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Review of Australia's Petroleum Resource Rent Tax: Implications from a Case Study of the Gorgon Gas Project

Published online by Cambridge University Press:  01 January 2025

Diane Kraal
Diane Kraal*
Affiliation:
Business Law and Taxation Department, Monash Business School, Monash University
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Abstract

Australia has welcomed new business investment of $200 billion for integrated gas projects. However lower than expected tax receipts have tempered the early optimism of project benefits. In particular, petroleum resource rent tax (PRRT) revenues since the 2002–03 financial year have fallen. These reduced revenues have raised concerns about the effectiveness of petroleum taxation in Australia and pressured the Australian Government to call for a review of the PRRT in late 2016. Examined are the modifications necessary to the petroleum fiscal regime to address one of the PRRT Review's aims of providing an equitable return to the Australian community. Findings from a case study of an operational gas project include the need for PRRT modifications, and the addition of royalties for particular integrated natural gas projects in Commonwealth waters. The article is significant for its unique overview of Australia's petroleum taxation since the fall in oil prices from mid-2014 and the rise of gas export projects. This interdisciplinary and empirical research forms an important contribution to the current Commonwealth PRRT Review through its recommendations for change to the Petroleum Resource Rent Tax Assessment Act 1987 (Cth). It calls for more uniform federal legislation for the taxation of petroleum resource projects.

Type
Article
Information
Federal Law Review , Volume 45 , Issue 2 , June 2017 , pp. 315 - 349
Copyright
Copyright © 2017 The Australian National University

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References

1 Treasurer, The Hon. PJ Keating, MP, and the Minister for Resources and Energy, Senator, The Hon. Peter Walsh, ‘Future Taxation Arrangements for the Petroleum Sector’ (Joint Press Release of Ministerial Statement, 18 April 1984); Treasurer, The Hon. PJ Keating, MP, and the Minister for Resources and Energy, Senator, The Hon. Peter Walsh, ‘Resource Rent Tax on “Greenfields” Offshore Petroleum Projects’ (Joint Press Release of Ministerial Statement, 27 June 1984).

2 See Explanatory Memorandum, Petroleum Resource Rent Tax Assessment Act 1987 (Cth).

3 Australian Taxation Office, Submission to The Treasury, Review of the Petroleum Resource Rent Tax, 7. All public submissions to the PRRT review lodged from 3 February 2017 can be found at <http://www.treasury.gov.au/ConsultationsandReviews/Reviews/2016/Review-of-the-Petroleum-Resource-Rent-Tax/Consultation/Submissions>.

4 See Appendix 2 for PRRT revenue from 1989.

5 Office of the Chief Economist, Department of Industry (Cth), Resources and Energy Major Projects (April 2015) <https://industry.gov.au/Office-of-the-Chief-Economist/Publications/Documents/remp/REMP-April-2015.pdf>.

6 Commonwealth Government, ‘Release of the Petroleum Resource Rent Tax Review’ (Media Release, 28 April 2017). For the final report, see Michael Callaghan, ‘Petroleum Resource Rent Tax Review Final Report to Treasurer’ (28 April 2017) <https://cdn.tspace.gov.au/uploads/sites/72/2017/04/PRRT.pdf>.

7 David, A Wood, ‘A review and outlook for the global LNG trade’ (2012) 9 Journal of Natural Gas Science and Engineering 16, 16Google Scholar.

8 Australian Petroleum Production & Exploration Association (APPEA), ‘LNG 18 Daily Reports’ (Paper presented at LNG 18_18th International Conference & Exhibition on Liquefied Natural Gas, 11–15 April, Perth, Australia, 2016) day 2 p 13; Elizabeth Fabri, ‘On the Home Straight’ The Australian Energy Review, November 2016, 13; Peter Coleman, ‘Tax mistake could kill nation-building gas industry’, Australian Financial Review (online), 2 February 2017 <http://www.afr.com/opinion/columnists/tax-mistake-could-kill-nationbuilding-gas-industry-20170202-gu3xw7>.

9 International Energy Agency, World Energy Outlook 2015 (10 November 2015) <http://www.worldenergyoutlook.org/weo2015/>; Office of the Chief Economist, above n 5.

