Safeguard Mechanism: International Best Practice Benchmarks

DCCEEW SGM IBP Benchmarks 11 August 2023

Safeguard Mechanism Taskforce
Department of Climate Change, Energy, the Environment and Water
King Edward Terrace
Parkes
ACT 2600

RE: Consultation on Draft Guidelines for Setting International Best Practice
Benchmarks

Please find below comments and feedback relating to the proposed draft guidelines to set international best practice (IBP) emission intensities (EI) under the Safeguard Mechanism
(SGM).

The principles of the IBP benchmark reviews should be based on an as large as possible number of international industry analogues, by project categories within a given industry, and adapted for local Australian conditions. The company would be happy to provide, through future one-on-one engagements with the SGM Taskforce, the results of internal analysis undertaken of international references relevant to Australian projects.

The guidelines for establishing IBPs may have significant financial implications for new gas field and gas project developments. Large investments required for multi-decades energy production projects, including technology aimed at process emissions reduction, cannot be undertaken without a long term stable fiscal regime and well-defined operating guidelines.

The Energy Trilemma (finding balance between Energy Security, Energy Affordability and
Energy Sustainability) needs to consider both the local and international impacts of a given country energy policy. Whilst the Australian SGM is considering only Scope 1 emissions, its principles should be established taking into account the regional and global benefits in reduction of global Scope 3 emissions through partially decarbonised new gas/LNG projects offsetting coal fired power emissions in Australia and the Indo-Pacific region.

We would welcome the opportunity to engage further on how to enhance SGM reforms for new gas production facilities, including providing support for practical, fair and locally adapted international best practice assessments.

Further initial recommendations and feedback are provided below.

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General principles for International Best Practices benchmarking:

1. The IBP review should be based on an as large as possible number of relevant
international industry analogues, by project categories within a given
industry, and adapted for local Australian conditions.

2. The geographical and climate pertinence and applicability should be
considered as “first filter” of relevance when selecting IBP facilities for
benchmarking.

3. The IBP benchmarking process will benefit from considering the top 25%
performing international facilities instead of only focusing on top 10% as this
may not provide the intended depth of reference information to meet the
‘robustness’ principle. A minimum of 5 existing analogue facilities is required
to be representative.

4. Long term regulatory predictability and stability is a key factor in attracting
investment in large-scale and long-lived energy projects in Australia.
Uncertainty in future SGM terms, such as production variables for new
facilities, increases investment risk for companies making decisions on
whether to allocate capital to projects in Australia versus projects in other
countries.

PVs and EIVs specific parameters

5. The PV for reservoir CO2 for new production facilities should be established
such that it meets fair and non-discriminatory principles (aligned to PV under
evaluation for existing facilities). It is recommended that DCCEEW revisit the
proposed zero reservoir CO2 IBP benchmark considering the broad range of
reference data available around the world.

6. It is recommended to consider assigning IBP benchmarks separately for LNG
production from gas produced from conventional versus unconventional
sources (key building blocks of these plants and resulting EIVs are expected
to be different). This would address the ‘consistency’ principle.

7. DCCEEW should indicate if other than currently prescribed PVs or EIVs would
also be issued and benchmarked in the future. If this the case, a clear outline
of the proposed timeline for lower priority PVs and EIVs is essential to enable
project investment decisions.

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Other aspects

8. It is unclear how any proposed further adjustment to the IBP benchmark
value based on relevant methane (CH4) standards would be implemented. It
is recommended to minimise any changes to new facility PVs once set as per
point 5 above and to deal with CH4 reduction obligations by other means.

9. DCCEEW should outline the proposed modelling and/or estimation methods
for IBP facilities to be considered where emission data is not available (no or
very few relevant analogues worldwide).

10. Two (2) years of recent data for IBP benchmarking facilities may not meet
the robustness evaluation principle. It is recommended to consider recent
four (4) to five (5) years duration for data gathering (may provide
representative inputs for any facility within turnaround cycles).

11. Recommendation is to consider using a minimum of two independent
contractors for defining IBP benchmarking values as their access to global
data sets may not be similar and can provide a more balanced outcome for
IBP definitions.

12. The application of the decline rate (to net-zero to 2050) to new facilities
should start from the commencement of commercial production date instead
of 1 July 2023. The time lag (4-6 years depending on project scale) between
technology selection (best in class at the time) and project start-up leads to
overly onerous imposts on large scale projects that could result in project
delays and cancellations.

