The Petroleum Resource Rent Tax 1987: The Process of Reform and Implications for Taxation of Petroleum Resources Today

During the 2017 Australasian Tax Teachers Association (ATTA) Conference in New Zealand, Emily Millane interviewed Dr Diane Kraal, Senior Lecturer in taxation law at the Monash Business School, Monash University. Diane was given access to the private papers of Dr Craig Emerson, a ministerial economic advisor in the 1980s petroleum tax reform period, and later a Federal Government Minister with the Rudd-Gillard Government. These papers and other primary archival documents provided compelling insights into the reform process that led to the petroleum resource rent tax (PRRT).

After the PRRT historical inquiry was completed, Diane then conducted modelling for a contemporary project, Chevron’s Gorgon project, which shows that the community will have to wait decades for a PRRT return from the natural gas feedstock used for this integrated gas to liquefied natural gas (LNG) project. She argues that the design and practical application of the PRRT in relation to integrated natural gas projects needs to be reviewed.

Tell us about what led you to look at the PRRT and the particular sources of evidence you have used. 

The project was precipitated by work I did in Papua New Guinea (PNG). PNG worked through tax reform between 2013-2015, which included the petroleum (oil and gas), and mining industry taxation. I conducted research on those industries with Dr Craig Emerson. In PNG there is a resource rent tax called the ‘additional profits tax,’ and we recommended that it be re-introduced for mining sector. Doing this research got me interested in Australia’s oil and gas industry.

When the work in PNG work finished and our recommendations were taken up in the PNG Budget 2017, I then looked at the history of Australia’s Petroleum Resource Rent Tax (PRRT). I interviewed Craig about his time as an economic advisor in the Hawke-Keating Government, which he accepted upon completing his PhD at ANU.

What are the main insights you have drawn from the Hawke Government’s political and consultative processes that resulted in the Petroleum Resource Rent Tax Assessment Act 1987 (Cth)? What or who were the main drivers for introducing the new legislation?

I was interested in how this concept of rent tax for petroleum came about. Originally, I thought it came from the UK concept because they have what is called a ‘petroleum revenue tax’, which is an additional tax on profits. As I dug into the literature, I became familiar with theoretical work of (Ross) Garnaut. I also spoke to Wayne Mayo, someone who has done tax modelling for Treasury both in the 1980s and now. He was a person with some practical insights.

The challenge was to prepare a narrative about how a policy transitioned to actual legislation. The transition was something so critical: a total tax change from what was previously royalties and excise, to something completely different and a little bit complex. I was interested in this process.

It was also notable how the reform process came down to a few individuals. My delving into the National Archives showed that Peter Walsh (former Resources and Energy Minister) was driving the reform. While Paul Keating was there (as Treasurer), and a resource rent tax was a policy on the ALP Party Platform, Peter Walsh pushed consistently for what became known as the PRRT. (As Prime Minister) Bob Hawke obviously had a role too, in gaining support for the PRRT within Cabinet and its signing-off.

From my research I found that Treasury wasn’t keen on the PRRT at the time. The system they were trying to replace was royalties and excise, which is easy to calculate. All you mainly need are forecast production volumes from which you can make revenue calculations. By contrast, the PRRT is triggered by profits from particular projects going over a threshold. So it is not a straightforward revenue calculation.

The only key opposition to the PRRT was industry, which was two main petroleum companies – BHP and Exxon. Their campaign was to be a blueprint for the mining industry opposition to the RSPT/MRRT in 2010. I am expecting a similar campaign to be launched on the current PRRT review[1].

As you note, Australia’s oil production is diminishing, and PRRT was not designed for gas projects. What reform proposals would you suggest in terms of PRRT in relation to integrated natural gas projects?

Based on my interim research findings, these recommendations have been submitted to the Review of the PRRT:

Recommendation 1: To determine the effect of differing uplift rates on deductible expenditure, more sensitivity PRRT modelling is required for offshore gas projects in Commonwealth waters.

Recommendation 2: Transferability of exploration expenditure was negotiated for oil back in 1990, and is not working as intended today for gas. Gas projects only provide utility rates of return, not ‘super profits’ as found in oil. Transferability of exploration expenses should be modelled for a fairer outcome from community resources.

Recommendation 3: Reverse order of deductions for the PRRT should be modelled. For example, high uplift deductions should be deducted first.

Recommendation 4: The focus of PRRT modelling should be on natural gas projects in Commonwealth waters that are not subject to a royalty regime. Case study modelling shows flaws in the PRRT regime for gas, which suggests minimal resource tax will be paid on these projects in the near future. This is a serious matter for the federal government revenues.

Recommendation 5: The Gas Transfer Price method is flawed, as shown by case study modelling. There are alternatives, such as the use of the ‘mid-stream breakeven price’ method, or the ‘Net Back’ method alone, either of which would derive a fairer price. Advance Pricing Arrangements should be made transparent to the public, much like the Australian Tax Office ‘sanitised’ private rulings or interpretive decisions.

Recommendation 6: Royalties should be re-introduced for integrated natural gas-to-liquids projects in Commonwealth waters. This change would result in earlier and assured revenue from resources. Royalties are credited against later PRRT collections. The fiscal system would then be equal to onshore coal seam gas projects and the North West Shelf project.

[1] The review will report to the Government by April 2017.