Petroleum Resource Rent Tax Research Articles

Australia offshore well inventory characterisation and decommissioning cost saving opportunities through cap rock restoration and rigless/riserless techniques

This research utilises the Geoscience Australia and NOPIMS public database to characterise the national inventory of active offshore oil and gas (O&G) wells and, through representative examples of dry and wet completions, establish the current well decommissioning cost opportunities associated with using riserless and rigless techniques to restore cap rock. These techniques have been successfully applied in the Gulf of Mexico (GoM) and this study explores the potential savings and barriers to adoption in the Australian offshore operating and regulatory context. Third party studies (Bills 2018; Wood Mackenzie 2020) have reported Australian O&G decommissioning cost estimates in the range of USD 33–49 billion over the next 30–40 years. The well decommissioning contribution to the total project cost has been estimated at 49% (OGUK 2020). This cost is materially significant to the economic life of the asset, the operator’s financial liability and a significant cost burden to the Federal Government through Petroleum Resource Rent Tax (PRRT) offsets. In this context there is a paucity of detail and transparency for well decommissioning cost estimates, to establish whether there are cost saving opportunities whilst still maintaining an acceptable level of risk both during plug and abandonment (P&A) operations and in the longer term when relinquished back to the Federal Government. This study illustrates how and to what extent the Australian offshore Federal well inventory could be decommissioned using cap rock restoration and rigless/riserless techniques and proposes a staged strategy to realise a progressive cost reduction of 21–41% over the base estimate of circa USD 4.08 billion benchmarked with OGUK (2019). This significant cost reduction aligns with the OGTC (2019) technology roadmap target of 35% supported in part by the pursuit of a rigless and riserless well decommissioning philosophy.

Taxation and Pricing of Natural Gas: The Dutch Transition to a Gas Market Hub and Lessons for Australia’s Integrated Gas Projects

The Australian government receives poor revenue returns from the Petroleum Resource Rent Tax (‘PRRT’), a tax regime that applies to integrated offshore, gas projects. By contrast the Netherlands has captured significant tax revenues from gas. We ask whether Australian government PRRT revenue would increase from an alternative method of gas pricing (known as the gas transfer price) by modelling four large gas projects. The Dutch case explains their gas market evolution and how high revenues have been maintained. We find that Australia’s current PRRT regulated pricing method for integrated gas projects is problematic and change is needed. The Dutch case study contextualises the discussion of an alternative gas transfer pricing method for offshore gas projects in Australia. The energy justice framework is used for analysis. This article contributes to the current government review of the PRRT regulations on the gas transfer pricing method.

Decommissioning and rehabilitation: what's tax got to do with it?

The obligation to decommission oil and gas facilities and rehabilitate a petroleum operation area typically arises when a producer or titleholder wishes to exit the field or title. It is a costly but necessary condition and a consequence of being granted the right to extract the resource. The issue is not necessarily confined to the field life ending, but is also a pertinent consideration in an ownership transfer transaction that can happen at any stage of a project’s lifecycle. This is especially so given present regulatory uncertainty over a titleholder’s ongoing liability for any unsatisfied decommissioning responsibilities after transferring the title to another party. When considering decommissioning and rehabilitation options, strategies and timing, it is important to understand the Australian income tax and petroleum resource rent tax implications and their effect on the after-tax costs of undertaking those activities and the economics of the project as a whole. The Australian tax system makes general provision for decommissioning and rehabilitation (including environmental protection) costs to be tax-relieved. However, this paper demonstrates that there are several inefficiencies in the Australian tax regulations and in their administration, which can often restrict or impede the ability to obtain effective tax relief. A more responsive and progressive tax policy setting is urgently needed to better accommodate the evolving nature by which decommissioning obligations and risks associated with petroleum operations are managed by industry now and into the future.

What's your gas worth: a thrilling or a taxing matter?

