Sasol Chevron Consulting Ltd by ps94506


									Sasol Chevron Consulting Ltd.
Incorporated in England & Wales
ABN 46 096 439 404

Submission to the Fuel Tax Inquiry

29 September, 2001

1      Introduction................................................................................................................. 1
2      About Sasol Chevron .................................................................................................. 1
    2.1 The Company .....................................................................................................................1
    2.2 The Corporate Plan ...........................................................................................................2
    2.3 The Technology ..................................................................................................................2
3      About GTL Fuel .......................................................................................................... 4
    3.1 Physical and chemical properties .....................................................................................5
       3.1.1      Density...................................................................................................................................... 5
       3.1.2      Energy content .......................................................................................................................... 5
       3.1.3      Cetane number and Cold Flow characteristics .......................................................................... 5
       3.1.4      Sulphur content ......................................................................................................................... 5
       3.1.5      Polar compounds....................................................................................................................... 5
       3.1.6      Thermal stability ....................................................................................................................... 5
       3.1.7      Elastomer compatibility ............................................................................................................ 6
       3.1.8      Metals corrosivity ..................................................................................................................... 6
       3.1.9      Lubricity.................................................................................................................................... 7
       3.1.10       Biodegradability ................................................................................................................... 8
       3.1.11       Ecotoxicity............................................................................................................................ 8
    3.2 Engine performance and fuel consumption.....................................................................9
    3.3 Emissions - compression ignition (diesel) engines...........................................................9
       3.3.1      Oxides of nitrogen (NOx) ....................................................................................................... 11
       3.3.2      Particulate matter (PM)........................................................................................................... 12
       3.3.3      Other emissions....................................................................................................................... 12
    3.4 The Market .......................................................................................................................13
       3.4.1      GTL Fuel ................................................................................................................................ 14
       3.4.2      GTL Naphtha .......................................................................................................................... 15
4      The Australian Opportunity ..................................................................................... 16
    4.1 Background.......................................................................................................................16
    4.2 The Australian Project (AGTL) .....................................................................................16
       4.2.1      Site Selection & Gas Supply ................................................................................................... 17
       4.2.2      Plant ........................................................................................................................................ 17
       4.2.3      Project Timeline...................................................................................................................... 17
5      Goals of the Fuel Tax Inquiry.................................................................................. 19
    5.1 Distortions in the current tax system ............................................................................20
       5.1.1      Tax distortions caused by variations in combustion efficiency............................................... 20
       5.1.2      Tax distortions cause by current Alternative Fuels policy ...................................................... 20
    5.2 Levelling the playing field – setting excise base on combustion efficiency.................24
6      Measures for a Better Environment......................................................................... 27
    6.1 Rewarding environmental performance........................................................................27
    6.2 Environmental Credentials of GTL Fuel.......................................................................28

       6.2.1      Reduction of urban air emissions ............................................................................................ 30
       6.2.2      Greenhouse gas emissions....................................................................................................... 31
       6.2.3      Unified fuel ranking with GTL Fuel ....................................................................................... 33
7      Revenue Neutrality.................................................................................................... 34
8      Support and Development of Australia’s Industry.................................................. 37
    8.1 The role of Diesel in Australia’s industry......................................................................37
       8.1.1 Fuelling the productive sector................................................................................................. 37
       8.1.2 Grant and rebates .................................................................................................................... 40
       8.1.3 Fuel specifications now and into the future............................................................................. 41
       8.1.4 Vehicle Design Standard Trends Worldwide.......................................................................... 42
       8.1.5 Clean fuels incentives ............................................................................................................. 44
 Using the Excise System to Encourage Cleaner Fuels........................................................ 44
 Issues for consideration in implementing a clean fuels incentive ....................................... 45
    8.2 GTL Fuel a strategic new industry for Australia .........................................................46
       8.2.1 Australia’s position in the global race to establish GTL Fuel plants....................................... 46
       8.2.2 Barriers to GTL Fuel Investment Today ................................................................................. 48
 Capital intensity .................................................................................................................. 48
 New technology.................................................................................................................. 50
 Market penetration.............................................................................................................. 50
 Lack of gas supply and industry infrastructure ................................................................... 54
 Comparative economics...................................................................................................... 57
       8.2.3 The industry is viable in the long term.................................................................................... 58
 Capital Costs........................................................................................................................ 58
 Operating Costs .................................................................................................................. 60
       8.2.4 The industry complements Australia's areas of competitive advantage .................................. 62
       8.2.5 Economic benefits of an Australian GTL Fuels project .......................................................... 64
 Cost benefit, macro economic and general equilibrium model approach ........................... 64
 Employment........................................................................................................................ 65
 Investment .......................................................................................................................... 65
 Economic Impact................................................................................................................ 66
 Research & Development ................................................................................................... 68
 Synergies with other industries ........................................................................................... 69
 A Sasol Chevron GTL Fuel project will be a new productive sector.................................. 70
       8.2.6 Mechanisms to establish a domestic GTL Fuel industry ......................................................... 71
       8.2.7 GTL Fuel Producer Grant ....................................................................................................... 72

Figures and Tables
Figure 3.1            Graph of changes in tensile strength and thickness of Viton® rubber immersed in different
                      compression ignition fuel samples ___________________________________________ 6
Figure 3.2            Lubricity characteristics of GTL Fuel_________________________________________ 7
Figure 3.3            Graph of biodegradation analysis for GTL Fuel ________________________________ 8
Figure 3.4            Heavy duty emissions with GTL Fuel (1991 DDC engine) ________________________ 10
Figure 3.5            Heavy duty emissions with GTL Fuel (1999 DDC engine) ________________________ 10
Figure 3.6            Passenger car emissions with GTL Fuel ______________________________________ 11
Table 3.1             Characterisation of GTL product options _____________________________________ 14
Figure 4.1            AGTL Overall Schedule __________________________________________________ 18
Table 5.1             Comparison of the current tax paid by consumers of petrol and diesel ______________ 20
Table 5.2             Comparison of the current tax paid by consumers of standard and alternative fuels ____ 20
Figure 5.1            Distortion of tax per kilometre paid by consumers of different fuels ________________ 21

Figure 5.2    Market penetration of LPG from 1972-1999 vs excise relief compared to petrol_______ 22
Figure 5.3    Foregone excise revenue from LPG market growth in 1999 dollars from 1973-1999 ___ 22
Table 5.3     Comparison of tax paid by consumers of standard and alternative fuels excise at the same
              rate __________________________________________________________________ 23
Table 5.4     Comparison of tax paid by consumers of standard and alternative fuels excise using fuel
              efficiency ______________________________________________________________ 25
Table 5.5     Comparison of tax paid by consumers of standard and alternative fuels excise using fuel
              efficiency with an assumption of revenue neutrality _____________________________ 25
Figure 5.4    Setting of excise revenue using fuel efficiency and a base rate value ________________ 26
Figure 6.1    Application of environmental efficiency weighting to ‘level playing field’ excise model _ 28
Figure 6.3    Comparison of the sulphur and aromatic content of GTL Fuel with mandated Government
              fuel objectives __________________________________________________________ 30
Figure 6.4    Comparison of lifecycle air emissions for clean fuels ____________________________ 31
Figure 6.5    Comparison of greenhouse gas emissions for alternative and future fuels on a fuel use basis
              ______________________________________________________________________ 32
Figure 6.6    Comparison of greenhouse gas emissions for alternative and future fuels on a lifecycle
              basis _________________________________________________________________ 32
Figure 6.7    Addition of GTL Fuel to the proposed fuel ranking based excise regime _____________ 33
Figure 7.1    Outlook for Australia’s fuel mix to 2030______________________________________ 36
Figure 7.2    Real excise revenue profile prior to grants for three alternative scenarios ___________ 36
Figure 8.1    Forecast global middle distillate demand. Source: British Petroleum Report 2000
              Forecast_______________________________________________________________ 37
Figure 8.2    Comparison of Singapore diesel margins over IPE Brent at times of economic growth and
              downturn ______________________________________________________________ 38
Figure 8.3    Growing deficit of domestic middle distillate supply ____________________________ 39
Figure 8.4    Historical and forecast domestic crude oil supply compared to domestic refining capacity
              ______________________________________________________________________ 40
Figure 8.5    Cost to consumers of compliance to decreased sulphur content in diesel_____________ 43
Figure 8.6    Excise Differentials for ULSD in the United Kingdom - 1997 Onwards Source: HM
              Customs and Excise, November 2000 ________________________________________ 44
Figure 8.7    Market Penetration Rate of ULSD in the United Kingdom – 1997 Onwards. Source: HM
              Customs and Excise, November 2000 ________________________________________ 45
Table 8.1     The Global Race Between Companies for Footprint Plants _______________________ 47
Figure 8.8    Comparison of International Fiscal Regimes. Source: From LNG Action Agenda 2000,
              DISR _________________________________________________________________ 48
Table 8.2     Impact of oil price on GTL Fuel and refining margins ___________________________ 51
Figure 8.9    OECD Petrol Prices and Taxes_____________________________________________ 54
Figure 8.10   Gas Reserves in NW Australia. Source: LNG Action Agenda 2000, DISR, October 2000 56
Table 8.3     Comparison of indicative economics for Australia and Qatar _____________________ 57
Table 8.4     Competitive position against key market place competition _______________________ 58
Figure 8.11   GTL Capex is Still Significantly Higher Than New Refineries _____________________ 59
Figure 8.12   LNG Capex Improvements Over Time. Source: Shell ___________________________ 60
Figure 8.13   Australian Refinery Opex Improvements Over Time. Source: From Presentation to
              Securities Institute of Australia, Caltex, October 2000___________________________ 61
Table 8.5     Improvements in GTL Fuel economics in Australia with time and increasing scale ____ 62
Figure 8.14   Australian gas reserves continue to increase while the reserves to production ratio
              continues to average 100 years_____________________________________________ 63
Figure 8.15   Illustration of change in Real Investment, Real GNP and Real GDP compared to ABARE
              reference case.__________________________________________________________ 67
Figure 8.16   Projection of Australia’s future supply/demand balance for refined products compared to
              projections of domestic and export GTL Fuel use_______________________________ 70
Figure 8.17   Illustrates the potential benefits in Government revenue from focussed measures to
              establish a sunrise GTL Fuel industry________________________________________ 72
Figure 8.18   Outline of the oil shale producer grant model _________________________________ 72

Acpl    Australian cents per litre
AGO     Australian Greenhouse Office
AGTL    Sasol Chevron’s Australian gas-to-liquids project
bbl     barrel
bpd     barrels per day
CNL     Chevron Nigeria Limited
DISR    Federal Department of Industry, Science & Resources
DPPAA   Downstream Petroleum Products Action Agenda
USDOE   US Department of Energy
EA      Environment Australia
EGTL    The Escravos gas-to-liquids project in Nigeria
FEED    front-end engineering design
FT      Fischer Tropsch technology
GCA     Gaffney Cline & Associates
GTL     gas-to-liquids
ha      hectare
IPE     Import Parity Equivalent
LPG     liquefied petroleum gas
m /d    cubic metre per day
m /hr   cubic metre per hour
NNPC    Nigerian National Petroleum Corporation
OECD    Organisation for Economic Cooperation & Development
OEM     Original Engine Manufacturers
ppm     parts per million
RFSU    Ready for start up
SPD     Sasol’s slurry phase distillate process
tcf     trillion cubic feet
Tj/d    terajoules per day
ULSD    Ultra-Low Sulphur Diesel

1      Introduction

Australia is well placed in the world-wide race to attract sunrise gas-to-liquids
industries. There are vast natural gas fields off the NW coast, the reserves are well
positioned for export industries serving the Asia Pacific region and Australia has a
reputation as a secure supplier.

The rewards for attracting the embryonic industry to Australia are substantial. Billions
of dollars in investment, jobs, a new export industry and an opportunity to turn around
a looming deficit in liquid transport fuels. As a producer of GTL Fuel, Australia could
become a regional leader in clean energy, exporting both LNG and synthetic liquid
fuels that are becoming increasingly environmentally prized about the world.

There are some significant hurdles, however, to the establishment of a GTL Fuel
industry in Australia. One of the biggest is the uncertainty over how ultra clean
synthetic diesel will be regulated and taxed.

The current Australia tax regime is inequitable in the treatment of alternative transport
fuels. The zero excise treatment of LPG and CNG distorts the market by influencing
the value of fuel at the pump and encouraging fuel inefficiency.                 For the
Commonwealth, it also means a growing problem with foregone excise revenue.

Sasol Chevron believes any examination of fuel taxing should first “level the playing
field” and treat fuel consumers and producers equally. This submission proposes a
fuel tax excise regime that does this and then allows fuel taxes to be applied on a fair
and equitable basis.

The excise treatment of GTL Fuel will be important irrespective of whether or not it is
produced in Australia. Within the next four to five years the fuel will be readily
available as committed GTL projects come on stream. It is essential there is an
understanding of how this new, ultra-clean alternative fuel will be treated in Australia
before it arrives in the market.

As well as helping establish the excise treatment of GTL Fuel, the Fuel Tax Inquiry is
likely to look at specific policy measures that will determine whether a GTL Fuel
industry is established in Australia. During 2001, a Federal Government GTL
Taskforce has been examining the implications and viability of an Australian GTL
industry. The Taskforce has proposed a range of measures to assist a GTL industry,
some of which relate to tax, rebates and excise arrangements. If adopted by
Government, some – such as a Clean Fuels Incentive and a GTL Fuel Producers’
Rebate – would be expected to become a focus for the Fuel Tax Inquiry. This
submission examines the implications of the measures proposed by the Taskforce.

More generally, Sasol Chevron believes the Fuel Tax Inquiry offers a unique
opportunity to:

       •   Simplify the current fuel tax system
       •   Make the system fairer for both producers and consumers
       •   Create better revenue outcomes for the Commonwealth
       •   Broaden the Government’s policy options in relation to transport fuel taxing

•   Help promote and encourage Australian industry
•   Create significantly better environmental outcomes for Australia
•   Improve the competitiveness of Australian industry

2      About Sasol Chevron

Sasol Chevron is proposing to build a world-scale GTL plant in the Pilbara region of
Western Australia using natural gas from the Carnarvon Basin. The GTL Fuel
produced – predominantly synthetic diesel - is the cleanest compression ignition
engine fuel in the world.

The three phase Australian GTL (AGTL) project involves a total investment of around
A$9 billion. The Phase 1 footprint plant, to be operational in 2006, would produce
45,000 barrels of product per day (bpd).     Two expansion phases will bring total
production to more than 200,000 bpd to service both the domestic and Asia Pacific

Sasol Chevron has identified a total feedstock requirement for the three phases of
more than 20 trillion cubic feet (tcf) of gas over the 25 year project life, which will
require, and underwrite, the development of an Australian greenfields gas reserve.

2.1    The Company
On 16 October 2000, international energy companies Sasol and Chevron signed final
agreements for the creation of a new company, Sasol Chevron Holdings Limited, with
its wholly owned subsidiary Sasol Chevron Consulting Ltd, as part of a 50/50 global
joint venture formed to evaluate GTL opportunities world-wide. Sasol Chevron
Consulting Limited is based in London (43-45 Portman Square, London, U.K. W1H
6AN). The Chief Executive Officer, George Couvaras, is from Sasol and the Chief
Operating Officer, Mark Koelmel, from Chevron.

The parent companies are:

SASOL, established in 1950, is a world-leader in the commercial production of liquid
fuels and chemicals from coal and natural gas. The company has annual sales of
A$4.7 billion and, with a market capitalisation of A$6.7 billion, is listed on the
Johannesburg Stock Exchange (SOL) and on the NASDAQ (SASOY). With 50 years
of experience in GTL technologies, Sasol manufactures more than 200 fuel and
chemical products at its plants in Sasolburg and Secunda in South Africa, as well as at
several other plants abroad. The company's products are exported to more than 70
countries.   Sasol has developed world-leading technology for the commercial
production of synthetic fuels and chemicals from low-grade coal as well as through the
conversion of natural gas to environment-friendly fuels and chemicals.

CHEVRON, the second largest integrated petroleum company in the United States, is
headquartered in San Francisco. It operates in 90 countries and employs 34,000
people around the world. As of year-end 2000, the company had A$68.7 billion in total
assets. Earnings before special items in 2000 were A$8.6 billion. Chevron is involved
in all aspects of the energy business: exploration, production, manufacturing,
transportation, marketing and research.       Shares of Chevron stock are traded
principally on the New York, Pacific and Midwest Stock Exchanges. Chevron is a
major stakeholder in Australian natural gas reserves being a partner in the North West

Shelf Venture and the operator of the greater Gorgon area gas assets. It is also the
operator of the Barrow Island oil field. [Chevron and Texaco have US Federal Trade
Commission approval for a merger that will be put to shareholders of both companies
on 9 October 2001. If agreed, ChevronTexaco will be one of the largest integrated
energy companies in the world.]

2.2    The Corporate Plan
Within the next decade, Sasol Chevron expects to operate four plants producing
360,000 bpd of GTL Fuel - 45% of forecast global GTL production. During this period,
Sasol Chevron anticipates investments totalling more than A$8 billion.

Chevron’s international upstream and downstream technologies, experience and
resources, combined with Sasol’s Fischer-Tropsch (FT) technologies and experience,
open up new options and markets for dealing with uneconomic or stranded gas and
increases the likelihood of exploration and development of gas reserves world-wide.

Sasol’s corporate strategy for global deployment of FT technologies is well aligned with
Chevron’s plans for growth, creating many potential synergies between the two
companies. For example, Sasol’s FT technology and Chevron’s ISOCRACKING
technology offer a unique combination of world class technologies to establish GTL as
a successful, global business. Cooperation between the technology groups of
Chevron and Sasol will ensure that joint GTL activities remain state-of-the-art and
world class.

Sasol Chevron is actively pursuing application of GTL technology for selected Chevron
and Sasol reserves of natural gas, for third-party gas reserves and on behalf of host
countries seeking to monetise their gas reserves. In addition, it is fostering the
development of a GTL Fuel industry and global markets for GTL Fuel, and will be
involved in building, owning, operating and managing plants throughout the world.

