This analysis is able to be downloaded as a static PDF.
Key insights
(Click or tap to expand)
- In the first two years of the reformed scheme, one-in-six of all the Safeguard Mechanism Credits issued across the entire Safeguard Mechanism were issued to Shell’s Prelude liquefied gas terminal: with almost $95 million worth of credits issued to date.
- While Prelude’s emissions will eventually outpace its annual emissions limit, this will not occur before it receives almost as many undeserved free credits again. By the time this happens in 2028/29, the facility will have received a total just under $200 million free credits.
- In three years from January 2020 to January 2023, Prelude ceased operations four times and was shut down for more than 18 of 36 months. Most of this shutdown period was caused by direct intervention from Australia’s offshore safety regulator NOPSEMA in response to repeated life-threatening safety incidents.
- These shutdowns led to the facility having a vastly inflated emissions intensity at precisely the period used to calibrate the Safeguard Mechanism for individual facilities. Consequently, Prelude is being rewarded today for no other reason other than the fact that their emissions-intensity has normalised compared to a period of multiple on-board safety crises.
- Even now that its production and emissions have normalised, due to its design Prelude is nonetheless one of Australia’s most emission-intensive liquefied gas terminals.
- Its emissions are set to increase dramatically this decade as production shifts to the Crux field. In 2024/25 – the first full year of relatively normal production at the terminal – Prelude emitted 2.25 million tonnes of greenhouse gas. In 2028/29, this total is set to reach 3.06 million tonnes, an increase of more than one-third.
- While Prelude’s emissions will surpass its emissions limit eventually, the around 5 million tonnes worth of free offsets will mean that it can offset any emissions excess until long into the future. Between now and 2029/30, it will be required to surrender just 2 million of these free credits.
In more detail
A worker’s strike and a series of extraordinary safety incidents at Shell’s Prelude gas terminal has resulted in the global oil and gas producer receiving an extraordinary and unearned bounty of free offset credits under Australia’s Safeguard Mechanism, linked to no real world environmental benefit.
The Prelude facility sits offshore from Western Australia, roughly half way between Broome and the island of Timor. The 488 metre floating gas terminal produces liquefied gas, LPG and condensate for export and is the world’s largest floating construction. It began production late in 2018.
While the floating gas terminal is an impressive piece of engineering, its early years were plagued by significant issues. As a result of these, the facility was forced to shut down four times in three years, three of these in response to critical safety concerns aboard the vessel. Between February 2020 and January 2023 the facility was out of action for a little over half of the time, mostly as a result of direct orders to cease operations from NOPSEMA, Australia’s offshore safety regulator.
This has had the direct consequence for Shell that it has now received over $90 million dollars worth of free offset credits under the Safeguard Mechanism over the first two years of the reformed scheme. So far, one out of every six Safeguard Mechanism credits that has ever been issued to any facility has gone to Shell for its operations at Prelude. The grant of 1.4 million SMCs to Prelude after reconciliation of the 2024/25 financial year represents the largest volume of offset credits issued to an Australian offset project under either the Safeguard Mechanism or the Australian Carbon Credit Unit (aka “ACCU”) scheme.
The reason that this has occurred relates to the process through which Safeguard mechanism emissions limits are determined. The Safeguard mechanism is an emissions intensity scheme, with emissions limits increasing and decreasing along with the production at each facility. Until 2030, facilities like Prelude that have been operating since before the 2023 Safeguard mechanism reforms have their emissions limits set with reference to their average emissions intensity in the five years to 30 June 2022.
Due to the very many issues facing the facility in the years after start-up, Prelude had astoundingly high emissions intensity in these years compared to its production. For example, in the 2018/19 financial year the facility emitted 2.3 million tonnes of greenhouse gas – roughly the same as the combined emissions from every domestic Virgin flight in the same year – and shipped just one tanker load of liquefied gas. These problems, extending across multiple years, mean that Prelude’s recorded emissions intensity is five times higher than the industry average.
Since the reformed scheme commenced on 1 July 2023, production at Prelude has normalised. While the facility is still more emissions intensive than its Australian peers, it is now being disproportionately rewarded because its emissions intensity today is merely exceptionally high, rather than unfathomably so.
