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.

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