The Australian government has announced that it is considering reviewing the Petroleum Resource Rent Tax (PRRT), the fiscal system that underpins their upstream oil and gas industry. Details are slim at this point, but officials have indicated that an independent expert is reviewing the system under the auspices of ensuring that it is working the way it was intended. There have been recent concerns about the level of tax deductions claimed by owners of the offshore Northwest Shelf project. The government’s concerns may be justified; however, in all likelihood, there is at least an equal amount of concern around the significant drop in revenues that the government is expecting to collect in this world of relatively low commodity prices. Even if prices eventually rise, there appears to be an appetite for change spurred by the budgetary challenges that the country is currently facing.
A change to the system would impact projects in a multitude of different ways based on their respective histories. For its economic model and analysis, Stratas Advisors developed cost and production profiles for a hypothetical project that was of a size and scope that resembles quite closely the feedstock for Gorgon LNG. Analysis of this type of incremental new-source gas project would shed light on the variability in PRRT obligations and why the government might be calling for a review.
The owners of Gorgon, or any other project that has revenue tied to oil, were likely somewhat relieved when oil prices lived in the $90-plus per barrel (bbl) realm for several years. The fact that prices dropped after the financial crisis in 2008, but then quickly rebounded, might have played a fundamental role in the decision to call final investment decision for Gorgon LNG in 2009. At that time, many believed high prices were somewhat of a new normal, and a reasonable view of the economic profile might have assumed that prices would stay relatively flat in real terms.
The blue line in Figure 1 represents the backend loading structure of the PRRT, which shows that tax kicks in once the project has recovered a return of and on the capital investment as defined in the statutes. The lower the price of oil, the further back in time the PRRT starts. At $90/bbl, the firm’s calculations estimate that the Australian government would have been planning to collect more than US$20 billion in PRRT, in real terms, over the life of just this project alone. Unfortunately, with the drop in oil prices right before the project started up, a project of this sort would never achieve the threshold returns, and the dark blue profit-based tax would never materialize. This fact could clearly support another possible (huge) reason that the PRRT is now being questioned.
Without collecting taxes from PRRT, the effective rate of Government Take (“GT”—all government forms of taxation and profit sharing) in Australia would be related only to a relatively low 30% corporate income tax. Even with PRRT payments, a profitable project is likely to only pay a total GT rate, on average, of around 45% to 50%, which is fairly low compared to other developed nations. Proponents would point to this low rate and argue that Australia’s huge resource base should be exploited at a much higher cost to developers. Critics might argue that the low GT rate is what keeps people investing in an area that is often plagued with difficult and costly development hurdles. Keeping the rate low will continue to entice companies to move discretionary capital spending to Australia.
Regardless of one’s opinion, Australia’s position in the world of gas supply will still be closely watched for years to come.
Recommended Reading
Analysts: Diamondback-Endeavor Deal Creates New Permian Super Independent
2024-02-12 - The tie-up between Diamondback Energy and Endeavor Energy—two of the Permian’s top oil producers—is expected to create a new “super-independent” E&P with a market value north of $50 billion.
Sold in 66 Days: Inside the Diamondback-Endeavor Deal
2024-03-26 - Diamondback Chairman and CEO Travis Stice first offered “at least $25 billion” for Endeavor Energy Resources on Dec. 8. The deal closed just weeks later for $26 billion.
Daugherty: Diamondback Scales Up Amid Consolidation Super Cycle
2024-03-11 - It’s time for the strongest among the services sector to follow Diamondback's lead: find fortifying prey and hunt.
EIA: E&P Dealmaking Activity Soars to $234 Billion in ‘23
2024-03-19 - Oil and gas E&Ps spent a collective $234 billion on corporate M&A and asset acquisitions in 2023, the most in more than a decade, the U.S. Energy Information Administration reported.
ConocoPhillips CEO Ryan Lance: Upstream M&A Wave ‘Not Done’ Yet
2024-03-19 - Dealmaking in the upstream oil and gas industry totaled $234 billion in 2023. The trend shows no signs of slowing, ConocoPhillips CEO Ryan Lance said at the CERAWeek by S&P Global conference.