Australia is akin to a petro state without the petro dollars. We receive not only low resource related revenues, but face higher energy costs. We are the world’s largest LNG exporter but pay higher gas prices than necessary. Monopolistic lobbying activities determine these poor returns to the public.
We are giving our resources away for free as if they are an exclusive money tree for multinationals and their shareholders. This defies the nature of governing ‘for the people’. We should all be shareholders of Australian resources – that’s what an effective resource rent system ensures.
Our problem is that Australia’s Petroleum Resource Rent Tax (PRRT) is banking on future super profits that may never eventuate. Elaborate depreciation allowances have encouraged $342 billion in carry forward losses (2019). Some have estimated the tax will not raise revenues until the 2050s.
Compounding this, the efficiencies of marginal investment encouraged by a PRRT may no longer be relevant in an impending future of stranded assets. The ability to write off exploration and project costs against future resource rents (compared to a simpler royalty) was a driver for industry development.
In it, we discussed the way that generous uplift of cost deductions erodes the resource rental base …
“The 15 per cent uplift above the Long Term Bond Rate (LTBR) is an extraordinary gift that undermines the resource rent tax base by allowing it to be minimised any time there is new investment by the owner of the PRRT project, whether it is related to the project or not …Recommendation: Apply the LTBR as a maximum uplift on all costs” (Prosper Australia Submission, p. 10-11).
In order to stabilise revenue potentials, our Callaghan submission raised concerns that all PRRT costs should be quarantined on a project basis.
“The net effect is to shield the full economic rent of the project from the PRRT, since the market value of the project is the capitalisation of all future economic rents! This move was either a massive mistake or was developed with a high degree of industry input and limited oversight from a frank and fearless public service” (Prosper Australia Submission, p. 7). “
Following the Callaghan review, such uplift rates were reduced to 5% as per the original intentions of the PRRT. This resulted in a typical media scare campaign.
How have other countries developed fairer systems?
Countries like Norway have used equity stakes and public companies to ensure they get a slice of oil and gas profits. But is this still viable as climate pressures close in?
Just across the sea, Timor Leste has administered an effective resource rent regime with a growing sovereign wealth fund. Since its inception (2005), it has received $23bn (USD) in oil and gas receipts (2019). Their tax system includes a 5-10% royalty, a PRRT of 40-50% and a company tax of 30%.
Alaska has a 35% tax on the production value, but with a large number of deductions. The total corporate tax rate is 21-30% (state + federal). Norway’s combined taxes on the resource sector add up to 78%, but still there is a queue of companies bidding for any license that becomes available, primarily because companies can only dream of a 22% return on investment. This is the power Australian taxpayers must recognise. We have an exclusive resource at our fingertips and we should have domain over it.
Prosper advocates a return to a system of royalties. Simply put, this allows for less accounting trickery. A flat 10% rate charged at the wellhead ensures the taxpayer at least gets something for resources each Australian owns.
Climate targets are growing in significance, inferring that oil & gas policy reform will also need to shift. Australia should prioritise a regime that minimises tax avoidance through administrative simplicity and transparency, whilst maximising the direct return on resources extracted, pricing hydrocarbon resources appropriately (in the absence of carbon pricing).
A minimum 10% royalty on all subsequent extraction (deductible from the PRRT, but not company tax) must be enacted.
A multitude of climate related challenges are mounting including potential EU carbon tariffs, stranded assets and the retirement of oil rigs. The taxpayer can’t be left to pick up these bills after missing out on billions in taxable resource rents.
Recently the Chinese owners of the Dampier-to-Bunbury gas pipeline brought forward the effective end-of-life timeframe by nearly 30 years (from 2090 to 2063). Concerns rose that the pipeline owner could increase its depreciation schedule, resulting in short term profits. Is the controversial Depreciated Optimised Replacement Cost method still an optimal depreciation method – particularly for something that will never be replaced?
Most dying industries will cut maintenance costs, OH&S, and reduce depreciation timeframes to deliver shareholder returns.
We recommend the use of the more typical Depreciated Actual Cost method to ensure fairer accounting practices. Governments cannot allow a system incentivizing windfall gains for investors and bill shock for customers.
Regulators monitoring the market also need to update from a ‘private profitability’ test to a ‘natural monopoly’ test when analysing pricing returns. This will take a stricter view on pricing points for an industry with a comparatively lower risk profile.
Another environmental and regulatory loophole that must be closed is the use of ‘minnows.’ Minnows are a shelf company that a soon to be exhausted mining company is sold into. It holds little to no assets and is designed to shield the parent company from environmental clean up costs.
With pressures mounting on a covid ravaged world, we must ensure that a fairer share in the nation’s natural resources is a much higher priority. Our challenge is to change that narrative so that taxpayers gain agency over our shared heritage, the common-wealth.