Australia is poised to imminently become the world’s largest liquefied natural gas (LNG) producer. The prices realised for Australia’s natural gas, whether for export LNG or domestic consumption, dictate the level of revenues and, ultimately, the profitability and returns, of the gas producers. A rational producer will seek to maximise the price or return for the gas it supplies. A portion of a producer’s remuneration for its gas is then shared with the community via taxes and royalties. In Australia, these imposts are triggered at different taxing points, hence necessitating a determination of what the gas is worth at each point. Typically, for royalties, it is the wellhead value; for the petroleum resource rent tax, it is either the value at the domestic gas processing plant outlet or the value of feed gas just before liquefaction; and, for income tax, it is the proceeds or consideration for the gas when sold or exported. Wherever related party transactions occur, the price must be set at arm’s length and reflect market realism. Where gas must be valued at a point devoid of an actual sale, finding a suitable comparable price can be challenging. In such circumstances, pricing options include the cost-plus, the netback and the profit-split methods. Each has its own merits and limitations, and incorporates elements that are susceptible to disputation. Gas producers should consider engaging proactively with the revenue authorities to agree a gas pricing model upfront to mitigate latent tax liabilities if the pricing approach adopted is subsequently challenged.

Shining the spotlight on the petroleum resource rent tax

The petroleum resource rent tax (PRRT), a 40% profits-based upstream tax that applies to Australian oil and gas projects, has come under significant scrutiny as to its effectiveness in providing an appropriate return to the community for the exploitation of Australia’s petroleum resources. The April 2017 independent Callaghan review into the design and operation of the PRRT found that it remained the preferred way of achieving a fair return to the community from petroleum exploration and recovery, without discouraging investment into the sector. However, the Callaghan review recommended possible changes to the regime to improve its sustainability and compatibility with the current state of the industry, while ensuring fiscal stability for existing investments. In response to the findings and recommendations of the Callaghan review, Australian Treasury embarked on a consultation process to investigate potential reform options to the PRRT. Government has yet to announce its decision on the way forward. What the future holds for the PRRT and the consequential impact on existing and new or proposed projects remain to be seen pending the Government’s chosen policy direction. This paper covers the following: • a survey of the economic rent theory underpinning the framework of the PRRT regime, including its pros and cons compared with other forms of resource taxation • a review of key recent developments in the administration and interpretation of the PRRT law, and • how the PRRT regime is anticipated to change and the associated repercussions on the after-tax economics and practical compliance for existing and future projects.

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

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.

The Petroleum Resource Rent Tax: Overview of Primary Documents and Literature Leading to the 1987 Legislation

Newly available archival documents give insight into the Hawke Government (1983-1991) political and consultative processes, which resulted in the Australia’s Petroleum Resource Rent Tax Assessment Act 1987 (Cth). The recently unpacked private papers from 1984 of Dr Craig Emerson (a Ministerial economic advisor at the time of petroleum tax reform) provide a unique perspective into the consultative process via hand-written files, draft reports with annotations, and personal observations. Further, relevant files from the National Archives of Australia reveal the government’s petroleum tax reform discussion papers, media statements, industry responses to the tax, comparative tax modelling and the records of consultative meetings from 1984. This paper draws on these new files to provide a brief narrative and identify the dominant stakeholders in the route to petroleum tax reform for a later more detailed enquiry by the author into the roles of key persons in the progression of resource policy to legislation. This paper is the result of preliminary research into government archival files, which have just been released, at the request of the author. Thus the archival files, as well as the Emerson files, have been accessed for the first time.

Australia’s petroleum resource rent tax: Paul Keating, Peter Walsh and other game changers

ABSTRACTIt is now timely to examine the important area of the 1980s reform of petroleum resource taxation, about which there is scant analysis, compared to other Australian Labor Party reform initiatives from that era. The questions concern the roles of Paul Keating, as Treasurer and Peter Walsh, as Minister for Resources and Energy, in petroleum taxation reform. Bourdieu’s social practice theory is used to analyse the consultative process of resource rent tax policy to legislation, which culminated in the Petroleum Resource Rent Tax Assessment Act 1987. This Act introduced a tax on profits, over a specified threshold, generated from the sale of petroleum commodities. To revisit the story of the 1980s petroleum tax reform, this article draws on primary archival documents, predominantly from Craig Emerson’s private papers that cover his time (in 1984) with the Office of the Minister of Resources and Energy. Unique insights are obtained into the consultative process via his hand-written files and personal observations. The findings indicate that although Paul Keating, Bob Hawke and advisors such as Ross Garnaut played important roles, Peter Walsh should be given the most credit for progressing the petroleum resource tax policy in 1984, that later resulted in legislation in 1987.