This unearned bounty is set to continue until at least 2027/28, by which time Shell will have received just under 5 million tonnes worth of Safeguard Mechanism credits – worth around $200m. The company may sell these credits to other Safeguard Mechanism participants at full value or hang on to them indefinitely to use in lieu of buying other forms of offset once its emissions finally exceed its limits. The credits have no expiry date, and the global oil and gas producer has received enough to be able to free-ride its obligations under the Safeguard Mechanism until well into the 2030s.
Prelude’s past and projected emissions under the Safeguard Mechanism – along with its past and anticipated Safeguard mechanism emissions limits – are shown below. (Chart not showing correctly? Click to expand.)
As shown above, Shell projects that emissions at the facility will increase dramatically this decade. The facility will remain one of Australia’s most polluting, even compared to other Australian LNG terminals. In 2028/29, emissions from the facility will be more than one-third higher than they were in 2024/25.
Prelude’s past production compared to its nameplate capacity is shown below. (Chart not showing correctly? Click to expand.)
Timeline of major incidents at the Prelude facility 2020–2023
June 2019: Prelude offloads its first shipment of liquefied gas.
February 2020: The offshore regulator NOPSEMA orders that Prelude be shut down after three separate dangerous events within four months: These investigations into these events – the last of which occurred while NOPSEA staff were on-board conducting an inspection into the earlier safety issues – “led the NOPSEMA inspectors to the conclusion … that there was a significant risk to the health and safety of persons at the facility.”
January 2021: Prelude resumes normal operations after an 11 month shut down.
December 2021: A fire breaks out at the facility and Prelude loses power for several days. It is again shut down by NOPSEMA because “Inspectors concluded that the operator did not have a sufficient understanding of the risks of the power system on the facility, including failure mechanisms, interdependencies and recovery.” Without power, there was a highly remote, but unnecessarily real, risk of catastrophic failure of the foundational structures supporting the facility due to the effect of -162°C LNG on steel containment.
April 2022: Prelude resumes operations after being cleared by NOPSEMA to do so. It has been shut down for a little over four months.
July 2022: Employees implement work bans at the facility as part of a pay dispute. These prevent the facility from offloading produced fuels, and ultimately lead to a limited shut down.
September 2022: Industrial action ends after Shell agrees to an improved Enterprise Agreement. It has been closed for two and a half months.
December 2022: Prelude catches fire and production is suspended.
January 2023: Prelude restarts production after being closed for a month.
Frequently Asked Questions
What is the Safeguard Mechanism?
The Safeguard Mechanism is an Australian greenhouse gas emissions trading scheme and the country’s most expansive climate policy. Under the scheme, Australia’s largest industrial facilities are bound to annually-declining emissions limits, known as baselines.
Each facility has its own individual baseline that is set using complex formulas that reference that facility’s own historical emissions intensity, the performance of other facilities in its sector, and its annual production in each year. Usually, facility baselines decline by 4.9% each year. However, facilities operating in identified ‘trade-exposed’ sectors may apply to slow this annual decline rate if the cost of meeting their obligations exceeds certain thresholds.
In 2024-25, 208 facilities were covered by the Safeguard Mechanism. This includes gas terminals, coal mines and metals mining and processing facilities, along with many other sectors. Combined, these facilities reported a total of 132.8 million tonnes worth of greenhouse gas emissions. This is just under the annual emissions from the Australian electricity sector and nearly one-third of Australia’s total net annual emissions.
The scheme does not cover emissions from farming, land clearing or the production of electricity supplied to one of Australia’s five largest grids.
Facilities bound by Safeguard baselines can either reduce their reported emissions to below their annual emissions limit in each year or surrender offset credits to bring their annual emissions below the permitted level on paper. To date nearly all action to comply with the Safeguard Mechanism has occurred through the purchase and surrender of offset credits.
The Safeguard Mechanism commenced in 2015, but was heavily reformed in 2023. It is scheduled to be reviewed later in 2026.
About Naru Research
Naru Research is a climate and energy research consultancy founded by Tim Baxter, a respected expert in the field with a demonstrated track-record of success working with the Australian NGO sector. Tim prides himself on his willingness to assess climate and energy policy on its raw merits – without fear or favour – and an exclusive commitment to verifiable real-world outcomes and demonstrated benefit.
Leave a Reply