Tax rates encourage offshore exploration

AUSTRALIA compares favourably with most other oil producers in the level of taxation that applies to oil and gas production, although there are concerns about changes proposed to depreciation rates.

The attractive returns available should continue to encourage exploration and development onshore and particularly offshore in Western Australian waters, now the centre of the Australian oil and gas industry.

Contrary to the belief of most of its citizens, Australia generally has tax rates that are not high by world standards — about average for OECD countries, similar to those for the UK and the US, much lower than most European countries.

There are similar surprises in a study of taxation and royalties imposed on oil companies, which reveals that the rate of return, after tax, on investment in a typical oilfield is among the lowest of 16 oil producing countries.

With a rate of return of 22.6 per cent, after tax, Australia is surpassed only by the UK (29.5 per cent).

Companies operating in the Zone of Economic Agreement (ZOCA) have a slightly higher return, but this is now irrelevant, since the terms applying to it are under intense renegotiation by Australia and the interim administration of East Timor.

The rate of return for investment in some developing countries is as low as 10.3 per cent.

The author of the study, petroleum economist Michael Sarich, of Schlumberger-Murak, based in Perth, says that “when viewed in isolation, the petroleum fiscal regimes in Australia are relatively attractive”.

All the tax systems in place in Australia (they vary according to whether production is onshore or offshore, and imposed by the State or Federal Governments) have low imposts, especially when compared with some systems in South-East Asia – Malaysia and Indonesia, for example.

Writing in the Department of Minerals and Energy publication Petroleum in Western Australia, Mr Sarich warns, however, that uncertainties over Native Title, the need to find markets for big gas reserves, and issues related to depreciation levels are challenges still to be met.

Mr Sarich notes that the system applied to offshore fields by the Federal Government is profit based, which may be more attractive to companies, and could be one reason why offshore exploration is increasing while there is less activity onshore (where royalties are based on sales).

There are a number of expenses that can be deducted before tax applies to profit, under the Federal system, but the net result is that usual company tax, and tax on oil production profits total 60 per cent, and the State royalties and excise absorb 57 per cent.

There are a number of concessions in both systems that make the net figures more attractive that the percentages suggest.

Mr Sarich said that, compared with other major oil and gas producing nations, Australia was relatively unexplored.

“It is difficult to say if this is a direct result of the petroleum taxation system – one of the factors most easily influenced by government and taken into consideration by production and exploration companies looking for opportunities,” he said.

“While attempting to obtain a fair return for the nation’s resources through taxation, the Australian Government must be aware of the impact of factors such as Native Title, environment conditions, historical success and infrastructure.”

He pointed out that Western Australian prospects have shown the greatest potential on the Australian continent, with many companies relocating their head offices to Perth.”

Last year there were 24 oil and gas discoveries across Australia (most in WA), two thirds of them offshore, which should add to our ability to develop and sustain new export markets in Australia.

Last year the value of the State’s oil and gas production doubled, to nearly $10 billion.

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