Financing LNG infrastructure using master limited partnerships

In recent years, an unprecedented level of capital has been invested in developing Australia’s latest liquefied natural gas (LNG) projects, with several more still in the pipeline. In the wake of ever-increasing oil price volatility, and international competitiveness and uncertainty in the global financial markets, Australian LNG projects that are either under development or are being proposed continually face pressure to be more cost-efficient and value-accretive to their capital providers. The application of cutting-edge technology, such as floating LNG, together with more innovative financing strategies, are among the key factors that could provide more attractive project yields to make investing in new greenfield LNG projects more commercially viable. For many years, master limited partnerships (MLPs) have been used as a tax-effective financing vehicle in the North American energy and resources sector for funding the construction of gas infrastructure assets. This extended abstract explores the feasibility of holding Australian LNG infrastructure assets such as LNG pipelines and processing facilities within a MLP structure, including: how a typical MLP investment model would work in practice in the LNG sector; the fiscal treatment of a MLP and its impact on investor yield; the types of LNG assets that are appropriate for a MLP structure; the suitability of the MLP vehicle in the Australian context; commercial considerations in establishing and maintaining a MLP structure, including transactional costs and Australia’s unique Petroleum Resource Rent Tax regime; and, sustainability of the MLP model in the context of the current Australian and worldwide focus on fiscal accountability.

Getting the message across—taxation contribution of the petroleum industry in Australia

With the global move towards tax transparency reporting measures, resource companies face challenges in ensuring that reporting captures the full extent of revenues contributed by resource companies and also correctly reports the project and profitability life cycles of resource companies. This extended abstract focuses on the global tax transparency debate and highlights the challenges for large Australian and global oil and gas businesses in demonstrating their payment of their fair share of tax and contributing to the communities in which they operate. Issues to be covered include: A summary of the revenue contribution of oil and gas companies in Australia through the layers of taxation, such as state royalties, the Petroleum Resource Rent Tax (PRRT) and corporate income taxes. Highlighting the types and rates of taxes paid by Australian oil and gas companies compared to other selected countries. A comparison of the concessions granted to Australian oil and gas companies to other countries. A historical summary of taxes paid by Australian oil and gas companies. A summary of existing and developing transparency reporting, such as the Australian Taxation Office (ATO) reporting of taxpayers with revenues more than A$100 million, the Extractive Industries Transparency Initiative, Dodd Frank rules, OECD country-by-country reporting, and BEPS developments. Recommendations to get the message across; that is, what should be the common ground on reporting the actual overall global tax liability including income tax, resource taxes, employment taxes and indirect taxes.

Unitisation of petroleum project interests

Traditionally, the unitisation of oil and gas project interests involved the exchange of legal ownership interests between project proponents to achieve uniformity of their licence interests across the project. Recently, more contemporary and creative forms of unitisation have emerged including economic, beneficial and contractual unitisation approaches that do not necessarily involve the transfer of legal title interests. Unitisation is a way of pooling resources to improve the likelihood of an economically viable project for participants and to overcome practical challenges resulting from uneven interests in the component parts of a broader project. In some cases, unitisation is the catalyst for project sanction. Achieving agreement and alignment on the most equitable unitisation outcome, including the valuation of the relative resource base and ownership stakes, is not easy. It involves navigating a myriad of legal, commercial, operational and financial considerations. A project residing in both federal and state waters can add increasing layers of complexity due to the interaction between overlapping federal and state jurisdictional and taxing rights. This extended abstract discusses key issues arising in various unitisation models and considers the associated fiscal implications from income tax, capital gains tax, petroleum resource rent tax and royalty perspectives. It also examines the government’s announced tax measures for dealing with the swapping of interests or interest realignments resulting in a common development project and the impact and effectiveness of these rules on unitisation arrangements.