These points are further detailed below.

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Recommendation for Consultation on Draft Guidelines for Setting International Best
Practice Benchmarks.

1. The IBP review should be based on an as large as possible number of
international industry analogues, by project categories within a given
industry, and adapted for local Australian conditions.

2. The geographical and climate applicability should be considered when
selecting IBP facilities for benchmarking.

The proposed guidelines for setting IBP benchmarks states that ‘the best practice
benchmark will be based on facilities that have the lowest emission intensity of
production located anywhere in the world’. The suitable IBP facility identification
process then describes proposed requirements for selection. The draft document then
outlines some special considerations, including the adjustment for Australian
conditions. The climate, including ambient conditions listed as one of these aspects,
where correlation is drawn between ambient temperatures and energy requirement of
LNG processing.
The adjustment for Australian conditions should precede the IBP facility selection /
shortlisting step. By doing that the potential outliers, for instance Arctic Circle LNG
production plants, would be excluded at the beginning of the selection process while
still considering a large enough sample size to define relevant PVs and EIVs for IBP
benchmarks.

3. The IBP benchmarking process will benefit from considering the top 25%
performing international facilities instead of only focusing on top 10% as this
may not provide the intended depth of reference information to meet the
‘robustness’ principle. A minimum of 5 existing analogue facilities is required
to be representative.

4. Long term predictability and legislative [regulatory/contractual] stability is
a key factor to continue to attract large-scale investments in energy projects
in Australia. The uncertainty on future SGM terms in the short and mid-term
is putting at risk multi-decades projects.

PVs and EIVs specific parameters

5. The PV for reservoir CO2 for new production facilities should be established
such that it meets fair and non-discriminatory principles (aligned to PV to be
confirmed for existing facilities). It is recommended that DCCEEW revisit the
proposed zero reservoir CO2 IBP benchmark considering the broad range of
reference data available around the world.

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The DCCEEW consultation process with industry has been consistently based over the
past few years on the principles of a fair, effective, consistent, practical and robust
SGM reform. The adoption of a PV set to zero for all reservoir CO2 processed by a new
facility is contradicting most of the governing principles of the reform (a reservoir CO2
factor being currently finalised to apply to existing facilities out to 2030). It is well
understood that Australia and its onshore and offshore gas basins are not homogenous
in terms of reservoir CO2 content. The regulation to be put in place for existing and
for new facilities should consider local geology and reservoir conditions to be fair,
practical and robust. The IBP principles dictating future project PVs ought to take these
local factors into consideration, in a tangible way.

6. It is recommended to consider assigning IBP benchmark separately for
conventional and unconventional gas processing facilities for LNG production
as the key building blocks of these plants and therefore resulting EIVs could
be different – this would address the ‘consistency’ principle.

Approximately a quarter of the country’s LNG production is supplied by unconventional
coal seam gas (CSG), on the east coast of Australia, while LNG facilities supplied by
conventional natural gas resources are located in WA and the NT collectively
accounting for around 75% of Australian LNG production. Gas feedstock from CSG is
almost pure methane with very limited heavy hydrocarbons and impurities, while the
conventional gas reservoirs can contain up to 20-30% of heavier hydrocarbons and
inerts or impurities. Given the compositional differences, the CSG can potentially be
turned into LNG using significantly less thermal, mechanical and electrical energy, and
therefore a CSG to LNG plant could operate at lower overall energy intensities.
Following the guidance of ‘Framework for developing default PVs and EIVs’ as far as
principles are concerned, the IBP benchmarking should also employ the balance of
effectiveness, consistency, practicality and robustness. Therefore, DCCEEW should
consider benchmarking the conventional LNG facilities using international conventional
LNG production plants, while a separate benchmarking assessment should be
established for unconventional or CSG facilities based on similar international
analogues. This would support the ‘consistency’ principle from the framework
document.
In order to provide a representative and robust reference data set for Australian
operating LNG facilities, it is also recommended to consider the upper quartile (~25%)
for statistical reasons rather than decile (10%) as proposed when establishing
reference facilities for comparison against the IBP benchmarks.

7. DCCEEW should indicate if other than currently prescribed production
variables (PVs) or emission intensity values (EIVs) would also be issued and
benchmarked in the future. If this is the case, a clear outline of the proposed
timeline for lower priority PVs and EIVs is essential to enable project
investment decisions.

