The Petroleum Resource Rent Tax (PRRT) is paid by producers of hydrocarbons (crude oil, condensate, LPG and natural gas) with projects located in offshore areas under Federal Government jurisdiction, except for the North West Shelf project which pays royalty and crude oil excise.

The PRRT is a project based tax and is levied at 40% of annual net positive cash flows from the project after recovery of all eligible exploration expenditure, including offshore exploration outside the project area, all project operating costs and all capital expenditure. In addition, the capital expenditure earns a rate of return equal to the long term bond rate plus 5 percentage points and the exploration expenditure earns a rate of return which varies according to when and where it was undertaken in relation to the project. There is a range of complex rules governing the write-off of expenditures against revenue.

This scheme of taxation means that new projects, such as the Woodside operated Laminaria project in the Timor Sea, delay paying any PRRT until all exploration and development expenditure is fully recovered. A mature project, such as the Esso/BHPP Bass Strait project, will pay PRRT annually on the basis of revenue minus operating expenses, new exploration and development expenses.

The key variables needing to be determined in order to estimate Government PRRT collections are:

• The price of oil in $US. A likely source of data would be the forward contracts quoted by Nymex for West Texas Intermediate crude, which is a world trade benchmark for the price of oil;

• The exchange rate between the $US and the $A. There is no reliable means to forecast exchange rates;

• Taxable production; and

• Operating costs, development costs and exploration costs. For new projects, estimates of undeducted expenses carried forward from previous years need to be made.

Until recently, PRRT paid by the Bass Strait project accounted for around 80% of all PRRT collected. With Bass Strait production falling and several new projects starting to mature, the ratio of PRRT collection from Bass Strait is falling toward 70%.

ACIL has developed a spreadsheet model to estimate PRRT collections from Bass Strait and from the aggregate of other liable projects. The ACIL model is calibrated to 1996/97 PRRT collections, as that year is relatively free of major new development expenditure and is a relatively normal year for Bass Strait.

The model produces estimates of PRRT collections within 10% of actual collections except in 1998/99. In this year there was a disruption to Bass Strait production of about 10%, however, this does not explain the PRRT collected of just $419 million, representing a 55% decline on collections from the year before.

Estimates for 1999/2000 and 2000/2001

While major new developments, and hence expenditures, will increasingly have a significant impact on PRRT collections, the key to estimation of PRRT remains Bass Strait. Further, the key influences on Bass Strait PRRT are the $US price of oil and the $US/$A exchange rate, moderated by around 20% of production being in the form of natural gas tied to fixed price contracts.

The original 1999/2000 Budget estimate of PRRT collections was $720 million — ACIL's model suggests Treasury used an exchange rate of around $A0.65/$US1 and an oil price of $US14 to generate this estimate. Treasury's most recent estimate for 1999/2000 contained in the 2000/01 Budget is $1,135 million — ACIL's model suggests an exchange rate of $0.65 and an oil price of $US18.50. The actual average exchange rate of around $0.625 and an average oil price of around $24 for 1999/00 suggests actual PRRT collections in 1999/00 could have been over $1,700 million or about $600 million over the last budget estimate.

The 2000/01 Budget estimate of PRRT collections is $1,280 million — ACIL's model suggests Treasury used an exchange rate of around $US0.60 = $A1 and an oil price of $US20 to generate this estimate. Using an exchange rate of $A0.54 and an average price of $US30 for oil, which is consistent with current Nymex futures prices, PRRT collections could be over $2,300 million or $1,000 million more than the Budget estimate.

A more conservative Treasury mid-year review for 2000/01 might use $A0.58 and an oil price of $25 resulting in PRRT of $1,760 million or around $480 million in extra tax.

In summary, for the 2000/01 Budget estimate:

• A one cent change in the exchange rate will change PRRT collections by 2.2% or $26 million; and

• A $US1 change in the oil price will change PRRT collections by 6.3% or $80 million.

It should be recognised that PRRT is deductible from company tax, hence an increase in PRRT payments decreases company tax payments. Assuming all companies liable for PRRT also pay company tax, at a company tax rate of 33% the net increase in PRRT collections is 77% of the gross increase.

In addition to the PRRT, the Federal Government also collects royalty and excise from the North West Shelf project. The collections from this project are less sensitive to the increases oil prices and lower exchange rate because the bulk of the output is in natural gas priced under domestic contract.

1 November 2000