Australia’s largest liquefied natural gas (LNG) producer has repeated its call to the Commonwealth not to tinker with the Petroleum Resource Rent Tax (PRRT).

It has also implied that any concerns regarding domestic energy security should not be used to fuel the taxation reform debate.

Speaking during the recent Australian Petroleum Production and Exploration Association (APPEA) Conference in Western Australia, Woodside Petroleum Ltd chief executive and managing director Peter Coleman said tax structures should be designed to encourage investment and allow reasonable deductions while ensuring government revenues remained predictable and sustainable.

He also highlighted the fact that any unwarranted taxation changes could be detrimental to junior explorers “who were more likely to take the risks that could lead to the discoveries which would be crucial if Australia wanted to grow its gas production”.

During April, the Federal Treasury was presented with a lengthy review of the PRRT by Mike Callaghan, which ominously claimed “community groups consulted were of the view that the (tax) was not providing the Australian people with an equitable return on the development of petroleum resources”.

“In particular, concern was expressed that PRRT revenue is declining at a time when a number of large LNG projects have or will soon come into production that will result in Australia becoming a leading exporter of LNG,” Callaghan explained.

“Concerns were also expressed that some large LNG projects may not pay PRRT for decades to come, or may never pay PRRT at all.”

The energy sector, however, sees things differently, arguing that given the surge in investment in petroleum plays, it was inevitable there would be some time before these projects became cash positive and started paying PRRT – especially as some of them had only recently commenced production or were still being developed.

As a result, Callaghan said, the review’s recommendations came in two parts.

The first suggested an update of the PRRT, with resulting changes only applying to new projects.

Secondly, adjustments to improve the “integrity, efficiency and administration” of the tax which would apply to existing and new PRRT projects were put on the table (see the list of recommendations at the end of this story for more details).

In terms of the first recommendation, areas to be considered included changing the arrangement for the uplift rates for all deductible expenditures such that they became more commensurate with the risk of losing PRRT deductions (while taking into account transferability risk fluctuations over the life of a project); ensuring that classes of expenditure with the highest uplifts were deducted first (while being mindful of how these deductions could compound in large, long-life projects); examining the rules for the transferability of deductions between projects in a company to ensure they produced a consistent set of outcomes, and; examining the gas transfer pricing arrangements to identify possible changes which would achieve greater simplicity and transparency, ease of compliance as well as fair treatment of the economic rent from each stage of an integrated petroleum operation.

Message delivered

Woodside Energy had already made its feelings known about any possible changes to the PRRT before Coleman’s appearance at APPEA, outlining its worries in its submission to Callaghan’s review.

“Material changes to the current fiscal regime run the risk of creating additional barriers to investment, significantly reducing the competitiveness of Australia and jeopardising Woodside’s portfolio of Australian projects,” the company said.

“This regime has supported the development of marginal projects, which under a more onerous fiscal setting would likely not have been developed.

“As a profits-based tax, it is not unusual to have declining PRRT at a time of declining oil and gas prices and prior to these projects recouping their costs. The benefits from such projects must be measured over their full lifecycle and not adversely judged during periods of commodity price downturn.

“Any adjustment with retrospective impacts will undermine those good faith investments previously made for existing projects, reduce the ability to invest in the near term in any expansion plans, and significantly reduce confidence to manage future investments.”

Coleman reiterated some of these points during the APPEA show, which this year was held in Perth.

“Exploration onshore is largely off limits at the moment due to state government bans and that’s particularly problematic for smaller explorers, who may not have the resources for offshore exploration,” he said.

“Offshore exploration has been in decline for years, even when commodity prices were strong. Unless we, as an industry, throw our support behind changes to reinvigorate exploration activities, we face a long term decline in production.

“Exploration is already in dire straits. We should all be concerned if it becomes even harder for small to mid-cap explorers to attract backing. There must be explorers and seismic companies questioning whether there’s a future for them in the Australian industry.”

Troubled times

Coleman also suggested the energy sector make an effort to address some of the public perception-related issues which had “a tendency to divide industry, depending on where you sit and whether or not you are directly affected”.

This included concerns that Australia was facing an energy security crisis.

“Quite rightly, there are many here today who are feeling under significant pressure and a little aggrieved by the way our industry is being portrayed in national debates,” he noted.

“But equally, there are others who may be scratching their heads and wondering what went wrong and how we ended up here.

“Now is not the time for us to revert to tribal behaviours that could leave our industry vulnerable to populist campaigns. Now is the time for us to unite as an industry and define our common purpose, mindful of the need to explain to the community how they benefit from our activities.”

Additionally, Coleman believed the growing uncertainty over energy security had “shone a spotlight on the constraints of east coast gas markets, revealing manufacturers’ anxieties over escalating prices and supply shortages”.

“This highlighted dual challenges – state government exploration and development bans were restricting new supply, while the rapid growth in exports from the east coast hoovered up much of existing production,” he noted.

“The exploration and drilling bans are symptomatic of a trust deficit that has emerged between our industry and the broader community. The imbalance between exports and domestic gas has made this situation worse.

“It is clear we need to consider how we can regain the trust of the public.

“We need to convey to the community that we understand they own the resources. As resource developers, we commit to being responsible stewards of the environment.

“But over and above this, we have a responsibility to make a contribution to energy security, as well as a social contribution and an economic contribution, including through creation of jobs and payment of taxes.”

Adjustments outlined

In his review, Callaghan recommended there be a number of PRRT changes to apply to existing and new projects. 

They include: 

• Stopping off- to onshore transitioning projects with a starting base (deductable expenditures) being combined with future onshore projects without a starting base to form a single PRRT undertaking that could use the starting base amount as a tax shield for the entire project;

• Recognising that any changes to decommissioning requirements coming from the review should take into account that onerous closing down requirements would significantly affect PRRT revenue;

• Amending the PRRT payment arrangements whereby taxpayers would be required to lodge annual returns after they started holding an interest in an exploration permit, retention lease or production licence rather than having to wait until they received assessable receipts from the project;

• Giving the Commissioner of Taxation the power to treat a new project as a continuation of an earlier one (when it would be reasonable to do so);

• Amending the payment rules so taxpayers could choose to adopt a substituted accounting period for their PRRT so it would align with their choice to use a substituted accounting period for income tax;

• Making sure Multiple Entry Consolidated outfits (income tax consolidated groups of Australian entities that are wholly foreign-owned and do not have a common Australian head company) can make a functional currency choice for PRRT purposes which aligns with the functional currency choice made for income tax purposes;

• Allowing the Australian Taxation Office to exempt projects from lodging PRRT returns when they are clearly unlikely to pay this impost in the foreseeable future, and;

• Adjusting the PRRT anti-avoidance rules so they are in line with amendments to income tax laws.