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Tri-Star takes on LNG giants
April 29, 2016
Author: Mark Ludlow
The royalty spat between the Queensland government and a major gas consortium has flared up, with a petroleum exploration company claiming big liquefied natural gas producers used transfer pricing to reduce their royalties bill.
The Australia Pacific LNG consortium, led by Origin Energy, is seeking a judicial review over a royalty determination by the Queensland government late last year to reflect the fall in world oil prices. But APLNG – which includes
Origin Energy, ConocoPhillips and Sinopec – has been blindsided by US-based company Tri-Star, which is attempting to join the court action, claiming it would be impacted by the consortium paying lower royalties.
The court action against the cash-strapped Queensland government could have ramifications for other players in the $80 billion export industry based around Gladstone.
Supreme Court Chief Justice Catherine Holmes has reserved her decision on whether Tri-Star can join the court action, but explosive documents tendered to the court claimed the big LNG producers inflated their construction costs to allow them to make bigger deductions against royalties owed.
A briefing document from Tri-Star to then-Queensland premier Campbell Newman in 2014 called on the state government to overhaul its methodology for working out LNG royalties. Queensland’s Office of State Revenue uses the so-called “netback method” to determine royalties paid into state coffers. Royalties are payable at 10 per cent of the well head value – the amount that could reasonably be expected to be realised if sold on a commercial basis – less deductable operational and capital costs.
But in the briefing document to the Queensland government, Tri-Star claims the current royalty pricing structure “could be prone to transfer pricing, which allows operators to avoid paying their fair share of royalties”.
“Because the largest Queensland operators own all associated infrastructure and sell CSG to themselves rather than a third party, they are currently able to use a variety of methods to reduce the value of the CSG at the well head – and the royalties paid,” the document said.
“Such schemes include artificially creating numerous transactions or sales from the producer [at the well head] to the end customer, often times through affiliated entities. These entities also allocate upstream profits to affiliated downstream entities. As a result, pricing of pipelines and CSG-to-LNG liquefaction costs may be inflated.”
Tri-Star – which has been in a long-running dispute with Origin wanting to trigger “reversion rights” over coal seam gas reserves – proposed the Queensland government put a fixed tariff on LNG and pipeline proceeds which would provide a low-risk rate of return of no more than 8 per cent to 10 per cent.