Bills Digest no. 114 2007–08
Excise Tariff Amendment (Condensate) Bill
2008
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
Financial implications
Main provisions
Contact officer & copyright details
Passage history
Excise Tariff Amendment (Condensate)
Bill 2008
Date
introduced: 15 May
2008
House: House of Representatives
Portfolio: Treasury
Commencement:
On the date of the Royal
Assent.
Links: The
relevant links to the Bill, Explanatory Memorandum and second
reading speech can be accessed via BillsNet, which is at http://www.aph.gov.au/bills/.
When Bills have been passed they can be found at ComLaw, which is
at http://www.comlaw.gov.au/.
The purpose of the Bill is to end
the current exemption from excise of condensate produced in the
North West Shelf project area and onshore areas, and to replace it
with a new system which imposes excise on condensate.
Crude oil produced in Australia falls into three categories:
- old oil is oil that was discovered and in production before 18
September 1975
- intermediate oil is oil discovered before 18 September 1975 but
not developed as at 23 October 1984, and
- new oil is oil produced from naturally-occurring discrete
accumulations discovered on or after 18 September 1975.
Condensate is a form of light crude oil. It is a by-product of
so-called wet natural gas and is used mainly to produce petrol.
Not all crude oil technically called stabilised crude petroleum
oil is subject to excise. Some is subject to the petroleum
resource rent tax. The oil that is subject to crude oil excise
reflects the constitutional division of responsibility between the
Commonwealth and the States. The following categories are
subject to the crude oil excise:
- with respect to offshore projects, the Commonwealth levies
excise and a royalty on the North West Shelf
- coastal waters projects are subject to excise and State
royalties, and
- onshore projects are subject to excise.
Whereas some crude oil is subject to excise, condensate is
excise-free.
Excise is based on the value of sales. This is the product
of:
- the volume of annual sales and
- the average realised price of that annual volume (measured in
megalitres).
The first 4,767 megalitres (the metric equivalent of 30 million
barrels) of crude oil produced from a field are exempt.
The value of sales is known as VOLWARE (from the volume-weighted
average realised price).
The rates of excise:
- are set as a percentage of VOLWARE
- rise as the annual sales volume increases that is, the marginal
rates rise and
- vary depending on whether the oil is old, new or
intermediate.
As an example, the current rates of excise on new oil are set
out in the following table. These are the rates that the Bill
proposes to apply to condensate.
|
Annual sales (megalitres)
|
Percent of VOLWARE
|
|
0 to 500
|
0
|
|
Over 500 to 600
|
10
|
|
Over 600 to 700
|
15
|
|
Over 700 to 800
|
20
|
|
Over 800
|
30
|
The Whitlam Government introduced the crude oil excise in August
1975 to redistribute to the community, via the Government, some of
the gains oil producers received after world prices increased in
1973. In determining of the level of excise, the Government of the
day sought to balance the return to the community against the need
to ensure adequate incentives for exploration and production of
oil. This was evident in the major changes to the excise rates
which occurred on 23 October 1984. Before that date, the rates
depended on whether oil was classified as old or new . Oil
discovered before 18 September 1975 was classified as old oil . New
oil was oil produced from naturally occurring discrete
accumulations discovered on or after 18 September 1975. The excise
revisions of 23 October 1984 were aimed at encouraging the
development of a number of old oilfields that had not been
developed because of inadequate returns under the previous oil
excise scale. Such fields became eligible for concessional
treatment under a new intermediate excise category.
The exemption of condensate from excise was introduced in 1977
in the context of international oil prices exceeding domestic
prices. The following is the relevant excerpt from the Budget
speech given by the then Treasurer, the Hon. Phillip Lynch, dealing
with crude oil policy (bolding added):
The world price of crude oil has risen
dramatically in recent years but only very minor adjustments have
been made to the price of crude from Australian wells. Australian
crude is now substantially underpriced. Without significant new
discoveries in the next few years, indigenous crude oil would fall
from meeting about 70 per cent of total Australian demand to about
30 per cent from 1985. We cannot afford a pricing policy that flies
in the face of all energy conservation principles by condoning
excessive consumption of our scarce presently known supplies of
crude. We are moving to an appropriate energy pricing structure.
