Santos Ltd ABN 80 007 550 923 Santos Centre 60 Flinders Street Adelaide SA 5000 GPO Box 2455

Adelaide SA 5001 Telephone: 8116 5374

7 February 2013 Clean Energy Regulations Consultation Design, Coverage and Regulatory Branch Department of Climate Change and Energy Efficiency GPO Box 854 Canberra ACT 2601 ce.regulations@climatechange.gov.au Clean Energy Amendment Regulation 2013: Coverage of non-transport LPG and LNG and natural gas Santos thanks the Department of Climate Change and Energy Efficiency for the opportunity to comment on the exposure draft Clean Energy Amendment Regulations 2013, which set out provisions for coverage of non-transport liquefied petroleum gas (LPG) and liquefied natural gas (LNG) and proposed new arrangements for the coverage of own use of natural gas not currently covered by the carbon pricing mechanism. 1. Coverage of non-transport LPG 1.1 Background

As Santos has noted in previous submissions in relation to the Clean Energy Act, the Departments Guidance Paper on making proposals to list upstream gas processing plants in Schedule 2 to the Clean Energy Regulations states that the natural gas supply provisions of the Clean Energy Act are designed to capture supplies of natural gas to end-use customers and as such it is appropriate to exclude pipelines that form part of upstream operations from being natural gas supply pipelines because, in the Departments own words: most gas supplied in upstream operations is processed for resale rather than supplied for use in upstream processing facilities; and it is expected that gas used in upstream operations would generally be covered at the level of the upstream facility.

It is Santos understanding that the gaseous fuels amendments to the Clean Energy Act (which provide for coverage of embodied emissions in LPG and LNG produced or manufactured in Australia for domestic non-transport use) were similarly designed to capture supplies of LPG and LNG to end users that are not themselves operators of liable facilities. As is the case for natural gas supplies, LPG transferred between sites (and/or between related entities) as part of upstream operations is either processed for resale or used or lost (ie as fuel, flare, vent or fugitives) (used) in upstream facilities that are subject to facilitybased liability.

1.2

Santos submission

Santos submits that the Regulations should provide for LPG that is used in upstream facilities to be exempt from the operation of subsections 36B(1) and 36C(1) of the Clean Energy Act. Subsection 36C(1) provides for the manufacturer/producer of LPG to have a carbon liability for the embodied emissions associated with the manufactured/produced LPG unless an OTN is quoted by a recipient of a supply of the LPG or the amount of LPG manufactured/produced is exempt under the Regulations. Subsection 36B(1) creates an equivalent liability for an importer of LPG. Such an exemption will enable the embodied emissions in the fuel to be covered at facility level where relevant, without the administrative effort associated with obtaining and quoting an OTN to another member of the same corporate group (or to another party to an upstream processing arrangement). Further, it will save the supplier (or suppliers) of the LPG to an upstream process from being required to individually register as liable entities under the National Greenhouse and Energy Reporting Act and from being required to obtain and administer ANREU accounts (and surrender the relevant carbon units for the embodied emissions in the LPG). Instead, the emissions will be included in the emissions number of the recipient facility operator who is already a registered, liable entity with their own ANREU account. To illustrate the significant efficiency improvement that would be achieved by the exemption, consider the supply of domestic non-transport LPG from Santos Port Bonython plant for upstream processing use. Each year, approximately 300 tonnes of LPG is trucked from Port Bonython to Santos Moomba Plant. The LPG is produced by 13 joint venture parties (10 of which are Santos Group entities) and supplied to Santos Ltd, the operator of Moomba Plant. Moomba Plant is a facility for the purposes of the Clean Energy Act and emits in excess of the 25,000 tonne CO2-e threshold. Section 36C and the Clean Energy Regulations as currently proposed will have the effect of requiring each of the 13 producers of this LPG to individually be registered as a liable entity under the NGER Act, and will require each of the 13 producers to go through extensive vetting to open ANREU accounts, report interim emissions numbers and buy and surrender carbon units. Of the 10 Santos entities among the 13 producers of the LPG, six will be liable entities solely as a result of section 36C. For the first eligible financial year of the LPG scheme, the total emissions numbers for each of these six companies will be in the order of 20 tonnes CO2-e, 14 tonnes CO2-e, 13 tonnes CO2-e, 7 tonnes CO2-e, 7 tonnes CO2-e and 1 tonne CO2-e. Consequently, Santos will be required to register six companies under the NGER Act and open and administer six additional ANREU accounts in order to account for 62 tonnes of emissions (which could otherwise have been included in Santos Ltds emissions number for the Moomba Plant facility). Given that Santos Ltds emissions from the various facilities under its operational control in the 2011/2012 financial year were in the order of 3.7 million tonnes CO2-e, using Santos proposed exemption to eliminate the significant additional administrative burden associated with attaching liability to supply of LPG for upstream processing use is consistent with the Governments commitments to reduction of green tape. As Santos has previously submitted to the Department on 21 December 2012, it will be very simple to incorporate Santos proposed exemption (for LPG used in upstream facilities) into the legislation. The relevant upstream facilities subject to the exemption can be defined without difficulty by reference to a schedule drafted in a similar format to Schedule 2 (ie defining the facilities as points upstream of specified connection points or flanges).

