Substantial regional development and economic benefits stand to be gained from GTL, as well as opportunities for capacity building through technology transfer, supply of goods and services and training of skilled workforces.
A number of factors will help or hinder the development of GTL operations, in Australia in particular. In a paper to be presented to the Australasian Gas to Liquids Conference, I will present the results of a survey of GTL players to identify the issues as they perceive them. The paper will also provide analysis of the key issues, propose appropriate policies for government and look forward at economic and political trends.
GTL participants are being asked questions such as how they rate issues in terms of their importance to GTL development; why they are important; and what governments (and others) need to do to attract GTL development. Issues already identified include: gas prices; capital costs of project development; taxation arrangements, and provision of infrastructure.
Some second order issues are also likely to emerge. These may include industrial relations and the ability to attract and hold skilled staff in regional centres.
The setting up of the Commonwealth - State Gas to Liquids Task Force in 2000 was significant in the history of the government approach to attracting industry. In times past, governments, while encouraging investment in major new resource-based industry, tended to take a passive approach to investment attraction. They believed that if one company did decided not to develop a resource, development might be premature, or another investor would soon follow. Australian governments now recognise that Australia is increasingly competing with other locations throughout the world for investment. Simply having world class resources does not guarantee that they will be developed and that economic benefits will flow. Australia has to be competitive in the key areas of industry economics and needs to be proactive in attracting investment.
A key role of the GTL Taskforce was to identify the key determinants of being competitive for GTL investment and to recommend to governments how Australia's attractiveness could be improved. The Taskforce found, rightly, that Australia was competitive in several respects. Most observers would agree that great gains have been made in the past two decades. But there remain some significant shortcomings. For example, the Taskforce identified what it described as "market failure" in provision of infrastructure for GTL development in essentially greenfields locations. It concluded that provision of multi-use infrastructure is a legitimate way in which governments could facilitate the development of a GTL industry.
What the GTL Taskforce didn't appear to do, however, was to propose how to address the real issues behind this "market failure". While it looked at the company tax and depreciation regimes as applied to GTL industries in other countries, it did not specifically examine these issues in relation to private sector provision of infrastructure. In the view of ACIL, the failure is more likely to be one of government policy. There is a significant policy gap that needs to be filled if Australia is to continue to invest adequate capital in infrastructure.
Most project developers cannot bear the cost of infrastructure on their own. Governments are also finding it increasingly difficult to provide infrastructure for industry, or even growing regional centres, in the face of budgetary pressure and increasing demands for expensive services in health, social services and education. And commercial incentives for third party infrastructure providers are often weak or absent.
ACIL believes that a more strategic approach to infrastructure provision is needed. The question is: how can essential infrastructure be provided without undermining the economics of new projects and without spending by government that is inefficient, often wasteful and potentially unpopular?
The issues go beyond the role of government and beyond the tax system and the specific issue of accelerated depreciation. The issues are complex and some will be difficult to resolve. Examples include: Inefficient administrative processes, for example poorly defined approvals processes and duplication between State and Commonwealth governments; Inefficiencies resulting from tax distortions, including the treatment of depreciation expenses and the treatment of cost of gaining approvals versus feasibility studies; Inefficiencies of current regulatory policy and implementation, for example governments and regulators failing to appreciate the changed nature of risk and reward for projects and not adjusting regulatory approaches accordingly; and Inefficiencies arising out of current policy implementation, such as focus by governments on revenue protection as distinct from revenue growth; and Unclear mandates for corporatised government-owned infrastructure providers.
It is only by addressing these issues in an integrated and strategic manner that Australia can hope to close the policy gap and achieve a climate where infrastructure providers take on more of the investment load.
On taxation, while Australia's company tax rate is now more competitive with those of other countries, treatment of depreciation for long-life capital intensive projects is problematic. A report to the GTL Taskforce found that the company tax rate was a more important determinant of GTL economics than depreciation rates. The report did not examine the relative impact of depreciation rates on infrastructure, however. Infrastructure providers, such as pipeline owners, have been strongly lobbying for reduced "effective life" over which to depreciate their assets in order to improve investment attractiveness.
A "sleeper" issue for GTL could well be industrial relations. The WA Labor Government has just announced new legislation that will wind back direct employer-employee agreements and restore the role of unions. Just what impact this has on the economics of constructing and operating GTL plants remains to be seen, but industry bodies are fearful.
By Ian Satchwell, Manager WA and NT, ACIL Consulting.
