WA gas boom 'will not deliver royalties for decades'
The once-in-a-lifetime liquefied natural gas boom off the coast of Western Australia will not deliver any significant royalties to the federal government for at least two decades, according to an analysis prepared for the state’s government.
One of the companies involved in the boom, Chevron, will in effect be able to pump and sell about 300 million tonnes of Australian LNG before paying any royalties.
The $US54 billion Gorgon gas project hits a milestone
The first LNG cargo from the massive $US54 billion LNG project is expected to leave Barrow Island next week. It’s been a seven-year construction journey to get to this point, filled with plenty of challenges.
The bleak assessment of the $90 billion offshore LNG industry’s contribution to the national wealth can be revealed as Prime Minister Malcolm Turnbull and Resources Minister Josh Frydenberg tour Western Australia trumpeting the coming “golden age of gas”.
On Monday, the pair visited Australia’s largest single resources project, the $US54 billion ($71 billion) Gorgon LNG facility on Barrow Island, which Mr Turnbull approved as environment minister in 2007 and this week described as a “triumph”.
The jetty at the Gorgon LNG facility off the coast of Western Australia.
The project, which suffered an embarrassing shutdown after loading its first shipment of LNG last month, ran $US17 billion over budget – all of which can be recouped through tax deductions before its owners Chevron, Shell and ExxonMobil are forced to pay a cent in royalties.
Gorgon’s major owner, Chevron, has promised “direct taxation and royalty payments” of $1 billion a year to the Commonwealth by 2019 from Gorgon and its sister project Wheatstone, rising to $3 billion by 2024 and staying at or above that level to at least 2036.
In November, Chevron Australia managing director Roy Krzywosinski told a Senate hearing that Gorgon’s contribution would “buy a lot of hospitals … purchase a lot of schools” in Australia.
A Chevron spokeswoman said on Tuesday the company had paid $3 billion in federal and state taxes and royalties, primarily from the company’s interest in the North West Shelf project.
Malcolm Turnbull visits the Gorgon LNG project at Barrow Island.
Chevron’s LNG forecasts are based on an economic benefit analysis prepared by ACIL Allen which found Gorgon and Wheatstone would contribute $338 billion to the federal government between 2009 and 2040.
But the WA Treasury has a much different assessment. According to documents released under freedom of information laws, the Commonwealth will wait “decades” to receive any significant revenue from the petroleum resource rent tax.
Part of the Gorgon gas project, jointly owned by Chevron, Shell and ExxonMobil.
“Given current market conditions, the major LNG projects off the coast of WA are unlikely to raise significant PRRT revenue over the next few decades,” the WA Treasury found.
It said PRRT from export LNG would be “very lucrative” for the Commonwealth once capital tax deductions were “worked off over 20 years”.
In effect, that would mean Chevron is able to pump and sell about 300 million tonnes of Australian LNG before paying a dollar in royalties.
In an original 2013 analysis, released to the International Transport Workers’ Federation as part of the freedom of information request, the WA Treasury said PRRT payments from the Gorgon project would begin about 2025-26. But a 2015 update pushes that out to about 2035.
“This is because the price of oil has declined by around 50 per cent from the peak and capital costs were largely incurred at a time when the industry was supply constrained (and therefore high),” the WA Treasury found.
“A brief assessment indicates that a higher oil/LNG price or lower exchange rate will be required for significant PRRT revenue to be generated from these projects over the next few decades.”
As revealed by Fairfax Media in November, the government’s take from PRRT has remained static at about $1.4 billion over the past decade despite the offshore LNG industry growing 12-fold during that time and some projects reaching maturity.
The PRRT, which operates like Labor’s controversial mining tax, is designed to encourage investment and exploration by not raising revenue until a project generates more profit than what is needed to justify investment.
This is unlike state royalties, which generally charge a 10 per cent tax at the “well head” – or by volume.
In October last year, Chevron was hit with a $300 million tax bill after the Federal Court found it had shifted profits out of Australia between 2004 and 2008 through complex loans and related-party payments.
Chevron Australia Holdings, which had operating income of $3.2 billion last year, paid no tax and instead claimed a $5.7 million refund from the Australian Tax Office.
According to its latest consolidated financial accounts, Chevron Australia’s US-based parent company holds $US35.7 billion in “undistributed earnings” – otherwise known as unrepatriated profits held offshore.
The company lists 40 subsidiaries, including in the tax havens of Bermuda and the Bahamas, as well as the low-tax jurisdictions of Singapore and the US state of Delaware. In Bermuda alone, there are 279 incorporated business names beginning with the word Chevron.
Paddy Crumlin, president of the International Transport Workers’ Federation, said: “At current prices Australia is unlikely to see one cent in royalties from the Gorgon project for 20 years. In effect the Australian people will have donated over 300 million tonnes of LNG to the Chevron-led project for free.”
Perth-based LNG analyst Peter Strachan, of Stock Analysis, said the government had to strike a balance between ensuring big investors such as Chevron are encouraged to keep taking risks in Australia and that Australia’s wealth is not given away free.
He said LNG prices were likely to bounce back in the next two years. “These projects will be making a lot of money and they should be paying a lot of tax as long as the guys in Canberra and the ATO are doing their jobs,” he said.
The WA analysis found headwinds such as cost blowouts and the lower oil price “does not mean the projects are going to be unprofitable”, but their lower return on capital will not exceed the hurdle rates at which PRRT begins to be charged.
Chevron said the company is “a significant taxpayer in Australia. Over the past five years we have paid more than $3 billion in federal and state taxes and royalties, primarily attributable to our interest in the North West Shelf Project.
“Chevron takes a long-term view of prices because our investments last for decades. The independent economic analysis from ACIL Allen Consulting uses long-term future oil prices that take into account commodity price cycles and short-term price volatility which are common in our business.
“Our current income tax profile reflects where we are in our investment life cycle with two major capital projects under construction.
“As one of Australia’s largest investors, Chevron will pay its fair share of tax and, through the Chevron-led Gorgon and Wheatstone Projects, Australia will continue to enjoy the associated economic benefits over the life of the projects.”
In Perth on Tuesday, Chevron’s global chief executive, John Watson, appeared to blame multibillion-dollar cost blowouts in Australia on the cost of operating resources projects in Australia and warned capital would move to profitable markets.
“Australia’s costs are high today. We need to have a competitive offering for our projects going forward,” he said.