10 There was a minor update to AUD $950 million of PRRT revenue for 2016-17 in the government's ‘Midyear Economic and Fiscal Outlook’ report in December 2016 <http://www.budget.gov.au/2016-17/content/myefo/html/>; The Treasury, Budget Paper No. 1 Budget Strategy and Outlook 2016–17’ (3 May 2016) <http://budget.gov.au/2016-17/content/bp1/html/bp1_bs4-02.htm>.

11 Commonwealth Government, ‘Review of Petroleum Resource Rent Tax. Issues Notes’, released 20 December 2016 <http://www.treasury.gov.au/ConsultationsandReviews/Reviews/2016/Review-of-the-Petroleum-Resource-Rent-Tax>.

12 Petroleum Resource Rent Tax Assessment Act 1987 (Cth) s 2E.

13 Ibid s 2E(3).

14 See, eg, Central Desert Regional Council, Submission to The Treasury, Review of the Petroleum Resource Rent Tax, 31 January 2017, 1.

15 PRRT dates and changes between 1983 and 1998 are summarised in Appendix 1. For a detailed historical account of the petroleum resource rent tax, see Diane, Kraal, ‘Australia's Petroleum Resource Rent Tax: Paul Keating, Peter Walsh and other game changers’ (2016) 25(4) Griffith Law Review 492Google Scholar.

16 Petroleum Resource Rent Tax Assessment Act 1987 (Cth) pt 5 div 3A. A tax ‘ring fence’ limits the application of legislation to a defined point, for example, deductions are held within one resource project operated by one group of entities.

17 Ibid pt 5 div 3 s 36A–C, for example, exploration costs of $100 million, multiplied by 150 per cent, equals a deduction of $150 million.

18 Petroleum Resource Rent Tax Assessment Regulations 2005 (Cth), repealed by Petroleum Resource Rent Tax Assessment Regulation 2015 (Cth), the regulations are referred to when there an entity operates an integrated gas to liquids project with no arm's length pricing between the different phases of activities.

19 Department of Industry Innovation and Science (Cth), The History of the Petroleum Resource Rent Tax <http://www.industry.gov.au/resource/Enhancing/ResourcesTaxation/PetroleumResourceRentTax/Pages/PRRTHistory.aspx>.

20 John Lowe, Oil and Gas Law in a Nutshell (West Academic Publishing, 2014) 11.

21 British Petroleum, BP Statistical Review of World Energy June 2016 (2016) <https://www.bp.com/content/dam/bp/pdf/energy-economics/statistical-review-2016/bp-statistical-review-of-world-energy-2016-full-report.pdf>.

22 The Commonwealth royalty on the North West Shelf project, and shared with Western Australia, is set out in the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) s 75. The Federal crude oil and condensate excise is outside the scope of this article, but see the Excise Tariff Act 1921 (Cth), as amended, which only applies to the North West Shelf project, coastal and onshore areas, <https://industry.gov.au/resource/Enhancing/ResourcesTaxation/PetroleumResourceRentTax/Pages/CrudeOilExcise.aspx>.

23 Santos Ltd, with permission.

24 Author.

25 See, eg, Ross, Garnaut and Anthony, Clunies Ross, ‘Uncertainty, Risk Aversion and the Taxing of Natural Resource Projects’ (1975) 85(338) Economic Journal 272Google Scholar.

26 See, eg, Ross, Garnaut and Anthony, Clunies Ross, ‘The Neutrality of Resource Rent Tax’ (1979) 55(3) Economic Journal 193Google Scholar. An investor's risk or hurdle rate denotes the level of return at which a project is deemed profitable enough to proceed; Ross, Garnaut, ‘Principles and Practice of Resource Rent Taxation’ (2010) 43(4) Australian Economic Review 347, 349Google Scholar. ‘Net present value’ is an economic concept that calculates the time value of money, i.e. a dollar today is worth more than a dollar in the future.

27 Author.

28 Commonwealth Government, ‘Outline of ‘Greenfields’ Resource Rent Tax in the Petroleum Sector’ (Position Paper, 18 April 1984). See National Archives of Australia, Canberra: Commonwealth Record Series A1690/62, A1690/63 and A1690/64 for relevant government files on petroleum tax reform.

