Petroleum Resource Rent 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.

Canberra observed

Canberra observed

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.

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.

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.

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.

Taxation aspects of climate change management measures

Climate change is undoubtedly one of the greatest economic, social, and environmental challenges now facing the world. The present Australian Government is committed to acting on climate change and Australia’s progress towards its emissions reduction targets is being closely watched internationally. To contribute effectively to global climate change action, Australia must demonstrate its ability to implement robust and sustainable domestic emissions management legislation. The Carbon Pollution Reduction Scheme (CPRS), modelled after the cap-and-trade system, continues to be debated by our policymakers, as the Government moves to re-introduce its preferred CPRS legislative package for the third time. The advent of climate change legislation is inevitable and its impact will be far-reaching. This paper reviews the fiscal aspects of the proposed CPRS legislation in the context of the oil and gas industry, and whether it is conducive to creating incentives for appropriate climate change response by the industry. In particular, this paper will consider: the direct and indirect tax features specifically covered in the proposed CPRS legislation and their implications; the areas of taxation that remain uncanvassed in the proposed CPRS legislation and aspects requiring clarification from the tax administration; the interaction between Petroleum Resource Rent Tax (PRRT) and the CPRS measures; the flow-on impacts to taxation outcomes resulting from proposed accounting and financial reporting responses to the CPRS legislation; the income tax and PRRT treatment of selected abatement measures; and, elements of a good CPRS tax strategy and compliance action plan.

THE COMPETITIVENESS OF THE AUSTRALIAN FISCAL REGIMES FOR OIL, GAS AND LNG COMPARED TO PRODUCTION SHARING CONTRACTS IN SOUTHEAST ASIA

With uncertain energy markets in Asia, each energy exporting country needs to be aware of the competitiveness of its fiscal regime. Oil and gas companies are quick to find fault with fiscal regimes, while governments can be slow to react to industry demands.Companies are using increasingly sophisticated methods of project selection. Therefore, if governments wish to encourage exploration and development while ensuring a fair return to the nation, they must constantly analyse fiscal terms and their impact on cash flows for the most common forms of oil and gas projects in the country.This paper takes an objective look at the competitiveness of Australia's Petroleum Resource Rent Tax and royalty/excise fiscal regimes for oil, gas and LNG projects against fiscal regimes in Indonesia, Malaysia and Papua New Guinea. Worked examples have been calculated for each regime to compare Australia's system relative to the other major producing countries in the region.Australia's onshore and offshore regimes are shown to be very competitive with respect to net present value. In addition, Petroleum Resource Rent Tax is one of the more progressive regimes in the region. However, Production Sharing Contracts in Indonesia and Malaysia are seen to be potentially more flexible when considering the varying nature of oil and gas projects, and they can provide a greater degree of certainty as the negotiated terms remain fixed for the life of contracts.

THE IMPACT OF TAXATION LEGISLATION DEVELOPMENTS ON NON- RESIDENTS INVESTING IN AUSTRALIAN PETROLEUM PROJECTS

Australian legislation has recently undergone further developments which affect non- residents investing in Australian petroleum projects. The comments in this paper reflect our understanding of the law at November 1988.These legislative developments have occurred in foreign investment rules and primary tax areas such as the thin capitalisation and debt creation rules for nonresident investors, Australian capital gains tax including the new involuntary roll- over provisions, the Australian dividend imputation system, and secondary taxes such as state royalties and excises and petroleum resource rent tax.The purpose of this paper is to analyse some of the recent legislative developments from the viewpoint of a non- resident investing in Australian petroleum projects. Changes in most cases are incorporated in complex legislation, and full and proper consideration of the changes is warranted for taxpayers both to comply with the law and maximise shareholders' financial returns.