Petroleum Resources Rent Tax must be seen as a future fund
The success of Australia’s $200 billion-plus LNG bonanza is evidence that our fiscal regime is working to attract the valuable international investment we need.
Yet those advocating for major changes to Australia’s Petroleum Resources Rent Tax risk discouraging future projects and the significant economic and social dividends they bring.
The PRRT was introduced in the 1980s as a profits-based tax designed to deliver substantial returns once investors had recovered their capital costs.
Its high 40 per cent tax rate has netted in the order of $25bn for the nation over three decades.
This seems lost on those demanding an instant PRRT return from new projects.
The contribution of 40-year projects cannot be measured by the revenue from their start-up phases.
Their fiscal and economic benefits must be assessed over their entire project lives.
Consider the Chevron-led Gorgon Project. The Gorgon gas field was discovered in 1980. The final investment decision was made in late-2009. Construction commenced in December 2009 and full production capacity will not be realised until at least the second half of this year.
That’s 35-plus years since first discovery and an investment in excess of $50bn over seven years without a single return for shareholders.
Over its 40-year life, this legacy project will deliver reliable energy supplies to customers in Australia and the region and significant economic benefits. Gorgon, its sister project Wheatstone and Chevron’s other activities in Australia are expected to add more than $1 trillion to Australia’s GDP over its life and create tens of thousands jobs.
The PRRT should be viewed as a form of “Future Fund”, delivering large returns at a time in the future when Australia’s demographic challenges will be at their greatest.
Chevron, as the largest investor in the Australian petroleum industry, is testament to the sound working of the PRRT in attracting investment into Australia.
But the benefits of potential future projects can’t be realised if a poorly designed taxation regime discourages that future investment — especially with Australia’s competitiveness already under threat from high cost construction and company tax rate. There is also the threat of low-cost US LNG entering the global market — something for which I have first-hand experience.
Before joining Chevron Australia, I led up Chevron’s Appalachian Mountain Business Unit, home to some of North America’s largest and richest sources of natural gas from shale.
Low-cost shale gas technology has transformed North America’s natural gas industry and made it a net gas exporter — and a highly competitive one at that.
Make no mistake, the comparative and geographic advantages on natural gas that Australia has long enjoyed can no longer be relied upon and are under threat.
Making material changes to the PRRT regime would not only be counter to the design intentions of the tax, but would also represent a retrospective change to the “rules of the game” for global investors — a further dent in Australia’s reputation for fiscal stability.
The resources sector is part of the solution to Australia’s economic growth — not the reverse.
It is this industry that can deliver exactly what unions and others are calling for — jobs for the future.
The government’s PRRT review must focus on policy settings that will maximise the overall economic return to Australia over the life of these projects, rather than short-term revenue considerations.
Any changes must meet a strict test: ensure future investment is encouraged; that existing project economics are not retrospectively undermined; and that Australia’s international competitiveness is not further compromised.
Having already served Australia well, the PRRT regime can underpin a further wave of oil and gas investment.
This investment will underpin the creation of many thousands of new jobs, support local companies, build new capabilities to support the long-term operations and deliver ongoing economic and social benefits for the people of Australia.
Nigel Hearne is managing director of Chevron Australia.