29 Kraal, above n 15, 514.

30 APPEA, Submission to The Treasury, Review of the Petroleum Resource Rent Tax, 3 February 2017, 49.

31 Kraal, above n 15, 514.

32 The uplift rate (also known as a threshold, augmentation or accumulation rate) is an indexation factor, to which the current long term bond rate is also added. Eg 15 per cent accumulation rate + 1.9 per cent LTBR = 16.9 per cent uplift. Expenditure is divided into classes using different uplift rates. The purpose of the uplift rate is to compensate investors for the risk of the activity, thus PRRT is not paid until a project meets the threshold rate, or risk-adjusted rate of return.

33 For Class 2 ABR general expenditure see PRRT Act 1987 div 3 s 34A.

34 For taxable profit, see PRRT Act 1987 s 22.

35 Australian Taxation Office, above n 3, 7–8.

36 Howard V Rogers and Jonathan Stern, ‘Challenges to JCC Pricing in Asian LNG Markets’ (OIES Paper: NG 81, Oxford Institute for Energy Studies, February 2014).

37 International Energy Agency, above n 9.

38 A S, Bujang, C J, Bern and T J, Brumm, ‘Summary of Energy Demand and Renewable Energy Policies in Malaysia’ (2016) 53 Renewable and Sustainable Energy Reviews 1459Google Scholar; Andrew, Cheon, Maureen, Lackner and Johannes, Urpelainen, ‘Instruments of Political Control: National Oil Companies, Oil Prices, and Petroleum Subsidies’ (2015) 48(3) Comparative Political Studies 370Google Scholar; K Y, Foo, ‘A Vision on the Opportunities, Policies and Coping Strategies for the Energy Security and Green Energy Development in Malaysia’ (2015) 51 Renewable and Sustainable Energy Reviews 1477Google Scholar.

39 Andrew, Cheon and Johannes, Urpelainen, ‘Escaping Oil's Stranglehold: When Do States Invest in Energy Security?’ (2015) 59(6) Journal of Conflict Resolution 953Google Scholar; Jeff, D Coglan, ‘Oil, Domestic conflict, and Opportunities for Democratization’ (2015) 52(1) Journal of Peace Research 3Google Scholar.

40 Juncal, Cunado, Soojin, Jo, and Fernando, Perez de Gracia, ‘Macroeconomic Impacts of Oil Price Shocks in Asian Economies’ (2015) 86 Energy Policy 867Google Scholar; Pauline, Jones Luong and Jazmín, Sierra, ‘The Domestic Political Conditions for International Economic Expansion: Lessons From Latin American National Oil Companies’ (2015) 48(4) Comparative Political Studies 2010Google Scholar; Jonas, Meckling, Bo, Kong, and Tanvi, Madan, ‘Oil and State Capitalism: Government-Firm “coopetition” in China and India’ (2015) 22(6) Review of International Political Economy 1159Google Scholar; Gilbert, E Metcalf and Catherine, Wolfram, ‘Cursed Resources? Political Conditions and Oil Market Outcomes’ (2015) 36(3) The Energy Journal 331Google Scholar; Jeffrey, D Wilson, ‘Understanding Resource Nationalism: Economic Dynamics and Political Institutions’ (2015) 21(4) Contemporary Politics 399Google Scholar; Robert, Y Shum, ‘Where Constructivism Meets Resource Constraints: the Politics of Oil, Renewables, and a US Energy Transition’ (2015) 24(3) Environmental Politics 382Google Scholar; Aasim M Husain et al, Global Implications of Lower Oil Prices (Staff Discussion Notes No 15, International Monetary Fund, 2015).

41 See, eg, John, Freebairn, ‘Reconsidering Royalty and Resource Rent Taxes for Australian Mining’ (2015) 59(4) Australian Journal of Agricultural and Resource Economics 586, 600Google Scholar.

42 ‘APPEA, LNG 18’, 18th International Conference & Exhibition on Liquefied Natural Gas, 11–15 April 2016, Perth, Australia <http://lng18.org/>.

43 APPEA, ‘LNG 18 Daily Reports’ (Paper presented at LNG 18, 18th International Conference & Exhibition on Liquefied Natural Gas, 11–15 April, Perth, Australia, 2016) Day 1, 11.

44 Ibid Day 3, 4.

45 Ibid Day 3, 2.

46 Ibid Day 2, 4.

47 Ibid Day 1, 3.

48 Ibid Day 2, 2.

49 Legislative Assembly Economics and Industry Standing Committee, Parliament of Western Australia, The Economic Impact of Floating LNG on Western Australia—Volume 1 (2014) 246.