GTL products are expected to set new global standards for premium high-
performance, environmentally friendly fuels.

2.3    The Technology
The venture is built on the foundation laid by Sasol, a leader in state-of-the-art FT
technology. It will utilise proprietary technologies of both companies -- Sasol's Slurry
Phase Distillate (SPD) process and Chevron's ISOCRACKING™.

SPD is a Sasol proprietary process for converting reformed natural gas into waxy
syncrudes. Utilising technology from Haldor Topsoe, a Danish company, methane, the
main component of natural gas, is mixed with oxygen and reacted over a catalyst to
create a mixture of carbon monoxide and hydrogen called synthesis gas or syngas. In
a Slurry Phase reactor, the syngas is heated to about 240 degrees Celsius and mixed
with another catalyst to form various liquid hydrocarbons (FT conversion), yielding
condensates and waxy syncrudes.

ISOCRACKING is a Chevron proprietary process used to upgrade waxy syncrudes
by separating heavier molecules, which are usually solid at room temperature, then
rearranging them so they become liquid. This process yields lighter products such as
synthetic diesel and naphtha, which contain virtually no sulphur and aromatics.

3      About GTL Fuel

The Sasol Chevron GTL Fuel process produces products with purity levels that are
difficult to attain economically and technically through conventional crude oil refining
processes.       As a result, these products display performance characteristics and
environmental benefits that in many applications are superior to those of conventional
crude equivalents.

The SPD process converts natural gas into high quality GTL Fuel and GTL Naphtha.
This creates an opportunity to produce easily transportable and marketable products
from abundant and largely under-utilised natural gas resources. Product split from the
SPD process is approximately 70-80% GTL Fuel and 20-30% GTL Naphtha, with a
small volume of Liquefied Petroleum Gas (LPG).

The GTL Fuel produced by the process can be used in conventional compression
ignition (diesel) engines. It has a very high cetane number and virtually zero sulphur
and aromatic content. These qualities significantly reduce exhaust gas emissions,
offering considerable environmental benefits. GTL Fuel is compatible with existing fuel
distribution infrastructure and with current and envisaged future engine and exhaust
gas after-treatment technologies.

GTL Fuel has the potential to provide not only significant environmental benefits, but
also important fuel efficiency gains. Compression ignition engines are currently 30-
50% more efficient than spark ignition (petrol) engines. GTL Fuel offers more
kilometres per litre of fuel and fewer emissions per kilometre driven.

In the reduction of all air emissions, GTL Fuel is equal to, or out-performs, other
transport fuels. In conventional diesel engines the high quality of GTL Fuel yields a
reduction of all regulated emissions by typically 20 to 40%. It is expected that further
improvements are possible in the next generation of diesel engines, which will be
designed around cleaner fuel. The US Department of Energy (USDOE) full fuel-cycle
analysis (from well to wheel) rates GTL Fuel as the best overall performer in the
foreseeable future. In fact, USDOE is planning to sponsor a GTL Fuel trial with the
Washington DC bus fleet.

The USDOE’s analysis indicates that the lifecycle Greenhouse emissions from GTL
Fuel are already comparable with other clean fuels. Once large-scale GTL plants are
operating, major production improvements can be expected and Greenhouse
emissions will be reduced further. On a fuel use basis, GTL Fuel is already the most
Greenhouse-efficient fuel.

The GTL Naphtha produced by the process is a highly paraffinic (95%+) light naphtha
which is ideally suited for producing ethylene. Its properties result in superior ethylene
and propylene yields compared with currently available naphtha feeds for this

3.1     Physical and chemical properties
3.1.1   Density

GTL Fuel consists almost entirely of paraffins, with less than 1% (mass) aromatics.
With a higher hydrogen-to-carbon (H/C) ratio, paraffins have lower density than other
hydrocarbon types. Consequently the density of the GTL Fuel is lower than that of
conventional crude oil derived diesel fuels (0.78 kg/l compared to 0.82 - 0.85 kg/l). The
higher density of conventional diesel results from a relatively high (15-30%) aromatic

3.1.2   Energy content

Another consequence of the high H/C ratio is that GTL Fuel has a higher energy
content, on a mass basis, than conventional diesel. The gross heating value of the
GTL Fuel (47.1 MJ/kg) is approximately 4% to 5% higher than a typical crude oil
derived diesel fuel. Due to the low density, however, the volumetric energy content of
GTL Fuel is lower than conventional diesel.

3.1.3   Cetane number and Cold Flow characteristics

Linear paraffins in the diesel boiling range have very high cetane numbers, but poor
cold flow properties. Conversely, branched paraffins have lower cetane numbers, but
significantly better cold flow properties. The type and positioning of the branches also
have a strong influence on these properties. The SPD process enables some control
over these parameters with the result that a good balance between these properties
can been achieved. GTL Fuel has a cetane number in excess of 70, while retaining
good cold flow properties (CFPP lower than -20°C)

3.1.4   Sulphur content

As the Fischer-Tropsch synthesis catalyst is poisoned by sulphur, sulphur components
in the synthesis gas are reduced to very low levels in the preparation gas feed to the
syngas process. As a result, the sulphur content of the GTL Fuel is less than 5 ppm.

3.1.5   Polar compounds

The SPD product work-up process involves a hydro-processing step that removes
polar molecules. GTL Fuel, therefore, contains essentially zero oxygenates.

3.1.6   Thermal stability

The thermal stability of GTL Fuel, as determined according to the Octel F21-61 test
procedure (180 minutes at 150°C), is very good. The reflectance rating of 99.1% far
exceeds the minimum limit of 80% proposed for the US "Premium Diesel" specification.

3.1.7   Elastomer compatibility

The two most commonly used elastomers in automotive fuel systems are nitrile rubber,
and Viton®. ASTM (D 471 and D 412) test procedures have been used to compare the
effect of GTL Fuel with that of a typical US diesel. The tests determine the effect of the
fuel on mass, thickness and tensile properties of the elastomers.

Figure 3.1 shows the changes in tensile strength and thickness of nitrile rubber and
Viton® respectively. The reference samples shown in the two figures were not
immersed in the diesel samples.

Figure 3.1     Graph of changes in tensile strength and thickness of Viton®
               rubber immersed in different compression ignition fuel samples

The differences between the GTL Fuel and conventional diesel are relatively small. In
both cases the thickness change for all of the fuels tested is less than 5%.

As can be seen, the effect of the conventional diesel is to increase the thickness of the
sample, whereas the converse effect is observed for the GTL Fuel. It is well known that
the presence of aromatic compounds in conventional diesel fuel causes swelling of
certain elastomers, which is not the case in aromatic free fuels.

3.1.8   Metals corrosivity

The corrosivity of GTL Fuel (compared with a typical US diesel) towards various metals
has been tested by immersing metal coupons in the fuels at a temperature of 60 ± 2 °C
for a three week period. The metals tested were:

        Carbon steel
        Aluminium alloy LM 24
        Aluminium alloy 1200
        Copper alloy (70 Cu : 30 Zn)

In all cases, corrosion rates have been found to be extremely low. Even the highest
corrosion rates measured are too small to be considered significant.

3.1.9   Lubricity

Lubricity in a conventional diesel fuel is derived from the presence of polar molecules
(including hydrocarbon-based and sulphur-based compounds). As GTL Fuel is
essentially sulphur-free, and since the SPD product work-up process involves a hydro-
processing step which removes polar molecules, neat GTL Fuel displays poorer
lubricity properties than crude oil derived diesel fuels. This is also the case with most
other highly hydro-treated, very low sulphur diesel fuels.

Lubricity characteristics of GTL Fuel, as well as a typical US diesel and three blends
have been evaluated by the CEC F-06-A-96 (HFRR) and ASTM D 6078 (SLBOCLE)
methods (Figure 3.2).

Figure 3.2 Lubricity characteristics of GTL Fuel

The WSD (Wear Scar Diameter) measured in the HFRR test is around 570 µm for the
neat GTL Fuel. This value decreases sharply in the blends containing 80% and 50%
GTL Fuel, after which it remains fairly stable at between 470 and 485 µm. The results
of the SLBOCLE tests show a similar trend, with lubricity improving with decreasing
concentration of the GTL Fuel in the blends.

Both the GTL Fuel and the conventional diesel exhibit higher wear than the proposed
CEC maximum WSD of 460 µm. If GTL Fuel were to be used neat, a lubricity
improvement additive would probably need to be added to the fuel, depending on the
application. The graph shows GTL Fuel response to two commercially available
lubricity improvement additives (one acid based, the other ester based). Adequate
lubricity can be achieved with a relatively low level of additive.

3.1.10 Biodegradability

The CO2 evolution test method (modified Sturm OECD method 301B) has been used
to evaluate the biodegradability of GTL Fuel. Compounds are considered to be “readily
biodegradable” if they achieve 60% biodegradation within 28 days. Domestic activated
sludge, not previously exposed to industrial effluent, was used as the source of micro-
organisms for the test.

Figure 3.3 shows that GTL Fuel reaches 60% biodegradation in around 28 days,
confirming that it will degrade rapidly and completely in an aquatic environment under
aerobic conditions. This is attributed primarily to the low aromatic content in the GTL

Figure 3.3    Graph of biodegradation analysis for GTL Fuel

3.1.11 Ecotoxicity

GTL Fuel has been evaluated in two ecotoxicity tests. The first is the Activated Sludge
Respiration Inhibition (ASRI) test, which measures the effect, at different sample
concentrations, on activated sludge respiration. The second is the Pseudomonas
Putida Growth Inhibition Test, which is used to determine the effect of a sample on
microbial degraders, which form an important part of ecosystems.

Both results confirm that GTL Fuel is non-toxic to bacteria in concentrations of up to
100,000 ppm. Since this is above the solubility limit of the product in water, it confirms
that if GTL Fuel should enter into the environment and be washed into sewage works,
it would not jeopardise the efficiency of wastewater treatment systems.

3.2    Engine performance and fuel consumption
On a standard compression ignition (CI) engine, fuel consumption using GTL Fuel is
comparable to conventional diesel. Although GTL Fuel has a lower density than
conventional diesel, this is compensated by two factors:

       •   Energy density per unit mass of GTL Fuel is higher than that of
           conventional diesel, therefore a lower mass of fuel is required for the same
           energy output.
       •   Most CI engines are not able to operate at maximum efficiency due to
           emissions limitations. Because of the emissions benefits associated with
           combustion of GTL Fuel, it is possible to operate under a more efficient
           control strategy with the use of this fuel.

Importantly, an engine specifically designed to exploit the benefits of the higher cetane
number and other characteristics of GTL Fuel is expected to achieve a performance
advantage over the conventional package.

These effects are being investigated in a number of development programmes.

3.3    Emissions - compression ignition (diesel) engines
Although CI engines emit a range of pollutants, the two most important are oxides of
nitrogen (NOx) and particulate matter (PM). This is where most of the environmental
focus lies.

Concerns about aromatic hydrocarbons and particularly poly-aromatic hydrocarbons
(PAH), are growing due to their carcinogenic effects, and oxides of sulphur (SOx) are
important in regions where acid rain is a problem.

Unburned hydrocarbons (HC) and carbon monoxide (CO) are not generally regarded
as a "diesel problem" as they are low relative to other sources.

GTL Fuel has been tested in a number of programmes to evaluate emissions
performance in compression ignition engines.

Figure 3.4 shows exhaust emissions of GTL Fuel compared with a typical US diesel
fuel. The test was based on the US FTP cycle, using a 1991 Detroit Diesel engine.

Figure 3.4    Heavy duty emissions with GTL Fuel (1991 DDC engine)

Figure 3.5 shows exhaust emissions of GTL Fuel compared with a typical US diesel
fuel. The test was based on the US FTP cycle, using a 1999 Detroit Diesel engine.
This shows that, despite advances made in engine technology, the GTL Fuel still
exhibits significant emissions benefits.

Figure 3.5    Heavy duty emissions with GTL Fuel (1999 DDC engine)

Figure 3.6 shows exhaust emissions of GTL Fuel compared with a typical European
reference diesel fuel. The test was based on the European 13-mode steady state
cycle, using a Peugeot 2.0 litre engine. This shows that GTL Fuel exhibits significant
emissions benefits in light duty as well as heavy-duty applications.

Figure 3.6    Passenger car emissions with GTL Fuel

3.3.1   Oxides of nitrogen (NOx)

The rate of formation of oxides of nitrogen (NOx) during combustion of diesel fuel is
most closely a function of flame temperature, which in a compression ignition engine is
closely related to cylinder pressure. At optimum injection timing (maximum combustion
efficiency) NOx limits are generally exceeded, therefore injection has to be retarded in
order to reduce peak cylinder pressure to bring NOx emissions back within limits. This
results in an efficiency penalty, and efficiency of most diesel engines is therefore NOx-

GTL Fuel has an important advantage in this respect. With a higher cetane number,
ignition delay period is shorter than with diesel. Less fuel undergoes premixed
combustion and more undergoes mixing-controlled combustion. The higher cetane
number also results in a more "even" burn. In addition, since GTL Fuel has a lower
density than conventional diesel, a longer injection period is required to meet fuel
energy demand of the engine. Combustion takes place, therefore, over a longer period
of time, and this allows more time for cooling by heat transfer and dilution. Under
identical injection timing conditions, the peak cylinder pressure and flame temperatures
are lower, and this explains the lower NOx formation rates associated with the use of
GTL Fuel.

In practice, since efficiency is typically NOx-limited, the use of GTL Fuel allows
injection timing to be advanced, which results in improved engine efficiency while still
maintaining NOx levels within legislated limits.

It is generally accepted it will not be possible to achieve proposed NOx reductions in
Europe and the US without catalytic after-treatment. However de-NOx catalysts are
noble metal catalysts which are poisoned by sulphur. It is generally agreed that NOx
after-treatment systems will require fuel sulphur levels below 15 ppm to function
efficiently. In this respect GTL Fuel is an "enabling" fuel, containing well below this
sulphur threshold level.

3.3.2   Particulate matter (PM)

Particulate matter (PM) in a CI engine exhaust comprises a number of components
such as elemental carbon, unburned hydrocarbons, metal and ammonium sulphates,
and bound water. Since sulphur compounds in PM are directly related to sulphur
present in the fuel, low fuel sulphur, such as is the case with GTL Fuel, is a significant
advantage in reduction of PM.

With the lower aromatic and iso-content of GTL Fuel, the degree of combustion is
higher, therefore the carbon and unburned hydrocarbon content of the PM and hence
the total PM released is lower.

Since NOx is formed in conditions of vigorous combustion, PM emissions bear an
inverse relationship to NOx emissions (the so-called NOx - particulate trade-off).
Following the above discussion on NOx, if the engine timing is modified to bring NOx
back up to the limit and improve combustion efficiency in an engine running on GTL
Fuel, the PM will therefore be further reduced.

One way of reducing PM is to use a particulate trap in the engine exhaust, and it is
generally believed that it will not be possible to achieve the proposed PM reductions in
Europe and the US without such after-treatment. Accumulated PM is periodically
burned off (carbon and unburned hydrocarbons are re-oxidised) using an oxidation
catalyst. If fuel sulphur is high, however, oxidation of SOx in the exhaust gas, may in
turn lead to a dramatic increase in sulphur-based PM. It has been shown sulphate
formation on oxidation catalysts is prevented, if the sulphur content of the diesel is
below 0.05 % (wt), as is the case with GTL Fuel. Furthermore, particulate traps use
noble metal catalysts that are poisoned by excessive levels of sulphur. It is believed
that such after-treatment systems would require fuel sulphur levels below 15 ppm to
function efficiently. In this respect GTL Fuel is an “enabling” fuel containing well below
this threshold level.

3.3.3   Other emissions

The extremely low sulphur content of GTL Fuel effectively results in zero emissions of
oxides of sulphur (SOx) in the combustion stage.

Most unburned aromatics appear in PM. Of particular concern are the polyaromatic
hydrocarbons (PAH), which are generally regarded to have carcinogenic properties.
Ironically, since PAH have the highest density and more difficult to combust than
straight chain hydrocarbons, they are the most likely to appear in exhaust emissions,
and more specifically in PM. With a lower concentration of fuel PAH in GTL Fuel, the
concentration in exhaust emissions is proportionally reduced. The carcinogenic activity
of PM in engines running on reformulated diesel has been shown to decrease by
between 74 and 81% compared with engines running on conventional diesel.

While carbon monoxide (CO) is a legislated emission in many countries, most modern
CI engines are easily able to achieve current specification limits, so this is not a
challenge facing diesel fuel at present. CO emissions from GTL Fuel combustion are
however between 30% and 50% lower than conventional diesel. This can be explained
by the high cetane number. Since this results in a shorter ignition delay period, and a

longer and more “even” burn, degree of oxidation is higher, resulting in a reduced
amount of CO in the exhaust gas.

While HC is a legislated emission in many countries, most modern CI engines are
easily able to achieve current limits, so this is not a challenge facing diesel fuel at
present. Nevertheless, HC emissions from GTL Fuel combustion are between 40%
and 60% lower than for conventional diesel

3.4    The Market
Global GTL synthetic diesel production from natural gas is expected to grow from less
than 15,000 bpd today to as much as 800,000 bpd within the next decade. The
performance and environmental benefits of GTL products constitute competitive
advantages that are expected both to ensure placement in target markets and, in most
cases, generate price premiums above conventional crude oil refined products. The
range of GTL product options is characterised in Table 3.1.

The economics of Sasol Chevron projects are based solely on GTL Fuel and GTL
Naphtha products. These are the only markets capable of absorbing the projected
large product volumes without causing severe pressure on supply/demand balance
and overall pricing.

