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The gas industry is bracing for the threat of a fifth market intervention since December as Treasurer Jim Chalmers warns Australians may not be getting a reasonable return from exports of their natural resources and weighs raising taxes on surging profits.
Chalmers said on Monday he had received a report from Treasury on the settings of the $2 billion-a-year Petroleum Resources Rent Tax (PRRT) that applies to offshore oil and gas projects. While the government is yet to finalise its position, Chalmers declared there was an open question over whether the scheme was delivering the revenue that the community expected.
Shell’s floating LNG facility. LNG is one of Australia’s most valuable exports.Credit: Shell
“We’ve said for some time now that we want to make sure that the PRRT arrangements are up to scratch,” he said, adding that the review had been commissioned by the former Coalition government.
“Clearly my predecessors had some concerns that they were not, and I have some concerns that they are not – the Australian community, I think, shares those concerns.”
The PRRT is levied on offshore oil or gas projects at a rate of 40 per cent of their taxable profit, but this is applied after generous deductions for capital investments, raising questions over the quantum of revenue it raised compared with the billions reaped in profits by gas giants including Woodside, Chevron and Santos.
LNG, one of Australia’s most valuable exports, is forecast to hit $91 billion in export earnings this financial year – three times more than in 2020-21 – as Russia’s invasion of Ukraine pushed fossil fuel prices to record highs.
‘Government is clearly reviewing options to increase tax revenues – and bring forward PRRT receipts – to help stem federal budget deficits.’
The 2022-23 federal budget papers show the PRRT is expected to raise $2.6 billion this financial year, but will thereafter decline steadily over the next four years to about $2 billion by 2025-26.
Energy analysts at investment bank Macquarie on Monday told clients they expected PRRT reforms to be announced “around the May budget”.
“Energy companies are facing a variety of pressures from government, and additional PRRT take [is] likely to be added to the list,” Macquarie’s analysts said.
“Government is clearly reviewing options to increase tax revenues – and bring forward PRRT receipts – to help stem federal budget deficits.”
The potential tax reform looms as the latest in a series of market interventions for the gas sector in the past several months as governments seek to bring down soaring east coast energy prices.
The federal government, in December, set a temporary $12-a-gigajoule cap on the price of domestic gas sales and is finalising a new mandatory code of conduct for the industry, which will contain a long-term requirement for gas contracts to be sold at “reasonable” prices.
From July, major gas processing plants that rank among the nation’s 215 top industrial polluters will be forced to comply with new emissions limits under the so-called “safeguard mechanism”. East coast gas producers are also facing the more regular threat of having exports forcibly diverted to the domestic market to head off potential supply shortfalls under changes to the Australian Domestic Gas Security Mechanism.
Gas producers on Monday said the industry was expected to deliver an extra $9 billion to state and federal governments this financial year through corporate income tax, PRRT, state royalties and excise.
The Australian Petroleum Production and Exploration Association (APPEA), an industry group, warned that higher taxes could stifle critical investments in new energy supply projects.
“Any consideration of changes to PRRT must be reviewed in the context of the cumulative impact of recent interventions, which have already chilled investment in new supply and prompted valued international partners to voice concerns,” APPEA chief executive Samantha McCulloch said.
Of Australia’s large oil and gas companies, Macquarie expects Woodside to be most exposed to the potential PRRT reforms, while Santos could also face impacts.
Chalmers on Monday said Treasury’s PRRT review had faced delays because of COVID-19 and was only handed to him last week. He said he had not yet decided if the government would announce its response in the budget on May or afterwards.
“I’ve only received that advice very recently. I’m working my way through it,” Chalmers said. “I’ll engage in a consultative way with my colleagues, and we will come to a view on it.”
The overhaul of the PRRT, which the Parliamentary Budget Office found would increase tax paid by the sector by $94.5 billion over the next decade, including the likelihood that some projects would become financially unviable and cease production.
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