50 Ibid 245.

51 APPEA 2016, 56th Conference, 5–8 June, Brisbane, Australia, <http://eventcampaign.com.au/enews/appea/2016/APPEA2016-enews8.html>.

52 Saul Kavonic, ‘The Death of Australian LNG—and How to Bring it Back to Life’ (Paper presented at the APPEA 2016 56th Conference, Brisbane, Australia, 5–8 June 2016); Edward van Geuns, ‘The Dawn of LNG Price Reviews in Asia Pacific’ (Paper presented at the APPEA 2016 56th Conference, Brisbane, Australia, 5–8 June 2016); Chris Graham and Andrew McManus, ‘Lower Oil and Gas Prices and the Changing LNG Landscape’ (Paper presented at the APPEA 2016 56th Conference, Brisbane, Australia, 5–8 June 2016).

53 Elizabeth Fabri, ‘Oil, gas tax payments still high’, The Australian Energy Review (online), January 2017 <http://www.miningoilgas.com.au/pdf/AER-JAN-2017.pdf>.

54 See, eg, Lindsay, Hogan and Rebecca, McCallum, Non-Renewable Resource Taxation: Policy reform in Australia (Report, Australian Bureau of Agricultural and Resource Economics, 2010)Google Scholar; Henry, Ergas, Mark, Harrison, and Jonathan, Pincus, ‘Some Economics of Mining Taxation’ (2010) 29(4) Economic Papers: A journal of applied economics and policy 369Google Scholar; Richard, Eccleston and Timothy, Woolley, ‘From Calgary to Canberra: Resource Taxation and Fiscal Federalism in Canada and Australia’ (2014) 45(2) Publius: The Journal of Federalism 216Google Scholar.

55 See, eg, Garnaut and Clunies Ross, above n 25, 353; Lindsay, Hogan, ‘Non-Renewable Resource Taxation: Policy reform in Australia’ (2012) 56(2) Australian Journal of Agricultural and Resource Economics 244, 250–2Google Scholar; Freebairn, above n 41, 600.

56 See PRRT Act 1987 s 2E, where ‘marketable petroleum commodities’ are taxable but excluding processed products, such as liquefied natural gas (LNG).

57 Oana Luca and Diego Mesa Puyo, Fiscal Analysis of Resource Industries (FARI) Methodology (Technical Notes and Manuals, Fiscal Affairs Department, International Monetary Fund, February 2016) <http://www.imf.org/external/np/fad/fari/#3>.

58 Chevron Australia, ‘Gorgon Fact Sheets’ (2017), <http://www.chevronaustralia.com/ourbusinesses/gorgon>.

59 For the overview of uplift rates see above n 32.

60 Office of the Chief Economist, above n 5.

61 The Gorgon project is operated by an Australian subsidiary of Chevron (47.3 per cent interest). Its joint venture partners are ExxonMobil (25 per cent), Shell (25 per cent), Osaka Gas (1.25 per cent), Tokyo Gas (1 per cent) and Chubu Electric Power (0.417 per cent), see Chevron Australia, above n 58.

62 Wood Mackenzie, <https://www.woodmac.com/>. Other investigators can, in principle, independently obtain the data used in this modelling.

63 Capital expenditure is classified in the FARI model as development costs in the pre-production phase; and as replacement costs in the production phase. In FARI these expenditure categories are aggregates, each with a separate depreciation schedule.

64 Operating costs are separated from capital costs and categorised. The categories are those directly related to recovery of the hydrocarbons from the ground; removal of impurities; pre-cooling for liquefaction; liquefaction; transportation costs incurred before the physical point where royalties or CIT are imposed.

65 Australian National Audit Office, Collection of North West Shelf Royalty Revenue (Australian Government, released 28 November 2016) 9, 10, 23 <https://www.anao.gov.au/work/performance-audit/collection-north-west-shelf-royalty-revenue>.

66 Hydrocarbons can be in a liquid or gas form. The liquid form, condensate, is more valuable.

67 Author.

68 If there is no APA or comparable uncontrolled price for the gas, then the GTP must be used, Petroleum Resource Rent Tax Assessment Regulation 2015 (Cth) s 20 (3).

69 Australian Taxation Office, Petroleum resource rent tax: application of Petroleum Resource Rent Tax Assessment Regulations 2005 to an integrated gas-to-liquid operation, TR 2008/10, 17 December 2008.