Further, given that OTNs should only be quoted by a recipient of a supply of LPG where the supplier would otherwise have had a liability for the LPG pursuant to subsections 36B(1) and 36C(1) of the Clean Energy Act, the application of sections 58AA and 58AB of the Clean Energy Act (which deal with mandatory and voluntary quotations of OTNs for supply of LPG) should be limited to circumstances where an LPG supplier liability exists. LPG that is not subject to LPG supplier liability can easily be excluded from the application of sections 58AA and 58AB by way of minor amendments to the regulations, given that the Act already provides that the sections only apply to supplies if the conditions specified in the regulations are satisfied. To that end, Annexure 1 to this submission sets out details of Santos Port Bonython facility, which is an end point of Santos upstream processing operations. Excluding LPG from the application of sections 36B and 36C where it is used upstream of a connection point associated with the exit stream from the Port Bonython facility is consistent with the policy intent of the Clean Energy Act. Annexure 2 to this submission sets out drafting notes and suggested forms of the required amendments to the draft Regulations. 2. Coverage of additional natural gas usage

Santos submits that the very limited risk and small amount of emissions that the proposed own use provisions are intended to address do not justify the introduction of a complex and administratively burdensome additional legal regime at this time. 2.1 Background the existing regime for natural gas supplies

In introducing an additional legislative regime that applies to certain natural gas usage, it is important for the Department to recognise that the Clean Energy Act and Regulations already set out an extensive and complicated scheme for allocating liability to natural gas suppliers for scope 3 emissions (natural gas supplier liability scheme). This existing natural gas supplier liability scheme operates independently from and in addition to the facility liability scheme, which forms the core component of the Clean Energy Act and which imposes liability on facility operators where their emissions exceed the 25,000 tonne CO2-e threshold. The existing natural gas supplier liability scheme is also inconsistent with the key feature of the facility liability scheme, in that the supplier liability scheme imposes liability for greenhouse gas emissions of any quantity, without reference to a threshold of materiality. Natural gas producers are not only required by the Clean Energy Act to discharge their liability in respect of facilities and natural gas supplies, but they are also required to comply with the labour-intensive Obligation Transfer Number scheme that imposes a suite of prescriptive administrative and compliance requirements on suppliers and large users of natural gas to provide notices of intention to quote OTNs, quotations of OTNs, notices of acceptance, refusal and withdrawal of quotations (among others) and requirements to maintain detailed records of correspondence and supplies. All of this extensive activity is apparently in order to confirm that the end user, who would already have a direct liability for the combustion emissions under the Clean Energy legislation as a liable entity for a facility, will retain that liability. It should be noted that in order to facilitate compliance with the natural gas supplier and OTN requirements, Santos employees have already expended hundreds of hours in identifying supply arrangements in which Santos is a supplier or recipient (or both) that could trigger obligations under the existing supplier liability scheme. Santos estimates that to date it has been necessary to dedicate the equivalent of 1 FTE employee, for six months, to carrying out this analysis, corresponding with the other parties to its supply agreements to confirm

