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Gas tax leaks billions as energy prices soar

John Kehoe
John KehoeEconomics editor

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Changes to the gas profits tax initiated by the former Morrison government give the Labor government an option to extract revenue from energy giants benefitting from soaring prices, should it change its mind about increasing resource taxes.

It is understood Treasury in the incoming government briefs noted that the recommendations of a review of the so-called gas transfer pricing arrangements for the petroleum resource rent tax (PRRT) were left unimplemented by the former government.

Greens leader Adam Bandt has called for a super profits tax. Rohan Thomson

Treasury held consultations in 2019 and 2020 with the energy industry including BHP, Chevron, Shell and Woodside Energy, before the pandemic interrupted the project.

Economists said the Albanese government should consider strengthening the PRRT to collect more revenue from gas exporters, as the federal and state governments contemplate assistance to help energy-intensive manufacturers survive the electricity price spike.

Greens leader Adam Bandt on Monday demanded gas producers pay a “windfall tax on their obscene profits and that money could help households and businesses weather the current crisis.”

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Federal Treasurer Jim Chalmers in an interview with The Australian Financial Review published on the weekend said Labor’s October budget plans did not include increasing the $2.4 billion PRRT, which applies to offshore oil and gas projects in Australian waters.

Jim Chalmers has said there are no changes planned to the PRRT in the October budget. AFR

“That’s not something that we’re working up for the budget,” Dr Chalmers said.

Dr Chalmers said the government had other regulatory tools to manage the energy crisis.

The Treasurer made the comments after speaking last week to UK Chancellor of the Exchequer Rishi Sunak, who has temporarily increased, from 40 per cent to 65 per cent, a windfall profits tax on energy companies to raise an extra £5 billion ($8.8 billion) to help fund financial assistance for households and businesses to cope with high energy prices.

The UK also introduced generous tax incentives for energy companies to extract more fossil fuels to increase energy supply, a move local energy producer Santos has supported.

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A source from outside the current Labor government said the mooted PRRT changes could raise “billions of dollars” over the next decade and beyond.

The Treasury consultation on gas transfer pricing rules for integrated PRRT projects began in April 2019, following recommendations by a wholesale review of the PRRT by former Treasury official Mike Callaghan in 2017.

The PRRT is forecast by Treasury to deliver $2.4 billion annually over the next four years, up from $786 million in 2020-21 when oil and gas prices plunged during the pandemic.

Modelling undertaken for the Callaghan review found that if oil prices remain elevated at $US100 a barrell and stay there, the PRRT could deliver $45 billion over 10 years and $230 billion to 2050.

Credit Suisse head of energy and resources research Saul Kavonic said the more than $US200 billion ($287 billion) of investment in LNG projects had failed to deliver the anticipated economic returns to shareholders and governments.

“Any government relying on these for budget purposes, that would be pretty optimistic,” he said.

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“We would have to see the current high price environment sustained for more than a few years to get to the point where these projects are making super profits before most of them start to pay meaningful PRRT.”

“Realistically, if oil prices revert to the $US60 to $US70 range, most of these projects will never pay PRRT.”

On top of the 30 per cent corporate rate, the 40 per cent PRRT is levied on offshore oil and gas projects once they become cash flow positive – which usually takes years or decades because capital expenditure is fully deductible upfront.

National resource

Economist Chris Richardson said the PRRT was originally designed for taxing oil, but was “very generous” in the deductions for gas project capital expenditure.

“Gas projects cost more and take longer, so most of the gas giants have big write-offs,” he said.

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“To be fair to the big gas guys, they spent the big bucks under a given tax system, so it was a bit rough to change the rules after the event.

“Equally though, Australia is not getting much at all from a pretty key national resource.”

Mr Richardson said the government should consider the relatively light taxation when considering pulling the gas trigger, adding: “Given the tax generosity, the government should be more willing to use the trigger.“

Mark Hatfield, managing director in Australia for Chevron, which operates the huge Gorgon and Wheatstone LNG ventures in Australia, said the US major had some years where it paid little tax but would in future become a “ginormous” taxpayer as it recovered its investment costs.

