Independent claims proposed amendments to the offshore gas tax could jeopardise upstream investment, writes Tom Major
Making changes to the Australian federal government's petroleum resource rent tax (PRRT) could further pressure investment in the sector, particularly given volatile commodity prices, Australian independent Woodside Energy says.
The PRRT is a profit-based tax on offshore upstream gas projects that allows for deductions for the cost of exploration and development. Volatile commodity prices mean fiscal stability and predictability is critical to investment in the sector, Woodside chief executive Meg O'Neill said to the Australian National Press Club on 19 April, ahead of the Australian budget for 2023-24 being announced on 9 May, including any changes to the PRRT.
"There's temptation to change a tax regime, I certainly understand that," O'Neill said. "The risk that we run, though, is to try to do something in the near-term that's […] going to cause long-term harm. It's going to cause investment to be under additional pressure. Our message to the government is hold the course, stay with the framework we have. It's delivering very well for Australians."
Revenue from the PRRT is predicted to peak at 2.6bn Australian dollars ($1.7bn) in 2023, before declining to about A$2bn from 2024. Financial services group Macquarie says future investment in offshore LNG is limited, leading the government to rely on increasing taxation for existing projects.
Any changes to the PRRT are likely to build on a 2018 Australian Senate inquiry that recommended reforms to tax deduction rules for gas companies. The findings were consistent with the 2017 Callaghan report by Australia's federal treasury department, which found that gas transfer pricing arrangements for calculating the PRRT required updating for integrated LNG projects, the price point at which the resource is taxed being a critical element of determining the PRRT to be paid. After a consultation with the industry on the changes, the previous government paused negotiations during the pandemic in 2020.
Inflationary pressures
Australia's Labor government has been under pressure from tax commentators and lobbyists, which say not enough tax has been raised from the record-high profits reported by gas giants for the past financial year, leading it to restart a review of PRRT arrangements that the previous coalition government had started.
Australia's LNG export revenue is forecast to jump to A$91bn in 2022-23, a figure that has increased pressure on the government to raise taxes as Australian consumers face higher energy prices. The resource-rich nation is grappling with an energy shortfall, as prices rise with the closure of several coal-fired power stations in recent years and a booming appetite for LNG exports.
The government last December imposed a 12-month price cap of A$12/GJ ($7.90/GJ) on domestic gas prices in east Australia, a measure that it now proposes maintaining until 1 July 2025, as part of Canberra's push to contain inflation. The latest consumer price index (CPI) data for January-March show a 12-month increase in domestic gas prices of 26.2pc, the largest ever recorded by Australia's Bureau of Statistics. Annual CPI inflation fell to 7pc for January-March, from a 30-year peak of 7.8pc in October-December.
The price cap may force producers to ensure there are sufficient domestic supplies before exporting additional volumes overseas. Some export figures have fallen in recent months since the initial December price cap. The Australian Competition and Consumer Commission (ACCC) this month slashed its forecast gas shortfall to 3PJ from 30PJ for the remainder of 2023.The Australian Petroleum Production and Exploration Association says the extended cap flies in the face of ACCC recommendations to encourage new supplies.