compliance arrangements, seeking independent legal advice about the need for OTNs in individual circumstances and collating records as required by the Clean Energy Act and Regulations (among other things). This work has been undertaken at significant cost to Santos. In addition to this work, Santos has also expended significant resources in seeking to quantify (including by developing systems for collation of data, and by correspondence with numerous pipeline operators to obtain detail not otherwise set out in invoices) the amount of natural gas used by the pipeline operators for compression purposes, which gives rise to natural gas supplier liability under the existing scheme. The ongoing administrative burden in gathering this information in a timely manner to enable reporting and surrendering of carbon units by 15 June for the 9-month period to the end of March is likely to be very substantial. That being said, the actual number of carbon units that will be required to be surrendered in relation to this liability is anticipated to be very minor in the context of the Scheme as a whole. For instance, for one of Santos gas transportation arrangements, the total emissions associated with gas supplied to the pipeline operator for compression purposes might be less than 3000 tonnes of CO2-e per annum. This amounts to an extremely small number of carbon units to be surrendered, even in comparison to Santos facility liability of 3.7 million tonnes of CO2-e per annum, let alone the entirety of the Carbon Pricing Scheme. Consequently, Santos submits that the already significant cost and resource burden that the existing scheme imposes on industry at present needs to be borne in mind by the Government when considering the introduction of further administrative requirements for natural gas supply. This is particularly necessary given that the Government has repeatedly publicised its intention to reduce red tape for industry and facilitate efficient, cost-effective regulation. 2.2 Proposed regulation of own use of natural gas

The provisions set out in the draft regulations will introduce a suite of additional complex compliance obligations that will place an even greater burden on industry. Given that the proposed provisions, in addition to the existing natural gas supplier liability provisions create numerous legal regimes that either apply or do not apply depending on a variety of circumstances, it will be necessary for industry to further expend significant cost and time to continually analyse and reanalyse their supply arrangements to identify which arrangements may trigger which liabilities under the legislation, in order to ensure that they do not inadvertently fail to meet the myriad of new compliance requirements that are proposed to be introduced. Santos understands from the Department that the purpose of the introduction of the additional natural gas supplier liability trigger (at this stage for own use) is to limit the opportunities for gas suppliers and/or users to avoid payment of a price on the embodied emissions in the gas by structuring their gas supply arrangements to create commercial situations that are not covered by the Carbon Pricing Scheme. Santos has extensive experience as a gas producer and supplier in Australia. It is Santos experience that the structure of any gas supply arrangement is substantially determined by a range of physical, geographical, operational, commercial and legal constraints that are not easily altered. Consequently, the extent to which a supplier and end-user could develop a scheme that enabled a supply of natural gas outside the circumstances already subject to the Carbon Pricing Scheme is extremely limited. The practical, commercial and legal difficulty (not to mention the legal costs) of altering an existing contractual arrangement in order to avoid natural gas supplier liability is likely to far outweigh any possible financial benefit from avoiding liability, particularly given that the supply arrangements in question involve only small quantities of gas that do not get captured by facility liability.

Further, the costs and operational complications that would be associated with any attempt by an end-user to restructure their operations so as to avoid being in control of a large gas consuming facility (for instance by operating several smaller facilities) would be so prohibitive as to prevent any large-scale user of natural gas from ever being able to avoid coverage by the existing Carbon Pricing Scheme. Santos recognises that in introducing further regulations to extend the Carbon Pricing Schemes coverage of natural gas supplies, the Governments intention is to ensure competitive neutrality within the industry. That is, the Government is seeking to ensure that some industry members are not able to unfairly avoid liability under the Carbon Pricing Scheme and gain commercial advantage over their competitors. Nevertheless, Santos notes that the proposed scheme appears to unfairly single out natural gas suppliers as against other energy sources for the imposition of liability with no reference to materiality, and fails to recognise that by seeking to cover scope 3 emissions of natural gas combusted by small users (below the 25,000 tonne per annum CO2-e threshold), the Government is creating competitive advantage and disadvantage across various fuel supply industries by creating a regime that discourages use of natural gas by small industrial/ commercial users and encourages use of uncovered energy sources such as coal. 2.3 Santos submission

