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What the election means for these three energy producers

Election years can be fraught with uncertainty for many companies. We have already seen the impact of proposed tax policies on salary packaging company McMillan Shakespeare (ASX: MMS), whose shares dropped sharply. But what does the election mean for Australia’s major energy producers?

The biggest issue facing the companies is still changes proposed to the Clean Energy legislation, which is behind the current system of carbon permit pricing.

LNG production is going to be of huge importance for the Australian economy in the coming years and the pricing of carbon permits is important for Australia’s competitiveness as well as investing returns.

According to industry monitor Platts, LNG production capacity is estimated to triple from around 24 million metric tonnes per year today to more than 80 million by 2017.

Under the current system, LNG producers have to surrender one ‘carbon permit’ for each tonne of carbon dioxide equivalent emitted at a rate of $23 per tonne. For Santos (ASX: STO) this means an estimated cost of between $45 million and $65 million for the year to 1 July 2013. The company expected to recoup this partially through permits granted to the company by the Clean Energy Regulator and in part by passing it on in its domestic sales agreements.

Woodside Petroleum (ASX: WPL) for its part was forecasting a net expense of $17 million for the year after factoring in units granted by the regulator. BHP Billiton (ASX: BHP) would also be up for a big bill as a significant carbon producer.

The election offers two possible paths. Kevin Rudd wants to introduce a floating carbon price linked to European carbon pricing, which estimates suggest could bring the price down to just $6 per tonne. Opposition leader Tony Abbott plans to scrap the carbon price altogether.

Ironically, if this was to happen it could lead to an increase in the demand for coal in power generation, which would become more economical, reducing LNG demand slightly. However the net result of lower costs and higher investment returns is likely to have a positive outcome for LNG producers and investors alike.

Foolish takeaway

Both party’s policies on carbon tax look set to reduce the financial obligations of oil and gas producers. The most important outcome of this is the increase in the competitiveness against competing LNG producers including the US and East Africa and this is good news for investors.

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Motley Fool contributor Regan Pearson does not own shares in any companies mentioned in this article.

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