PRRT review catches oil and gas industry off-guard

The oil and gas industry was caught on the hop by news of yet another review of the Petroleum Resource Rent Tax.

The Australian Petroleum Production & Exploration Association says the review could be timely.

The oil and gas industry was caught on the hop when Scott Morrison sprung the news of yet another review of the Petroleum Resource Rent Tax — the 30-year-old super-profits tax on the sector.

But the surprise factor in the review — which comes as the industry battles the crash in oil and gas prices — was not enough for the industry to label, publicly at least, the move as a make-up tax grab after the government’s compromise on the backpacker tax.

A review of the PRRT was timely and would show it was working as intended, said the industry’s peak lobby group, the Australian Petroleum Production & Exploration Association.

But its member companies are nevertheless annoyed about the timing of the review given pressure from low oil and gas prices. They are also frustrated the government and the ATO seem to be giving credence to claims from green and left groups that they are dodging PRRT.

BHP Billiton also highlighted that if the intent of the review was for higher taxation, it would be at odds with moves by the US and Britain to reduce corporate tax rates over the short term.

“Australia cannot afford to stand still or it will become less and less attractive as an investment option,’’ BHP said.

BHP contributed $968 million in PRRT for 2014, the most recent year of publicly available figures. Over the past decade it estimates it has paid $65 billion in taxes and royalties.

“A core principle for BHP on taxation is transparency and we look forward to contributing to the review,” it said. “Australia’s tax system needs to be as efficient and competitive as it can be to ensure investment opportunities and well-paid, highly skilled jobs are created for Australians.’’

Shell Australia chairman Andrew Smith said the absence of PRRT revenue from the investment boom in export LNG in recent years — the subject of attacks from green and Left groups — was “not evidence of a loophole design fault — it is reflective of the nature of LNG investments’’.

“The design of the PRRT ­allows government to capture ­revenue when projects are profitable but also means revenue will fluctuate as there is no profit during construction stage, and profits are considerably reduced when commodity prices are low,’’ Mr Smith said.

“Many of the LNG projects in Australia, aside from the North West Shelf, are either still under construction or have only recently commenced production, with ­future revenue to be impacted by global commodity prices.’’

Woodside, the operator of the North West Shelf, said the review came as the industry was “under significant financial pressure from low commodity prices, therefore stability in tax arrangements is ­essential for our shareholders to support investment in uncertain business environments’’.

“It is essential for long-term confidence in the industry that reviews of taxation arrangements should be consultative,” Woodside urged, again reflecting the surprise factor in the Treasurer’s announcement.

Still, unlike the resources industry’s reaction to Labor’s mining tax, there was no ferocious backlash from the oil and gas industry to news of the review.

APPEA chief executive Malcolm Roberts said the review could be “timely” as the industry confronts the twin challenges of a dramatic collapse in profits and a sustained fall in the level of exploration undertaken in Australia.

Mr Morrison said revenue from the PRRT had halved in the past couple of years to $800m.

In the same period, oil prices have collapsed from $US100 a barrel and gas export prices have plunged from $US15 a gigajoule to less than $US7.

The review is led by former Treasury official Michael Callaghan, who will report by April next year. Mr Morrison’s announcement is said to have surprised some in the cabinet, although he said Treasury had been working on the terms of reference since September.

“This is an issue people understand exists, and the decline in those revenues can be put down to any number of matters, particularly the decline in production as existing projects come to the end of their lives, the subdued outlook for oil and gas prices, and large amounts of deductible expenditures from the recent mining ­investment boom,” Mr Morrison said. “There have been no changes to the PRRT since 2012, and we think it is timely that these matters be addressed, and be addressed in time for these matters to be considered in the preparation of next year’s budget.”

Since its inception under the Hawke government in 1984 and its introduction in 1987, the PRRT has been tinkered with many times, with its scope increased from new greenfield oilfields to capture all oil and gas production, be it onshore or offshore.

The profits-based PRRT is struck at a rate of 40 per cent, but only after a company has recouped all its investment, plus the long-term bond rate, plus 5 per cent, plus an additional uplift for historical exploration expenditure. It is the latter points that critics say are “shielding’’ companies from having to pay PRRT.

The 40 per cent cut of profit as PRRT is deductible against corporate income tax, meaning companies pay 30 per cent of the 60 per cent left after the PRRT — making the corporate tax rate an effective 18 per cent, but the all up tax rate on profit 58 per cent.

Dr Roberts said a fact-based review of the PRRT would show the super-profits tax was working as intended. “Much of the debate about PRRT has been characterised by grossly misleading ­infor­mation, distortion and a willing­ness to ­ignore the facts,’’ he said.

“For almost 30 years, the commonwealth has used the PRRT as a super-profits tax. The tax encourages investment by only taxing projects when upfront costs have been recovered and profits exceed a modest benchmark rate.

“However, when these conditions are met, the PRRT, in conjunction with the company tax regime, applies an effective tax rate of 58c in every dollar of profit.

“When projects are not profitable — usually because prices are depressed or upfront costs have not been recovered — the commonwealth still applies a 30 per cent company tax to revenue.’’

APPEA estimates that despite the industry recording its first-ever net loss in 2014-15, it paid more than $5bn of taxes during the same period.