Gas, oil tax changes to rake in $6bn

The federal government expects to raise $6 billion over the next decade from changes to the taxation of Australia's big oil and gas producers.

Changes to the law will stop companies taking losses on unprofitable gas exploration and using them to reduce taxes on highly profitable operations.

But the gas and oil industry lobby warns lifting taxes could affect investment decisions.

Treasurer Josh Frydenberg announced the changes in response to the Callaghan Review of the Petroleum Resource Rent Tax, which has seen declining revenues even as Australia's gas exports have significantly increased.

"These changes will ensure production of our petroleum resources are taxed appropriately while continuing to support the development of our world leading LNG industry," Mr Frydenberg said in a statement on Friday.

Australia is set to become the largest exporter of liquefied natural gas in the world, led by producers such as Woodside Petroleum, Chevron and Shell, but the government's tax revenues were declining under the original PRRT.

That's because gas projects take longer to make a profit and have more deductions that can be claimed, so companies could make large losses on paper even as they were exporting lots of gas at high prices.

Australia made $1.12 billion in PRRT revenue in 2017-18; by comparison, Qatar exports a similar amount of natural gas but collects tens of billions of dollars a year in royalties.

"The new uplift rates and removal of onshore projects are expected to raise $6 billion over the next decade, to 2028-29," Mr Frydenberg said.

Under the changes, limits will be placed on excessive compounding of deductions for exploration.

Onshore projects will also be removed from the PRRT, despite only being brought into the scheme in 2012.

No revenue from onshore projects has been collected since 2012 and instead companies have used them to claim deductions against much more profitable offshore operations.

Australia has been going through a gas development boom but much of the gas has been sent offshore while household electricity prices rise.

The Australian Petroleum Production and Exploration Association said attracting investment to the industry had never been more important.

"Investors are always concerned when long-standing tax arrangements change," association chief executive Malcolm Roberts said.

Dr Roberts said, in particular, changes to the treatment of exploration costs are troubling, given exploration has fallen to historic low levels. 

“While Australia has attracted significant investment in liquefied natural gas (LNG) projects over the last decade and global demand for LNG continues to rise, future investment in Australia is far from guaranteed,” Dr Roberts said.

APPEA claims the PRRT delivers more money over the life of a project than a royalties system, in place in countries like Qatar.

“The independent Callaghan Review confirmed the PRRT is an effective profits tax which delivers, over the life of projects, a higher return than royalties. 

"Once a project has recovered its costs and achieves a modest profit, the combination of company tax and the PRRT applies an effective tax rate of 58 cents in the dollar."

The PRRT has delivered $35 billion in revenue since 1987.

Shadow treasurer Chris Bowen said Labor will review the changes closely but the government has to show what work it has done to avoid negative impacts on the sector.

Wood Mackenzie's senior analyst Chris Meredith said changes to the PRRT from this process will apply to new projects after 1 July 2019, and therefore will mainly affect projects approaching a final investment decision (FID).

"The key projects at the pre-FID stage are Scarborough (Woodside operated), Browse (Woodside operated), Barossa (ConocoPhillips operated), Dorado (Quadrant/Santos operated) and Clio Acme (Chevron operated), worth more than US$50 billion of new investment," he said.

"Pre-2019 exploration expenditure that has not yet been deducted will also be caught by these rule changes.

"This means that the rule changes will have limited impact on existing LNG projects (Wheatstone, Gorgon, Pluto, Prelude, Ichthys, APLNG, GLNG and QCLNG) because these are likely to have already deducted their exploration expenses, or have development expenditure that is so high relative to expected revenues, that exploration spending is not relevant to their PRRT calculation."