The National Energy Advisory Committee has the whole question of
national energy policy under urgent study and is reporting
progressively to the Government on it. We also need a pricing
policy that encourages new exploration and ensures full economic
recovery of known deposits. In partial recognition of these truths,
the previous Government announced, and we have maintained, a policy
of applying import parity prices to oil discovered after 14
September 1975. But the previous Government did nothing to conserve
the usage for existing fields, to increase the extent of recovery
from them, or to develop new fields based on discoveries already
made. An estimated 400 million barrels of oil could be recovered in
Australia at import parity prices that would not be recovered at
existing prices. This would add about 20 per cent, or about two
years present requirements, to the reserves which could be
economically recoverable at present prices. Following a Government
reference in May 1976, the Industries Assistance Commission has
made recommendations directed to an orderly transition towards
import parity prices for all local oil. The Government endorses
this objective and has adopted an approach based essentially on the
Commission s recommendations. An annually increasing proportion, or
six million barrels per annum, whichever is the greater, of crude
oil from each field or new development within fields discovered
before 14 September 1975, will be sold at import parity prices,
with the remainder sold at the present fixed prices for each field.
For the first year, commencing tonight, the proportion of oil per
field to be sold at import parity prices will be 10 per cent of
production. In the three subsequent years, the corresponding
proportions will be 20, 35 and 50 per cent. Beyond this, it is the
Government s intention to move to full import parity as soon as
possible thereafter; accordingly it will, prior to the end of the
period, review the matter.
The Government believes that not all the
additional profits resulting from these decisions should remain
with the producers, and that the community should obtain a return
from the exploitation of these resources which adequately reflects
their value. The fact that the recently increased value of crude
oil stems essentially from action by a cartel of foreign oil
producers makes the community interest in that enhanced value all
the more obvious. In view of this, the Government has decided to
increase the production levy on crude oil from $2 to $3 per barrel.
The Government is, meanwhile, examining whether the levy should be
replaced by a resources tax. The levy will not apply to
condensate marketed separately from a crude oil stream; such
condensate may now be sold at commercially negotiated
prices. Nor will the levy apply to liquefied petroleum gas
fields not yet in production. This will assist the
marketing of L.P.G. and condensate from fields already discovered
but not yet developed in the North West Shelf and the Cooper
basin. Condensate sold commingled in a crude oil stream
will continue to be treated as crude oil for pricing and levy
purposes. The levy on liquefied petroleum gas from currently
producing fields will remain at $2 per barrel.[1]
The exemption was intended to encourage the development of the
liquefied natural gas (LNG) industry in the North West Shelf and
thus can be seen as a form of infant industry assistance.
The rates of excise on old oil and new oil were reduced on 1
July 2001. These changes were made under the
Excise Tariff Amendment (Crude Oil) Act 2001. The
justification for the reductions was that the lower rates might
stimulate further evaluation of the fields which were producing old
oil and new oil .[2]
This Bill contains provisions which refer to 1 July 1987 being
the date on which earlier major changes to excise arrangements were
made. In particular, the first 30 million barrels of oil from
offshore fields that began production after 1 July 1987 were
exempted from excise. (The first 30 million barrels for onshore
fields were also made excise-exempt).[3]
The LNG industry has, not surprisingly, reacted negatively to
the decision. These reactions have taken two main forms.
Firstly, the industry argues that the decision undermines
investor confidence, and that this could threaten future
investment.
Secondly, the Government made the decision without consulting
the industry and the industry claims that this has had the effect
of undermining relations between the Government and the industry.
For example, the
Chief Executive of the Australian Petroleum and Exploration
Association Limited took the view that the decision creates
uncertainty and expressed concern about the lack of
consultation.[4] Mr
Don Voelte, the Chief Executive of Woodside Petroleum Limited, a
major participant in the LNG industry,
made it clear in a formal ASX announcement that Woodside is
considering its position following the decision, stating that:
.. the relief from condensate excise was among
a range of measures between the North West Shelf participants and
the Commonwealth and Western Australian governments that
underpinned the economic viability of the project, while
guaranteeing early financial returns to government.
