The flow of cash to the state and federal governments from the North West Shelf, Australia’s largest oil and gas project, has been reduced by errors in the calculation of royalties, according to analysis into how these billions are calculated.
The Australian National Audit Office says here has been limited scrutiny of the billions of dollars in deductions claimed by the resources companies running the project to reduce revenue and the amount of royalties due.
“Some errors in the claiming of deductions have been identified, but the available evidence indicates that the problems are much greater than has yet been quantified,” the audit office says in the report of an investigation into North West Shelf royalty revenue. It has been 17 years since there has been an audit of the royalty calculations.
Treasurer Scott Morrison today announced a review of resources taxes and royalties in response. The Petroleum Resources Rent Tax has halved since 2012-13 to $800 million.
“I anticipate that we will see a further deterioration potentially in this area and that’s why it’s important we address it,” Morrison said.
“We think it’s a problem, have already been working on it and this process will help us get to the right answer.”
He said the government was committed to ensuring Australia’s taxes are working as intended and companies pay the right amount of tax.
Australia’s federal budget is exposed to falls in commodity prices, reducing the royalties and taxes collected. Forecasts of a return to budget surpluses have been pushed further into the future as revenue expectations keep falling and public debt rises.
Citi analysts say: “This situation could of course have been managed by investing revenue increases during the commodity price boom in a dedicated fiscal stabilization fund.”
Revenue reported by producers from petroleum sales from the North West Shelf between July 2014 and December 2015 was $19.7 billion.
From this, $1.9 billion in royalties was collected. The Australian Government retained $0.6 billion (32.3%) and the remaining $1.3 billion (67.7%) was paid to Western Australia.
The amount of royalty paid is reduced by producers claiming “significant” deductions for operating costs and the depreciation of capital assets.
More than $5 billion of deductions were claimed against petroleum revenues in the 18 months to December 2015.
The $34 billion project is operated by Woodside and is jointly owned with BHP Petroleum, BP Developments, Chevron, Japan LNG and Shell.
The audit office says there are some significant shortcomings in the framework for calculating the royalties.
“The consolidated Royalty Schedule, which governs those calculations, has not been updated in the last 10 years,” the olffice says.
“In addition, the testing of the meters that are relied upon to identify production and allocate it to the appropriate field for royalty calculation purposes has not been sufficiently comprehensive or frequent.”
The Western Australian Government recently commissioned consultants to analyse capital and operating expenditure claimed by North West Shelf producers.
That report’s findings indicate that there is a risk of significant errors in the claiming of deductions, according to the audit office.
The producers have agreed that $8.6 million in royalties has been underpaid.
“But many matters identified by the consultants have not yet been addressed,” the audit office says.