    Table 3.1 Characterisation of GTL product options

                    Global      Max Yield    Premium
                                                             Conventional                     GTL
  Product           Market     (45,000 bpd   vs. Diesel
                                                              Products                      Products
  Groups            (bpd)         Plant)     (US$/bbl)
                                                          • Cetane: 45-50        • Cetane: 70+
  GTL Fuel        11,000,000     36,000         0-4       • Sulphur: 500ppm+     • Sulphur: <5ppm
                                                          • Aromatics: 20-30%    • Aromatics: <1%
                                                                                 • High paraffin content
                                                                                   provides excellent cracker
  Chemical                                                • Ethylene Cracker
                   2,900,000     7,500          -1.5                               yields
  Naphtha                                                   Feed
                                                                                 • High H2 content provides
                                                                                   ideal fuel cell feed material
                                                          • Excess Supply
   Base Oil                                               • Price Set By
                   781,000       6,750         15-23                             • See Base Oil (premium)
(Conventional)                                              Refining
                                                          • Limited Supply       • High viscosity index
   Base Oil                                               • Relatively high      • Excellent oxidation stability
                    12,000       6,750        50-105
  (premium)                                                 manufacturing        • Very good low temperature
                                                            costs                  viscometrics.
                                                          • Petroleum based
                                                          • Variable quality
                                                                                 • Consistent quality (zero oil)
   Medium                                                 • Supply under
                    37,000       10,500        25-45                             • High crystallinity - may need
                                                            pressure due to
                                                                                   to blend or isomerise
                                                            new iso-dewaxing
                                                          • Extracted from
                                                            kerosene & gas oil
                                                                                 • Low cost
 N-Paraffins        19,000        7,500        35-55      • Processed to
                                                                                 • 95% linear
                                                            remove olefins and

    3.4.1      GTL Fuel

    The global demand for diesel in the transport sector is large (11 million bpd) and
    demand growth outlook remains positive over the next decade and beyond. Diesel
    continues to dominate as the universal fuel for economic growth. Advancements in
    diesel engine technology over the past decade have also led to diesel vehicles gaining
    widespread acceptance in the passenger market. Diesel, with a higher distance per
    unit carbon emitted relative to other transport fuels, is expected to benefit from
    pressure for improved fuel economy and reduction in CO 2 emissions.

    GTL Fuel has a number of unique characteristics that differentiate it from conventional
    diesel. It has a cetane number in excess of 70, almost zero sulphur and aromatics,
    good cold flow characteristics, and it is ultra-pure by even the most stringent
    standards. It is anticipated that, with legislation progressively tightening diesel quality,
    GTL Fuel will be a sought-after blend component with which to upgrade higher sulphur
    or low cetane diesel. Europe and the US are taking the lead in raising the
    environmental bar and it is expected a number of countries in Asia and South America
    will take a similar legislative approach to transport fuels and emissions.

    The progressive increase in demand for cleaner fuels and lower emissions is expected
    to result in the growth of smaller niche markets for fuels delivering lower emissions

than the pool average. Such markets could include inner cities and pollution sensitive
areas such as hospitals, military fleets and underground applications.

Since consumers are generally unwilling to pay a price premium for fuel on
environmental grounds alone, premium value in these niche markets is likely to be
derived from preferential tax treatment, where authorities seek to provide an incentive
for the use of ultra clean fuel.

3.4.2   GTL Naphtha

GTL Naphtha is the primary GTL Fuel co-product and will be produced in all Sasol
Chevron ventures. GTL Naphtha is highly paraffinic, which makes it an ideal feed for
cracking to ethylene, and it will therefore be marketed as a feedstock for ethylene

Ethylene crackers are able to process a range of light hydrocarbon feedstock, and a
wide range of naphtha grades find their way into this market. In general, chemical
naphtha pricing follows crude oil pricing and is not strongly influenced by ethylene
demand. Since ethylene is the highest value cracker product, the cracker feedstock
price is linked to the ethylene yield that can be achieved

4      The Australian Opportunity

4.1    Background
In 2000, Sasol Chevron started looking at the possibility of a project using
uncommitted reserves of natural gas off northern Australia. Preliminary work
culminated last year in a submission to the Federal Department of Industry, Science &
Resources (DISR) on Sasol Chevron's vision for an Australian GTL Fuel industry. This
was followed by an undertaking by the Minister for Industry, Science & Resources,
Senator Minchin, to establish in the first half of 2001 a clear position and fiscal
framework for the new industry.

To achieve this, Senator Minchin directed DISR to set up a working party with other
Federal Government agencies and Sasol Chevron. Subsequently, the DISR GTL
Taskforce was established to assess the potential of a GTL industry using Australia’s
undeveloped natural gas resources. In July, the Taskforce delivered an interim report
and in September detailed a number of policy options to support the establishment of a
GTL Fuel industry. The Taskforce is close to completing its work.

The Federal Government has indicated a strong interest in the project, which would:
      • Underpin a greenfields gas development
      • Monetise large volumes of stranded natural gas
      • Establish a major new industry
      • Provide a fuel replacement for dwindling domestic supplies of crude
      • Introduce an ultra clean transport fuel.

At the beginning of 2001, Sasol Chevron established a 12 member project team in
Perth. Since then the company has spent several million dollars examining the
potential for a project in Australia. The project team, with support from Head Office in
London, has been evaluating the commercial feasibility of an Australian GLT “footprint”
project to serve the Asia Pacific region. As part of this work, possible sites in NW
Australia have been assessed and discussions held with potential gas suppliers.

4.2    The Australian Project (AGTL)
Sasol Chevron is currently looking at the commercial feasibility of a 45,000 bpd plant to
start up around 2006. A plant this size would require more than 450TJ/d of gas and
would produce a volume of synthetic diesel that equates approximately to the current
diesel output of one Australian refinery. Two subsequent expansions of the plant will
each add 90,000 bpd to the output. By way of comparison, the first two phases of
AGTL (45,000 and 90,000 bpd) will use more gas than the North West Shelf LNG
project uses today.

4.2.1   Site Selection & Gas Supply

For a GTL plant, site selection is driven largely by the need to be close to the gas
supply. Sasol Chevron has evaluated a number of sites in NW Australia with a view to
accessing the three basins with significant gas reserves:
       • Bonaparte Basin (Timor Sea)
       • Browse Basin (Kimberley region)
       • Carnarvon Basin (Pilbara region)

There are suitable onshore plant sites for gas from both the Bonaparte and Browse
Basins, however the schedule for development of these gas fields does not suit Sasol
Chevron’s project timing.

While site selection and gas supply negotiations are continuing, it has been necessary
to develop the economics of the project. To do this, Sasol Chevron adopted for its
base case a hypothetical location on the Burrup Peninsula.

4.2.2   Plant

AGTL Phase 1 is based on a plant of three 15,000 bpd trains – the design of which
would be fundamentally the same as EGTL. In the current schedule, AGTL would
commence beneficial operation in 2006. Two subsequent phases, each of 90,000 bpd,
are planned for commissioning prior to 2008 and 2013.

A site of approximately 200 ha is required for the foundation plant and two subsequent
expansion phases. Infrastructure requirements are as follows:

4.2.3   Project Timeline

Figure 4.1 illustrates the current project timeline. In order to meet the ready for start
up (RFSU) schedule of early 2006 Sasol Chevron requires clarification of the fiscal
regime and the potential for an investment incentive package for AGTL by the end of
2001. The following are the key dates in the AGTL timeline:

        •   End 2001 – Clarification of fiscal regime and assistance package
        •   Late 2002 – Policy measures legislated
        •   Late 2002 – AGTL moves into FEED
        •   Late 2003 – AGTL awards EPC Contract
        •   Late 2003 – Construction begins
        •   Early 2006 – AGTL RFSU

Figure 4.1 AGTL Overall Schedule

           2001                 2002                       2003                 2004                 2005                  2006           2007

      2Q    3Q     4Q   1Q     2Q     3Q     4Q   1Q    2Q      3Q   4Q   1Q   2Q   3Q   4Q   1Q    2Q   3Q   4Q   1Q   2Q    3Q   4Q     1Q

        Site(s)    Confirmed         BOD & +/-20%            Development
      Identified     Site              Estimate              Plan & +/-10%
      & +/-30%                                                  Estimate                                            GTL


                   FEASIBILITY                      FEED                                      EPC                            OPERATIONS

                                           Environmental / NT


                    Fiscal            Fiscal
                   Regime            Regime
                   Defined          Legislated

      2Q    3Q     4Q   1Q     2Q     3Q     4Q   1Q    2Q      3Q   4Q   1Q   2Q   3Q   4Q   1Q    2Q   3Q   4Q   1Q   2Q    3Q   4Q     1Q

           2001                 2002                       2003                 2004                 2005                  2006           2007

5       Goals of the Fuel Tax Inquiry
The Fuel Tax Inquiry has been asked to consider a number of issues of relevance to
Sasol Chevron. The Inquiry’s Terms of Reference that have direct relevance to Sasol
Chevron are:

    •   Options available to government to reduce any adverse effects of existing
    •   The examination of petroleum substitute products, particularly for transport and
        off road use and related rebates, subsidies and grants, including the proposed
        Energy Grants (Credits) Scheme and other fuel related measures proposed as
        part of the Measures for a Better Environment.
    •   The effects on the efficient allocation of resources, taking into account the pivotal
        role that petroleum products play in terms of economic activity, environmental
        outcomes, including in relation to transport.
    •   The interplay between fuel taxation and related issues such as petroleum pricing,
        cost structures and marketing arrangements with particular attention to the
        effects on competition (in particular, access to supply) and the efficiency and
        international competitiveness of Australian industries.
    •   Options available to the government to reduce or eliminate any adverse effects
        reported above, including any anomalies or inequities arising from the existing
        arrangements for industry and consumers.

There are also a number of issues the Inquiry has been asked to have regard to which
makes GTL Fuel relevant. These are:

    •   The overall economic performance of the Australian economy, including
        promoting domestic competition and international competitiveness of Australian
    •   Downstream industries and consumers.
    •   Externalities associated with transport.
    •   The use of fuels that would deliver better air quality and contribute to greenhouse
    •   The flexibility and sustainability of government revenue.

All these issues can be broadly captured in three main themes:

        1. Helping create a better environment
        2. Achieving revenue neutrality for Government
        3. Encouraging industry

This submission discusses policy options and strategic opportunities for Government in
terms of these three themes. However, before addressing them, there is a need to
address the issue of leveling the playing field in terms of the tax treatment of transport
fuels. The current tax treatment of transport fuels is distorted because a volume based
production tax (excise) is passed directly on to the consumer. It takes no account of the
fact that fuels are not equal in performance they deliver for each litre of consumption.
The goals of the FTI can only be addressed once this distortion is removed.

5.1          Distortions in the current tax system
There are two areas of distortion within the current tax treatment of transport fuels:

                  •     Variations in tax paid by consumers because of variations in the
                        efficiency of transport fuels
                  •     The excise tax treatment of alternative fuels

5.1.1       Tax distortions caused by variations in combustion efficiency

As noted above, excise is a volume-based production tax passed directly to the
consumers of the product. In effect, excise is a consumption tax. As a consumption
tax, excise levels should take account of the variations in the combustion efficiency of
different transport fuels and combustion systems available in the market place. As an
example, Table 5.1 compares the tax treatment of the two most widely used fuels in
Australia, petrol and diesel. Petrol used in spark-ignition engines is over 30% less
efficient when combusted compared to diesel in compression-ignition engines. As a
result, consumers of petrol pay more than 30% in tax per kilometre driven than diesel

Table 5.1               Comparison of the current tax paid by consumers of petrol and
                      Fuel                         Excise Rate (Acpl)                      Tax per km driven
             Diesel/ULSD                                    38.143                               4.16
                Petrol                                      38.143                               5.55

Rewarding fuel efficiency is a desirable policy position to take. However, the inequity is
compounded when the treatment of alternative fuels is considered.

5.1.2       Tax distortions cause by current Alternative Fuels policy

Fuels qualifying for alternative fuel status are awarded special tax treatment on the basis
of environmental performance. Two such fuels, LPG and CNG, attract no excise. The
zero excise treatment of natural gas fuels creates an enormous distortion in the fuels
market, not only for conventional fuels, but also for other alternative fuels that have to
compete with LPG and CNG.

Table 5.2 and Figure 5.1 illustrate the distortion in favour of LPG and CNG under the
current tax regime

Table 5.2               Comparison of the current tax paid by consumers of standard and
                        alternative fuels
                      Fuel                         Excise Rate (Acpl)                      Tax per km driven
             Diesel/ULSD                                    38.143                               4.16

    Analysis assumes the following mileage for 60l of fuel: Diesel/ULSD = 550km, Petrol = 412km, LPG = 350km

                 Petrol                        38.143                       5.55
               LPG/CNG                           0                           0

Figure 5.1         Distortion of tax per kilometre paid by consumers of different fuels



               Nominal Level Playing Field



     1                                                                      Diesel/ULSD

         0.5              0.6            0.7            0.8           0.9                  1
                                  Relative Combustion Efficiency
The tax distortion has helped LPG gain market share. Figure 5.2 shows the growth of
the LPG market against the growth in excise on petrol, which is the main fuel competing
with LPG). The inefficiency of LPG on a distance per volume basis acted as an
impediment to the growth of the fuel into the market. Despite zero excise, it was not until
petrol excise reached the 10 Acpl mark, or thereabouts, that LPG made significant
inroads into the transport fuel market. That was because, on a volume per distance
basis, the price of LPG was still relatively unattractive to consumers up until that point.
Since then, the price differential provided by the excise treatment of LPG has enabled
LPG to capture more than 6% of Australia’s fuel market.

Figure 5.2                 Market penetration of LPG from 1972-1999 vs excise relief
                           compared to petrol
                           Market Penetration of LPG vs Excise Relief (1999 equivalent)
          40000                                                                                                                                                                                          45
                                      LPG Demand
          35000                                                                                                                                                                                          40
                                      Excise (Acpl 1999 equivalent)

                                                                                                                                                                                                              Acpl (1999 equivalent)















                                      Market penetration stimulated by excise differential

Along with the rise in LPG market share, there was a corresponding growth in the
leakage of excise revenue, as shown in figure 5.3. Unless some action is taken, by
2006, excise revenue leakage from LPG and CNG is predicted to reach $1 billion per

Figure 5.3             Foregone excise revenue from LPG market growth in 1999 dollars
                       from 1973-1999
        40000                                                                                                                                                                                     $1,000

        35000                      LPG Demand                                                                                                                                                     $900
        30000                      Excise Revenue Loss
                                   (1999 equivalent)                                                                                                                                              $700        A$MM/annum


        15000                                                                                                                                                                                     $400
           0                                                                                                                                                                                      $0














       Revenue leakage to consumer and marketer >A $900 MM per annum in 1999

One option to stem the tide of revenue leakage would be to excise LPG/CNG at the
standard excise rate of 38.143 Acpl. Table 5.3 shows the tax per kilometer outcome if
LPG/CNG received the same excise treatment as diesel/ULSD and petrol.            The
increased cost of LPG would make it uncompetitive and its market share would be
rapidly eroded.

Table 5.3 Comparison of tax paid by consumers of standard and alternative
          fuels excise at the same rate

                Fuel                            Excise Rate (Acpl)                     Tax per km driven
           Diesel/ULSD                                   38.143                              4.16
              Petrol                                     38.143                              5.55
            LPG/CNG                                      38.143                              6.46

The Government developed an alternative fuels policy for two reasons:

          1. to encourage the use of certain ‘environmentally friendly’ fuels, and;
          2. to enable the efficient allocation of resources, taking into account the pivotal
             role that petroleum products play in terms of economic activity,
             environmental outcomes, including in relation to transport.

The current regime, which does not tax natural gas-based fuels (LPG and CNG), does
not necessarily promote the use of the most efficient, environmentally and greenhouse
beneficial fuels across the board as only some environmentally-friendly fuels receive
favourable excise treatment. The arbitrary application of excise breaks does not
deliver a coherent policy on fuel use either for environmental or fuel efficiency reasons.

For example, leading scientific studies (eg USDOE, 1999) have shown that ULSD is a
far more efficient, environmentally and greenhouse beneficial fuel than either LPG or
CNG . However, ULSD receives no special excise treatment at present and attracts
the same excise as conventional (high sulphur) diesel. Thus, not only is there no
incentive for consumers to use ULSD over high sulphur diesel, but there is no price
incentive to use ULSD over LPG or CNG.

The main limitations of the current policy on the excise treatment of alternative fuels
      • The use of the most efficient, environmentally and greenhouse-beneficial
          fuels is not promoted. The scheduling of all alternative (non-petroleum
          product) fuels at zero excise rate does not take into account efficiency or
          environmental performance differences between fuels (eg ULSD
          outperforms LPG and CNG across the board) or between engine types
          (compression ignition engines and spark ignition engines).
      • Revenue leakage on LPG and CNG continues to grow. Without a change,
          the current policy involves continuing significant excise revenue leakage for

 Analysis assumes the following mileage for 60l of fuel: Diesel/ULSD = 550km, Petrol = 412km, LPG = 350km
 The draft CSIRO report commissioned by the AGO indicates that CNG is a more favourable fuel, however, the methodology
used is inconsistent in its treatment of different fuels, engines technologies and drive cycles.

       •    Technology developments and improvements are not considered.
            Scheduling all alternative fuels at a zero rate of excise does not allow for
            the excise rate of different alternative fuels to be adjusted for improvements
            in either the efficiency or environmental benefits of the fuels, including new
            engine and after-treatment technology. An excise mechanism based on
            efficiency and environmental benefit would provide incentives for technology
            investment in new and improved transport fuels.

To level the playing field and address these problems two steps need to be taken. The
most important is to rate fuels uniformly according to combustion efficiency (distance
delivered per volume of fuel). This can be done so as to create a revenue neutral base
that treats all fuels equally. It also opens up a range of policy options available to the

Once the playing field has been levelled, Government can fairly reward environmental
efficiency (emissions per volume) as well as fuel efficiency (distance per volume) while
maintaining revenue neutrality. In such a fuel ranking system, distortions and inequities
are removed, revenue leakage is halted, Government has more policy options,
environmental efficiency is rewarded, and new fuels can more easily enter the
transport market.

