Mining and resources changes

Budget Review 2013–14 Index

Alex St John

The most important Budget measure for the resources sector is that companies will no longer be able to immediately claim a tax deduction for the cost of acquiring an exploration permit or licence bought from another company.[1] These ‘mining rights’ also include information relating to resource exploration. Instead of an immediate deduction of the full cost, these items will now be depreciated over 15 years. This measure does not apply to the initial purchase of such rights from a relevant government authority, or to ‘farm-in/farm-out’ arrangements.[2] This measure is expected to raise $1.1 billion over the forward estimates.[3]

According to the Government, the changes aim to avoid exploration permits being sold through several companies (each time deducting the purchase price), without real exploration taking place.[4] Mining advocacy groups have complained that the measure affects Australia’s international competitiveness.[5] Petroleum advocates argue that the measure discourages smaller exploration companies from selling their interests to larger, better-resourced companies, thus reducing incentives to undertake exploration.[6]

According to the Reserve Bank, the Australian resource industry is heavily reliant on small, ‘junior explorers’, since most large companies have reduced their exploration capacity in Australia. Small companies typically sell their interests to medium-sized companies, who on-sell to large companies.[7] Although the measure will reduce the tax benefit to companies acquiring interests from other companies by cash purchase, it is not clear whether the measure will discourage genuine exploration efforts, or simply remove incentives for speculative mining right acquisitions. The option to sell a mining interest by a farm-in arrangement keeps the entitlement for the incoming company to claim an immediate deduction.[8] In this case, both the original and incoming mining interest holders retain a financial interest in the resource being commercially developed. To date, media commentary has focussed on increased costs to industry. There has been little examination of the propriety of allowing expensive assets (exploration permits and information) to be written off immediately – a benefit which is not generally open to other industries – and whether the risky nature of resource exploration justifies the favourable tax treatment.

A smaller measure is the Government’s previously announced move to restore the deductibility of certain expenses related to petroleum production operations under the Petroleum Resource Rent Tax (PRRT). A Federal Court decision in 2012 seemed to limit the ability of petroleum producers to apportion operating and exploration expenses over numerous projects, which was not in keeping with the design intent of the PRRT. [9] The original intended deductibility will be restored by amendments to the Act.[10] The cost of this measure is $120 million over the forward estimates.[11]

Other exploration measures

Geoscience Australia (GA) has been provided with an additional $34 million in 2013–14 and $40 million annually thereafter. This funding is to expand GA’s core program of geo-scientific services, particularly the preparation of ‘pre-competitive’ data, which amounts to preparation of offshore petroleum acreage for competitive tendering.[12] This funding will allow the agency to expand from 690 to 720 employees.[13] This measure seems directed at opening up more offshore acreage for exploration in a bid to increase taxation revenue under the PRRT in the long-term.

The new GA funding coincides with the introduction of cash-bid tenders for selected exploration permits. Under the Offshore Petroleum and Greenhouse Gas Storage Act 2006, tenders for petroleum exploration permits may be invited by cash-bids (where an applicant nominates a price they will pay for the exploration rights) or a work-bid (where an applicant nominates a program of work they will undertake to develop the petroleum resource). [14] Cash-bids do not require an associated work program but provide instant revenue for the Government. Work-bids only provide substantial revenue to the Government if the resource moves into production. Since 1992, work-bids have been the only mode of tendering for exploration permits.[15] Cash-bids are only designed to be used in areas where a petroleum resource is known to exist;[16] hence the ‘pre-competitive data’ provided by GA must be high-quality for the tender process to be successful.

The Budget predicts that the cash-bid measure will raise $160.3 million over the forward estimates.[17] However, as cash-bids are won by competitive tender, actual revenue will depend on market conditions. Petroleum advocates say the measure will reduce funds for exploration.[18]

Study into compliance with International Energy Agency requirements

The Budget provides $1.5 million over two years to the Department of Resources, Energy and Tourism (RET) to conduct a study and consultation on implementing the International Energy Agency’s (IEA) requirement that member countries stockpile 90 days’ worth of oil imports, to guard against supply disruptions. RET is also provided with $3.6 million over the forward estimates to introduce mandatory reporting by industry on their oil stockholdings.[19]

When Australia originally joined the IEA in 1979, Australia was a net exporter of oil and was exempt from the requirement to stockpile 90 days’ worth of imports. Since 2000, Australia has become heavily dependent on oil imports, but has not moved to implement the IEA requirement. Australia is the only member country of the IEA that relies entirely on private industry to comply with its stockpiling requirement.[20] As at January 2013, Australia had only 63 days of oil stock on hand, in contravention of the IEA’s requirement.[21] The Minister for Resources and Energy currently can direct companies to stockpile liquid fuels, but these powers are designed to be exercised only as an emergency measure.[22]

[1].       Australian Government, Budget measures: budget paper no. 2: 2013–2014, Commonwealth of Australia, Canberra, 2013, pp. 36–37 accessed 15 May 2013.

[2].       Farm in/farm out arrangements are typically where a small exploration company assigns some of their mining rights to another company that will undertake more technical exploration or production on the permit (such as drilling test wells). The original mining rights holder may earn a royalty or other benefit if the resource is commercially developed, in addition to being entitled to the proceeds of their remaining portion of the mining interest.

[4].       P Coorey, ‘Swan accuses BCA of Liberal bias’, Australian Financial Review, 16 May 2013, p. 1, accessed 16 May 2013.

[5].       J Kunkel, ‘Budget 2013’, Minerals Council of Australia website, 14 May 2013, accessed 15 May 2013; M Smith, ‘Changes ‘will discourage exploration’’, Australian Financial Review, 16 May 2013, p. 10, accessed 16 May 2013.

[6].       Australian Petroleum Production and Exploration Association, ‘Oil & Gas industry budget response’, Australian Petroleum Production and Exploration Association website, 14 May 2013, accessed 15 May 2013.

[7].       T Williams, ‘Exploration and the listed resource sector’, Bulletin, Reserve Bank of Australia, September 2012, pp. 37–42, accessed 16 May 2013.

[9].       W Swan (Deputy Prime Minister and Treasurer), M Ferguson (Minister for Resources and Energy) and D Bradbury (Assistant Treasurer), Amendments to address issues arising from Petroleum Resource Rent Tax litigation, media release, 14 December 2012, accessed 15 May 2013.

[10].     Petroleum Resource Rent Tax Assessment Act 1987, accessed 16 May 2013.

[11].     Budget measures: budget paper no. 2: 2013–2014, op. cit., pp. 31–32.

[12].     Australian Government, Portfolio budget statements 2013–14: budget related paper 1.16: Resources, Energy and Tourism portfolio, Commonwealth of Australia, Canberra, pp. 82–86, accessed 15 May 2013.

[13].     Ibid.

[14].     Offshore Petroleum and Greenhouse Gas Storage Act 2006, Chapter 2, accessed 15 May 2013

[15].     Department of Resources, Energy and Tourism (RET), ‘Competitive cash-bidding fact sheet’, RET website, accessed 15 May 2013.

[16].     Ibid.

[18].     APPEA, ‘Oil & Gas industry budget response’, op. cit.

[19].     Budget measures: budget paper no. 2: 2013–2014, op. cit., pp. 251–252.

[20].     International Energy Agency, Energy Policies of IEA Countries – 2012 Review – Australia, IEA, Paris, 2012, pp. 137–152.

[21].     International Energy Agency (IEA), ‘Closing oil stock levels in days of net imports, IEA website, January 2013, viewed 8 May 2013.

[22].     Liquid Fuels Emergency Act 1984, accessed 16 May 2013.

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