Proposed 'Resource Super Profits Tax' in Australia Stalls Major Project Decisions

---

Researched by Industrial Info Resources (Sugar Land, Texas)--The Australian government's proposed resource super profits tax, scheduled to be introduced in July 2012, has caused dismay among mining companies planning large investments in the country, particularly in Queensland.

The new tax is targeted at both existing and new projects, with a 40% tax on so-called 'super profits' generated by any resource company that performs projects in Australia. Although other countries have a similar tax, the Australian rate is effectively twice that of other resource-rich nations, such as Brazil and Canada.

Fotescue Metals has threatened to abandon $15 billion of investment in new iron-ore mining projects if the government does not drop or dilute the new tax. The projects are the $9 billion Solomon Hub and the $6 billion Western Hub developments. Shares in the company fell immediately following the tax proposal announcement, and at one stage were down 6.4% before making a partial recovery.

Super profits are defined as anything above 6% of the 10-year Australian Government Bond rate. The government has estimated that the proceeds from the tax could reach $7.6 billion annually during the 2013-14 period, which the government intends to use to fund higher pensions, infrastructure works and implement a cut in the company tax rate from 30% to 28%.

Several energy companies have indicated that they had plans to invest tens of billions of dollars in the conversion of coal-seam gas (CSG) to liquefied-natural gas (LNG) industry in Queensland, including Origin Energy Limited (ASX:ORG) (Sydney, Australia) and BG Group (LSE:BG) (Reading, England).

Both companies had planned to operate CSG-to-LNG conversion projects in Gladstone, Queensland, that could begin production as early as 2014, but at the recent Australian Petroleum Production and Exploration conference in Brisbane, the companies jointly stated that they would wait until the end of this year before final decisions are made.

Origin, through 50:50 joint venture company Australian Pacific LNG (APLNG) (Brisbane, Australia), which was formed with energy corporation ConocoPhillips (NYSE:COP) (Houston, Texas), is concerned that the tax will cause significant delays and increased costs for the almost $30 billion project.

The BG Group has indicated that the company's final investment decision would have to be reconsidered, despite the sealing of a contract with the state-owned China National Offshore Oil Corporation (NYSE:CEO) (CNOOC) (Beijing, China) to supply up to 3.6 million tons per year of LNG over the next 20 years.

Costs for CSG projects in Queensland were previously calculated on a corporate tax rate of 30%, with a 10% royalty to be paid to the state of Queensland. According to some analysts the equivalent tax of 41% would rise to 44% under the proposed system.

Queensland has vast reserves of CSG underground. Although CSG is currently a more expensive form of energy than coal, the increasing emphasis on green energy sources is expected to reduce the cost of CSG. While the resource has been an important energy source in Canada, the United States and other countries for several decades, the industry is still in its infancy in Australia.

Several companies, including major oil companies such as Royal Dutch Shell plc (NYSE:RDS.A) (The Hague, Netherlands) and the Malaysian state-owned Petroliam Nasional Berhad (Petronas) (Kuala Lumpur, Malaysia), together with local companies such as Arrow Energy Limited (ASX:ACE) (Brisbane) are now understood to be reconsidering the economics of proposed CSG projects in Queensland.

Opposition to the proposed tax has not been restricted to those companies concerned with CSG projects alone. Mining giant BHP Billiton Limited (NYSE:BHP) (Melbourne, Australia), although accepting the new tax in principle, has warned that applying it to existing projects could threaten the reputation Australia has for a stable fiscal environment.

Even diversified mining company Xstrata plc (LSE:XTA) (Zug, Switzerland) considers that the proposed tax will have a severe impact on cash flows and has caused "great investment uncertainty."

Meanwhile, the Australian government, despite consultations with mining companies, appears determined to have the tax implemented. The government's position is that the non-renewable resources of the country are owned by the population, which deserves a larger share of the profits.

View Project Report - 300007733 86000979

Industrial Info Resources (IIR) is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. IIR's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.