PESA 2014 business review

This review looks back at 2014 from a business context and considers where the Australian petroleum industry will be placed in 2015. Globally, there were a number of major developments in 2014. These included new supply sources (e.g. PNG LNG), exploration successes (e.g. Brazil), and evolving energy export policies that have been set to change the market (e.g. US, OPEC). Russia agreed to a major gas supply agreement with China, and access to talent remained an issue. In Australia, there were a number of developments that shaped the business agenda, including: Capital projects—Prelude, QCLNG, and many others—achieved major milestones such as first LNG production. There were ongoing cost increases in capital projects. From a tax perspective, the Petroleum Resource Rent Tax (PRRT) was not renounced, and a decision was made on Browse royalties. Operators were busy with commissioning teams and preparing to operate new assets. Boards debated capital management, notably the AU$200 billion of projects in pre-FID and asset divestments. Exploration, notably for onshore east coast regulations in NSW and Victoria. The opening of the Wallumbilla gas supply hub in Queensland, in March 2014. 2015 will be an important period for the industry in Australia. For instance, the price of oil will be under pressure due to the changing global market forces for energy. Operators will have to work hard in 2015 as they commission large new facilities, reduce costs, and improve plant reliability. Also, the regulatory agenda will be focused on exploration, and balancing domestic and export market forces.

The petroleum resource rent tax (PRRT) and the economics of an oil and gas project

When thinking about the key drivers of project value, the PRRT profile of a petroleum project may not be top of mind for non-tax teams. As a 40% tax on the upstream activities of a petroleum project, however, the PRRT can significantly impact on project NPV and non-tax teams can play an important role in optimising the PRRT profile of a project. For finance and legal teams, this may be as part of the due diligence, modelling, and contract negotiation phase of acquiring or disposing of an interest in a project. Operational and technical teams can play an important role in helping tax teams to understand a project so that they can apply tax technical concepts; for example, in determining the characterisation of expenditure. Properly substantiating PRRT expenditure is also of critical importance; finance, IT, commercial, and operational teams should be involved in developing systems that capture the information tax teams require to be able to quantify and evidence PRRT deductions. This extended abstract focuses on the practical ways in which non-tax teams can help optimise the PRRT profile and, in turn, the NPV of a petroleum project.

Evolution of the Australian fiscal landscape and its impact on oil and gas investments in Australia

The oil and gas industry is among the most regulated and highly taxed sectors of the Australian economy. In recent times, the industry has been confronted with ongoing tax reforms that significantly impact the after-tax economics of projects. Examples include the introduction of the carbon pricing mechanism, the extension of the Petroleum Resource Rent Tax (PRRT) to the onshore oil and gas sector, the decision in the Esso case impacting on PRRT taxpayers, amendments to R&D tax incentives and modifications to the taxation system affecting mobile employees. Although the Business Tax Working Group recently did not make any recommendations to broaden the tax base to fund a reduction in the company tax rate, the desire to undertake further reforms that may impact the sector remains. The year ahead will see implementation of further transfer pricing reforms, ongoing consultation and review regarding the definition of exploration expenditure, and increasing focus on corporate international tax reform in line with global trends. Any reform has the potential to have a material impact on the capital- and exploration-intensive oil and gas industry, which also relies heavily on capital funding from multinational investors. This extended abstract analyses the recent reforms and their impact on the oil and gas sector, provides an outlook of other relevant areas of potential fiscal change, and assesses what this might mean for the Australian oil and gas industry.

Non‐renewable resource taxation: policy reform in Australia*

In July 2010, the Australian Government announced that, effective from 1 July 2012, the petroleum resource rent tax will apply to all offshore and onshore oil and gas projects (including liquefied natural gas and coal seam gas projects), and a minerals resource rent tax will apply to coal and iron ore projects. State/territory governments mainly apply ad valorem royalties to oil and gas, coal and iron ore projects; these royalty payments will be creditable under the Australian Government’s resource rent taxes. This paper argues that a hybrid system allows governments to collect a minimum return to the non‐renewable resource through the ad valorem royalty and a share of the rent from higher‐profit projects through the rent‐based tax. This paper also provides updated and expanded estimates of the potential shortfall in resource taxation revenue over the period 1992–1993 to 2009–2010 by comparing actual revenue with revenue under a range of hypothetical Brown taxes.

