Review of Australia's Petroleum Resource Rent Tax: Implications from a Case Study of the Gorgon Gas Project
| DOI | 10.1177/0067205X1704500207 |
| Published date | 01 June 2017 |
| Date | 01 June 2017 |
| Subject Matter | Article |
REVIEW OF AUSTRALIA’S PETROLEUM RESOURCE RENT
TAX: IMPLICATIONS FROM A CASE STUDY OF THE
GORGON GAS PROJECT
Diane Kraal*
ABSTRACT
Australia has welcomed new business investment of $20 0 billion for integrated gas
projects. However lower than expected tax receipts have tempered the early optimism
of project benefits. In particular, petroleum res ource rent tax (PRRT) revenues since the
2002–03 financial year have f allen. 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 t he 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 additi on
of royalties for particular integrated natural gas projects in Commonwealth waters. The
article is significant for its unique overview of Austra lia’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 Co mmonwealth
PRRT Review through its r ecommendations 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.
I INTRODUCTION
The period from the Hawke Labor Government’s election in March 1983 through to the
detailed resource tax policy announcement in June 1984, is a time-frame marked by two
Ministerial Statements that outlined the government’s intention for a resource rent tax.
1
The political and consultative processes t hat ensued resulted in the Petroleum Resource
Rent Tax Assessment Act 1987 (Cth), which took effect in 1988 and applied to petroleum
* Senior Lecturer, Business Law and Taxation Department, Monash Business School, Monash
University.
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).
316 Federal Law Review Volume 45
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production from future offshore petroleum fields in Commonwealth waters.
2
The
petroleum resource rent tax (PRRT) is a tax at the rate of 40 per cent on the ‘taxable profit’
from petroleum projects. In 1987, the legislation excluded the large operating petroleum
fields in Victoria’s Bass Strait, and the North West Shelf gas project off Western
Australia. Subsequent legislative changes extended the application of the PRRT to all
petroleum (oil and gas) projects whether situated onshore or offshore in Commonwealth
waters.
The PRRT has been successful in ra ising over $33 billion in revenue,
3
however since
the 2002–03 financial year the tax take has fallen,
4
despite new business inve stment for
integrated gas projects Australia-wide.
5
Criticisms and concerns about falling petroleum
revenues led to the announcement in late 2016 of a Federal review of the PRRT and
related resource taxes. The Review requirement was to advise the Turnbull Government
on whether Commonwealth oil and gas taxes are operating as intended, with regard to
an equitable re turn to the community, and without discouraging investment in
petroleum exploration and development. The PRRT Review final report was released in
April 2017 but its recommendations and call for further consultation later in 2017 are
generally outside the sco pe of this article.
6
Motivated by the PRRT Review, and noting
the current state of low petroleum prices, this article aims to investigate the extent to
which petroleum taxatio n design issues are disruptors to Commonwealth government
revenue, specifically from integrated natural gas-to- liquefied natural gas (LNG) projects
in Australia. Thus, in the context of ‘low oil price shock’, the question asked is: What
might be the economic outcomes if Australia’s petroleum fiscal regime for integrated
natural gas-to-liquids projects was modified to generate higher government revenue?
The scope of this article is limited to the case of the Gorgon gas project, operated by
Chevron Australia. Gorgon is an integrated natural gas-to-LNG project that extracts
from a basin in Commonwealth waters, off north-west Australia. The article presents
models of alternative taxing regimes with a focus on government revenue. An analysis
of the Gorgon modelling provides the basis for the author’s recommendations t o the
federal PRRT Review for legislative reform, which are outlined in the conclusi on of this
article.
The global expansion in LNG pr ojects raises questions about the real economic
contribution of this activity to a host country.
7
In the case of Australia, industry espouses
the economic rewards from the relatively recent $200 billion investment in new LNG
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, 16.
2017 Review of Australia’s Petroleum Resource Rent Tax 317
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infrastructure.
8
Agency data details seven significant projects to extract and process gas
for LNG export under construction or that have recently commenced production.
9
Thus
the stage has been set for community expectations of significant government revenue to
be raised from these large gas projects, such as Gorgon.
However, low tax revenue figures have tempered optimism. The Australian Budget
2016–17 figures show actual petroleum tax revenues of $1.8 billion in 2014–15 and then
lower forecasts of $800 million per annum to 2020.
10
The Budget papers claim low oil
prices as the reason for the decreased revenue. By contrast, the PRRT Review into
petroleum taxation has the scope to investigate beyond low oil prices in searching for
possible reasons for the low tax take.
11
In the operation of an integrated gas project, the resource extracted is subject to the
PRRT when it satisfies the definition of a ‘marketable petroleum commodity’.
12
Gas for
export needs to be subject to further processing that results in liquefied natural gas
(LNG), and this secondary product is excluded from PRRT liability.
13
The Australian
Government is concerned about the reduced flow of PRRT revenue from gas feedstock
(that is used for LNG).
The PRRT legislation embodies both tax and economic concepts which is the reason
for the interdisciplinary approach for this article, which provides definitions of these
concepts throughout. This article is significant for its unique review of Australia’s
petroleum resource taxation since both the fall in oil prices from mid-2014 and the rise
of gas projects for LNG export. Additional gas revenues from tax reform might
contribute toward balancing Australia’s budget deficit and benefit the wider Australian
community. This research has implications for other jurisdictions that may wish to
consider a review of their taxation outcomes from the extraction of non-renewables,
8
Australian Petroleum Production & Exploration Association (APPEA), ‘LNG 18 Daily
Reports’ (Paper presented at LNG 18_18th International Conferen ce & Ex hibition 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 $9 50 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 St rategy 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).
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