In light of these comments, it is Santos submission that on balance, the introduction of additional compliance requirements for natural gas supplies (and the consequential burden that they will place on industry) is not justified given the limited circumstances that the requirements are intended to address. It would be far more efficient and less burdensome for industry to use anti-avoidance provisions to prevent attempts to contract out of liability for natural gas. Santos does not support the introduction of additional regulatory provisions to extend the coverage of the carbon pricing scheme to other natural gas usage not already covered by one of the many triggers for liability under the existing legislation. Santos endorses APPEAs recommendation that the making of any regulations to extend the existing coverage of natural gas supplies be deferred until after the completion of review of the operation of the existing Scheme during the first compliance period (ie, deferred until at least the third compliance period) and after a more comprehensive assessment is completed regarding the extent to which the types of supply arrangements described in the consultation paper actually exist or could be created. Santos would be happy to meet with the relevant members of your team to further discuss the issues raised in this submission if that would assist. In the meantime, if you require any further clarification of Santos comments, please do not hesitate to contact me on (08) 8116 5374 or via email at susie.smith@santos.com. Yours sincerely

Susie Smith General Manager, Strategy, Planning and Carbon

Annexure 1: Details of Port Bonython facility

Facility name Port Bonython Location On the coast of South Australia near Whyalla at the head of the Spencer Gulf, approximately 250 kilometres north-west of Adelaide. Latitude: -32.989097 Longitude: 137.769122 Address: Port Bonython Road, Port Bonython SA 5600 Ownership South Australian Cooper Basin Joint Venture: Santos Group 66.6% Alliance Petroleum Australia Pty Ltd Basin Oil Pty Ltd Bridge Oil Developments Pty Ltd Reef Oil Pty Ltd Santos (BOL) Pty Ltd Santos (NARNL Cooper) Pty Ltd Santos Limited (Operator) Santos Petroleum Pty Ltd Vamgas Pty Ltd Delhi Petroleum Pty Ltd 20.2% Origin Energy Resources Limited 13.2% Facility description Liquid hydrocarbons are transported to the facility from Moomba via a 659 kilometre 355 millimetre diameter pipeline. The hydrocarbons include a mixture of condensate, crude oil, propane and butane which is processed at the facility in distillation towers and molecular sieves to produce various products. These products, naphtha, crude oil and LPG, are stored in large tanks before being shipped to customers. Port Bonython incorporates a 2.4 km jetty for loading of tankers as well as road tanker loading facilities. The majority of LPG produced (approx 70%) is exported via the ship loading facility. The central processing plant comprises: pipeline terminal pre-fractionation heaters ethane distillation tower de-propaniser distillation tower propane molecular sieve to remove sulphur and water de-butaniser distillation tower butane molecular sieve to remove sulphur and water naphtha distillation tower 6

propane/butane chillers LPG pressurised bullets crude and condensate bulk storage propane and butane bulk storage.

Exit Flanges LPG ship loading: The exit flanges at the ends of each of the three propane and three butane ship loading arms. LPG truck loading: The exit flange at the end of the truck loading arm. Upstream pipelines The Moomba to Port Bonython Liquids Pipeline (PL2) is owned by the South Australian Cooper Basin Joint Venture and is operated and maintained under contract by Epic Energy.

Figure 1 Moomba to Port Bonython Liquids Pipeline (PL2)

