Bills Digest No. 184  1999-2000Petroleum (Submerged Lands) Legislation Amendment Bill (No. 2) 2000

Numerical Index | Alphabetical Index

WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

CONTENTS

Passage History
Purpose
Background
Main Provisions
Endnotes
Contact Officer & Copyright Details

Passage History

Petroleum (Submerged Lands) Legislation Amendment Bill (No. 2) 2000

Date Introduced: 1 June 2000

House: House of Representatives

Portfolio: Industry, Science and Resources

Commencement: Royal Assent.

Purpose

To facilitate a lump-sum pay-out of the Commonwealth's obligations to Western Australia arising under a royalty sharing agreement over the North West Shelf project.

Background

The North West Shelf Project

The North West Shelf extends from North West Cape to the Arafura Sea and includes the northern Carnarvon, offshore Canning, Browse, Bonaparte, and Arafura Basins. The 'North West Shelf project' comprises the North Rankin, Goodwyn, Perseus and Angel gas and condensate fields off north-western Australia. It is defined in the Petroleum Resource Rent Tax Assessment Act 1987 and the Petroleum (Submerged Lands) (Royalty) Act 1967 as a set of exploration permits in the North West Shelf area.

The project has two phases: the domestic gas phase and the liquefied natural gas phase. Initial production from the project commenced in 1995. Production in 1999 was 8.2 million barrels of oil/condensate, 108 thousand tonnes LPG, 12.7 billion cubic feet of gas and 1.3 thousand tonnes LNG.⁽¹⁾ Total investment in the project to date has been around A$12bn. A significant expansion project has been proposed.⁽²⁾ The project is apparently responsible for maintaining more than 60,000 jobs a year and the joint venturers pay more than $200 million annually in royalties to State and Commonwealth Governments.⁽³⁾

Historical Account

In 1967 interest in offshore petroleum exploration led to negotiations between the Commonwealth and the States and Northern Territory which produced an agreement regarding joint responsibility over offshore petroleum exploration and exploitation. This agreement was reflected in the Petroleum (Submerged Lands) Act 1967 (the 1967 Act).

The 1967 Act established joint authorities and an exploration permit/exploitation licence regime. However, the Act did not resolve controversy surrounding the constitutional basis of the Commonwealth's claim vis-à-vis the States and the Northern Territory.

The issue was tested in the early 1970's by two pieces of legislation.⁽⁴⁾ The Seas and Submerged Lands Act 1973 asserted for the Commonwealth territorial sovereignty over the 'territorial sea' and sovereign rights over the 'continental shelf'.⁽⁵⁾ The Petroleum (Submerged Lands) Act 1973 specifically extended Commonwealth control over offshore petroleum exploration and extraction by extending the limits of the 'adjacent areas' (very broadly, areas of sea adjacent to each State between 3 nautical miles and the limit of the 'continental shelf') under the 1967 Act.

The issue was resolved in the Seas and Submerged Lands Case.⁽⁶⁾ Effectively the High Court determined that the Commonwealth has control vis-à-vis the State over all offshore mineral exploration and extraction. The consequence was that, while the States arguably retained their extra-territorial jurisdiction under common law,⁽⁷⁾ it was considered desirable to effect a 're-ordering and readjustment of powers and responsibilities' to reflect the underlying sovereignty of the Commonwealth.⁽⁸⁾ Negotiations commenced between the Commonwealth and the States resulting in the Offshore Constitutional Settlement and amendments to various Acts including the 1967 Act.

Tax Revenue

The Commonwealth has received royalties from petroleum production since production commenced in Bass Strait in 1968. Excise was first levied by the Commonwealth on the production of crude oil, commingled condensate and liquefied propane gas in 1975. In 1983 an excise and royalty regime was implemented which distinguished between onshore and offshore petroleum production, revenue associated with the latter being centralised in accordance with the Offshore Constitutional Settlement.⁽⁹⁾ In 1987 the regime was largely replaced by a new regime based on a 'petroleum resource rent tax' (PRRT), a profit based tax levied on 40% of a project's taxable profits.⁽¹⁰⁾ An outline is given elsewhere.⁽¹¹⁾

North West Shelf

Significantly, the North West Shelf project was exempted from the PRRT. Thus, exploration permits, leases and licences for this project are dealt with specifically by the Petroleum (Submerged Lands) (Royalty) Act 1967 (the Royalty Act). Apparently, the exclusion of the project from the PRRT regime was 'primarily a reaction to economic problems which would be encountered in calculating resource rent tax on the production of the project, were the [Act] applied to it'.⁽¹²⁾ More specifically:

Section 5 of the Royalty Act makes the holder of an interest liable to pay a monthly royalty at the prescribed rate. The prescribed rate is 10 per cent of the value at the well head of petroleum recovered under a lease, permit or licence, by virtue of section 5(2) of the Act, while the rate for a secondary licence is stated in section 5(3) to be determined in accordance with subsection 42(1) of the Act. This provision sets the rate at between 11 per cent and 12 per cent of the value of petroleum recovered at the well head. Section 9 of the Royalty Act allows for the value of the petroleum at the well head to be determined, while section 10 sets out a procedure for ascertaining the quantity of petroleum recovered.⁽¹⁴⁾

Arrangements with Western Australia

Under the Royalty Act, the States and the Northern Territory were paid a share of around 2/3^rds of the monthly royalty collected by the Commonwealth. Section 130 establishes an arrangement whereby the Commonwealth shares with Western Australia an additional share of its royalties from the domestic gas phase of the North West Shelf project. The additional share equates to:

• the remainder of the yearly royalty retained by the Commonwealth, or
• a fixed yearly royalty based on the yearly royalty collected by the Commonwealth in 1984-85 and weighted according to changes in GDP

whichever is the lesser.

