S Korea joins Japan in seeking exemption from Australia's Safeguard Mechanism

South Korea has joined Japan in seeking an exemption from recently introduced reforms to Australia's Safeguard Mechanism, leaving Canberra effectively facing a united front from two of its largest LNG importers on the contentious issue.

South Korea and Japan in particular share concerns over the impact of the Safeguard Mechanism reforms on the Barossa project, in which companies from both countries participate, as well as the potential impact on future LNG business with Australia, currently the largest supplier to both countries.

During a meeting with Australia's Climate Change and Energy Minister Chris Bowen on July 25, South Korea's Minister of Trade, Industry and Energy Lee Chang-yang raised concerns about the reform, which took effect July 1, and requested an exemption, a MOTIE official told S&P Global Commodity Insights July 27.

"Minister Lee asked for the Australian government's cooperation for normal implementation of investment," the MOTIE official said. "Minister Lee also asked for South Korea's exemption from the Safeguard Mechanism, with no immediate response from the Australian side."

The Safeguard Mechanism applies to industrial facilities, including oil and gas production and mining operations, that emit more than 100,000 mt/year of CO2 equivalent, and requires offsetting of CO2 emissions through steps such as purchasing carbon credits or carbon capture and storage.

The mechanism requires affected facilities to cut net emissions by 4.9% annually through 2030, while new facilities, including gas fields such as the Barossa project, are expected to have a baseline of net-zero emissions from the start of operations.

The Barossa gas project is operated by Australian company Santos, alongside Japan's JERA with a 12.5% stake and South Korea's SK E&S with 37.5%.

SK E&S's CEO Choo Hyung-wook also sought the Australian government's support for the Barossa project, including in the area of CCS, during a July 25 meeting with Bowen, an SK E&S spokesperson said.

The project, which has already taken a final investment decision, plans to capture CO2 emissions and ship them to the Bayu-Undan oil and gas field in the Timor Sea for storage. However, before this part of the project can get underway, the governments of Australia and East Timor will need to adjust legal frameworks under the London Protocol on transboundary CO2 transfers. Until that aspect of the project is up and running, it would have to purchase carbon credits to cover its emissions.

Japan likewise is seeking an exemption for the Barossa project, with its Minister of Economy, Trade and Industry Yasutoshi Nishimura saying last month that the requirement under the Safeguard Mechanism reforms for projects that had already taken FID to be net-zero from day one would create unexpected costs. Tokyo has been seeking clarity from Canberra over the availability of Australian Carbon Credit Units (ACCUs) and Australia's readiness for a carbon capture and storage (CCS) project over two jurisdictions.

Defending the mechanism

Bowen, in a visit to Tokyo on July 26, defended the country's Safeguard Mechanism reforms.

"In relation to exemptions, the law has passed, it is the law of the land," Bowen said during a Q&A session at the Australian Business Council in Japan, in response to a question about whether there would be any exemptions for gas projects.

Regarding the need to get the Bayu-Undan CCS aspect of the Barossa project sanctioned, Bowen noted that Barossa "is a very high carbon field... so it needs to be dealt with," according to a transcript released by the minister's office.

"We have introduced the legislation to enable that to occur because we think it's fair if we're requiring apart from the generality of [CCS], if we're requiring companies to meet ambitious emissions reductions targets and they have a way to do it, we can help them achieve it," Bowen said.

"So that legislation is making its way through the parliament. So that's how we're best interacting. In my experience, the companies and governments have responded well, to that dialogue, explaining that."

Later in the day Bowen held talks with Nishimura, with the two ministers sharing views on the importance of stable policy and investment environments in both countries to underpin cooperation on energy security and climate change, and stressing the need to continue discussions in areas including the application of the Safeguard Mechanism.

Commenting on Bowen's remarks, Takayuki Nogami, chief economist at Japan Organization for Metals and Energy Security, or JOGMEC, said he that discussions with the Australian government over the matter could take a long time, and that this might lead to companies accelerating moves towards LNG supply diversification.

"With no suggestion of easing application of Australia's Safeguard Mechanism from Minister Bowen's remarks, talks with the Australian government on this matter might take a long time to reach any agreement, as well as it remains unclear to any settlement satisfiable for LNG project companies," Nogami said.

"Given an expected increase in Australian LNG prices as a result of factoring costs from cutting CO2 emissions in the future, a series of the Australian government moves would likely lead end-users to look for other LNG supply sources as part of LNG supply diversification," he added.