This is not a loophole which is being closed,
or a free ride which has come to an end. This is a negotiated
fiscal arrangement which formed the basis of Australia s largest
resource development.[5]
He further stated that the existing taxation arrangements had
underpinned more than $25 billion in investment in the North West
Shelf Venture, providing billions of dollars in revenues to the
Western Australian and Commonwealth governments over the past 24
years. The arrangements resulted in revenues to government flowing
from first production, many years before the project had recouped
its costs. This contrasts with the current petroleum resource rent
tax regime, in which tax is only paid once a project has recouped
its costs.[6]
The effect of the excise is to reduce profits of condensate
producers. This follows from the fact that energy prices in
general, and crude oil prices in particular, are determined on
world markets. In other words, Australia is a price taker so far as
crude oil prices are concerned. Australian producers thus cannot
pass the excise on to international consumers and so will bear the
excise in full.
There are different views as to the desirability of the excise.
On the one hand, it could be argued that the LNG industry has long
since lost its infant industry status and that assistance is no
longer justified. The exemption was granted when it was difficult
for the partners in the North West Shelf project to justify the
costs of proceeding with the development. The industry has since
grown strongly and growth is projected to continue.[7] It could also be argued that the
exemption is a distortion in the taxation regime, and that applying
the same rate of excise on condensate as on new oil would eliminate
a distortion. This argument is strengthened by the fact that
condensate, sold commingled in a crude oil stream, is subject to
excise.
On the other hand, it could be argued that the decision
undermines investor confidence in an international industry in
which Australia has to compete for investment. Such investment is
sensitive to the taxation regimes applying in different countries.
The imposition of the excise may thus deter future investment in
Australia by reducing returns to Australian producers. Further,
while the decision may be seen as a means of capturing some of the
windfall profits resulting from current prices, this situation may
not prevail should international energy prices fall in the future,
and is thus opportunistic.
According to an
article in Australian:
the Coalition is refusing to guarantee Senate
passage for the Government's $2.5 billion tax hike on condensate
from the North West Shelf, citing concerns that the move will raise
gas prices in Western Australia and possibly flow through to the
cost of petrol. [8]
In a
press release, the Shadow Minister for Resources, Energy and
Tourism, Senator the Hon. David Johnston, criticised the excise on
the grounds that it would adversely affect Australia s oil security
position, and discourage local offshore exploration.[9]
For further background, the reaction of the industry to the
proposal, arguments for and against the proposal, and financial
implications, see the Bills
Digest for the Excise Legislation Amendment (Condensate) Bill
2008.[10]
Budget Paper No. 1 2008-09 shows the financial implications for
the Budget as set out in the Table below.
Revenue ($ million)[11]
| |
2007-08
|
2008-09
|
2009-10
|
2010-11
|
2011-12
|
|
Australian Taxation Office
|
107.2
|
673.1
|
763.1
|
753.4
|
753.4
|
|
Department of Resources, Energy and Tourism
|
-13.4
|
-109.1
|
-127.7
|
-127.7
|
-127.7
|
|
Total
|
93.8
|
564.0
|
635.4
|
625.7
|
625.7
|
|
Related Expense ($ million )
|
|
|
Department of the Treasury
|
80.0
|
72.3
|
84.1
|
85.1
|
85.1
|
|
Department of Resources, Energy and Tourism
|
-8.9
|
-72.8
|
-85.1
|
-85.1
|
-85.1
|
|
Total
|
71.1
|
-0.5
|
-1.0
|
-
|
-
|
The related expense refers to the compensation that the
Commonwealth will pay to Western Australia for the royalty revenue
loss that Western Australia will incur as a consequence of imposing
excise on condensate.
The Bill amends various sections of the Excise Tariff Act
1921 (Excise Tariff Act). The Schedule of Amendments has two
parts. Much of Part 1 is devoted to changing
definitions. Part 2 contains application and
transitional provisions.
Items 2 to 13 of the Bill amend existing
subsection 3(1) of the Excise Tariff Act which is a definitions
provision.
Items 2 to 4 deal with offshore production.
Item 2 inserts a new definition of exempt offshore
condensate into existing subsection 3(1). Item 3
repeals the existing definition of exempt offshore oil and replaces
it with a new definition of the term, meaning stabilised crude
petroleum oil that is included in exempt offshore oil and
condensate .
As already stated, excise generally applies only after a
production threshold, namely, 4767.3 megalitres the equivalent of
30 million barrels has been reached. Item 4
defines exempt offshore oil and condensate to mean the first 4767.3
megalitres as defined in either new
paragraphs (a) or (b).