The arrangement was introduced to 'help Western Australia meet its contractual obligations to the North West Shelf operators and so ensure the continued viability of the project'.⁽¹⁵⁾ It seemed that, in negotiating a take-or-pay contract with the joint venturers, the Court Government in Western Australia had over-estimated the domestic demand for gas. As a result, the State Energy Commission of Western Australia might have incurred 'major payment obligations for gas that could not be used'.⁽¹⁶⁾ The Commonwealth Minister for Resources and Energy said, 'It was clear that the basic principle of the take or pay contract had to be honoured, and a sufficient cash flow ensured to the joint venturers to enable the financing of the export phase of the project.'⁽¹⁷⁾ The arrangement was to last until 2004-05.

Since the arrangement was introduced, royalty receipts have grown exponentially, outstripping the fixed regime and reducing the proportional burden on the Commonwealth.

Actual Petroleum Royalties Collected by the Commonwealth (to May 2000)⁽¹⁸⁾

One-off Payment to Discharge the Obligation

The Explanatory Memorandum indicates that the Commonwealth and Western Australia have agreed for the Commonwealth to make a one-off payment of $79,118,990 ($117.1m in 1984/85 dollars) to discharge the entire obligation under section 130. It is estimated that the one-off payment will save the Commonwealth $93.9m.

However, given the fact that section 130 creates an exclusive regime for making these payments, it effectively ties the hands of the Commonwealth Treasurer. Therefore, in order to make the one-off payment, it is necessary to repeal section 130.

Main Provisions

Schedule 1 Item 1 repeals section 130 of the 1967 Act.

Endnotes

1. http://www.bhp.com.au/aboutbhp/fastfacts/northwest.htm.
2. For an overview of its economic and fiscal impacts see North West Shelf Expansion Project: Australian Economic and Fiscal Impacts, prepared by Access Economics for Woodsite Offshore Petroleum Pty Ltd at http://www.ae.aust.com/~bhaccess/nwsaust.doc [8/6/00]. For a general critique of the project's prospects see Brian Robbins, 'North Slope poses a threat to NW Shelf', Business News Resources, 24/8/98 at http://www.brw.com.au/content/240898/brw08.htm [8/6/00].
3. 'Economic Impact' on the Woodside webpage at http://www.woodside.com.au/anws/impact.html [8/6/00].
4. In fact, the issue was first tested in 1970 with the Territorial Sea and Continental Shelf Bill 1970, but the Bill never proceeded. The Seas and Submerged Lands Bill 1973 followed a report by the Senate Select Committee on Offshore Petroleum Resources that recommended the issue be resolved by Commonwealth legislation.
5. These terms reflected the terminology in the Convention on the Territorial Sea and the Contiguous Zone and Convention on the Continental Shelf, op. cit. note 35.
6. NSW v The Commonwealth (1975) 135 CLR 337.
7. For example, the High Court held that the States retained a power over fisheries in the territorial sea: Pearce v Florenca (1976) 135 CLR 507.
8. Offshore Constitutional Settlement: A milestone in co-operative federalism, Commonwealth of Australia, Attorney-General's Department, AGPS, Canberra, 1980, p. 4.
9. Petroleum (Submerged Lands) Amendment Act 1980 and the Petroleum (Submerged Lands) (Royalty) Amendment Act 1980. Both these Act commenced in 1983.
10. Petroleum Resource Rent Tax Act 1987 and the Petroleum Resource Rent Tax Assessment Act 1987.
11. Petroleum (Submerged Lands) Legislation Amendment Bill 1999, Bills Digest
    no. 45, 1999-00 at http://www.aph.gov.au/library/pubs/bd/1999-2000/2000BD045.htm [8/6/00].
12. Ian Ireland & Marco Bini, 'Mineral resources: taxation, levies & charges - a legislative overview', Background Paper no. 28, 1994-95 at http://search.aph.gov.au/search/ParlInfo.ASP?Folder=PRSPUB&Criteria=citation_id:VH520;&action=bookmark.
13. Michael Ridd, 'Royalties and natural resources: a discussion paper', Background Paper No. 11 1992 at http://search.aph.gov.au/search/ParlInfo.ASP?Folder=PRSPUB&Criteria=citation_id:U7T00;&action=bookmark. The author cites a press release: Australia. Treasurer (Paul Keating) and Minister for Resources (Alan Griffiths). 'Review of petroleum production excise and royalty arrangements'. Press release, no. 78, 21 Aug. 1990.
14. This description is paraphrased from Ian Ireland & Marco Bini, 'Mineral resources: taxation, levies & charges - a legislative overview', Background Paper no. 28, 1994-95.
15. The Hon Kim Beazley, MP, Petroleum (Submerged Lands) Amendment Bill 1985, Second Reading Speech, Parliamentary Debates, 23/4/85, p. 1697 at [8/6/00].
16. Senator Gareth Evans QC, 'Agreement Reached on North West Shelf', Press Release, 11/3/85.
17. ibid.
18. Source: Personal Communication, Department of Industry Science and Tourism.

Contact Officer and Copyright Details

Nathan Hancock
20 June 2000
Bills Digest Service
Information and Research Services

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.

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ISSN 1328-8091
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Published by the Department of the Parliamentary Library, 2000.

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