70 The term ‘real’ means constant dollars, and ‘nominal’ means inflation is included in the calculation.

71 The METR reflects the burden placed by the fiscal regime on a project at the margin of viability (i.e. projects that lie at the far end of a sector's cost curve), thus indicating the extent to which the regime affects business investment decisions.

72 The AETR is the ratio of the NPV of government revenue (composed of royalty, company tax, PRRT and withholding tax) to the NPV of the pre-tax net cash flows of a successful project, both calculated in discounted value.

73 In Appendix 3, there are also ‘Snapshot’ summaries of the results listed as tables 1–4, which provide an economics perspective on the results, and as mentioned previously, the petroleum resource rent tax uses both tax and economics concepts.

74 Commonwealth Government, ‘Review of Petroleum Resource Rent Tax. Issues Notes’, above n 11.

75 For a discussion on how gas prices are linked to oil prices in the Asia Pacific region, see Rogers and Stern, above n 36.

76 For uplifts relating to deductible expenditure, see PRRT Act 1987 div 3.

77 IRR is the discount rate at which a project is at break-even, and 7 per cent is extremely low. See APPEA, ‘Submission to the Federal PRRT Review 2017’, above n 30, attachment 3.

78 Ken Henry et. al. Report to the Treasurer. Australia's Future Tax System (the Henry Review) (Commonwealth Treasury, 2009) pt 2, vol 1, 227.

79 Joint Press Release of Ministerial Statement by the Treasurer, The Hon. PJ Keating, MP, and the Minister for Resources, the Hon. Alan Griffiths, MP, 21 August 1990, ‘Review of Petroleum Production Excise and Royalty Arrangements.’

80 For exploration transferability, see PRRT Act 1987 div 3A. The trade-off for exploration transferability was a lower uplift rate of five per cent on general expenses.

81 ExxonMobil Australia and Shell Australia, both 25 per cent shareholders in Gorgon, have transferred exploration expenditures to other projects for deduction purposes.

82 For an example of how the legislation prescribes the order of deductions, see PRRT Act 1987 s 35C(5).

83 See Petroleum Resource Rent Tax Assessment Regulation 2015 (Cth) pt 3.

84 Henry, above n 78.

85 Replacement costs are capital costs in the production phase.

86 Graham, Kellas, ‘Natural Gas: Experience and issues,’ in Philip, Daniel, Michael, Keen, and Charles, McPherson (eds), The Taxation of Petroleum and Minerals: Principles, problems and practice (Routledge, 2010) 170Google Scholar.

87 Author.

88 PRRT Act 1987 s 35C. Resource taxes such as royalties and excise are ‘grossed-up’, that is increased by dividing by the 40% PRRT rate, before deduction, eg. $2 million royalty/40%= $5 million.

89 Callaghan, above n 6.

90 Scott Morrison, ‘Release of the Petroleum Resource Rent Tax Review’, Australian Treasury, Canberra, released 28 April 2017 <http://sjm.ministers.treasury.gov.au/media-release/038-2017/>.

91 Hogan and McCallum, above n 54, 2.

92 See, eg, E, Cary Brown, ‘Business-Income Taxation and Investment Incentives,’ in L, Metzler, H, Perloff and E, Domar (eds), Income, Employment and Public Policy: Essays in Honour of Alvin H. Hansen (Norton, 1948)Google Scholar; Garnaut and Clunies Ross, above n 25.

93 See, eg, Zishan, Jooma, ‘Stranded Assets’ (2015) 892(1) Chemical Engineer 22Google Scholar; Spencer Dale, ‘New Economics of Oil’ (Paper presented at the Society of Business Economists Annual Conference, London, 13 October 2015) 6; Tony Seba, ‘In Rethinking Transportation 2020–2030: The Disruption of Transportation and the Collapse of the ICE Vehicle and Oil Industries’ (2017) <https://www.rethinkx.com/transportation>.

94 Australian Government annual budget papers.

95 See Chevron Australia Holdings Pty Ltd v Commissioner of Taxation [2017] FCAFC 62 where the full bench of the Federal Court dismissed unanimously Chevron's appeal against the Australian Taxation Office, ordering the company to pay more than AUD $300 million in company income tax. The decision was handed down on 21 April 2017.

96 Henning Gloystein, ‘Australia's gas dream facing major delays’, The Age (Melbourne), 28 January 2017.