Australia's petroleum tax change prompts mixed response from gas players

Australia's changes to the Petroleum Resources Rent Tax, or PRRT, have triggered a mixed reaction among players in the gas industry, with some calling it a balancing act but leaving many others concerned over its complexity and its inability to generate a significant amount of revenue immediately, while also raising fears of derailing new projects because investment could dry up.

According to the changes announced in the Federal Budget 2023, the government is set to cap allowable PRRT deductions -- including exploration expenditure transferred from other projects -- for offshore LNG project participants for a particular PRRT year at 90% of PRRT assessable receipts for that year. This cap will apply from the later of seven years after the year of first production or July 1.

"The changes aim to get the balance right between the undeniable need for a strong gas sector to support reliable electricity and domestic manufacturing for decades to come and the need for a more sustainable national budget," Samantha McCulloch, chief executive of the Australian Petroleum Production and Exploration Association (APPEA), said in a statement May 7.

The move provides greater certainty for the industry to consider the future investment required to maintain both domestic and regional gas supply security for its customers, she added.

However, she cautioned that a bipartisan approach was needed to provide certainty for future investment and called on the government to "work constructively and cooperatively with the opposition."

Some sources attending the APPEA 2023 conference in Adelaide during the week started May 15 noted that the PRRT would usher in a mixed bag of outcomes for the industry.

"Any change is challenging at the beginning, but people have to comply with it, and it evens out," an LNG industry source said, adding that the PRRT would inject efficiency in the system by raising additional revenues that would be directed toward benefiting the community.

While it raises an additional A$2.4 billion (US$1.6 billion) in revenue, it would be spread over five years.

"So, it's not huge over that time horizon. The PRRT makes sense for oil projects but with an almost flat LNG line up, it takes a long time to chew away those benefits," an industry source based in South Australia said.

Prime Minister Anthony Albanese's Labor administration is proceeding with eight recommendations under the Callaghan Review that were accepted but not implemented by the previous Liberal/National Coalition government.

The review was initiated in 2016 to determine whether the PRRT was operating as it was originally intended as well as to address the reasons for the rapid decline of Australia's PRRT revenues.

Filtering projects

Australia accounts for about 21% of global LNG exports, with its three primary export markets being Japan, mainland China, and South Korea, together accounting for more than 81% of annual exports since 2010.

According to S&P Global Commodity Insights, Australia's LNG export volumes stood at 83.9 million mt in 2022, with exports being nearly steady year on year.

In the near term, export volumes will decline in 2023–24 to 80 million mt and 77 million mt respectively, owing to an expected shutdown of Darwin LNG because of the end of life for the Bayu-Undan field and delays in backfill projects, according to S&P Global Commodity Insights analysts.

Declines from Australia's existing resources require new discoveries to backfill production to meet domestic demand requirements and maintain LNG export levels.

"We are concerned about the investment cycle and the sustainability of some projects, in light of changes such as the PRRT," a source at an energy technology company said.

While the big projects will continue relatively unscathed, "marginal projects and greenfield exploration might dry up" because of the lack of investors, who may stay on the sidelines due to future regulatory uncertainty, another industry source said.

According to EnergyQuest, "the Woodside-managed North West Shelf LNG venture is not affected because it pays royalties under a separate regime, nor are the three onshore LNG projects in Queensland."

Santos' Darwin LNG is not currently affected as its gas comes from the Bayu-Undan field in waters partly held by Timor-Leste and which is covered by a production sharing contract although it is expected to be covered once replacement gas supply flows from the Barossa field, the Australian-based energy consulting firm said in its latest monthly report.

"The PRRT changes are more likely to affect Woodside and Japan's Inpex most, relative to their size, given the weight of Australian LNG in their total portfolios," it added.

Inpex did not comment at the time of writing. However, a spokesperson at Woodside said that it was already a significant taxpayer.

"We paid A$2.7 billion in Australian tax and royalties in 2022, including A$720 million in PRRT. We also spent $3.6 billion on goods and services from Australian suppliers in 2022. We pay our way," the spokesperson said May 16.

"The announcement provides greater certainty for our industry to consider the future investment required to maintain both domestic and regional gas supply security for our customers," the spokesperson said, adding that this outcome also closed out the long-running Callaghan Review, informed by public consultation, and will ensure the ongoing efficiency and administration of this regime.

"Woodside will continue to engage constructively with the government on ways to support a functioning market and a positive investment climate for industry to deliver the energy Australians need."