Friday, April 6, 2018

Queensland is giving its gas away

Australia's mining and energy industry often claims to be a significant source of public revenue. One case where that is not true is in Queensland's coal seam gas sector. Back in 2012, the sector gave the impression that it would provide a massive financial windfall for the State government via royalties. Even The Economist magazine noted the sector's "glittering promise of jobs and royalties for governments."

As you can see below, the forecast growth in royalties to over $600 million per year did not happen, nor does it seem likely to in the near future.

Coal seam gas companies had an incentive to overstate their economic benefits when applying to the Queensland government to approve their operations in the face of substantial opposition from farmers and environmentalists. Unfortunately, these exaggerations were taken seriously in the budget and were a likely influence in the approvals process as well.

One way to get a more accurate estimate of expected royalty revenues royalties is to insist on upfront payments of the first 5 years forecast royalties at a discounted rate. Companies that finance this payment will demonstrate that their royalty forecasts are credible. The economic claims of those that can't (or won't) can be dismissed as not credible.

Forcing the mining and energy sector to put their money where their mouth is one way to stop exaggerated economic claims being made. If approvals for resource projects are going to hinge on economic outcomes, including future royalty incomes for the State, it seems important to get a forecast backed up by dollars rather than by economic modelling and wishful thinking.

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