5.2        A Level playing field – setting excise by combustion
While there were environmental advantages in displacing leaded petrol and high-sulphur
diesel, the arbitrary setting of excise rates neither allows nor promotes the development
of cleaner and more efficient standard fuels. This shortcoming will become even more
apparent when the new mandated clean fuel specifications come into force in 2006, or
when an ultra-clean product, such as GTL Fuel comes on to the market.

One way of addressing these distortions is an excise system that:

                   •   Levels the “playing field” for all transport fuels
                   •   Stops Government revenue leakage
                   •   Increases Government policy options
                   •   Rewards combustion efficiency
                   •   Rewards environmental efficiency

This approach would encourage the production and sale of alternative transport fuels
and encourage consumers to use fuels that provide the best combustion (distance per
volume) and environmental (emissions per distance) efficiency. It is an approach that
not only removes one of the biggest barriers to all alternative fuels, but also one of the
biggest fuel tax issues for the Government, revenue leakage.

If, as it should, the fuel tax regime recognises the issue of fuel efficiency it should set
excise on a tax per kilometre basis. This will have the effect of levelling the playing

Table 5.4 illustrates an excise regime based solely on combustion efficiency. This
model has been generated using the assumption excise will not be increased on diesel
or petrol.

Table 5.4 Comparison of tax paid by consumers of standard and alternative
          fuels excise using fuel efficiency

                 Fuel                            Excise Rate (Acpl)                      Tax per km driven
           Diesel/ULSD                                    38.143                               4.16
              Petrol                                      28.607                               4.16
            LPG/CNG                                       24.564                               4.16

However, there is a problem with this model. While the tax per kilometre is the same for
each fuel, the application of this model to the current market penetration of the fuels
would lead to a net decrease in Government excise revenues to the value of more than
$1.3 billion per year.

If a combustion efficiency excise ranking was adjusted to create revenue, diesel/USLD
would increase significantly in price, as shown in Table 5.5.

Table 5.5 Comparison of tax paid by consumers of standard and alternative
          fuels excise using fuel efficiency with an assumption of revenue

                 Fuel                            Excise Rate (Acpl)                      Tax per km driven
           Diesel/ULSD                                    43.000                               4.69
              Petrol                                      32.250                               4.69
            LPG/CNG                                       27.692                               4.69

The model used to adjust revenue implications for Government is based on a base rate
multiplied by the fuel efficiency factor (Figure 5.4 ). Such a mechanism allows policy
flexibility as Government can set a common base rate for excise that protects its
revenue position and then adjust the base rate according to fuel efficiency variations.
By creating such a mechanism, the playing field is levelled for all fuels, which now
attract the same tax rate on a fuel efficiency basis.

  Analysis assumes the following mileage for 60l of fuel: Diesel/ULSD = 550km, Petrol = 412km, LPG = 350km
  Analysis assumes the following mileage for 60l of fuel: Diesel/ULSD = 550km, Petrol = 412km, LPG = 350km
  Analysis assumes the following mileage for 60l of fuel: Diesel/ULSD = 550km, Petrol = 412km, LPG = 350km

Figure 5.4 Setting of excise revenue using fuel efficiency and a base rate value

                                         Fuel Efficiency   Total Excise
                Fuel         Base Rate                                    Tax per km
                                          Km per litre        Rate
           Standard Diesel      43            1.00            43.000         4.69

                ULSD            43            1.00            43.000         4.69

           Unleaded Petrol      43            0.75            32.250         4.69

              LPG/CNG           43            0.64            27.692         4.69

                                                                Adjustments in the
 Adjustments in the                                         efficiency rate reflect fuel
   base rate vary                                          technology/efficiency gains

Setting a base rate also allows the Government to make future adjustments to revenue
impact and to regularly review the market share of each fuel and technology gains
affecting combustion efficiency. Base rate adjustment ensures Government’s desired
revenue take is retained. The base rate could also be indexed against inflation. Thus
the base rate system greatly increases Government policy options and acts as a safety
valve to ensure the desired revenue outcome for Government.

Having established a mechanism that levels the playing field it is now possible to return
to the goals of the FTI and discuss in turn the application of the mechanism to:

           1. Helping create a better environment
           2. Achieving revenue neutrality for Government
           3. Encouraging industry

6      Measures for a Better Environment

A key component of the Fuel Tax Inquiry’s Terms of Reference is to examine the fuel
tax implications of the Measures for a Better Environment initiative. Once the Inquiry
addresses the inequity in the current fuels market, it can then look at how best to
address environment issues and create policy consistent with the Measures for a
Better Environment initiative.

6.1    Rewarding environmental performance
Government should adopt policy that encourages consumers to use more
environmentally friendly fuels, such as GTL Fuel, ULSD and LPG/CNG. These goals
were the main motivation behind the removal of excise from LPG/CNG in the first

The excise ranking system proposed by Sasol Chevron can be used to reward
environmental efficiency. By including an environmental efficiency multiplier in the
mechanism, excise can be adjusted to reward the most efficient and environmentally
friendly fuels (Figure 6.1). To evaluate and rank the environmental performance of
transport fuels two elements need to be considered – emissions that contribute to
urban air pollution and emissions of greenhouse gases.

In order to assess urban air results, emissions impacting public health and the
environment need to be clearly identified and ranked. When assessing for greenhouse
gas performance, care needs to be taken to ensure industries are not doubly penalised
by other greenhouse penalty measures such as a carbon tax. If a carbon tax or some
other greenhouse penalty is levied at a fuel producing industry, the product should not
be further penalised on a lifecycle greenhouse basis for greenhouse emissions related
to its production process. The environmental outcomes of fuel production can, and
should, be managed through existing processes such as, environmental approval
conditions (eg carbon sequestration, carbon offsets, regulated emissions, etc) or
technology improvement targets.

The Government needs to differentiate between lifecycle and combustion greenhouse
emissions. Lifecycle methodologies are flawed as no account is taken for variations in
lifecycle profiles for different fuel producers, feedstock sources and applications. In
addition, fuel functionality and lifecycle transport cost is not accounted, for example
only the petrol and diesel parts of production process are considered in lifecycle
analysis for those products. However, the bottom line is that HSFO and other refinery
bottoms are inevitable by-products of the crude oil refining process. No account is
taken for the environmental and greenhouse effects of these bi-products (production
and consumption). In contrast, the GTL Fuel process produces only synthetic diesel,
naphtha, LPG, CO2, water and heat.

Figure 6.1 illustrates a revenue neutral fuel excise regime, adjusted for both combustion
efficiency and environmental efficiency. It is based on the same fuel efficiency equations
in Section 5 of this submission.

Figure 6.1     Application of environmental efficiency weighting to ‘level playing
               field’ excise model

                         Base     Environmental/   Fuel Efficiency
                                                                     Total Excise
             Fuel        Rate      Greenhouse         per litre                     Tax per km
                                     Benefit         equivalent

       Standard Diesel    34.7         1.40             1.00           48.580          5.30

             ULSD         34.7         1.10             1.00           38.170          4.16

       Unleaded Petrol    34.7         1.40             0.75           36.435          5.30

          LPG/CNG         34.7         1.15             0.65           25.938          4.39

In this model, ULSD has been used as the reference fuel with the goal of not changing
the price of ULSD at the pump. The weighting of environmental performance is a
subjective assessment based on available research findings.

Using environmental performance to adjust combustion efficiency-based excise rates
removes the current distortion in favour of LPG and CNG and supports the
implementation of environmentally efficient fuels such as ULSD and GTL Fuel. In this
model the excise differential between LPG and unleaded petrol becomes 10.5 Acpl, a
reflection of the difference between the two products in terms of both environmental and
efficiency performance.

The most notable outcome in the model is that standard diesel becomes expensive
compared to the other fuels. The environmental inefficiency of current diesel (most
Australian diesel currently has around 500 ppm of sulphur) would result in a heavy
penalty at the pump. However, there are good reasons why diesel use should not be
        • Diesel is a relatively combustion efficient fuel.
        • New diesel fuel specifications are mandated for Australia in 2006, Euro4
            standards of less than 50 ppm sulphur.

Once Euro4 specifications are enacted, only ULSD can be sold in Australia. At about
that time, GTL Fuel will likely start to enter the domestic market. If diesel excise, and
hence pump prices, rise too sharply before then, consumers will be discouraged from
buying vehicles with diesel engines denying the benefits offered by diesel engines
running on GTL Fuel or ULSD. The answer would be to artificially adjust diesel excise
until the mandating of Euro4 specifications. This would be consistent with the trend in
other countries to encourage the use of compression ignition engines.

6.2    Environmental Credentials of GTL Fuel
US Department of Energy studies show GTL Fuel is marginally less combustion
efficient and has better urban air and greenhouse performance than ULSD on a
combustion basis. In the clean fuels market, GTL Fuel offers the best compatibility to

the Government’s joint policy objectives of fuel and environmental efficiency as it
provides excellent urban air benefits and combustion efficiency (Figure 6.2).

Figure 6.2              Fuel ranking on urban air benefits and fuel efficiency

                                              Sulphur < 5ppm
                                              Aromatics < 1%
                                              Cetane > 70

      Fuel Efficiency

                                 Diesel                          GTL

                                                       LNG         CNG

                             Conventional          Alternative

      Current State
      Future State                Urban Air Benefits

Around the world Governments are looking at a range of new fuel specifications to
improve urban emissions and reduce greenhouse gas emissions. Many countries have
adopted the Euro standards for transport fuels. GTL Fuel is well placed within the
foreseeable environmental standards being set anywhere in the world (Figure 6.3),
including the strict standards (a 15 ppm sulphur limit by 2005) being imposed by the
California Air Regulations Board.

If used as a blending stock, GTL Fuel or the ultra-clean GTL Naphtha could improve
the environmental performance of conventional fuels and help conventional refiners
and engine manufacturers meet stricter fuel specification and vehicle emission
standards currently being introduced in Australia.

If used as a neat alternative fuel in transport, power generation or other applications,
GTL Fuel also has the ability to improve environmental performance compared to
whatever conventional fuel it replaces.

Figure 6.3         Comparison of the sulphur and aromatic content of GTL Fuel with
                   mandated Government fuel objectives


             35                                      World
                                        category 3
                                                     Charter               1993
                                        category 4
             15                                                  1998
             10                                              2000
                     50       350 500
                                                     Sulphur (ppm)
        fuel        15

6.2.1   Reduction of urban air emissions

The USDOE research indicates GTL Fuel has the lowest emissions of urban air
pollutants of all hydrocarbon fuels for conventional combustion engines on both a
lifecycle and combustion cycle basis.

For example, Figure 6.4 compares lifecycle emissions of standard urban air pollutants
from “clean”, environmentally efficient transport fuels, including LPG and CNG.
Conventional petrol or diesel are not included as they would distort the scale of the
chart due to their much higher environmental impacts. The USDOE data clearly
indicate that GTL Fuel is the cleanest fuel in terms of urban air benefits.

Figure 6.4 Comparison of lifecycle air emissions for clean fuels

                                                         Lifecycle                                 CH4 (g/km)
         0.7                                                                                       VOC (g/km)
                                                                                                   PM10 (g/km)
         0.6                                                                                       NOx (g/km)
                                                                                                   SOx (g/km)





                 Reformulated              ULSD             GTL Fuel               CNG                  LPG
 “A Full Fuel-Cycle Analysis of Energy and Emissions Impacts of Transportation Fuels Produced from Natural Gas”, USDOE, December 1999 -
 Long Term Leap Forward Scenario 2005-2010 - Accounts for all foreseeable technology improvements, all fuels

6.2.2     Greenhouse gas emissions

On a fuel combustion basis, the USDOE study found GTL Fuel has the lowest emissions
of Greenhouse gases (Figure 6.5). When considering the full lifecycle emissions of
greenhouse gases, GTL Fuel is comparable to the current alternative fuels and clean
conventional fuels of the future (Figure 6.6).

GTL Fuel has an additional advantage in that technology improvements are expected to
further increase the environmental efficiency of the fuel. There are unlikely to be
significant improvements in the lifecycle environmental performance of reformulated
gasoline and ULSD and little or no chance of significant lifecycle improvements in
LPG/CNG. However, production efficiency for GTL Fuel can be further improved by
optimising waste heat recovery for power generation and via an ongoing R&D focus on
synthesis gas reforming (eg eliminating the need for an oxygen plant). It should be
noted, however, the only way these improvements in production efficiency will be gained
is through operating plants.

Figure 6.5   Comparison of greenhouse gas emissions for alternative and
             future fuels on a fuel use basis

             2.5                                                    Fuel Use GHG (kg/10 km)





                       Reform.            ULSD         GTL Fuel           CNG              LPG

Figure 6.6   Comparison of greenhouse gas emissions for alternative and
             future fuels on a lifecycle basis

                  3                                              Lifecycle GHG (kg/10 km)






                  0 Reform.                              GTL
                                          ULSD                           CNG             LPG
                      Gasoline                           Fuel
                  “A Full Fuel-Cycle Analysis of Energy and Emissions Impacts of Transportation
                  Fuels Produced from Natural Gas”, USDOE, December 1999 - Long Term Leap
                  Forward Scenario 2005-2010 - Accounts for all foreseeable technology
                  improvements, all fuels

6.2.3        Unified fuel ranking with GTL Fuel
With the environmental credentials established by the US Department of Energy , GTL
Fuel should receive a better ranking than ULSD in terms of environmental efficiency.
Because of the slightly lower density of GTL Fuel, it would have a slightly lower ranking
than ULSD in terms of fuel efficiency. In the excise model proposed by Sasol Chevron,
when fuels are excised on an equal fuel efficiency basis (excise per kilometre travelled)
and ranked according to environmental efficiency, GTL Fuel would be excised at a rate
of 34.978 Acpl, as shown in Figure 6.7

Figure 6.7             Addition of GTL Fuel to the proposed fuel ranking based excise

                                       Base         Environmental/       Fuel Efficiency
                                                                                              Total Excise
                    Fuel               Rate          Greenhouse             per litre                              Tax per km
                                                       Benefit             equivalent

             Standard Diesel            34.7              1.40                 1.00              48.580               4.16

                   ULSD                 34.7              1.10                 1.00              38.170               4.16

             Unleaded Petrol            34.7              1.40                 0.75              36.435               5.30

                 LPG/CNG                34.7              1.15                 0.65              25.938               4.39

                 GTL Fuel               34.7              1.10                 0.96              34.978               3.82

        ULSD used as reference fuel
        Excise levels based on efficiency rather than volume
        Excise levels modified by environmental benefit
        Base rate used to adjust revenue stream for Government

    Sasol Chevron is currently undertaking a wide range of its own studies to verify the findings of the US DOE.

7     Revenue Neutrality
There are five components to the excise scheme proposed by Sasol Chevron.

1.    Base Excise Rate

      The base excise rate in cents per litre is the mark from which all fuels are
      evaluated.  The base excise rate provides a mechanism to maintain
      Government revenue as fuel use changes with time.

2.    Environmental/Greenhouse Benefit Multiplier

      Each fuel could be evaluated for its environmental impact on a per kilometre
      and a per litre equivalent basis. The best performing fuel would be given a
      rating of 1 and the other fuels a relative multiplier greater than 1 depending on
      relative environmental performance.

      The environmental benefit multiplier provides a mechanism to implement
      Government policy on the use of the cleanest, most efficient fuels. The
      mechanism can be used to increase the excise rate for poorly performing fuels
      and decrease the excise rate for fuels Government wishes to encourage into
      the market place.

      Environmental performance can be highly variable depending on the type of
      vehicle, driving conditions, engine capacity, after-treatment, etc. There is,
      therefore, a distribution of environmental performance for each fuel type.
      When defining the environmental benefit multiplier these factors would need to
      be taken into account.

3.    Fuel Efficiency Normalisation

      As noted earlier, excise is a volume-based tax. If Government wants to use
      environmental benefit as a mechanism for setting excise rates, then the excise
      rate has to be normalised for the fuel efficiency of each fuel. The fuel efficiency
      normalisation is also a multiplier of the base rate. A value of 1 would be given
      to the most efficient fuel. Other fuels would have values less than 1 dependent
      on relative efficiency compared with the most efficient fuel. Fuel efficiency
      normalisation has the effect of reducing the excise level on a cents per litre
      basis for less efficient fuels, however, the user would be paying the appropriate
      level of tax on a per kilometre basis.

      The fuel efficiency multiplier also provides a mechanism for Government to
      reward fuels that are efficient, or those that best meet Government drivers for
      resource allocation. For example, as GTL Fuel is an efficient fuel that has the
      potential to be a domestically sourced product from natural gas and as
      Australia has a very larger natural gas reserve, excise for GTL Fuel could be
      reduced below the normalised value in order to stimulate consumer choice in
      the direction of the preferred fuel.

       As with the environmental benefit multiplier, fuel efficiency can be highly
       variable depending on the type of vehicle, driving conditions, engine capacity,
       after-treatment, etc. There is, therefore, a distribution of fuel efficiency for each
       fuel type. When defining the fuel efficiency normalisation multiplier, these
       factors would need to be taken into account.

4.     Total excise rate

       The total excise rate would be the product of the base excise rate, the
       environmental benefit multiplier, and the fuel efficiency normalisation multiplier.
       The excise rate would be the rate charged to the producer.

5.     Tax per kilometre

       The tax per kilometre gives an a measure of the average tax being paid by the
       consumer depending on their choice of fuel. This provides a very clear
       indication of Government policy directives.

Some of the key benefits of the proposed scheme are:

       !   Ratings are consistent and transparent across all fuels.
       !   Excise is linked to environmental performance and efficiency not volume of
       !   There are three independent variables that can be adjusted as new fuels
           and better technologies emerge.
       !   A base excise rate can be adjusted to alter Government revenue while
           maintaining policy objectives through excise differentials

As noted above in Section 6.1, the proposed scheme can be revenue neutral to
Government. Figure 7.1 illustrates an outlook for Australian transport fuels out to 2030
(appendix A1). The outlook suggests increasing demand will be filled by alternative
fuels, with petrol demand flat to declining. Continuing growth of the LPG market with a
decline in the demand for petrol will have a significant impact on Government revenue
under the current tax treatment of these fuels. Figure 7.2 shows the potential
Government revenue using three models, 1) current tax regime, 2) level playing field
based tax regime, and 3) efficiency and environmental performance base tax regime.
The model assumes that excise is collected on every litre of product sold and no
exemptions or rebates have been included.