“Just this year we’re going to be paying a pretty large tax bill probably about $600 million. It’s just where you are in the investment cycle,” he said at a Credit Suisse event in Sydney this month.

“What I would say is Chevron’s contribution is well beyond directly paying taxes,” he added, describing the well-paying employee and contractor jobs its investments support and the indirect economic benefits as “huge”.

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Australian Petroleum Production and Exploration Association acting chief executive Damian Dwyer said: “APPEA is yet to see evidence that would support any case for significant change to the gas transfer pricing regime.

“The present provisions have underpinned Australia becoming a world leader in natural gas production whilst ensuring that the government and community does receive an appropriate return for the use of its non-renewable resources.”

LNG windfall tax

Outlook Economics director Peter Downes said: “I’m not sure why they haven’t gone for a windfall tax on LNG and coal.

“The UK design seems clever, use it or lose it, there has to be something in it for business, and even [Santos’s] Kevin Gallagher seems to support the idea.”

As energy prices soar, the coal sector is gearing up for a fight with the Queensland government when it lifts a 10-year royalty freeze in its budget this Tuesday and imposes what the industry is labelling a super profits tax.

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Former treasurer Josh Frydenberg did legislate some prospective changes to the PRRT. To raise an extra $6 billion over the long term, the Morrison government reduced PRRT tax breaks for the carry forward of exploration expenses, by lowering the “uplift rate” from 15 percentage points plus the long-term bond rate (LTBR), to 5 percentage points plus the LTBR.

The change wasn’t retrospective because Mr Callaghan warned it could increase “sovereign risk” perceptions about Australia among investors.

The former government also removed onshore petroleum projects from the scope of the PRRT, because they were unlikely to ever pay tax after being shielded by the Gillard government when it introduced the related Mineral Resource Rent Tax, a weaker version of the much tougher Resource Super Profits Tax abandoned by the Rudd-Gillard government.

Dr Chalmers was a senior adviser to then-treasurer Wayne Swan during the mining tax fight.

Labor appears cautious about introducing or increasing taxes, after being punished over the mining tax and its 2019 proposals to curtail negative gearing, capital gains tax concessions, franking credit refunds and trusts.

In relation to the unfinished Treasury review in 2019, the Callaghan report earlier identified that gas transfer pricing rules for PRRT likely undervalued gas that is used in vertically integrated LNG or electricity generation projects compared to what an arm’s-length market price for gas sales would be.

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The undervaluation reduces the PRRT paid by integrated projects and Mr Callaghan called for it to be overhauled in line with international best practice set by the Organisation for Economic Co-operation and Development.

In response to the Callaghan report, the Morrison government instructed Treasury in 2019 to lead a review of the gas transfer pricing arrangements of the PRRT with the stated goal of developing “options to reflect an appropriate distribution of rents, including when resource prices are high”.

The former government didn’t take up a recommendation to audit energy companies to check that expenditure items with the highest uplifts were deducted first to reduce the impact of compounding over time.

Some of the proposed PRRT changes would not deliver much immediate extra revenue and would take beyond the budget four-year estimates or decades to deliver materially more tax.

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Woodside Energy executive vice president, marketing and trading Mark Abbotsford said discussions about a potential windfall tax needed to take into account PRRT already serves that purpose.

“Australia has a PRRT regime already in place, which is intended to address the situation when you have an extended period of time when profits are above a certain rate of return,” he said this month.

“So we need to recognise that is actually the case and if an oil and company is paying PRRT then they are paying 58c in the dollar in tax, that’s already in place.”

“And we expect that Scarborough ….will pay PRRT.”

with Angela Macdonald-Smith

John Kehoe is Economics editor at Parliament House, Canberra. He writes on economics, politics and business. John was Washington correspondent covering Donald Trump’s election. He joined the Financial Review in 2008 from Treasury. Connect with John on Twitter. Email John at jkehoe@afr.com

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