Proposed paragraph (a) of the definition provides
that where an exempt offshore field produces stabilised crude
petroleum oil and condensate, both contribute to
the 4767.3 megalitres threshold. Proposed
paragraph (b) of the definition provides
that where an exempt offshore field produces
either stabilised crude petroleum oil or
condensate (but not both), either contributes to the threshold.
These provisions apply to fields where neither oil nor condensate
was produced before 1 July 1987.
The existing definition of oil producing region in the Excise
Tariff Act is the same as that in the Petroleum Excise (Prices)
Act 1987. Item 6 extends the existing
definition to include:
- a production area for old oil from which condensate is obtained
and which is recognised by regulation, as an oil producing region
or
- two or more production areas from which condensate is
obtained.
The purpose of item 6 is to
ensure that all fields producing condensate will be subject to
excise.
Items 10 to 12 deal with onshore
production. Item 10 inserts a new definition of
pre-threshold onshore condensate into existing subsection 3(1) of
the Excise Tariff Act. Item 11 substitutes a new
definition of pre-threshold onshore oil to mean stabilised crude
petroleum oil that is included in the pre-threshold onshore oil and
condensate. Item 12 inserts a new definition of
pre-threshold onshore oil and condensate . The definition
encompasses three situations where production contributes to the
threshold:
- where production is of both oil and condensate:
proposed paragraph (a) of the definition
- oil only: proposed paragraph (b) of the
definition or
- condensate only: proposed paragraph (c) of the
definition.
Items 15 to 24 of the Bill amend existing
section 5B of the Excise Tariff Act which relates to petroleum.
Existing subsection 5B(2) of the Excise Tariff Act provides that
where two or more kinds of petroleum are mixed together (such as
stabilised crude petroleum oil and condensate), the principal
character of the mixture determines how the mixture is treated for
crude oil excise purposes subject to the following:
- where there is a mixture of stabilised crude petroleum oil and
a petroleum product other than condensate which is deemed to be
stabilised crude petroleum oil: proposed subsection
5B(3)
- where there is a mixture of condensate and a petroleum product,
the petroleum in the mixture which is deemed to be condensate:
proposed subsection 5B(3A).
According to the Explanatory Memorandum the result of the
amendments in items 17 to 20 is that condensate
produced from one well and mixed with stabilised oil from another
is no longer excise free.[12]
Items 21 to 24 of the Bill are consequential
amendments.
Item 25 repeals existing sections 6AB and 6AC
of the Excise Tariff Act. The main effect of proposed
section 6AB is to standardise the definition of applicable
petroleum prices to all four categories of production. The amount
of excise payable is based on applicable petroleum prices. These
prices are subject to determination under the Petroleum Excise
(Prices) Act 1987 for the purpose of calculating VOLWARE and
hence excise. When the VOLWARE is finalised and a determination has
been issued, the applicable petroleum price is that contained in
the determination. Where the final VOLWARE price has not been
determined and an interim VOLWARE price has been calculated, the
applicable petroleum price is that used to calculate the interim
VOLWARE price. Proposed section
6AB inserts the words for stabilised crude petroleum oil
or condensate (as the case requires) in reference to the VOLWARE
price.
Proposed section 6AC deals with the application
of the excise regimes for old oil , intermediate oil and new oil to
different producing regions.
The term production area is defined in existing section 5B of
the Excise Tariff Act to mean separate areas for old oil[13], new oil[14] and intermediate
oil[15].
Item 27 inserts proposed section 6CA.
Proposed subsection 6CA(1) provides for a
new definition of prescribed condensate production area which is
able to be prescribed by by-laws, registered under the
Legislative Instruments Act 2003.[16] Under proposed section
6CA the excise on condensate will be calculated in similar
terms to those in existing sections 6B to 6D of the Excise Tariff
Act. New subsection 6CA(10) sets out the rates of
excise as shown in the table above.
According to item 31, the proposed amendments
will apply to condensate produced after midnight (by legal time in
the Australian Capital Territory) on 13 May 2008. Subitem
31(4) of the Bill provides that, for the avoidance of
doubt, the provisions of the Bill do not affect any excise in
relation to stabilised crude petroleum oil produced before midnight
(by legal time in the Australian Capital Territory) on 13 May
2008.
[11]. Source: Budget Paper No. 1, 2008-09, p.
19.
Richard Webb
27 May 2008
Bills Digest Service
Parliamentary Library
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