In the model using unified fuel ranking higher excise revenue prior to 2006 occurs
because of the high excise predicted for current diesel. If, as noted earlier, diesel excise
was set at the current rate until the implementation of the mandated Euro 4
specification, Government revenue would remain positive compared to the current tax

The demand outlook presented in Figure 7.1 is revenue positive using the unified fuel
ranking process. However, the real advantage of the excise system proposed by
Sasol Chevron is that the mechanism is flexible and can be easily adjusted to reflect
changes in fuel use, efficiency or environmental performance, while still maintaining
Government revenue.

Figure 7.1                  Outlook for Australia’s fuel mix to 2030


                                                                                           Fuel Cells
                                   Alternative fuels meet the demand
                                   & become the bridge to the future                                           GTL Fuel
                                                                       gD   ema                         LPG
            800,000                                         Incre

            600,000                     Increasing demand for middle distillates
                                        - drive to greater efficiency
                                        - economic growth
            400,000                                                                                            Jet Fuel

            200,000           Drives decreasing demand/oversupply
                              - Petrol becoming junk fuel
                     2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
          Source: Asia Pacific Petroleum Services Pty Ltd

Figure 7.2                  Real excise revenue profile prior to grants for three alternative








                                                                                            Current Excise Regime
                                                                                            Combustion efficiency ranking
                                                                                            Unified Fuel Ranking

                     2000      2002        2004      2006        2008       2010    2012    2014        2016        2018         2020


8       Support and Development of Australia’s Industry

8.1     The role of Diesel in Australia’s industry
8.1.1   Fuelling the productive sector

Transportation requirements account for almost 50% of world oil demand. Growth in
demand for transportation energy within industrialised countries is expected to average
around 1.6% per annum, while in the developing regions of the world, due to forecast
long-term economic growth, transportation energy usage is projected to grow at a rate
of around 3.9%. Within the transportation sector, diesel currently accounts for
approximately 30% of fuel usage, or 11 million barrels per day world wide, and average
growth until 2020 is expected to be around 2.5% pa. Diesel is, therefore, the fastest
growing sector of the global transport fuels market (Fig. 8.1). The global middle
distillate market is forecast to increase by 6 million bpd by 2015.

Figure 8.1                              Forecast global middle distillate demand. Source:   British
                                        Petroleum Report 2000 Forecast

                             Global Middle Distillates Demand
          Millions of Barrels per Day






                                             2000 2001 2002 2003 2005 2010 2015

In the Asia Pacific region, the diesel market is projected to grow at over 200,000 bpd
for the foreseeable future. This projection is based on an outlook for economic growth
in the region.

Diesel has a unique place in the fuels market because diesel engines are critical in
many key productive sectors of industrialised economies. The relationship between
diesel demand and economic wellbeing is illustrated in Figure 8.2. Economic growth
is, therefore, important to the timing of market development for GTL Fuels. While
impact of the US economy slow down combined with the impact of the recent spate of
terrorism is difficult to predict, diesel will, however, be an important commodity for
many years to come.

Figure 8.2                                              Comparison of Singapore diesel margins over IPE Brent at times of
                                                        economic growth and downturn

                                  Asian Growth                                                                                                                                                                                                     Recovery
                                                                                                                                                                          Asian ‘Flu’





                                                                          Price Influenced By Supply/Demand Balance






















                                                                                        Gasoil 0.5% Singapore Platt's Mid (US$/Bbl)                                                                                    IPE Brent Mth1(Adj) Close (US$/Bbl)

Australia, perhaps even more than other countries, has a refining industry that is
struggling with extremely low margins, ageing plants and technology, structural
difficulties and poor economies of scale. It is facing higher costs and the need for
significant capital investment to meet new clean fuel standards from 2006. Meanwhile,
South East Asia has excess supply capacity and modern plants. These plants produce
more petrol than is needed in the Asian market placing further pressure on the
Australian industry.

Australia’s diesel market is expected to grow significantly from its current 220,000
bbl/d. While gasoline is likely to continue to be long in the region, the outlook for diesel,
particularly ULSD, is tighter supply and higher prices.

But while the diesel market grows, Australia’s refining capacity will at best remain
relatively stagnant. A more likely outcome is refining capacity will decline as Australia’s
ageing and low margin or unprofitable refineries struggle to meet increasingly stringent
fuel specifications, especially in the middle distillates market.

Figure 8.3 shows the growing gap between Australia’s market demand and its output
of domestic refined product. As Australia’s capacity to meet the demand for refined
product falls, the gap between its market for middle distillates and its ability to supply
that market from domestic production also grows. As identified in section 4.3.2 (Future
crude oil supplies) of the Inquiry’s Issues Paper, Australia faces an increasing dilemma
with oil production outstripping reserves growth.

          “Although Australia currently has, on balance, a high level of self-sufficiency
          in oil production, the current reserves of 3.43 billion barrels are less than
          required to maintain present levels of production in the medium term.
          Estimates of future production of oil and condensate suggest that without
          further exploration activity, production rates will decline by 33 percent by
          2005 and 50 percent by 2010.”

Figure 8.3
,000 Bbls/d of all Refined Products                                      Growing deficit of domestic middle distillate supply
                                                                                                    Emerging deficit
                                      (capacity less demand)

                                                                      '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

                                                               -100                                                                     8 Refineries

                                                               -150                                                                     7 Refineries

                                                               -200                                                                     6 Refineries

As Australia’s capacity to produce diesel declines, the reliance on imported diesel
increases. For Australia, this is significant since diesel is the major fuel used in key
productive sectors like agriculture, mining, fishing, transport, and forestry. The role of
diesel in the economy is crucial.

In addition, by 2008, Australia is likely to be importing more than 80% of its crude oil
requirements, predominantly from Indonesia and the Middle East. Figure 8.4 shows
the decline in the domestic supply of crude oil compared to the current domestic
refining capacity. The three forecasts are scenarios presented by AGSO. The decline
in crude oil production is strongly influenced by the decline in production from the
Gippsland Basin. There has been a corresponding increase in the production of
condensate from the basins in the northwest of Australia. However, the majority of this
product is moved offshore as it is unsuitable for domestic refining.

Figure 8.4                  Historical and forecast domestic crude oil supply compared to
                            domestic refining capacity
                                  Current Domestic Refinery Demand

        000's BOPD

                                                                       6% per annum

                     300                                                                   Optimistic

                                                                        AGSO Forecast
                           1990               1995              2000        2005        2010
 Source: Australian Geological Survey Organisation, DISR 1999

8.1.2      Grant and rebates

In recognition of the economic importance of diesel to domestic industry, the Federal
Government continues to support price discounts to particular consumer groups
through the application of grants and rebates.

The diesel fuel rebate scheme (DFRS) has provided excise rebates to mining
operations (off-road use), primary producers (off-road use), hospitals, nursing homes
and aged persons homes (power generation) for many years. Rebates are paid to the
consumer of the diesel (and the supplier in certain States) with the result of lowering
the end price to the consumer and promoting diesel use over more expensive and less
efficient fuels. From 1 July 2000 the rebate for most eligible applicants increased to a
100% rebate. The full rebate is available to agriculture, fishing, mining, hospitals,
nursing homes, aged persons homes, forestry and eligible businesses in the rail
transport and marine industry sectors. The DFRS was to be replaced on 1 July 2002
by the Energy Grants (Credit) Scheme (EGCS). This is now a matter for the FTI,
though the Government has committed to maintain the intent of the current DFRS.

The introduction of the Diesel and Alternative Fuels Grants Scheme (DAFGS) on 1
July 2000 is a mechanism for providing rebates to specific fuel-user groups. DAFGS is
available to on-road fuel users with vehicles over 4.5 tonnes. This specific user group
receives a grant for using diesel and alternative fuels such as CNG. This encourages
clean fuel use in high impact transport sectors and areas. Like DFRS, DAFGS was to
be rolled into the EGCS but is now to be considered by the FTI.

These grants and rebates result in a significant price discount to the vast majority of
diesel consumers in Australia and help offset the taxes levied on this fuel. Grants and
rebate schemes do, however, increase the administrative burden to both Government
and industry.

8.1.3     Fuel specifications now and into the future

In 1998, the European Communities adopted the Euro 4 Directive setting the maximum
sulphur level for diesel at 50 ppm by 2005. The Directive resulted from the "Auto-Oil"
programme and included other fuel specification standards for petrol and vehicle
emission and design standards. In October 2000, the EC issued a review of the
second round of the Auto-Oil programme, in which it noted technological, political and
market developments had led to a reopening of fuel specification standards, with
potentially lower sulphur levels being required after 2005. Sweden and Finland are
already using 10 ppm sulphur diesel and Germany is moving to 10 ppm in 2003 .

The California Air Resources Board has committed to introduce 15 ppm sulphur diesel
by 2006 and the US Environment Protection Agency has a pending proposed rule for
the same specification by 2007. In the US, some refiners (eg BP and Tosco) and the
Alliance of Automobile Manufacturers are actively supporting the 15 ppm limit.

Throughout the world, fuel specifications are tightening much earlier than anticipated
driven by vehicle technology developments. Very low fuel sulphur levels are believed
to allow the efficient operation of a range of new after-treatment technologies that
dramatically reduce NOx and particulate emissions from vehicles.

There is increasing evidence clean compression ignition fuels and compression ignition
vehicles (and hybrids) have the greatest potential to increase fuel efficiency and
reduce vehicle emissions, when compared with petrol, LPG and CNG. In 2000, diesel-
electric hybrids unanimously won the race for most practical concept cars in
"Partnership for a New Generation of Vehicles" - a US Government/industry joint
research and development programme (US$140 million/year).

The future growth of compression ignition engines in the transportation sector is likely
to be significantly affected by environmental pressures. The general trend is towards
higher efficiency engines and improved fuel economy. With the environmental
emphasis on emissions of greenhouse gases, and given the contribution of
transportation sources to the problem, there is a compelling argument to support
encouragement of a stronger penetration of compression ignition vehicles as a means
of reducing CO2 emissions. As noted in Section 5.2, compression ignition engines are
significantly more efficient than spark ignition (petrol) engines, to the extent that for the
same CO2 emitted, a compression ignition engine is able to extract almost double the
useful work. With ongoing improvements aimed at enhancing performance and
reducing noise and emissions, (which have traditionally counted against the
compression ignition engine), this is becoming an increasingly attractive option for
passenger car applications, as seen in Europe and Asia.

Environmental pressure is typically exerted at the exhaust emissions “end” of the diesel
fuel equation. However, both fuel quality and engine design (including after-treatment
systems) play a significant role in determining exhaust gas properties. Increasingly,
therefore, legislators are looking for integrated solutions and are "designing" legislation
accordingly. The diesel engine-fuel dynamic is a clear case in point.
  Hart's Diesel Fuel News, 11.9.00 and 13.11.00
  Hart's Diesel Fuel News, 25.9.00
   Hart's Diesel Fuel News, 13.11.2000

While compression ignition engines are an attractive solution for CO2 reduction, other
exhaust emissions associated with diesel fuel are increasingly coming under the
environmental spotlight. Most notable are the oxides of nitrogen (NOx) and particulate
matter (PM), regarded almost exclusively as "diesel problems".

This has presented engine manufacturers, refiners and legislators with a difficult
challenge. Although significant progress has been made through refinement of engine
technology, it now seems clear the only way forecast standards for compression
ignition fuels will be met is through catalytic after-treatment of exhaust gases. These
catalytic systems are poisoned by sulphur, however, and would require fuel sulphur
content of less than 15 ppm to be a practical solution.

This has prompted tightening of fuels legislation to require a maximum in Europe of 50
ppm fuel sulphur by 2005, and in the USA of 15 ppm fuel sulphur by 2007. In Australia
the Euro4 diesel specification becomes mandatory in 2006. This is dictating a trend
that is likely to be followed elsewhere in the world.

Other diesel fuel properties beside sulphur, are expected to be involved in future fuel
upgrading. Aromatic content, while legislated, is still relatively high, but its link to
particulate matter guarantees governments cannot ignore it for much longer. In
particular, there is an increasing focus on poly-aromatic hydrocarbons, some of which
have been found to be carcinogenic. There is also a trend towards improvement in
cetane number and reduction in heavy ends and density, although these are receiving
lower level attention at present.

As a result of its unique properties, GTL Fuel will be well placed to provide answers to
these challenges, as shown in Section 6.2. The properties of GTL Fuel fall well within
both the announced new fuel specifications and the scope of anticipated future trends.
The fuel will be offered both as a neat fuel alternative, as well as a premium quality
blend component with which to upgrade off-spec fuel to meet prevailing requirements
or to upgrade on-spec fuel to premium grade product.

8.1.4        Vehicle Design Standard Trends Worldwide

Vehicle emission standards, along with fuel specifications, have been increasingly
tightened in recent years. New, low-pollution OEM vehicles and vehicles reliant on
after-treatment components will require increasingly stringent fuel specifications.

The focus in the European and Japanese car industries has been on cleaner, more
efficient engine technology in OEM vehicles whilst in the USA there seems to be a
stronger focus on after-treatment components and vehicle retrofits. Many after-
treatment technologies are not yet proven, however, it is clear fuel sulphur levels must
be much lower to avoid catalyst poisoning. Many manufacturers (including the USA
auto and engine industries) and environmental agencies believe even the proposed
USA level of 15 ppm sulphur by 2006-2007 is not low enough and sulphur levels must
be close to zero.

     Hart's Diesel Fuel News, 11.9.00

As vehicle and after-treatment technologies become increasingly reliant on tighter fuel
specifications, countries not keeping pace will find they do not have access to state-of-
the-art transport technologies. The potential cost of not staying with the leaders in fuel
specification and engine technology has to be compared to the cost of meeting the
specifications. Historical data and comments from the refining industry indicate the
cost of compliance to ever more stringent fuel specifications will cause an exponential
increase in the operating cost of production, which will inevitably be passed on to the
consumer (Fig. 8.5).

Figure 8.5                Cost to consumers of compliance to decreased sulphur content in

                                <15 ppm ?
                                            = USD 1.5 per bbl
      US$ per bbl


                                                                = USD 0.5 per bbl


                           50         500             1000            1500          2000   2500

                                    sulphur content (ppm)
As noted, Australian refining is under pressure from over-production of gasoline in
Asia. Australian refining is increasingly reliant on imported crude, which, with the
tightening of diesel product specifications, leads to higher costs of production. When
combined with the growing diesel demand in the Australasia region, the outlook is for
tighter supply and higher diesel prices in Australia. Increased diesel prices will affect
the key productive sectors of agriculture, fishing, forestry, mining, transport and remote
power. One option available to Government is to offset the increased cost of
compliance to tighter fuel specifications enabling Australia to maintain its international
competitiveness by having access to the latest engine technologies and reducing the
likelihood of increased diesel prices.

8.1.5    Clean fuels incentives

A clean fuels incentive was one of the mechanisms identified for consideration by the
GTL Task Force. The proposed mechanism was to provide a grant to fuel producers
who reach Euro 5 specifications prior to the specifications becoming mandatory. This
type of support mechanism has been used around the world to assist changes in
consumer choice prior to a mandated change. The implementation of ULSD in the UK
is an example.
 Using the Excise System to Encourage Cleaner Fuels

         In 1997, the UK Chancellor announced a Statement of Intent on Environmental
         Taxation, which has since successfully been used to achieve environmental
         objectives. Between 1997 and 1999, the rate of fuel duty for ULSD was
         steadily cut relative to conventional diesel (Figure 8.6). In the space of two
         years, the duty differentials succeeded in converting the entire diesel market to
         the cleaner fuel, cutting emissions of air pollutants and enabling the
         introduction of new pollution-reducing technology .

         Figure 8.6                            Excise Differentials for ULSD in the United Kingdom - 1997
                Excise Duty Differential

                   (Pence Per Litre)



                                                 1996      1997       1998      1999      2000


                                                                   Source:    HM Customs and Excise,
                                               November 2000

         The initial duty differential of 1p in 1997 encouraged a number of companies to
         start supplying ULSD. Smaller oil companies did not convert until the
         differential was increased. Similarly, the move to a 3p (~A$0.09/l) differential
         had a dramatic effect on the number of service stations carrying ULSD with all
         companies supplying and marketing the fuel by August 1999 (Figure 8.7).

  Using the Tax System to Encourage Cleaner Fuels:
 The Experience of Ultra-Low Sulphur Diesel, HM Customs and Excise, November 2000

         Figure 8.7                                     Market Penetration Rate of ULSD in the United Kingdom –
                                                        1997 Onwards. Source: HM Customs and Excise, November


                 ULSD Market Share (%)




                                               Sep-97    Jan-98   May-98   Sep-98   Jan-99   May-99   Sep-99   Jan-00   May-00   Sep-00

         The fuel duty differential enabled the UK to meet the European Community's
         proposed 2005 diesel standards six years ahead of schedule. The conversion
         of the market has delivered significant emission savings, including an 8%
         reduction in particulate emissions in urban areas, and has stimulated the
         development of new pollution-reducing technology by diesel vehicle
         manufacturers .
 Issues for consideration in implementing a clean fuels incentive

         One of the foremost issues is the lack of certainty on the timing and content of
         the next level of mandated fuel specification (Euro 5) in Australia. Without
         understanding these two issues the likely cost of compliance for the refining
         sector (and to the consumer) cannot be defined. These issues will need to be
         resolved before the magnitude of any incentive can be established. However,
         the principle of the incentive could be established today.

