Japan calls on Australia to exempt Barossa gas project from Safeguard Mechanism

The Japanese government has called on the Australian government to give an "immediate and sincere" response to its list of inquiries regarding the enforcement from July 1 of Safeguard Mechanism reforms, including a request to exempt a new gas development project, a Japanese government source told S&P Global Commodity Insights June 29.

The source added that Tokyo believes Canberra's yet-to-be-seen response would likely impact not only Japan's LNG business but also affect various other prospective cooperation arrangements, including on hydrogen and ammonia developments in Australia.

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 is expected to require offsetting of CO2 emissions through steps such as purchasing carbon credits or carbon capture and storage.

The mechanism will require the subjected facilities to cut net emissions by 4.9% annually from July 1, 2023, by 2030, while new facilities including gas fields are expected to have a baseline of net-zero emissions from purchasing carbon credits for CCS from the start of operations.

In a three-page long questionnaire sent to the Australian government three weeks ago, Japan sought clarity over availability of Australian Carbon Credit Units (ACCUs) and Australia's readiness for a carbon capture and storage project over two jurisdictions, the source said.

"It remains unclear about how much ACCUs will be supplied to the market, as well as the Australian government has not clarified how much it will prepare the ACCUs aside from the market," the source said.

Japan has been seeking assurances from Australia that there will be sufficient supply of ACCUs in order to be prepared for any potential leaps in demand and price, the source said.

The source also said that Japan is seeking an exemption for the Barossa gas project, in which Japan's JERA participates. The project is scheduled to start production in around 2025 after having already executed a final investment decision.

Barossa project

Japan is concerned that the Safeguard Mechanism reforms could result in a loss of "predictability" for the Barossa gas project, because of uncertainty over ACCU availability, as well as a lack of clarity surrounding Australia's readiness to deal with the planned CCS project in East Timor, the source said.

The source added that the Barossa gas project envisages transporting CO2 from Australia to the Bayu-Undan oil and gas field in the Timor Sea, requiring the governments of Australia and East Timor to adjust legal frameworks under the London Protocol.

"The frameworks need to be established in around the next year in order to be in time, so that we are asking [Australia] whether they can really do it with East Timor," the source said.

Without clarity over the legal frameworks, the Barrosa gas project would see delays in starting up its CCS project, and its project partners would end up purchasing ACCUs, the source said.

The Barossa gas field, located off Australia's Northern Territory, links to Darwin LNG by pipeline and is expected to start production around 2025, with CCS starting up from around 2027 and reaching fully-fledged CCS in around 2030, the source said.

JERA has a 12.5% stake in the Barossa project, operated by Santos with a 50% stake. SK E&S has a 37.5% stake.

Minister of Economy, Trade and Industry Yasutoshi Nishimura said June 16 that Australia's Safeguard Mechanism reforms would have an "extremely significant" impact on Japan's LNG business in the country.

Nishimura said requiring projects that have executed final investment decisions to be net-zero from day one would create unexpected costs and raised concerns over protecting investors.

Referencing Nishimura's remarks, the source said that Japan is concerned about the validity retrospective application of regulations will have on FID-executed projects.

"Such acts would make Japanese companies reluctant and deter them from pursuing any new projects," the source added.

Australia is by far the largest LNG supplier to Japan, accounting for 42.7% of the country's total LNG imports last year.

"For Japan, we need to ask ourselves whether it is really right to reply more than 40% of [LNG supply] from Australia," the source said.