Annexure 2: Drafting notes for proposed amendments

Sections 36B and 36C of the Clean Energy Act create LPG/LNG supplier liability. Subsections 36B(1) and 36C(1) set out the circumstances in which supplier liability arises. Paragraph (f) of each subsection provides that supplier liability only arises where the amount of LPG/LNG is not an amount that, under the regulations, is exempt from this subsection. Draft Regulation 3.5F sets out circumstances in which an amount of LPG/LNG is exempt from those subsections. Consequently, Regulation 3.5F must be amended to add the use of LPG/LNG in upstream processes. Sections 36D and 36E of the Clean Energy Act address the use of OTNs in relation to the supply of LPG/LNG. These sections only apply where a person has supplier liability pursuant to sections 36B and 36C. Given that the proposed amendment to Regulation 3.5F will ensure that no supplier liability arises for LPG/LNG used in upstream operations, no amendment to sections 36D and 36E is necessary. Sections 58AA and 58AB of the Clean Energy Act provide for circumstances in which an OTN must (58AA) and may (58AB) be quoted by a recipient of a supply of LPG or LNG, by reference to conditions specified in the regulations being satisfied. Draft Regulations 3.19A and 3.19F set out the conditions that must be satisfied in order for OTNs to be quoted. The application of sections 58AA and 58AB is not currently limited to supplies of LPG/LNG where a supplier liability has arisen pursuant to sections 36B and 36C. To ensure that OTNs are not quoted in circumstances where there is no supplier liability (which would impose unnecessary administrative burden on the recipient and supplier), the application of sections 58AA and 58AB should be limited to supplies of LPG/LNG where a supplier liability has arisen pursuant to sections 36B and 36C. This limitation can most efficiently be implemented by amending draft Regulations 3.19A and 3.19F to add supplier liability under 36B and 36C as a condition. Suggested forms of each of these amendments are set out in mark-up below.

3.5F Amount exempt from preliminary emissions number For paragraphs 36B (1) (f) and 36C (1) (f) of the Act, the following amounts are exempt from the calculation of a preliminary emissions number: (a) (b) an amount of LPG that is packaged in a non-refillable container that holds no more than 1 kilogram of LPG; an amount of LPG, packaged in a container that holds no more than 10 kilograms of LPG, that: (i) (ii) (c) (i) (ii) indicates the gas is for use as a refrigerant; and does not indicate the gas is for combustion; that is supplied, by a person mentioned in paragraph 36B (1) (d) or paragraph 36C (1) (d) of the Act (the supplier), to another person (the recipient); and for which the recipient provides a statutory declaration to the supplier, before the amount of LPG is supplied, stating that: (A) (B) .(d) the LPG is for incorporation into a product packaged in a container mentioned in paragraph (a) or (b); or the LPG is for packaging into a container mentioned in paragraph (a) or (b);

an amount of LPG:

an amount of LPG that is used upstream of an exit flange from a facility mentioned in column 1 of the table in Schedule 3, where "exit flange" means a flange mentioned in column 2 of the table in Schedule 3.

CLEAN ENERGY REGULATIONS 2011 - SCHEDULE 3 (subregulation 3.5F (d)) Facility South Australia Port Bonython Exit flange The exit flanges at the ends of each of the three propane and three butane ship loading arms at the Port Bonython plants LPG ship loading facility; The exit flange at the end of the Port Bonython plants LPG truck loading arm.

3.19A Condition for mandatory quotation of OTNlarge LPG or LNG consuming facility (1) For paragraph 58AA (1) (c) of the Act, the conditions is are that: (a) the gaseous fuel supplier has, under section 36B or 36C, a preliminary emissions number for an eligible financial year that is attributable to the import, manufacture or production of the amount of liquefied petroleum gas or liquefied natural gas supplied to the recipient; and the supply is for use in the operation of a large LPG or LNG consuming facility.

(b)

3.19F Conditions for voluntary quotation of OTN For paragraph 58AB (1) (c) of the Act, the conditions are that the gaseous fuel supplier has, under section 36B or 36C, a preliminary emissions number for an eligible financial year that is attributable to the import, manufacture or production of the amount of liquefied petroleum gas or liquefied natural gas supplied to the recipient; and: (a) the recipient is likely to use some or all of the amount of LPG or LNG as feedstock; or (b) the recipient is a person to whom an amount of LPG or LNG is supplied by a gaseous fuel supplier: (i) (ii) during an eligible financial year that begins on or after 1 July 2013; and for use in the operation of a large LPG or LNG consuming facility mentioned in regulation 3.19A; or

(c) the recipient is an approved recipient mentioned in regulation 3.19G for the financial year.