Petroleum Resource Rent Tax: an update on recent developments

Although the Petroleum Resource Rent Tax (PRRT) has been operating for longer than 20 years, the past few years have seen a significant amount of activity on this front: The announcement by the Australian government, on 2 July 2010, to expand the existing PRRTto include onshore oil and gas projects, including coal seam gas projects and the North West Shelf Project. The release of three ATO draft taxation rulings in 2010 about the pre-conditions for the deductibility of project expenditure, excluded expenditure (including indirect administration expenses) and the treatment of expenditure paid under ’sub-contractor’ arrangements. The courts’ decisions about the treatment of contract payments and the application of the PRRT taxing point. This extended abstract explores these developments as they apply to existing and new PRRT taxpayers, and identify the key issues that oil and gas companies will need to be aware of as they continue or commence compliance with the PRRT. This extended abstract also explores the impacts of these developments on transaction structuring, due diligence, financial modelling and fiscal certainty in the broader context of asset portfolios.

Contemporary fiscal issues impacting M&A in the oil and gas sector

Ongoing growth in deal activity in the oil and gas industry is one of the critical forces underpinning the sustained robustness of the Australian economy. Australian oil and gas assets continue to attract significant international interest and are actively pursued by global and domestic investors alike. On the supply side, exploration players are seeking the necessary funding and technical support to commercialise prospective oil and gas discoveries, while on the demand side, major established oil and gas companies are seeking to acquire viable targets as a means of rapidly replenishing their reserves. Consequently, merger and acquisition (M&A) deals and asset trades have become a regular feature of the corporate oil and gas scene in Australia. In time to come, a wave of industry consolidation is likely to emerge. This paper discusses key fiscal aspects of M&A transactions, as affected by recent developments in the Australian taxation landscape, and their impact on the overall economics of, and extracting value from, an investment in the oil and gas sector, including: the taxation of farm-in/farm-out arrangements, asset swaps and carry arrangements; structuring the deal consideration for fiscal efficiency; takeover and acquisition vehicle structures; the M&A issues associated with the extension of the Petroleum Resource Rent Tax (PRRT) to the onshore oil and gas industry; consideration associated with capital management, capital structure and financing trends for the industry; exit and repatriation routes—do all roads lead to tax?; managing transaction costs; and, managing tax risks in M&A deals.

Draft Minerals Resource Rent Tax Bill and Explanatory Material Released – Is the MRRT Really a Penalty for Being Australian?

This article follows the progress of the Australian government’s proposal to introduce a minerals resource rent tax from 1 July 2012. Additionally, the petroleum resource rent tax will also be extended from that date to cover all Australian oil and gas projects, whether offshore or onshore. The article focuses on a number of design features of the draft Minerals Resource Rent Tax Bill 2011 and also comments on a number of significant legal issues arising under the Bill.

Tax issues impacting acquisitions in the Australian oil and gas industry

Understanding the tax implications and structuring options of a transaction is critical when assessing and comparing new opportunities. When undertaking any transaction involving Australian oil and gas assets, the applicable taxation regime should be carefully explored and understood. From an Australian perspective, taxes such as corporate income tax, petroleum resource rent tax, capital gains tax, and goods and services tax have significant potential to influence the investment decision. This presentation will focus on the tax implications applicable to the acquisition and disposal of Australian oil and gas assets, providing valuable insights for both Australian companies and inbound investors.

Special Taxation of the Mining Industry*

The efficiency and equity arguments for changing the structure of, and the aggregate level of, special taxation of the mining industry are reviewed. An economic rent base tax would cause smaller taxation distortions than the current quantity base royalties. A higher level of taxation of immobile factors, including mining resources, as part of a tax‐mix change to fund lower taxation of internationally mobile capital would lead to higher Australian economic growth and after‐tax returns to labour. The Brown tax, the Allowance for Corporate Capital, and versions of a resource rent tax, including the petroleum resource rent tax and minerals resource rent tax variants, are described and evaluated as measures of economic rent in the mining industry. In principle, the Brown tax has greater transparency and desired efficiency properties.