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There has rarely been a better time to be an Australian gas exporter.
The war in Ukraine has seen demand for Australian gas soar, and has pushed prices sky high.
And Australia has a lot of gas to offer – it is one of the world’s largest exporters of LNG, and those companies that sell gas to the world are in a prime position to capitalize.
The gas that is sold is from the Commonwealth, and licensed to be sold by the companies that extract it.
So how much do Australian taxpayers make from selling Australian gas?
Now, probably not as much as you might expect.
The hidden tax you’ve probably never heard of
As gas prices have soared, there have been calls for Australia to try to capture some of that profit through a new tax on gas companies.
Comparisons have been made with countries such as Norway, which levies a 78 percent tax on profits from its oil and gas companies (many of which are partly state-owned anyway).
Others suggest that Australia simply reform the taxes already in place.
Australia already has a special tax for offshore oil and gas projects, known as the Petroleum Resource Revenue Tax (PRRT).
Tax the profits from those projects at 40 percent, because they are resources of the Commonwealth – so the Commonwealth must share in the profits.
But despite a lot of gas sold, it brings surprisingly little tax.
The tax has been in place since the late 1980s, as Australia’s oil industry was booming.
Gas is now a much bigger industry than oil, but despite the growth of the industry, the tax brought in almost the same amount of revenue.
Revenues are not even keeping up with Australia’s overall economic growth, becoming smaller and smaller against Australia’s growing GDP.
And it is expected to continue to decline – from $2.6 billion this year, to just $2 billion in 2025-26.
So why is it an industry that brings tens of billions in revenue, paying so little tax for the gas it sells?
A decades-long tribute made for a different time
The tax was introduced in 1988 to try to capture revenue from offshore oil and gas projects, but then it was mostly oil.
The goal was to try and encourage companies to explore offshore oil and gas, and significantly tax the profits made.
Companies would only have to pay the tax once the projects have fully paid for themselves – that is, all the money spent on the exploration and construction of oil and gas wells and the associated infrastructure has been recovered.
It is a fairly normal circumstance – most taxes are paid only on the profit.
But importantly (and controversial), those construction costs grow over time, the same way that interest grows and compounds in a savings account.
The scheme was designed to be remarkably generous, with interest of around 18 percent applied to various elements of a project’s costs, and allowed to compound.
For example, if a company has spent $10 billion on a project, they may be allowed to deduct $15 billion or more from their annual tax bill – because these costs are compounded.
Given the often remote location of gas deposits, projects can be very expensive.
By 2020-21, according to tax office data, the industry would bring a total of $283 billion in future tax deductions from expenses.
The Gorgon gas project, built on Barrow Island off WA’s north-west coast, is said to have cost $70 billion.
With the PRRT deductions scheme in place, there have been suggestions that the project may never pay the resource tax.
Change could be coming
It seems increasingly likely that the PRRT will change, in an effort to capture some more tax revenue from the sector.
Treasurer Jim Chalmers singled out the tax as an area of possible change, whenever he is questioned about the idea of a “wind tax”.
There are a few voices suggesting some reasonably simple tweaks that they argue could make a big difference.
The Morrison government ordered its own review of the PRRT in 2017, and made a few key changes by reducing the available deductions – but they only applied to new projects, not those already underway and benefiting from the current boom.
The Australian Industry Group (AI), a business lobby, argues that the changes should go further and capture projects that are already operational.
He suggests that additional revenue should go towards financing the transition away from fossil fuels, given how costly this process is likely to be.
The AI Group’s Tennant Reed said the tax clearly isn’t working.
“There is no doubt that the deductions under the PRRT are quite generous,” he said.
“And if those deductions were less generous, that existing tax would raise a lot more money for the production and sale of Australia’s gas and oil resources.”
He said that changing the tax parameters on existing projects is completely fair – as it happens to people and companies, all the time.
“While it requires careful action, altering the tax parameters that apply to future income years is totally legitimate,” he said.
“I’m more than 40 years into my asset life, and the tax parameters have changed on me many times.”
The gas industry argues that there is no case for change, as the PRRT is doing its job.
Samantha McCulloch from industry body APPEA was asked on the ABC’s 7.30 program if she thought PRRT’s current hiring was fair.
“The PRRT is expected to provide $11 billion to the federal government budget (over the next four years),” he said.
“This is already a tax based on profits of at least 40 percent, and it is only one of the financial contributions of the industry to the government’s revenues.”
Different ideas for a booming industry
Others are pushing for bigger changes.
The Greens will scrap the $283 billion in deductions available for gas projects altogether, and start charging producers the full rate of the tax.
Progressive think-tank The Institute of Australia suggests abandoning deductions, but restructuring the tax so that it kicks in when “super-profits” are earned.
If gas companies have a particularly good year, only a portion of their revenue will be available for tax deductions – which means some will be taxed no matter what.
In 2017, UNSW economist Richard Holden proposed to add to the PRRT with a royalty scheme, which would take 10 percent of the revenue generated by the projects.
The income is different from the profit – it is only the income made from the sale of the gas, without any consideration to the money spent to extract it.
Many states have royalty schemes in place for onshore mining and gas projects, but as offshore gas projects are in Commonwealth waters, no such schemes apply – which is part of the reason that the PRRT exists in the first place.
Five years later, Professor Holden argues that a better approach would be to open up more gas reserves to new projects, but requiring that part of the gas produced to stay in Australia – pushing up gas prices for consumers.
“By decoupling some of the supply in Australia from the world’s supply, you can decouple the price of gas in Australia from the world price of gas,” he said.
“Now that doesn’t do much for tax revenue, but it would do something to ease the price pressure that Australian families are under.”
Has the opportunity for gas wind already passed?
Australia’s energy market is already changing rapidly, and it is almost certain that dependence on gas will steadily decrease.
The Albanian government has made it clear that it expects gas to “play a key role as a transition fuel”, but the presumption in this is that it will decrease as it approaches net zero emissions.
Some experts expect the trend to be replicated around the world – meaning that no matter what type of taxes are placed on the sector, the opportunity to earn a significant income will disappear.
Mr. Reed said gas probably has another five years ahead of very strong prices, but the trend away will eventually catch up.
“If all our overseas customers do what they say they’re going to do, those profits will disappear over time,” he said,
“There will be a mega-trend of lower consumption and probably lower prices.”
Professor Holden said the prime time for gas exports (and the tax implications) may already be behind us.
“The exact time path is not clear, but the writing is on the wall for coal,” he said.
“I think gas is currently estimated to be around until at least 2040, in Australia, but there is no doubt that it will play a much less significant role in our energy mix in the coming decades.
“This means less opportunity to tax. So largely speaking, we missed the boat.”
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