         Once an incentive is established, it is likely that value to producers of any
         incentive will be significantly eroded through wholesalers/distributors/retailers
         extracting part of the value throughout the value chain. This may again result
         in increased prices to consumers. In addition, a clean fuels incentive is unlikely
         to exclude imports, which means clean fuel could be imported from Singapore
         or GTL Fuel from Bintulu or Qatar with no Australian refining investment.
         Under this scenario Government would be exposed to the fiscal benefits for
         ultra-clean fuel moving offshore.

         With declining crude oil reserves, a widening gap between Australian refining
         capacity and a growing diesel market demand, a GTL Fuel industry is a natural
         solution. It would replace domestic crude with domestic gas as a production
         feedstock for transport fuels. It would create a new synthetic diesel able to

  Using the Tax System to Encourage Cleaner Fuels:
 The Experience of Ultra-Low Sulphur Diesel, HM Customs & Excise, November 2000

        close the gap between domestic diesel production and market demand. Such
        an industry could be partly supported by a clean fuels incentive. However, the
        fuel already exceeds the most stringent foreseeable fuel specifications and the
        industry requires additional assistance measures to overcome a number of
        issues related to the international competitiveness of the industry and Australia
        that are described in the following Section.

8.2     GTL Fuel a strategic new industry for Australia
8.2.1   Australia’s position in the global race to establish GTL Fuel plants

Sasol Chevron expects to operate four GTL Fuel plants around the world within the
next decade, producing 360,000 bpd of GTL Fuel - 45% of the projected global GTL
production. During this period, Sasol Chevron anticipates investments totalling in
excess of A$8 billion. Sasol Chevron intends to maintain its lead in delivering new
generation GTL transportation fuels through unlocking the global potential of natural
gas. To this end, Sasol and Sasol Chevron already have two projects in FEED, in
Qatar and in Nigeria respectively. Australia, with its large resource of stranded natural
gas and ready access to the Asia Pacific markets is the third location under

The joint venture has a large cash flow generation forecast to meet by 2010. Until
then, the parent companies have agreed to capitalise and fund the joint venture.
However, without a third footprint plant by end-2006 or an expanded Nigerian or Qatar
project, the joint venture will not be able to meet its forecast. Both parent companies
are increasingly concerned that plans for the third plant are not further advanced. The
AGTL schedule highlights the limited time to achieve greater certainty before needing
to focus on other options to meet the 2006 imperative. This does not mean the joint
venture will not re-examine Australia, but without a near-term decision, there is a real
chance that the immediate focus will move to other locations.

A number of GTL Fuel plants will be built world-wide in the second half of this decade.
The GCA report identifies some of those companies seeking to be players in the
emerging industry:

        “There are many companies addressing this Gas To Liquids
        technology, including but not limited to BP/Amoco, Conoco,
        Exxon/Mobil, Mossgas, Rentech, Sasol Chevron, Shell and
        Syntroleum. This list includes the major oil companies and some
        niche players who are still developing their own approach to this

All of the global GTL proponents are looking for locations with large volumes of cheap
gas and Government encouragement. Investment decisions currently being made will
establish the players in this emerging industry. Once established, the initial footprint
plants will serve as the platform for future industry expansion for decades to come.
Hence there is a window of opportunity for those countries with abundant reserves of
natural gas to become foundation members of a unique club – the GTL Fuel industry.

Table 8.1 list countries competing to establish footprint plants today. As the economic
benefits will be considerable, so also is the global competition for footprint plants. As
the GTL Taskforce points out, some of Australia’s competitors are reportedly:

           “offering substantial incentives to attract new GTL projects.”

Table 8.1 The Global Race Between Companies for Footprint Plants
 Company                        Country           Proposal                                         Startup
 Sasol Chevron                  Nigeria           30,000 bbl/day plant                             2005
 Sasol Chevron                  Australia         Phase 1 30,000 bbl/day GTL Fuel Plant            2006
 Sasol Chevron                  Australia         Phase 2 90,000 bbl/day GTL Fuel Plant            2008
 Sasol Chevron                  Australia         Phase 3 90,000 bbl/day GTL Fuel Plant            2013
 Sasol                          Qatar             30,000 bbl/day Plant                             2005
 Shell                          Egypt             75,000 bbl/day Plant in conjunction with         2005
                                                  Egyptian General Petroleum Corporation
 Shell                          Trinidad/Tobago   75,000 bbl/day Plant                             2005-2006
 Shell                          Iran              70,000 bbl/day Plant in conjunction with         2005
                                                  National Iranian Oil Co and National
                                                  Petrochemical Co
 Shell                          Indonesia         70,000 bbl/day Plant (Bontang or Tangguh) in     Unknown
                                                  conjunction with Pertamina Indonesia
 Shell                          Australia         70,000 bbl/day Plant                             Unknown
 Shell                          Argentina         70,000 bbl/day Plant                             Unknown
 ExxonMobil                     Alaska            100,000 bbl/day Plant                            Unknown
 BP Amoco                       Alaska            Small 5-year Pilot Plant                         2002
 BP Amoco                       Alaska            85,000 bbl/day Plant                             2007+
 BP Amoco                       Indonesia         Plant (Tangguh)                                  Unknown
 Conoco                         Unknown           Known to be pursuing GTL Projects - no details   Unknown
 ANGTL                          Alaska            50,000 bbl/day Plant                             2006
 Syntroleum                     Australia         10,000 bbl/day Specialty Chemicals Plant         2003
 Syntroleum                     Australia         100,000 bbl/day GTL Fuel Plant                   Study completion
 Rentech                        USA               Conversion of Sand Creek, Colorado Methanol      2001
                                                  Plant to 1,200 bbl/day Plant
 Rentech                        USA               9 MW Fuel Cell Plant at Sand Creek               Unknown
 Rentech/GTL Resources/Worley   West Africa       Floating Methanol Plant                          Unknown
 Engineers (UK)
 Rentech/GTL Resources/Worley   Australia         Floating and Onshore Methanol and Other GTL      Unknown
 Engineers (UK)                                   Plants
 Rentech/Forest Oil             South Africa      10,000 bbl/day Plant                             Unknown
 Petroleos de Venezuela         Venezuela         15,000 to 50,000 bbl/day Plant                   2004
 Reema International Corp       Trinidad          10,000 bbl/day Plant                             Unknown

So like its competitors, Australia will need to be internationally competitive to attract the
industry to its shores. There are a number of factors in Australia’s current fiscal
regime that create uncertainty and make the country less competitive for international
investment in an indigenous GTL Fuel industry. The need for strategic investment
incentives to attract a GTL Fuel industry to Australia is discussed below for each of the
key barriers to investment identified by Sasol Chevron. When addressing the key
barriers, two issues have been considered: the fundamentals of GTL Fuel economics
today and Australia’s international competitiveness.

8.2.2                     Barriers to GTL Fuel Investment Today

The key hurdles to be overcome before a sunrise GTL Fuel industry will be established
in Australia are:

                          •       Capital intensity - the initial investment hurdle, especially the issue of
                                  early capital write-off for a highly capital-intensive industry
                          •       New technology - the “bedding down” issues of a new technology
                                  (opportunity to decrease expansion capital and operational costs and to
                                  offset startup risks, etc)
                          •       Market penetration – entry into an essentially oligopolistic downstream
                                  market in Australia (and elsewhere)
                          •       Lack of gas supply and industry infrastructure - lack of infrastructure,
                                  and price and supply competition in the gas feedstock market in NW

                 Capital intensity

                          Like LNG and refining, producing GTL Fuel is a capital-intensive enterprise
                          competing for global investment funds. GTL Fuel is cost competitive overall
                          with refining today around the world, but is more capital intensive. Even in the
                          refining industry, the establishment of new capacity has recently been restricted
                          to locations offering significant cost advantages or fiscal incentives. The capital
                          efficiency of the GTL Fuel industry is, therefore, even more sharply focussed.

                          Capital write-off periods

                          Given the capital-intensive nature of a GTL Fuel plant, capital write-off periods
                          are critical in attracting investment funds. Capital write-off periods of around
                          10 years or less are crucial to establishing the industry. The capital write-off
                          period in Australia is the effective life of plant (Fig. 8.8). This has nominally
                          been taken as 25 years for a GTL Fuel project, however, the Australian Tax
                          Office is currently reviewing effective life and recently suggested the period be
                          extended to 50 years for onshore pipelines. The potential negative impact of
                          further extension of effective life for capital intensive industries, such as the
                          GTL Fuel industry, cannot be understated.

                           Capital write-off periods in other Sasol (Qatar) and Sasol Chevron (Nigeria)
                         60proposed   plant locations are less than five years. In fact, in Nigeria, period
                                                             Australia’s markedly extended capital write-off the capital
                                                             unfavourably impacts GTL project economics making
                           is written-off immediately under a specific initiative chosen as the primary
                                                             it less attractive than other global locations
                           incentive mechanism by the Nigerian Government.                     The average write-off
                           period in other competing countries is about eight years. Of particular note, the
                           US has just reintroduced a seven-year capital write-off period for clean fuel
  Company Tax Rate (%)

                         40investments by refineries, along with a wide range of other incentives for clean
                                                 Egypt   Alaska
                           fuel diversification.

                         30Figure     8.8     Comparison of International Fiscal Regimes. Source: From
                                              LNG Action Agenda 2000, DISR
                                  Indonesia               Malaysia

                              0   1   2   3   4   5   6   7   8   9   10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27
The longer capital write-off period in Australia has a negative impact on the
international competitiveness of an indigenous GTL Fuel project, making
Australia comparatively less attractive for foreign investment. As an example,
in the work Sasol Chevron has presented to the GTL Taskforce, adjusting the
capital write-off period from 25 years to 10 years improves AGTL project
economics by more than A$215 million [NPV12 (2001)]. Put another way, if all
else were the same, Australia would be less attractive by A$215 million [NPV12
(2001)] as an investment location than Indonesia, Malaysia, Egypt, Alaska,
Trinidad and Tobago, and Qatar.

Company Tax Rates

Australia's company tax rate is mid-range compared with other countries with
potential for GTL Fuel projects. The tax rate in Nigeria is higher at around
50% while the tax rate in Qatar is lower at less than 20%. On a regional basis,
both Malaysia and Indonesia have lower tax rates than Australia.

Construction Costs

In addition to the inherent high capital cost of GTL Fuel projects, Sasol Chevron
is carrying a "location" uplift factor of 20% on capital costs in the AGTL project
economics. This rate of uplift is consistent with a recent comparison of LNG
plant construction costs by Shell International for Australia and Oman (LNG
Action Agenda 2000, DISR). The international competitiveness of capital costs
for an Australian GTL Fuel project therefore needs to be offset in other areas of
project economics. New technology

Sasol is the world leader in GTL Fuel technology and has been producing GTL
products for over 50 years. However, the industry is still very much in its
infancy as the latest technologies have not been applied on a commercial-scale
basis and there has been no opportunity to leverage from worldwide technology
development. As footprint plants are established around the world, the learning
in engineering, construction and operation will result in decreased capital and
operational costs for expansion phases (see Section 8.2.3). However, while
the industry is in its sunrise period, project proponents face significant start-up
risks that need to be mitigated by countries seeking to establish a GTL Fuel
industry. Market penetration

Traditionally, gas development projects have been underpinned by long-term
sales contracts (usually to public utilities either as natural gas or LNG) thereby
passing on the price risk to customers. In contrast, GTL Fuel will be traded in a
spot market just similar to refined transport fuels. Despite this, AGTL will be
forced to enter a long-term take or pay contract for gas feedstock. The market
risk for GTL Fuel is quite different, therefore, from the risk usually associated
with gas developments, as the product will have to penetrate the world diesel
market, which is a large global commodity market with significant price

The risk of market penetration and price is entirely borne by AGTL. GTL Fuel
will be a new product with associated product development costs (eg additives
for lubricity, etc). It will be entering a highly competitive marketplace with a
limited number of marketers and distributors who exert considerable market
influence. Consequently, GTL Fuel will need to provide premium returns to
marketers and distributors to stimulate the market, making this part of the
supply chain initially more expensive for GTL Fuel than for existing refined
transport fuels. Strategic investment incentives are needed to allow the fuel a
reasonable opportunity to enter and penetrate an essentially oligopolistic
downstream market in Australia and the Asia Pacific region.

The market penetration risks borne by AGTL are: oil price, GTL Fuel
premiums/cost of market entry, and market place distortions caused by grants
and rebates.

      Oil Price

      Oil price is a significant risk for GTL Fuel projects over their entire life. Sasol
      Chevron has no control over oil price risk. Consequently, Sasol Chevron is
      carrying a realistic oil price of US$19/bbl (flat nominal) in its project economics,
      which is consistent with:
              •       Long-run historical average
              •       Future outlook in terms of:
                          ! Technology changes
                          ! Less reliance on oil in the world economy
                          ! Growth in alternative fuels
                          ! Reduced OPEC influence

      Any movement below this level will adversely affect project economics. Oil
      price uncertainty, therefore, is a key issue for GTL Fuel projects globally. While
      prices higher than US$19/bbl may occur for short periods during the life of a
      project, history shows they are not sustainable or long-lived. Table 8.2
      compares GTL Fuel and refining economics on a cost of production/value of
      product basis for two different oil price forecasts US$16 per barrel and US$20
      per barrel. At US$20/bbl AGTL would generate margins equivalent to refining
      (albeit margins still well below currently recognised international rates of return
      in first world countries). At US$16/bbl refining margins are maintained
      (although historically margins are normally squeezed), however, AGTL would
      lose money dramatically.

      Table 8.2 Impact of oil price on GTL Fuel and refining margins
      US$16 per barrel crude price                                                                           US$20 per barrel crude price
                      Sasol Chevron GTL                                                                                        Sasol Chevron
Existing Australian                                                                                      Existing Australian
                        Fuels Plant (30                    US$ Costs and Revenues                                              GTL Fuels Plant
Refining (100kbpd)                                                                                       Refining (100kbpd)
                            kbpd)                                                                                                (30 kbpd)

                                                        Cost of Production per barrel
       16.90                0.00                                Oil Feedstock                                   20.90                0.00
        1.20                0.00                              Freight to Refinery                                1.20                0.00
        0.00                9.79                                Gas Feedstock                                    0.00                9.79
        1.80                5.30                                    OPEX                                         1.80                5.30
        0.70                9.04                                    CAPEX                                        0.70                9.04
        0.00                1.50                               Freight to Market                                 0.00                1.50
       20.60                25.63                         Total Cost of Production                              24.60               25.63

                                                               Revenue per barrel
       16.00                16.00                                     Oil Price                                 20.00               20.00
        2.87                 2.87                     Historical Singapore Refining Margin                       2.87                2.87
        0.40                 0.81         Refinery/Plant yield differences from Singapore crack spread           0.40                0.81
        1.00                 2.00                          Euro 4/ GTL Fuel Premium                              1.00                2.00
        1.90                 1.90                             Singapore Freight Cost                             1.90                1.90
       22.17                23.58                     Australian Average Product Value                          26.17               27.58

        1.6                  -2.1                                 Margin US$                                     1.6                 2.0

      While the world is currently experiencing high oil prices, most analysts expect
      prices to continue to ease with growth in production likely to move marginally
      ahead of the rise in global consumption as world economies slow. It is Sasol
      Chevron’s view that prices above US$25/bbl are a major contributor to the
      downturn in the US economy. The ABARE forecast for the world trade

weighted price of crude oil is US$22/bbl for the next five years, which is still
high compared with the long-run average. Both OPEC and non-OPEC
producers remain slow to respond to the development opportunities presented
by the tight supply/demand situation and high prices of the past year.
Consequently, further price spikes are possible over the next four to five years.

However, the long-run (40+ years) average oil price has historically been about
US$15-18/bbl and is likely to remain at this level until around 2010. In the post-
2010 period, the oil price is likely to fall below the US$18/bbl long-run average
with technology changes likely to reduce oil demand leading to the world
economy becoming increasingly less reliant on oil as an input to economic
activity. Crude oil expenditure as a percentage of world GDP had reached
about 8% by the late 1970s. Today it is 2% and falling. Nevertheless, oil
remains the most politically sensitive global commodity. As strategic reserves
in non-OPEC countries decline, alternative energy sources will become
increasingly important.

Current high oil prices have resulted from sustained and disciplined OPEC
production cuts since the second quarter of 1999. These cuts coincided with a
significant increase in worldwide oil demand, primarily because of stronger than
expected economic recovery in the Asian region. However, today's oil prices
can be expected to flow on to higher revenue for major oil companies,
increased exploration and development expenditure, and consumer country
investments in alternative fuels (including GTL Fuel). All these factors are likely
to be of concern to OPEC producers and therefore, OPEC can be expected to
relax quotas and boost output in an attempt to reduce prices to a level that
makes alternative fuel investments less attractive in the future.

GTL Fuel Premiums

The future price of GTL Fuel in the global and Australian marketplaces is highly
uncertain. Currently, AGTL economics assumes there will be little to no price
premium over ULSD and that GTL Fuel must compete at price parity with
conventional fuels to enter the market.

In the Asia Pacific market, both oil price and diesel margins are strongly
influenced by economic wellbeing (Figure 8.2). GTL Fuel premiums will be a
combination of the diesel premium plus any excess (deficit) for GTL Fuel.
Refined fuels can meet current and near-term (2006+) fuel specifications (50
ppm) with moderate investment, but major (and potentially uneconomic)
refinery investment is likely to be required as fuel specifications are tightened
further. The ultra-clean and high-performance quality of GTL Fuel already
exceeds even the long-term (2010-2020) outlook for fuel specifications and
clean transport technologies. While in the long-term performance is likely to
make GTL Fuel more competitive with refined fuels, a significant quality
premium is not likely to be realised in early GTL Fuel production. GTL Fuel will
need to be priced into the market at parity with other fuels to facilitate initial
market penetration.

