This story was originally published in The West Australian on 14 June 2017 with the headline "Senate questions tax Chevron." © Peter Milne.
The credibility of estimates from US giant Chevron, Australia’s biggest holder of gas reserves, of the tax it will pay from its LNG production has been undermined by questions put to the company by the Senate committee on corporate tax avoidance.
To demonstrate how Australia’s current tax arrangements “give the taxpayers a supercharged return”, Chevron Australia managing director Nigel Hearne told the Senate in April that Chevron expected to pay between $60 and $140 billion in petroleum resource rent tax.
“That is a significant number, and I would like to restate it. We expect to pay $60 billion to $140 billion in PRRT,” Mr Hearne said.
Mr Hearne was unable to provide the assumptions used by his employees to produce this “significant number” when questioned by the senators.
Chevron’s recent response to questions on notice from the Senate committee showed a high-price scenario, provided by industry consultant Wood Mackenzie, was used to calculate the higher PRRT estimate of $140 billion.
However, to calculate the lower estimate of $60 billion, Chevron used the mid-price scenario.
As the difference in PRRT paid between the high and medium price assumptions was $80 billion, it is possible much of the $60 billion lower PRRT estimate would disappear if Chevron had used the low-price scenario.
The response to the committee’s questions also showed Chevron relied on an unspecified number of gas discoveries to be approved as projects, starting mid next decade.
These projects still on the drawing board accounted for $59 billion, or 42 per cent, of Chevron’s higher PRRT estimate.
Chevron did not respond when asked why it did not use the Wood Mackenzie low-price scenario for its lower PRRT estimate and what the nature of the additional gas projects was.
A Chevron spokesman said an independent economic analysis showed that between 2009 and 2040 “Chevron Australia’s projects” would produce more than $338 billion of revenue to the Federal Government.
This analysis, performed by ACIL Allen for Chevron in 2015, predicted total government revenue of $355 billion when State revenue was included.
This total included tax from the 53 per cent of Gorgon, 36 per cent of Wheatstone and 83 per cent of the North West Shelf project that Chevron does not own, as well as the multiplier effect of taxation from people and companies associated with the projects.
The amount of tax Chevron paid was estimated to be $68 billion — 19 per cent of the headline number.
ACIL Allen noted that Chevron supplied the estimates of taxation revenue from the Gorgon and Wheatstone projects based on ACIL Allen’s price and exchange-rate forecasts.
For the two projects that will provide the vast share of Chevron Australia’s revenue, the tax was calculated by the recipient of the report, not the author.
ACIL Allen was asked whether the estimate of tax to be paid by Chevron in its report could be considered independent but it was not able to respond before publication.
Chevron used the $338 billion tax estimate in a November 2015 media statement that said Chevron Australia “is testament to the sound working of the PRRT in attracting investment into Australia”.
What the statement did not say, but Chevron’s recent answers to the Senate committee have revealed, is that the government revenue estimates from the ACIL Allen report “did not include an estimation of PRRT”.
Therefore, Chevron supported its argument that PRRT is “designed to deliver substantial returns” with a “high 40 per cent tax rate” with analysis that predicted no PRRT payments from Chevron.
As well as selective assumptions in the Chevron analysis and a lack of clear independence in the ACIL Allen report, the predicted timing of the tax payments needs consideration.
The further out predicted revenue is, the greater the uncertainty that it will occur. It is also less useful to the Australian Government for two reasons.
Inflation will erode the purchasing power of the revenue, which was factored in by ACIL Allen but not in the Chevron analysis.
More importantly, the nation gets more utility out of a bridge or hospital built now than one built in a few decades.
The Chevron analysis predicted PRRT payments to start as late as the mid-2030s and finish in 2062.
Mr Hearne had a positive portrayal of the delayed payment in an opinion piece in a national newspaper in March.
“The PRRT should be viewed as a form of ‘Future Fund’, delivering large returns at a time in the future when Australia’s demographic challenges will be at their greatest,” he wrote.
However, a future fund would receive money now and invest it for future use.
Receiving first payment for gas over a decade after production starts is not a future fund, it is merely delayed (and uncertain) payment for goods provided.
No other industry in Australia gets that deal from their suppliers.