On Friday 2 November, Treasurer Josh Frydenberg released the Australian Government’s final response to the report of the Petroleum Resource Rent Tax Review (PRRT) provided by Michael Callaghan.

Introduced in the mid-1980s, the PRRT is a profits-based resource tax generated from the sale of marketable petroleum commodities in Australia.

In an announcement last week, Mr Frydenberg said that the nature of petroleum production has changed since the tax was first introduced, shifting from crude oil and condensate to a more significant role for liquefied natural gas (LNG).

“In fact, over the past 30 years, oil and condensate production has nearly halved, and gas production has increased over sevenfold,” Mr Frydenberg added.

The Government initiated the Callaghan Review in November 2016 to provide external advice as to whether the PRRT is operating as it was originally intended in addition to addressing the reasons for the rapid decline of Australia’s PRRT revenues.

The Callaghan Review found that while the PRRT remained the preferred way to achieve a fair return to the community without discouraging investment: “changes should be made to PRRT arrangements to make them more compatible with the developments that have taken place in the Australian oil and gas industry”.

The changes, to be introduced from 1 July 2019, include:

• Lower uplift rates: These changes will limit the scope for excessive compounding of deductions. For example, the uplift rate on exploration expenditure will be reduced from Long-Term Bond Rate (LTBR)+15 percentage points to LTBR+5. (Existing investments will be respected).
• Onshore projects removed from the PRRT regime: Since onshore projects were brought into the PRRT in 2012, no revenue has been collected and that was expected to remain unchanged into the future. In practice, it has been used to transfer exploration deductions to profitable offshore projects reducing PRRT payable. This change will simplify the system and strengthen its integrity.
• Review of Gas Transfer Pricing Regulations: Treasury will commence a review into the regulations that determine the price of gas in integrated LNG projects for PRRT purposes. Treasury will consult closely with the industry and community.

“These changes will ensure production of our petroleum resources are taxed appropriately while continuing to support the development of our world-leading LNG industry,” concluded Mr Frydenberg.

Yet, the Australian Petroleum Production and Exploration Association’s (APPEA) Chief Executive, Dr Malcolm Roberts, warned that changes to the PRRT must be ‘assessed carefully’ by Australia’s oil and gas industry.

“Investors are always concerned when long-standing tax arrangements change. Since 1987, the PRRT has attracted investment to Australia while delivering $35 billion in revenue for the community,” Dr Roberts said.

“The independent Callaghan Review confirmed the PRRT is an effective profits tax which delivers, over the life of projects, a higher return than royalties. Once a project has recovered its costs and achieves a modest profit, the combination of company tax and the PRRT applies an effective tax rate of 58 cents in the dollar,” he commented.

“Investors will now need to assess what the proposed changes will mean for future investment in Australia.”

Dr Roberts said, in particular, changes to the treatment of exploration costs are troubling, given exploration has fallen to historic low levels.

“While Australia has attracted significant investment in LNG projects over the last decade and global demand for LNG continues to rise, future investment in Australia is far from guaranteed,” Dr Roberts said, “the global gas market is highly competitive, and we are not a low-cost producer.”