Unlike refineries, GTL Fuel plants are limited to locations close to gas supplies.
In the Australian context, this means product is remote from market, requiring

long-haul shipping within Australia and to export markets, further adding to
overall delivered product costs. The relatively small volumes of GTL Fuel from
AGTL Phase 1 will also result in significantly higher unit logistic costs until
economies of scale can be achieved through plant expansions and a developed

Significant fiscal levers are required to achieve price parity for GTL Fuel, given
initial relatively high manufacturing, marketing and distribution costs and the
other risk factors described here. In addition, Australia has the lowest pre-tax
petrol price of OECD countries and the fourth lowest after tax (Figure 8.9).
This will make it particularly difficult to introduce a relatively high-cost premium
fuel into the Australian marketplace.

Currently, Sasol Chevron is assuming a "best case" scenario for market
penetration, in which 100% of Phase 1 production enters the domestic market
from plant start-up. However, there is considerable risk associated with this
scenario and actual market penetration for GTL Fuel could be slower. LPG,
although different in that it required new distribution infrastructure and vehicle
conversions or new OEM vehicles, is a case in point. The market penetration
for LPG was initially slow. In the case of GTL Fuel, early market entry will
precede optimised engines and consumer uptake rates for the existing vehicle
fleet are uncertain.

Over time, however, the GTL Fuel market can be expected to mature and
stabilise with:
        • More stringent regulatory requirement for cleaner burning fuels
        • Growing demand for clean, efficient fuels
        • Growing demand for better direct injection and hybrid compression
            ignition engines
        • Increased supply volume and diversity bringing security and
            reliability for consumer
        • Expected price premiums yielding better returns as fuel
            specifications tighten and the refining crack spread moves upward

      Figure 8.9                        OECD Petrol Prices and Taxes
   Denm ark
     Austria                                                                                                                                  Price com ponents
     Ireland                                                                                                                                       Excluding tax
     Mexico                                                                                                                 Low est price pre-tax
Australia                                                                                                                   Fourth low est price w ith tax
New Zealand                                                                                                                 Low est price petrol pre-tax for last 10 quarters
                0                                    50                                  100                                  150                                  200                                  250
                                                                                                                                                                                                              cents per litre
                    D a ta: In te rna tio n a E n e rg y A g e n cy p e tro l su rve y su p p lie d by D e pa rtm e n t of In d us try, S cien c e & R e so u rce s 1 st q ua rte r 2 0 0 0 s urve y.

      Market place distortions from grants & rebates

      Grants and rebates are commonly used around the world to influence the
      market place. As noted in Section 5.1.2, the benefits conferred on LPG in
      Australia – including zero excise – have helped this product achieve significant
      market penetration (Figure 5.2).

      Removal of distortions in the fuel excise system will be essential to the success
      of an Australian GTL Fuel industry and achieving fuel tax revenue neutrality for
      the Government. Sasol Chevron seeks equitable treatment for GTL Fuel with
      all available fuels on the basis of efficiency and environmental performance. Lack of gas supply and industry infrastructure

      There are only two industrial development options of sufficient scale to
      underwrite new gas supply infrastructure anywhere in the world today. These
      are the production and sale of GTL Fuel and LNG. However, there is limited
      scope for the development of greenfield LNG projects in the face of fierce
      competition for limited contracts. GTL Fuel into the diesel market is, therefore,
      the best option to underwrite new greenfield developments. There are two key
      issues in addressing Australia’s international competitiveness in this area: gas
      price and multi-user infrastructure.

            Gas Price

            GTL Fuel projects anywhere in the world need large quantities of low cost gas
            to reach investment hurdles. Offshore Western Australia has more than 83 tcf
            of gas reserves at the 50% probability level (ie expectation case) with scope for
            significant expansion through further exploration and development . While NW
            Australia has world-class gas reserves (Figure 8.10), gas supply infrastructure
            for these reserves, and thus market place competition, is currently limited.

            In addition, the undeveloped Australian natural gas reserves are large volumes
            of remote dry gas with no liquid drivers to develop gas fields. The domestic
            market in Western Australia was the foundation customer for the North West
            Shelf Gas Venture through a State-funded pipeline and take or pay contract.
            While the existing suppliers have reserves on hand, new large gas fields will
            find great difficulty in competing for gas sales. In the future, as the incumbent
            gas supplier commits its gas reserves to LNG sales, domestic markets will
            demand more supply options to guarantee long-term security of supply. The
            State will once again be reliant upon production from a new, expensive to
            develop, gas resource.

            Australia needs a world class GTL Fuel industry to expand gas supply
            infrastructure today so that gas exports can grow and domestic gas supply will
            be guaranteed into the future. Expanding gas supply infrastructure can have a
            dramatic impact on price for gas customers if it results in increased market
            place competition in gas supply. However, Sasol Chevron believes that a
            strategic investment in multi-user infrastructure is required to help establish an
            expanded gas industry.

            Currently, Sasol Chevron is carrying a conservative, but realistic, gas price
            estimate of US$1.00/GJ in its Phase 1 project economics for Australia. Prices
            assumed for subsequent phases are US$0.85/GJ for Phase 2 and US$0.65/GJ
            for Phase 3. To make GTL Fuel projects internationally competitive, gas
            feedstock prices of around US$0.75/GJ are required, therefore gas price
            uncertainty is a key issue for Australian GTL Fuel projects. Gas prices higher
            than US$0.75/GJ must be offset by cost savings elsewhere in project
            economics for Australian projects to remain attractive.

     Western Australian Oil and Gas Industry, Dept. Resources Development, May 2000

Figure 8.10 Gas Reserves in NW Australia. Source: LNG Action Agenda
            2000, DISR, October 2000

 World class gas reserves
      Total ~100Tcf

By contrast, gas prices in other Sasol and Sasol Chevron proposed plant
locations are considerably lower.        Gas prices in Qatar are less than
US$0.50/GJ. While no published price is available for Nigeria, prices will be
very low since a GTL Fuel industry provides a solution for handling gas
associated with oil production, allowing accelerated oil recovery and providing a
use for gas that would otherwise be flared, vented or reinjected. Gas prices in
locations competing with Australia for Sasol Chevron's third footprint plant are
variable. For example, prices in Indonesia and Malaysia are believed to be
higher, while prices in Venezuela and Trinidad are lower.

Gas Industry Infrastructure

Development of an Australian GTL Fuel project will involve significant new
infrastructure. Costs for a NW Australian location are estimated at US$100
million in addition to plant capital costs. Using the Burrup Peninsula as a base
case, these costs include provision for:

       •   Export facilities
       •   Import of equipment close to site (up to 10,000 tonne lifts or roll-on,
       •   Very high site preparation and offsite (eg onshore pipelines, roads,
           etc) costs

       •    Start-up water supply

By comparison, in Qatar world-class infrastructure is already in place or being
developed by the State to support new oil and gas industries. Similarly,
significant State-funded infrastructure programmes are under way or planned in
a number of other competing countries, including Malaysia. Consequently,
infrastructure costs in Australia must also be offset elsewhere in project
economics for Australian GTL Fuel projects to remain attractive.

In some locations, project economics are boosted by plant synergies, such as
selling produced water and power or the ability to sharing key utilities or
processes (eg syngas manufacture) with adjacent industries. Over time, there
may be some ability to develop cluster industries in a NW Australian location
such as the Burrup Peninsula. However, the potential for such synergies for an
initial footprint plant is very low compared with, for example, Qatar. Comparative economics

As a way of illustrating the economic impact of the issues discussed above
Table 8.3 presents an indicative comparison of the project economics for a GTL
Fuel plant in Qatar and Australia. This table illustrates the challenges faced by
GTL Fuel proponents in overcoming high gas costs and capital costs.

Table 8.3    Comparison of indicative economics for Australia and Qatar

 US$/bbl                                         Australia            Qatar
 ISBL Cost US$/dbbl                               30,000             25,000
 Site Costs US$ million (minimum)                   100                 0
 Total Capex per barrel                             9.14              6.86
 Capital write-off period yrs                        25                4.5
 Gas Feedstock Cost US$/mbtu                       1-1.10            0.5-0.7
 Gas Feedstock Cost per barrel                      8.90              4.45
 OPEX Cost per barrel                               5.00              4.50
 Total Cost of Production per barrel               23.04              15.81

Table 8.4 illustrates how an Australian GTL Fuel project is competitively
positioned compared to some of the key competition. The four barriers
identified by Sasol Chevron need to be overcome before a GTL Fuel project
can be established in Australia.

        Table 8.4 Competitive position against key market place competition
         Barriers          to    Australian     Australian     Australian    Foreign
         Australian GTL Fuel     GTL Fuel       Refining       LPG           GTL Fuel
         Capital Intensity                      "              "             "
         Technical Maturity                     "              "
         Market Access                          "              ""
         Cost of Production                                    "             "

8.2.3   The industry is viable in the long term

GTL Fuel projects are competitive with refining today, but neither are economically
attractive greenfield investments. Decisions to invest in greenfield refining, whether
traditional or GTL, are strategic. They require Government intervention, including
targeted, attractive fiscal and regulatory conditions, wherever they occur in the world.
The other key to success is access to large volumes of reasonably priced gas. Future
growth in the GTL Fuel industry will occur in countries that invest now in world-class
gas supply infrastructure and footprint GTL plants. In the future, as capital costs are
driven down in the same way as they have been in the LNG industry over the last 15
years, and with the ability to target product slates tailored to the future fuels market,
GTL expansion projects will stand on their own. Capital Costs

        Even though GTL technology is advancing rapidly and capital costs are
        decreasing (Figure 8.11), the industry must reduce capital costs from around
        US$28,000/daily bbl in 2000 to below US$20,000/daily bbl during the next five
        years to achieve long-term sustainable competitiveness.

Figure 8.11 GTL Capex is Still Significantly Higher Than New Refineries

                                  80                             Historical
                                         Zealand                               GTL & conventional
 Capex (1997 US$K/daily barrel)

                                   60                                          refining capex converging
                                                                               as GTL technology improves


                                   40                     South

                                   30                                  Exxon                            GJV
                                                                       Qatar                           Target
                                              New Refineries
                                              CAPEX                                               PlantPlant
                                                                                                  Capex Only
                                       1980        1985   1990         1995      2000      2005      2010       2015

To achieve this, Sasol Chevron and other industry leaders are working on cost
reductions in the following areas:
       ! Construction
       ! Economies of scale
       ! Reforming (syngas generation - conversion of natural gas and
           oxygen to hydrogen and carbon monoxide)
       ! Utility efficiencies

Potential breakthrough technologies in reforming - for example, oxygen plant
elimination - have a reasonable potential to reduce capital costs by 10-20%
over the next five years. The Oxygen Transport Membrane Syngas Alliance,
involving Sasol, BP, Praxair and Statoil, recently announced it was entering the
pilot demonstration phase of its development programme. The programme
objective is to commercialise revolutionary new technology for large-scale
synthesis gas production. Another similar major initiative is the Ionic Transport
Membrane Alliance, involving Chevron, USDOE, Air Products and Norsk Hydro,
among others.      This Alliance is also well advanced with breakthrough
technology in the reforming process.

In other capital cost areas, there is potential for a further 20-35% cost
improvement. Big improvements in technology and capital costs can be
expected when new operating plants are established and the benefits of
operating experience, economies of scale, and utility efficiencies are
transferred to expansion and other new projects. The potential for learning
from operating plants and significantly improving capital costs over time is
clearly demonstrated in the experience of the LNG industry (Figure 8.12).

                                  Figure 8.12 LNG Capex Improvements Over Time. Source: Shell

                                 100 %                                             GTL Capex expected to follow same
Capital Cost of LNG Real Terms
                                                                                    trend as LNG industry over time

                                 50 %

Design year                              1969       1978        1985          1990          1993        1995    1999
                                         BLNG     MLNG-I         NWS         MLNG-II       NLNG        OLNG    “next”
                                                 (Malaysia)   (Australia)   (Malaysia)    (Nigeria)   (Oman)

                                                                             Lowest cost greenfield LNG

                                  Currently, scope for substantial improvement is limited by the lack of operating
                                  GTL Fuel plants internationally. Sasol and Mossgas (utilising Sasol technology)
                                  have the only large-scale commercial GTL Fuel plants in the world. Together,
                                  these plants, located in South Africa, produce about 200,000 bpd, the
                                  equivalent of a single large refinery. Shell has a 12,500 bpd demonstration
                                  plant located in Malaysia while Exxon and Syntroleum have laboratory-scale
                                  plants in the US, each producing less than 500 bpd.

                                  Despite current high capital costs, the GTL Fuel industry world-wide will
                                  establish footprint plants internationally within the next 5-10 years with a view to
                                  capturing future value in plant expansions through learning from design,
                                  construction and operating experience. For example, Sasol Chevron has
                                  assumed in its project economics capital cost improvements of 17% and 20%
                                  for Phases 2 & 3 respectively, and improved economies of scale of 12% for
                                  each of Phases 2 & 3.

                         Operating Costs

                                  The operating costs of GTL Fuel manufacturing plants are currently around
                                  US$5.00/bbl while refinery operating costs in Australia are approximately
                                  US$1.80/bbl today (DPPAA, DISR 1999)

                                  Future operating cost reductions are likely in the following areas:

                                         •       Economies of scale
                                         •       Catalysts
                                         •       Energy efficiency
                                         •       Plant automation

                                  As with capital costs, improvements in technology and operating costs can be
                                  expected when new plants are established and the benefits of operating

                  experience and economies of scale can be transferred to expansion and new
                  projects. The potential for increased productivity and lower operating costs
                  over time is clearly demonstrated in the experience of the refining industry.
                  Costs from 1996-2000 fell by about 20% (Figure 8.13).

                Figure 8.13 Australian Refinery Opex Improvements Over Time. Source:
                            From Presentation to Securities Institute of Australia, Caltex,
                            October 2000

                                4.5                                   GTL Opex expected to follow same
Operating Costs per bbl (US$)

                                                                      trend as refining industry over time




                                          1995   1996   1997            1998       1999        2000


                  The Sasol Chevron CBA includes a full break down of the project economics on
                  a phase by phase basis. Table 8.5 below summarises the economics of each
                  phase and the input parameters used to calculate the results. Once the
                  footprint plant is established there will be capital efficiencies for Phases 2 and 3
                  because of economies of scale, technical learning and brownfield expansion.
                  In addition, operational efficiency and gas supply costs are expected to improve
                  as the plant capacity increases dramatically in Phases 2 and 3. Sasol Chevron
                  is, therefore, only seeking strategic investment support to enable the Phase 1
                  footprint plant to be established.

Table 8.5     Improvements in GTL Fuel economics in Australia with time and
              increasing scale

                                         Phase 1          Phase 2          Phase 3
 Capacity (bpd)                           45,000           90,000           90,000
 Start-up                                  2006             2008             2013
 CAPEX (US$ billion)                        1.3              2.0              1.9
 OPEX (US$/bbl)                             4.5             2.92              3.0
 Feedstock gas price (US$/mbtu)            1.00             0.85             0.65
 Oil price (US$/bbl)                        18               18               18
 Product margins (US$/bbl)                 5.50             5.50             5.50
 ROR                                       5.8%            13.0%            15.2%
 NPV 12 (2001) US$ million                 -432              74               168
 NPV 15 (2001) US$ million                 -501             -141               7

8.2.4   The industry complements Australia's areas of competitive advantage

There is at least as much gas in the world on an oil-equivalent basis as crude but gas
supply infrastructure is currently limited.  There are only a small number of gas
customers, globally who are big enough to underpin new gas supply infrastructure.
The development of LNG and GTL Fuel industries are the most likely foundation
customers for the development of large greenfield gas projects.

There is tough competition around the world for LNG contracts and there are already
several well-advanced new and expansion projects, including Bontang, Qatar, Oman,
Sakhalin and Tanguh. GTL Fuel into the diesel market offers the best option to
underwrite new gas projects today. Unlike LNG, GTL projects do not have to compete
for the small number of high volume long-term supply contracts before proceeding.
Diesel can always be sold. As such, there is a significant first mover advantage for
those companies and countries that embrace this new industry.

Australia continues to maintain more than 100 years of reserves in spite of growing
production rates (Figure 8.14). Finding markets for Australian gas is therefore very
important. Despite a buoyant outlook for LNG and gas chemical projects, there has
been a long time between the initial development of the LNG industry and its

Figure 8.14 Australian gas reserves continue to increase while the reserves to
             production ratio continues to average 100 years

                     160                                                                                                         140

                                                  •   Average 100 years over a 20 year period
                                                  •   Reserves growing at 10% per year                                           120

 Years of Reserves


                                                                                                                                       Reserves (TCF)




                     20                                Reserves/Production Ration - Years of Reserves Remaining
                                                       Australian Natural Gas Reserves - Trillions of Cubic Feet

                      0                                                                                                          0
                           1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999


Together with LNG, a GTL Fuel industry could make Australia a major energy exporter
of diverse, value-added products. Sasol Chevron’s AGTL project would:

                                     •    Underpin the development of a major greenfield gas
                                     •    Increase gas supply options to domestic customers
                                     •    Create new infrastructure opening up new gas supplies
                                          to smaller industrial projects
                                     •    Stimulate new gas exploration

With access to the Asia Pacific region, large and growing natural gas base, low
sovereign risk, and independence from OPEC, Australia is well placed to secure a
significant market share of the global gas-derived products industry. However, the
country needs a world class GTL Fuel industry to expand gas supply infrastructure
today to grow gas exports and guarantee domestic gas supply into the future. The
key to a growing gas industry in Australia is an appropriate fiscal and industry policy
regime to encourage a sunrise GTL industry. In that way, Australia can reap the
rewards of the long-term sustainability of the industry.

8.2.5   Economic benefits of an Australian GTL Fuels project Cost benefit, macro economic and general equilibrium model

        Sasol Chevron commissioned ABARE to undertake an independent
        assessment of the economy-wide impacts of the proposed construction,
        operation and financing of a GTL plant over the period 2002 to 2015.

        ABARE’s analysis was based on an application of the MONASH model.
        MONASH is a dynamic, detailed, general equilibrium model of the Australian
        economy that has the capability to analyse the direct and indirect, or flow-on,
        effects of the construction, operation and financing of the plants. MONASH
        disaggregates the economy into 114 industries (including the fledgling GTL
        Fuel industry), and accounts for the interactions between producers and
        consumers, export and import markets and the government sector.

