Energy companies could face royalty hike

Australian oil and gas companies could face higher government royalties under the Petroleum Resource Rent Tax (PRRT), with a new review underway thanks to falling revenues.

Treasurer Scott Morrison says revenue from the PPRT has halved since 2012-13 to $800 million and crude oil excise has also fallen by more than half. Mr Morrison has now commissioned a review to report back by April 2017.

However, the treasurer also says the review is not primarily about revenue, but ‘ensuring sustainability and effectiveness and efficiency of our tax system’.

It is important these companies pay their fair share when it comes to these issues. They pay company tax, they also pay other forms of tax. We need to deal with these things sensitively,” he says. He added, “The last thing we want to do in moving in this area is do things that might put at risk investment.

Mr Morrison also says he is aware of some energy companies ‘gold plating’ investment so they can claim greater deductions against tax. No mention is made of who those companies are or what exactly they are gold plating.

The fall in PRRT revenues could be from a myriad range of issues, including the halving in the oil price over the past two years, declining production from large existing projects, a changing mix of petroleum products – such as less oil and more gas production, and larger amounts of deductible expenses resource companies incurred during expansion of their other mining assets.

But it seems clear that a royalty based on profit will suffer when the commodity in question suffers a 50% fall in its price like oil has.

If the review recommends higher rates of royalties and taxation, or lower limits on what can be included as deductible expenditure, then energy companies like BHP Billiton Limited (ASX: BHP), Woodside Petroleum Limited (ASX: WPL), Santos Ltd (ASX: STO), Origin Energy Ltd (ASX: ORG) and Beach Energy Ltd (ASX: BPT) could take another hit to their earnings.

PRRT is currently calculated as 40% of the profits on a petroleum (oil or gas) project. That includes projects operated and majority-owned by offshore companies like the Gorgon LNG project – although that has yet to start production.

Foolish takeaway

It must be a tough time for management of resources and energy stocks – when the government can change the rates of tax and royalties you have to pay, and when they want.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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