Reforms to the Petroleum Resource Rent Tax (PRRT) announced on Sunday close out unduly generous concessions granted to industry in the design of the tax while offering stability in the taxing regime for the Australian offshore gas industry.
The Hawke government introduced the PRRT in 1987 as a means of collecting a fair share of petroleum profits on behalf of the Australian people as the owners of the resource.
A review of the PRRT initiated by the Turnbull government and conducted by former Treasury official, Michael Callaghan, led to changes in the rate at which exploration and development could be carried forward for offsetting against project revenues.
Before 2019, exploration expenditures could be carried forward at the long-term Commonwealth bond rate plus 15 per cent, while development expenditures could be carried forward at the bond rate plus 5 per cent. The Turnbull government reduced these ‘uplift factors’, substantially increasing prospective government revenues.
These generous uplift factors – especially for exploration – were granted in negotiations in 1984 and 1985, when the petroleum industry was exploring for oil and Australia’s geology outside of Bass Strait was regarded as not very prospective. The PRRT was not designed for gas exploration and development.
After fighting successfully for Bass Strait to be exempt from the PRRT, paying instead a crude oil levy and a royalty, BHP approached the Hawke government in 1989 to switch to the PRRT.
The PRRT has not collected the amount of revenue envisioned by its architects. It would have done so if less generous uplift factors had been applied from the start, as those architects had recommended at the time.
A further concession was granted by the Howard government in 2005, agreeing to a new formula for valuing natural gas – the Residual Pricing Mechanism – which allowed a larger share of the costs of liquefying natural gas to be deducted from gas extraction revenues.
Treasury began the review of the Residual Pricing Mechanism in 2019 but put it on hold in early-2020 when the relevant officials were diverted to dealing with the economic effects of the COVID-19 pandemic. The Albanese government restarted the review in late-2022. It has now completed its work.
The Albanese government has not changed the Residual Pricing Mechanism. But in lieu of making such a change, the government has accepted an alternative Treasury recommendation: to limit deductible expenditure to 90 per cent of project revenues in the relevant year and allowing unused deductions to be carried forward only at the long-term bond rate.
The government has accepted a further six recommendations of the Treasury review and will proceed with eight recommendations of the Callaghan review that were accepted by the previous government but never enacted. They will greatly improve the integrity of the PRRT.
If unreformed, the PRRT would have offered tax revenue on the never never.
The PRRT and company tax combined will collect 58 per cent of gas company profits.
Ideally, the Howard government shouldn’t have introduced the Residual Pricing Mechanism, but LNG project proponents insisted it was essential to bring new offshore Western Australian LNG into production.
The new rules announced by the Albanese government will bring forward PRRT revenues. In the central oil pricing scenario used by Treasury, the cap on deductions is projected to increase PRRT revenues by $7 billion – substantially more over the next 10 years than a modified Residual Pricing Mechanism.
These changes do not affect gas extracted onshore in eastern Australia, where state governments have taxing jurisdiction. Nor do they affect projects in Bass Strait and Western Australia that produce gas only for the domestic market.
Following these changes, campaigns will continue both to increase taxes on the gas industry while closing it down.
But it’s time to draw a bipartisan line under tax changes and for the industry to recognise the hazards of reopening the newly settled arrangements.
Craig Emerson is managing director of Emerson Economics. He completed a PhD on resource rent taxation and was an architect of the Hawke government’s PRRT.