
costs on their emissions."  On August 11 Torkington told 
Econoff that if the government's goal was to provide some 
form of business certainty, they had erred in using the most 
volatile measure, revenue, as a deciding factor in whether a 
process would be assessed as trade-exposed.  This, combined 
with the fact that the GOA has decided to close off any 
possibility of being added to the EITE list after the scheme 
goes into effect, has driven suspicions that Canberra 
believes the big players will not walk away from the huge gas 
finds (Gorgon is believed to hold one quarter of all the gas 
found off Australia to date) and will grudgingly accept the 
costs of the ETS in order to stay in the market. 
 
¶6. (SBU) The Rudd Government, and the Carpenter state 
government in WA, may be right.  Torkington told us that even 
though Chevron has other options for investment, the fear 
that the GOA might void their tenancy rights over gas they 
paid hundreds of millions to find is a powerful incentive to 
remain.  The fear that competitors might gain access to gas 
fields like Gorgon or Wheatstone if left undeveloped because 
of ETS costs may well in the end drive LNG players to grit 
their teeth and go along after getting whatever level of 
special compensation they can wring from Canberra. 
 
¶7. (SBU) BP's Ian Singleton, Manager for the large Browse 
project, said BP was concerned about emissions trading costs, 
but was also concerned about Browse partners like Woodside's 
Don Voelte pressing ahead so aggressively.  Singleton said 
that the big players were in position to pay ETS costs as 
long as profits were high, and that "we have to be where the 
gas is".  BP is equally concerned with their refinery sector 
in Australia, which they see as more at risk of being 
off-shored rapidly (reftel B). 
 
GOVERNMENT SHIFT? 
----------------- 
 
¶8. (SBU) Two major events have dominated the public debate 
concerning government and LNG industry relations: Opposition 
Shadow Treasurer Malcolm Turnbull's visit to LNG facilities 
in Western Australia, and Prime Minister Rudd's direct 
response saying he was open to further consideration on the 
question of protecting the LNG industry during his July visit 
to the Northern Territory.  Dwyer suggested that the media 
reports may have gone "a little too far" as 
government-industry consulting still must take place.  Given 
the size and importance of LNG as an export product for 
Australia, it is likely that the GOA is considering some 
flexibility in how they accommodate the industry.  To spur 
that on, sources tell us that the major industry players, 
including Exxon Mobil, Chevron, BP, and Woodside are writing 
to Rudd to argue against a number of elements in the scheme, 
including EITE status.  That this letter is going to Rudd, 
rather than Climate Minister Wong, indicates how seriously 
Qrather than Climate Minister Wong, indicates how seriously 
the companies involved take this issue. 
 
¶9. (SBU) Comment: Even if big players are carping loudly 
while preparing to go along in 2010, their complaints have 
had some effect.  Sterland refused to be drawn out on 
possible changes to the plan during a meeting with Econoff on 
August 5, but the Western Australia Government's Emissions 
Trading manager Amy Lomas told us that she has heard that DCC 
is reconsidering the formula for determining EITE status and 
may move away from the revenue calculation.  Western 
Australia is frustrated that Canberra has not listened to 
their concerns about possible impacts of the ETS on core 
industries in the state.  This view was backed up by WA 
Department of Premier and Cabinet Environment Direct Rosh 
Ireland.  The challenge of being heard has not been helped by 
the decision to call a snap election in the state, which has 
placed the government in caretaker mode.  This has delayed 
the approval of draft submissions to Canberra on the ETS 
until after the elections in September. End Comment. 
 
 
CANBERRA 00000819  003.2 OF 003 
 
 
MCCALLUM