New tax would damage gas investment and increase energy costs

A royalty tax for the oil and gas industry would deter new investment and damage the viability of existing projects, according to a new report from the Australian Petroleum Production and Exploration Association (APPEA).

In November last year, Treasurer Scott Morrison announced a review of the operation of the Petroleum Resource Rent Tax (PRRT), crude oil excise and associated Commonwealth royalties.

One potential change that has been widely suggested by activists, is the introduction of a 10 per cent royalty to apply to fields liable only to PRRT and Corporate Tax.

The APPEA report, prepared by Wood Mackenzie, has investigated the impact a royalty tax would have on the industry.

“Their arguments are simplistic, ignoring the costs of retrospective changes to long-established tax rules,” APPEA chief executive Dr Malcolm Roberts said.

“It would be penny-wise, pound-foolish to chase the short-term gain of more revenue at the cost of killing investment.

“The Wood Mackenzie analysis shows that the latest liquefied natural gas (LNG) projects are already well-below normal rates of return needed to finance such projects; more taxes will further undermine these projects and therefore deter investment.”

“Any change to the terms will make future offshore LNG developments much less attractive at a time when even under existing terms their economics are likely to look marginal,” the report states.

“Not only would the economics of these incremental projects be adversely affected by changes to the fiscal terms, but Australia would be seen as being much more fiscally unstable, with a willingness to let companies invest and then to change the terms after companies have made these massive investments.”

With Australia already competing with 17 other LNG-producing countries, Dr Roberts said imposing a tax would deter international investors.

“Increasing taxes on energy production must flow through to higher production costs and therefore, higher energy prices – that will affect customers across Australia,” he said.

In addition to the Wood Mackenzie report, APPEA has separately analysed a report commissioned by the International Transport Workers’ Federation (ITWF) from the McKell Institute to justify the case for a new royalty.

“The McKell Institute report relies on anecdotal comments and dubious material provided by its client, the ITWF,” Dr Roberts said.

“The report presents misleading information, misrepresents the nature of deductions under the Petroleum Resource Rent Tax (PRRT) and ignores the wide range of taxes paid by the gas industry.

“Most of all, it ducks the fundamental point that the PRRT was designed to maximise investment and, over the life of projects, revenue to government.”