PERTH- Australia's liquefied natural gas (LNG) sector is changing from an industry that was vociferously opposed to any form of carbon taxes or trading to one that views a price on emissions as vital to its future.

The 180-degree change in attitude has happened rapidly and comes as the world's biggest producer of the super-chilled fuel grapples with how it's going to adapt to a carbon-constrained future, where it will likely have to achieve net-zero emissions in order to survive.

The annual gathering of the Australian Petroleum Production and Exploration Association (APPEA) event this week in Perth found an industry that has, perhaps belatedly, realised that the time available to it to embrace the challenges of climate change is becoming very short.

Perhaps wary of what has happened to the coal industry, which is struggling to attract financing, insurance, quality shareholders and young, skilled workers, the LNG sector is seeking to stay in business for the long term.

Put simply, this means embracing net-zero emissions targets and pivoting the industry away from producing substantial carbon emissions through the extraction of natural gas and the energy-intensive process of liquefaction.

What Australia's LNG producers have to be able to do is deliver on their commitment to "green" their product, and effectively they see two ways of doing this.

The first is to produce what is called green LNG, at first using carbon offsets but eventually moving to capture and store the carbon emissions, and also to use more renewable energy sources to power their liquefaction units.

The second plan involves switching from producing LNG to using natural gas to produce hydrogen, a fuel that is emissions free when burnt, but creates emissions in being produced.

The way to offset these emissions is to build into the hydrogen production process carbon capture and storage (CCS), and it's here where a carbon price becomes vital.

A senior industry executive, speaking off the record at the APPEA event, said his company could capture and store in depleted oil and gas reservoirs all the carbon emissions from producing hydrogen at a cost of around A$30 ($23.10) a tonne.

But in order to make this economically viable, the company needs to be able to sell a carbon credit for its work in capturing the emissions, hence the need for some form of carbon price.

Carbon credits created by CCS would have to be internationally recognised and traded, allowing energy utilities in importing countries such as Japan to offset their carbon liabilities.

 

POLITICAL CHALLENGE

The problem for Australia's LNG sector is that the current federal government is opposed to carbon pricing, with Prime Minister Scott Morrison's conservative Liberal-National coalition killing a carbon price after it won office in 2013 from the Labor Party.

Morrison has said that his government favours technology over taxes when it comes to addressing climate change.

The irony is that the LNG industry has what it thinks is a viable, technological solution to carbon emissions, but it needs a price on carbon in order for the plans to be economically sustainable.

The other issue is that carbon taxes are likely to be imposed on Australia's energy exports by importing countries at some point, with the developed world moving closer to agreeing on some form of carbon border adjustments.

The LNG industry argues that in this scenario it will be better for Australia to impose its own carbon pricing and keep the money inside the country, rather than pay it to foreign governments.

The Labor Party, currently the official opposition and neck and neck in opinion polls with the ruling Liberal-National coalition ahead of a federal election likely later this year, would most likely move to bring back some form of carbon pricing, and would also work with international partners to ensure recognition and tradeability.

But if Morrison's government wins re-election, the path to pricing carbon in Australia would be difficult, as it would take a major policy shift.

The irony is that Morrison's government sees itself as a huge supporter of the fossil fuel industry, but its actions may well end up crippling LNG's international competitiveness, and ultimately starve the sector of investment.

Clyde Russell

(Editing by Richard Pullin) ((clyde.russell@thomsonreuters.com)(+61 437 622 448)(Reuters Messaging: clyde.russell.thomsonreuters.com@reuters.net))