        In this analysis, ABARE adopted a conservative model setting. The particular
        assumptions that create a conservative model assumption are:

               •   A fixed labour market
               •   No upstream greenfield gas development
               •   No add-on gas industry development
               •   Conservative product sales assumptions for GTL Fuel
               •   Fixed balance of trade to GDP ratio
               •   Optimistic reference case for the domestic refining sector
               •   No health or environmental benefits from domestic consumption

        A conservative assessment was selected on the basis the benefits outlined
        below will be the minimum achievable for Australia.

        The ABARE analysis was based on a full Cost Benefit Analysis (CBA), which
        was undertaken for Sasol Chevron by external consultants. The CBA also
        used conservative assumptions in the economic benefits to Australia and
        Government revenue calculations consistent with the assumptions outlined
        above. The main cost and benefit assumptions in the CBA are outlined below:

            Benefits to Australia                    Operating costs:
        Capital flows:                                    Gas - foreign
            Foreign equity                                Labour
        Trade flows:                                      Other
           Exports (inc. condensates)                Upstream additional costs
           Import replacement                        Government costs:
        Domestic purchases:                               Infrastructure and incentives
           Gas                                       Dividends repatriated
           Other inputs
        Govt. revenue

            Costs for Australia
           Construction costs

                                                                                   64 Employment

The current employment estimate by Sasol Chevron for each phase of
development of the project suggests that during the nine years of construction
for the three phases, the average number of FTE jobs created will be:

       •   760 construction jobs;
       •   160 management and office jobs; and
       •   150 indirect and consequential jobs associated with the plant.

At peak periods of construction the number of people involved in the project will
rise to:

       •   2100 construction jobs;
       •   400 management and office jobs; and
       •   390 indirect and consequential jobs associated with the plant.

In the operational phase of the plant, more than 700 new jobs will be created:

       •   315 mostly skilled technical jobs;
       •   153 management and office jobs; and
       •   260 indirect and consequential jobs.

In addition, using a conservative regression of GDP growth to predict
employment growth from the ABARE reference case, approximately 20,000
jobs will be created from the flow on effects of the higher level of economic
activity generated by the AGTL project.

Using a conservative fixed labour pool, the ABARE General Equilibrium model
predicts an increase in real wages of 0.5% over the base case. This figure
reflects the increased demand for labour in Australia – largely in the oil and
gas, transport and service sectors - as a result of the AGTL project. The fixed
labour pool assumption has the consequence of increasing labour costs to the
economy, which has a knock-on effect to other industries, in particular those
that are export based. An assumption that allowed an increase in the labour
pool through, for example, reduced unemployment, would result in a reduced
increase in real wages and an even greater increase in GNP. Investment

Under the terms of the Sasol Chevron Joint Venture, project financing is the
responsibility of the parent companies. Assuming the AGTL project is the next
project for Sasol Chevron, the parent companies will provide 100% equity
finance for the project, which will result in an influx of foreign capital of nearly
A$9 billion for the three construction phases of the project:

       •   A$2.2 billion for the first 45,000 bpd plant (foundation plant);
       •   A$3.3 billion for the 90,000 bpd first expansion (Phase 2); and

       •   A$3.2 billion for the 90,000 bpd second expansion (Phase 3).

In addition, more than A$1.5 billion in capital will be invested in new gas
infrastructure needed to supply the large volumes of gas for the three phases
of the project. As noted earlier, the benefits of a greenfield gas development
have yet to be considered in the macro and general equilibrium modelling.

Based on the anticipated operations of the project, approximately A$2 billion
will be spent in Australia to support the AGTL project. Spending on gas for the
three phases of the projects will reach nearly A$17 billion. Economic Impact

Sasol Chevron’s proposal is an internationally significant project that will attract
more than A$9 billion to Australia from the global capital market during the nine
years for the three construction phases.       Even using conservative model
assumptions the economic benefits to Australia from AGTL are substantial.

The ABARE work shows the AGTL project has a positive impact on the
Australian economy:

       •   Contributing A$13 billion to GNP in the first 10 years of operations
           (A$6.4 billion NPV6 2001)
       •   Contributing more than A$2.4 billion to GNP annually post-2013.
       •   Delivering a 0.27% increase in GNP in 2015 (average 0.14%
           increase over the first 10 years)
       •   Adding 0.3% to real GDP and 0.7% to Australia’s terms of trade,
           compared with the ABARE reference case for the year 2015.

Figure 8.15 Illustrates the impact of AGTL on real investment, real GNP and
real GDP compared to the ABARE reference case for Australia. This model
run assumes a phased development of 30,000 bpd (Phase 1) in 2005, Phase 2
development of 90,000 bpd in 2008, and a Phase 3 development of 90,000 bpd
in 2013. The model also assumes a Government assistance package of
US$370 million NPV12 (2001) is applied as grants and infrastructure
contributions in Phase 1.

 Figure 8.15 Illustration of change in Real Investment, Real GNP and Real GDP
               compared to ABARE reference case.

 1                                                                                        0.35
              Real investment
0.9           Real GNP
              Real GDP                                                                    0.3

                                                                                                  % Change - Real GNP & GDP

0.7                                                                                       0.25


0.3                                                                                       0.1


 0                                                                                       0
     2001        2003        2005        2007          2009     2011        2013       2015

            The model yields positive results for the oil and gas, transport and service
            sectors of the Australian economy. The oil and gas sector is stimulated by the
            large demand for gas from AGTL. Increased competition in the domestic
            transport fuel sector results in a drop in fuel prices, which have the effect of
            decreasing transportation costs causing a growth in that sector.            The
            conservative closure of a fixed labour pool has a crowding out effect of
            increasing real wages, which has a positive impact on the service sector as the
            workforce has more spending power.

            The model assumptions also cause a crowding-out effect on coal and textiles
            due to increases in the exchange rate and real wages, which make these
            sectors less competitive in the international arena. Conversely, AGTL has a
            positive impact on the terms of trade because of the offset of imported refined
            products and the increase in exports.

            Government revenues are also predicted to increase significantly. Using a
            scenario of no Government support based on the CBA (upstream and GTL
            Fuel revenues to Government only) the model predicts the following
            Government benefits:

                   •    revenue in excess of A$14 billion over the project life (A$4.21 billion
                        NPV6 2001)

                   •    revenue in excess of A$600 million per year post-2015

       •   revenue in excess of A$3 billion in the first 10 years of start-up
           (A$1.55 billion NPV6 2001)

These revenues are based, for the most part, on corporate tax as a
consequence of enabling a stranded gas resource to be converted to value-
adding GTL Fuel. Sasol Chevron believes some of these revenues could be
used to stimulate a project development in a way that is revenue neutral to
Government. Research & Development

Sasol Chevron will invest in R&D programmes aimed at fully understanding the
benefits of GTL products in key target applications. As part of this process the
company will seek to establish strategic partnerships with Original Engine
Manufacturers (OEMs), industry groups, and government and independent
research centres. Through these relationships and participation in appropriate
technical forums, Sasol Chevron will position itself as the leader both in the
understanding of GTL products, and in the contribution to development of
applications technologies to exploit the properties of GTL products.

The GTL process is a proprietary process with confidentiality commitments to
the technology licensors.       The use of GTL Fuel, however, opens up the
opportunity for Australian motor manufacturers to start working on R&D for new
engine design and after-treatment technologies to take advantage of the
characteristics of GTL Fuel. The development of advanced engines and after-
treatment technologies could open up export opportunities for Australia. In
addition, R&D work to determine the suitability of GTL Fuel for Australian
conditions will be carried out locally.

The production of GTL Naphtha offers opportunities for fuel cell research. The
development of fuel cell technology has attracted a high level of interest world-
wide.     Although the prospect of a hydrogen economy is at best several
decades away, fuel cells offer a way to bridge the transition, as they are
capable of running on both hydrogen and hydrocarbon feedstocks. It is likely,
the shorter-term solution will be one in which hydrogen is generated by on-
board reforming of hydrocarbons widely available in the existing fuelling
infrastructure. The ideal hydrocarbon fuel for this application would be light,
hydrogen-rich, and free of impurities. Both GTL Fuel and GTL Naphtha are
well qualified for this purpose. Sasol Chevron will monitor developments in this
technology and participate in programmes to evaluate performance relative to
other potential fuel sources. If fuel cells become a commercial reality, Sasol
Chevron will seek to exploit the obvious “fit” of GTL Fuel with this application.

An additional area of R&D for which Australia is well positioned is the continued
development of technologies for the management, sequestration and eventual
elimination of greenhouse gas emissions during the lifecycle of GTL Fuel. GTL
Fuel has very low greenhouse gas emissions in the combustion phase
compared to other transport fuels. However, CO2 is a bi-product of the FT
reaction process. One of the advantages of having the CO2 emissions
concentrated at the plant is that technological improvements or cost effective

sequestration methods, can be focussed to further improve the lifecycle outlook
of GTL Fuel. Synergies with other industries

There are a number of other potential benefits of a Sasol Chevron GTL Fuel
project that have yet to be evaluated on the basis of commercial and economic
impact. These benefits include the potential to develop subsidiary industries
through synergies with GTL Fuel and the health and environmental benefits of
using GTL Fuel domestically. There are a number of industries that could
leverage off the products from a GTL Fuel plant. They include:

An Ammonia plant could use the surplus Nitrogen together with Hydrogen
(for which additional capacity could be built). As a likely target 600 to 700
tonnes per day of Ammonia could be produced if the surplus Hydrogen
mentioned above were available.

A Urea plant could consume 700 tonnes of Ammonia plus about 900 tonnes
per day CO2 to produce 1200 tonnes per day. Urea is a recognised fertiliser
for rice crops and, therefore, also a carbon sink for CO 2.

While the ethane levels of Western Australian gas limit the development of an
Ethylene Cracker, it may be possible to use Naphtha and LPG as feedstock,
which would open up a myriad possibilities to produce Polyethylene,
Polypropylene, Ethylene Oxide/Ethylene Glycol, 2EH, Phthalates. If local salt is
electrolysed to produce Chlorine and Caustic, there is a possibility of producing

Syngas mixtures of CO and Hydrogen can be used to produce Methanol, and
other alcohols, Acetic acid, Methyl Acetate and a host of other none aromatic

In addition, the plant produces excess quantities of water and power.

Water, which is produced within the FT process can be treated, along with
other waste water streams, to yield in excess of 5000 m3/d (after all plant
needs are satisfied). This water could be used for industry or agriculture.
Alternatively, if needed it could be upgraded to potable water quality with
appropriate treatment.

Power can be generated from the steam produced in the FT process. The
Phase 1 plant alone would produce sufficient quantities of steam to generate
200 MW of excess power, which well exceeds the likely demand in the area for
the foreseeable future.

                                                                            69 A Sasol Chevron GTL Fuel project will be a new productive sector

AGTL could be the cornerstone of a new productive sector for Australia. The
nation faces declining oil production and increased refined product demand.
The refining sector is under pressure because of the cost of feedstock imports,
structural inefficiencies combined with competition from large, efficient Asian
refining capacity. AGTL would provide Australia with an opportunity to diversify
its transportation fuel mix, increasing security of supply and limiting the trade
imbalance forecast to continue to grow as Australia’s demand for refined
products increases.

GTL Fuel is also well placed to become a new export sector for Australia as
there is an existing large and reliable spot export market for diesel. The outlook
for underlying diesel demand in Asia Pacific is strong, corresponding with
economic growth. GTL Fuel is well placed to serve underlying diesel demand
because GTL produces a targeted product slate with a higher diesel yield than
conventional refining (~70%). In addition, Australian-sourced GTL Fuel will
have a leading edge over refined diesel in markets that value security of supply
and diversifying fuel mix away from OPEC derived products. Australian LNG
already benefits from this driver in Japan and California. Figure 8.16 illustrates
the ABARE/DISR refined product outlook for Australia together with Sasol
Chevron’s projections for domestic and export volumes of GTL Fuel. The
projections highlight the synergy between GTL Fuel and Australia’s current fuel
producers in terms of filling the supply gap and developing a new export sector.

Figure 8.16 Projection of Australia’s future supply/demand balance for
            refined products compared to projections of domestic and
            export GTL Fuel use



                                                             Australian Diesel Demand
‘000 bbls/day


                200      Australian Diesel Production



                                          GTL Fuel Export
                                                                   GTL Fuel Domestic
                  2005         2007          2009           2011         2013           2015


Australia has enough gas to move towards a gas-based economy. A GTL Fuel
industry will enable gas sector growth and is likely to increase gas supply
competition through the delivery of a new greenfield gas supply to Western

        Australia. Increased gas supply competition will have a positive effect on gas
        based industries and in securing a competitive domestic supply of natural gas.

8.2.6   Mechanisms to establish a domestic GTL Fuel industry

The GTL Taskforce had three objectives in evaluating policy options:

   •    Assess potential for the industry to develop and add value to remote gas
        resources in western and northern Australia

   •    Identify transport fuel supply options that complement and diversify existing
        Australia fuel production

   •    Identify specific areas where Australia could develop technical capability to
        service the GTL industry

These objectives can be described in the following vision for Australia:

        To build a world-scale GTL Fuel industry in Australia to unlock natural
        gas resources utilising world-leading technology to produce clean and
        efficient liquid transport fuels for Australia and the Asia-Pacific region.

If an appropriate and targeted set of policy measures is put in place, a GTL Fuel
industry will meet the three objectives and achieve the vision for Australia. Policy
measures should not have to address each objective independently. However, if the
right measures are put in place to enable the GTL industry to establish a base in
Australia, the objectives will be met.

Focussed policy measures can overcome these hurdles and deliver a GTL Fuel
footprint plants to Australia. Targeted measures can limit Government exposure,
clearly establish a timeframe and policy framework for the industry, and enable GTL
proponents to decide on investing in Australia.

Sasol Chevron believes, at a minimum, the following policy measures are required to
encourage the establishment of a sunrise GTL Fuel industry in Australia by the second
half of this decade:

1. 10 year “effective life of assets” determination for clean fuels investments
   (preferred measure)
2. GTL producer grant of at least 5Acpl for GTL Fuel produced and sold in Australia
   for the period from 2006-2016 (preferred measure)
3. Multi-user infrastructure support on the Burrup and support of a pipeline to bring
   remote gas supply to the Burrup at a competitive price to multiple customers

Sasol Chevron also believes that if the GTL Fuel industry is assisted by the three policy
measures described above, the net result can be revenue neutral to Government on an
annual basis and revenue positive to the Australian economy over the project life.
Figure 8.17 illustrates the potential accelerated revenue profile for Government using
scenario outlined above plus the addition of the ‘Clean Fuels’ measure proposed by the
task force. The revenue stream to Government from the stranded gas is some time

                              into the future. This revenue stream can be bought forward by implementing
                              measures to establish the sunrise industry.

                              Figure 8.17 Illustrates the potential benefits in Government revenue from
                                          focussed measures to establish a sunrise GTL Fuel industry

                                              Government revenue with assistance measures
                                              Future Government revenue from stranded gas
                                              Government revenue without assistance
Annual Government Revenue (A$MM)



                                    300                                               Monetising & value-adding
                                                                                      to Australia’s stranded gas

                                       2000   2005        2010        2015            2020      2025      2030          2035    2040   2045   2050        2055
Model assumes: 8 year effective life for GTL Fuel industry, 10 year effective life for offshore gas industry,
A$150MM multi-user infrastructure, 3 Acpl clean fuel incentive & 9 Acpl GTL Fuel producer bounty
                              The proposed mechanism of a grant to producers of GTL Fuel requires consideration by
                              the Fuel Tax Inquiry.

                              8.2.7        GTL Fuel Producer Grant

                              A producer grant is a mechanism that provides a grant to domestic producers of a
                              particular product. The grant can be capped by a number of mechanisms including,
                              but not limited by, produced volume, time, use, and performance.

                              An example of a producer rebate is change to the excise tariff act and associated
                              regulations that govern support of the domestic oil shale industry (Figure 8.18). The
                              legislation and regulations have been established to assist an emerging industry that
                              will unlock a currently stranded resource. Key points of the oil shale precedent are:

                                                   •     Demonstration of new technology
                                                   •     Unlocks a stranded resource
                                                   •     Time, volume and value limited to control revenue leakage
                                                   •     Promotes domestic industry
                                                   •     Only available for domestic consumption

                             Figure 8.18           Outline of the oil shale producer grant model

                                                                          Mine the Oil Shale

                                                                                             Sell a volume of Naphtha

                                                                   $$                                            Which produces a                    72
                                                                                                                 volume of Petrol
                                                                                                                               Whi h
With very little modification the oil shale precedent can be applied to a sunrise
domestic GTL Fuel industry. This mechanism has the advantage that that it is already
a WTO-compliant and a working precedent. In addition, the producer grant is the
preferred startup industry mechanism because:

              •   It is targeted at the indigenous sunrise industry
              •   It fits an existing working precedent
              •   It controls Government revenue leakage
              •   It is only paid on successful domestic market penetration
              •   It can be hedged against oil or product price

Concern has been expressed about competitive neutrality with petroleum refining.
However, Sasol Chevron’s view is that the reverse is true – all competitive advantage
currently resides with the entrenched players. A producer grant could overcome initial
investment (refiners have sunk investment), costs of bedding down new technology
(refiners are using long-established technology), and other issues that currently place
GTL at a disadvantage to refining. Most of the entrenched players (gas suppliers,
refiners, LPG, CNG) have previously received significant industry assistance to enable
them to get to competitive positions today.

The Australian GTL Fuel industry needs sunrise industry support today so that it can
achieve the vision of building a world-scale GTL Fuel industry to unlock natural gas
resources to produce clean and efficient liquid transport fuels for Australia and the
Asia-Pacific region. A producer grant is the preferred mechanism to deliver this vision
and associated benefits to Australia.


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