Oil and Gas companies are likely to come under pressure over the coming months as the Queensland State Government unveiled a new 2.5% increase in royalties for companies with assets in the state.
Integrated producer and retailer Origin Energy Ltd [ASX:ORG], who has oil and gas producing assets in Queensland, will be exposed. At the time of writing Origin Energy’s share price is trading 0.28% lower, at $7.17 a share.
With Queensland’s debt spiralling out of control to $90 billion, oil and gas companies will now have to fork over more in royalties as Labor treasurer Jackie Trad struggles to kick the Sunshine State’s economy into gear.
Tax Queensland into prosperity
With the Queensland Labor government’s recent hike, the royalty rate has now been lifted by 2.5%. The move comes after the state government backed down from a coal royalty increase after Labor’s devastating loss of support regional Queensland in last month’s federal election.
LNG producers with assets in Queensland now face an increase in royalties from 10% to 12.5% from 1 July and is expected to raise an extra $476 million over the next four years.
Queensland already receives record coal and gas royalties, which are already flowing into the state coffers on the back of $85 billion in exports over the past 12 months, and a $12 billion increase on the previous year.
Queensland Resources Council boss Ian Macfarlane criticised Premier Annastacia Palaszczuk for back-tracking on a promise she made two weeks ago that there would be no royalty increase in this year’s budget, describing it as a betrayal of the industry.
‘This will make Queensland gas less competitive and risk jobs and future investment and the creation of new jobs. It will also make lower-emission energy generated from gas more expensive and increase the cost of gas to manufacturers such as Incitec Pivot in Brisbane.’
While increases in royalties might help fuel the government’s big spending plans, simple economics tell us this will likely increase the cost of gas production and undermine the long-term stability that is needed to continue to attract investment in Queensland.
Current economic data shows the oil and gas industry delivered an $8.2 billion economic contribution in the year to 2018.
The increased rates are likely to have flow-on effects in the domestic market, too. With declining production from assets in the Bass Strait and political barriers to prevent further development in southern states, gas prices are likely to increase — a move that could put further pressure on already high energy rates.
Other company’s to follow Origin Energy’s share price decline
It isn’t just oil and gas producers and explorers who were the losers of Queensland’s latest budget. Companies who rely on oil and gas to produce their own goods will also feel the pinch.
Queensland producer and fertiliser and explosives manufacturer Orica Ltd [ASX:ORI] and Incitec Pivot Ltd [ASX:IPL] are likely to feel the squeeze as both companies have struggled to find stable and affordable supplies to run their plants.
Diversified energy companies such as Santos Ltd [ASX:STO] will also have to fork over more from its Queensland producing assets too.
In fact, the Queensland Government itself might have just shot itself in the foot, so to speak. A significant proportion of Queensland’s oil and gas is sold to international markets, particularly energy-hungry Asia. If exporters choose to pass along the rate hike to their customers, China, South Korea, Japan, and Malaysia might start looking elsewhere.
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