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The draft and supplementary information provided by DCCEEW via the linked
consultation page [Consultation hub | Safeguard Mechanism: International Best
Practice Benchmarks - Climate Change (dcceew.gov.au)] indicates that IBP benchmark
would only be established for priority PVs. For any new development or project that
was not in commercial operation by 1/07/23, the applicable PVs and EIVs that are not
part of the priority list including coal, electricity, lithium hydroxide, iron ore, run-of-
mine metal ore, steel, processed natural gas, reservoir carbon dioxide from existing
gas fields, and bulk freight road transport would require finalisation of these
parameters in coming period in order to assist ongoing project development activities
with further defining capital and operational expenditures.
It is recommended that other PVs and EIVs, for instance stabilised condensate, and
LNG from processed and unprocessed natural gas should also be included in the first
phase of this IBP benchmarking exercise.

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Other aspects

8. It is unclear how any proposed further adjustment to the IBP benchmark
value based on relevant methane (CH4) standards would be implemented. It
is recommended to avoid any changes to new facility PVs once set as per
point 5 above and to deal with CH4 reduction obligations by other means.

Using historical production and emission data for LNG production facilities, the direct
CH4 releases are predominantly associated with flaring, direct venting, fugitive losses
or incomplete combustion. These emission sources would normally count for 10-15%
of total CO2e emissions generated by operations.
The proposed methodology by (a) identification of IBP facilities, (b) data gathering and
EI calculation using production weighted average, and (c) comparing these IBP results
against selected Australian LNG production facilities should be sufficient to define
applicable IBP PVs and EIVs. By adding the relevant CH4 standards into the comparison
process, the regulator may impose an additional and potentially unrealistic measure
that could lead to further significant capital and operational expenditures for new and
upcoming developments that in essence might turn attractive developments to fiscally
challenged development for minimal environmental gain. The CH4 fugitive emissions
reductions obligations should be imposed by other means.

9. DCCEEW should outline the proposed modelling and/or estimation methods
to be used for IBP facilities to be considered where emission data is not
available (no relevant analogues worldwide or for confidentiality reasons).

The draft consultation documents indicate that ‘in most cases it will not be practical to
obtain the emission intensity of every facility in the world. As such, reasonable
estimates and assumptions may be used for the purpose of identifying representative
facilities.’
In order to provide industry participants with necessary assurances that the selected
IBP benchmark facilities represent traceable and realistic data points, it is
recommended that DCCEEW outline the proposed modelling and estimation methods
which would be used for calculating production rates and associated emission levels
for facilities where these reportable parameters are not publicly available. This should
provide the Australian industry participants clarity on how IBP PV and EIV values have
been derived from transparent sources and/or methods.

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10.Two (2) years of recent data for IBP benchmarking facilities may not meet
the robustness evaluation principle. It is recommended to consider recent
four (4) to five (5) years duration for data gathering that may provide
representative inputs for any facility within turnaround cycles.

The proposed period for selecting data for IBP benchmark facilities of 2 years may not
provide the necessary depth of information for selected production units based on
practical operational experience. Large production facilities operate on pre-scheduled
4–5-year turnaround windows in which significant repair works, major improvements
and energy efficient solutions are usually implemented to enhance production yields
or perhaps reduce waste releases.
Considering a more natural cycle of work upgrades to production facilities, it is
recommended that the data gathering window be extended. This should provide
comprehensive and representative input set for defining PVs and EIVs for IBP
benchmarks.

11.Recommendation is to consider using a minimum of two independent
contractors for defining IBP benchmark values as their access to global data
sets may not be similar and can provide a more balanced outcome for IBP
definitions.

Using recent experiences from the private and corporate sectors when developing data
sensitive documents that support legislation intent, it is practical to gather inputs from
multiple sources. It is recommended to use more than one independent resource for
assessing IBP benchmarks and defining PVs and EIVs.

12.The applicability of the decline rate (to net-zero to 2050) for new facilities
should start from the commencement of commercial production date instead
of 1 July 2023. The time lag (4-6 years depending on project scale) between
technology selection (best in class at the time) and project start-up leads to
overly onerous imposts on large scale projects that could result in project
delays and cancellations.

We look forward to continuing to work with the SafeGuard Mechanism Taskforce in the next phase of this consultation process.

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