Delay risk for oil and gas projects

A Federal Treasury review of how the petroleum resource rent tax is applied could delay oil and gas projects and cut future earnings, analysts say.

The Australian has reported on the Government planning to change the PRRT and removing $6 billion of deductions over the coming decades, largely by cutting the “uplift rate”, which is the amount by which deductions from capital and exploration spending increase over the years.

The reason for the overhaul is the 30-year-old PRRT was designed to tax oil projects, not the huge LNG developments now dominating Australia’s oil and gas industry. Oil projects have lower development costs, quicker returns and shorter lives than the capital-heavy LNG developments, which oil and gas companies have spent more than $200bn building in the past 10 years.

The industry has cautiously welcomed the increase in the uplift rate and the certainty it provides. But analysts say an associated review of transfer pricing rules also announced will create uncertainty.

“This could both delay projects and potentially dramatically reduce future earnings,” Macquarie said in a note to clients.

“After all, how can a board sign off on a project if you don’t know the economics?”

Transfer price rules dictate the taxing point for the PRRT, which targets the value of oil and gas after it has been taken out of the ground but does not include processing costs to cool gas into LNG.

Read the full story at The Australian