Richard Denniss Is Calling For A Gas Export Tax, But An Effective Royalty System Would Be A Better Option

(MENAFN- The Conversation) Richard Denniss is an economist and head of the Australia Institute, a Canberra-based policy think tank. His monograph More Fool Me: How the Gas Industry Tricked Australia is an impassioned plea for ordinary Australians to lobby relevant federal ministers to more effectively tax the export gas industry.

The ineffectiveness of the current Petroleum Resources Rent Tax (PRRT), which also covers gas, is evident in the dismal tax revenues. This could have been further examined by Denniss, but his focus is a 25% export tax.

Review: More Fool Me: How the Gas Industry Tricked Australia – Richard Denniss (Australia Institute Press)

Woe was the day in 1988 that the Hawke government listened to lobbyists and changed the old petroleum royalty system.

The 1980s rhetoric claimed that the PRRT, which replaced the old system, was necessary to attract vital investment into Australia, though petroleum executives campaigned against the new tax at the time. They cried“sovereign risk”. (Denniss could have included the history of the minerals industry's hackneyed complaints about taxation.)

The PRRT differs from a royalty system, in that it is levied on profits.

Royalties are usually calculated on either production volume or production market value. Even if a company has no taxable income, it still pays a royalty based on production.

In other words, any company that extracts resources will always pay a royalty.

Oil is very profitable and low-cost to extract. Once it is extracted, it is pumped onto tankers or a pipeline and sent to customers. The PRRT was an effective tax for oil, but Australia's oil resources are now almost completely exhausted.

Gas is not as profitable as oil, as it requires costly infrastructure to convert it into liquefied form for export. The PRRT laws allow companies' capital costs and operating costs to be covered by gas revenues before the tax is paid.

This is a huge concession to gas producers, which results in the gas being“free” of a resource tax. Currently, across all offshore petroleum companies operating in Australia, the PRRT system has around AU$282 billion in expenditure carried forward. In other words, the gas companies need to generate up to AU$282 billion in revenue before they pay any PRRT.

The 2017 Callaghan Report into the PRRT spotlighted the political failures in taxing gas in Australia, but unfortunately it only led to minor tweaks to the system.

A 25% gas export tax?

Denniss notes how our politicians overlook the fact that Australia's GDP figures are boosted by including the value of gas exports,“even though the stock is not paid for”. He points out that export revenues mostly go to foreign shareholders.

To address this problem, Denniss advocates a specific 25% tax on exported gas, but his argument is tainted by resorting to various charges of the gas industry being“con artists” who resort to“trickery”.

A better approach would have been to focus on the reluctance of successive Australian governments to repeal the ineffective PRRT. Their inaction has increased gas industry revenue to the detriment of the Australian public and our standard of living.

Denniss does not explain the workings of his proposed tax. For instance, would the imposition of a 25% export gas tax involve the repeal of the PRRT? Would the 25% export gas tax be applied to gas export volumes or gas export value? At what point in the production process would the tax be levied?

The essay could have helpfully included a discussion of the gas production process chain. Woodside's North West Shelf Project in Western Australia, for example, extracts gas from the seabed to the wellhead at the surface, then pumps the gas by pipeline to onshore facilities for processing. At this point, the gas is metered and PRRT is calculated.

The gas then flows to the liquefaction plant, where it is lowered in temperature to liquid form (liquefied natural gas or LNG) and exported via LNG tankers.

In contrast to the current PRRT or a gas tax, the taxing point of a typical royalty system is at the wellhead, where gas is first extracted.

The alternative taxing point of a 25% export tax might be when a tanker leaves Australia. That tax calculation is likely to be complex. It would need to be further negotiated, as it would include other ongoing costs, such as marketing.

Gas export tax inequity

Denniss' focus on a gas export tax also has some inequities. His essay makes the valid point that the stock of gas extracted from Commonwealth waters for“free” should be paid for by gas companies through a more rigorous taxing system.

However, he does not mention that 15% of gas extracted in WA – by Chevron, for instance – is reserved solely for consumers and business use in that state.

Under the proposed 25% gas export tax, stocks of domestic gas would be untaxed. This is potentially unfair to those in states of Australia that rely on other sources of energy, such as solar or hydro.

Denniss mentions the effective gas taxation system in Saudi Arabia and Norway, as well as Qatar's successful royalty system. In all three countries, the government participates in gas projects on an equity basis. This is not the case in Australia.

The basic principle for all natural resources in this country is that the stock must be paid for, as it is owned by Australians. The most effective way to achieve this is through a royalty system. Denniss' essay does not consider that royalties are the uniform system for all resources in Australia – except for gas extracted from Commonwealth waters.

Onshore gas in Queensland, for example, was once taxed under the PRRT system, but its zero revenues led to the re-introduction of a royalty system, based on volume and price-tiered. The rates vary depending on whether it is export or domestic gas.

Denniss makes many valid points. He is correct in stating that gas companies will not get up and leave due to a changed tax system. The furphy of the necessity of trading our tax-free gas for overseas diesel, as the government has suggested, is called out.

The notion that taxing gas will harm stability in our region is rebutted. The claim that tax-free gas is an important transition fuel to net zero is swatted away. The proposition that there is a shortage of domestic gas due the cast-iron nature of gas export sales contracts is exposed as misleading.

Denniss' call for a grassroots push for change might just work. Back in 2017 a grassroots movement for a petroleum tax review resulted in the Callaghan Report, but no real gains in revenue.

The inaction of successive Australian governments is the reason for the failure of the current gas tax. The gas industry is the major beneficiary of this gross inaction.

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