ANALYSIS

Dutch giant Shell forecasts it will never pay Australia for oil and gas extracted for the Gorgon and Prelude LNG projects that it can sell for up to almost $4 billion a year.

Shell owns 25 per cent of the Chevron-operated $US54 billion Gorgon LNG project and 67.5 per cent of its Prelude floating LNG project that are both liable to pay Petroleum Resources Rent Tax.

Shell’s outlook of no PRRT payments is recorded in notes to the 2020 financial accounts for the global group released last week.

The note may not be apparent to a layperson, but the meaning is plain to an accountant: free gas forever from Australia.

PRRT is payable when a project’s income exceeds losses, and this would not be expected for some years after production starts due to the enormous cost of LNG projects.

To keep track of future PRRT payments, accountants recognise accumulated losses as a deferred tax asset and accumulated income as a deferred tax liability. Eventually, income should exceed losses, and PRRT is then paid at a rate of 40 per cent of the profit.

However, Shell’s accounts state that “deferred tax assets are recognised only to the extent it is considered probable that those assets will be recoverable.”

In other words, the accountants cannot record or “recognise” losses as a deferred tax asset if it is unlikely that Shell will pay any tax.

Shell accumulated “unrecognised” PRRT losses of $US39.4 billion to June 2020 and “based on business forecasts at existing commodity price levels, and the annual augmentation of the unused PRRT losses, this amount is expected to increase in the near future.”

While Shell’s assessment at the end of 2020 that it would never pay PRRT may have been based on the relatively low oil and gas prices of 2020, the multinational made the same assessment in its 2019 accounts before the pandemic hit commodity prices. It is possible that very buoyant gas prices in the future could alter Shell’s assessment.

Boiling Cold calculated that Shell’s share of production from the Gorgon and Prelude projects at full capacity was worth about $2.4 billion at 2020 prices and $3.8 billion in the more normal oil and gas market of 2019 (see spreadsheet link below).

Despite the pandemic, Shell made $US4.8 billion ($6.3 billion) profit in 2020.

A Shell spokesperson said the company complies with all its legal and tax obligations and is committed to paying the right amount of tax under the letter and the spirit of the law in all countries it operates in.

“Despite being in a heavy investment phase and net cash flow deficit, the Shell Australia Group made total taxation payments of around $5.8 billion during the last 10 years ended 31 December 2019,” the spokesperson said.

Much of this would be company tax that, like PRRT, is applied as a proportion of a calculated profit.

But the two taxes are levied for very different reasons.

All companies in Australia are liable to pay company tax, at 40 per cent of profit for large companies like Shell, for the same reason individuals pay income tax: to contribute to the community they are part of.

PRRT is an additional payment for a business input: oil and gas in the ground owned by the Australian Government that companies extract for profit.

The Australian Government does not give free meat to butchers or free flour to bakers, but with the PRRT, it gives away vast quantities of gas to multinational LNG makers.

Juan Carlos Boué, counsel at international law firm Curtis that advises countries on oil and gas policy, said the poor PRRT revenue outlook was not a recent phenomenon.

“Even before the pandemic, the likelihood of these projects ever paying taxes was recognised to be essentially zero by the Australian Government itself,” Boué said.
“Shell is saying nothing that the Government and everybody in the know has not been aware of for some time now.”

The 2017 Callaghan review into the PRRT concluded that at an oil price of $US65 a barrel, “most of the major LNG projects do not pay any PRRT.”

The main reason projects do not pay PRRT is that the legislation increases or “augments” accumulated losses each year.

“Simply put, the uplift rate applicable to the unrecovered expenditure is so great that, with the miracle of compound interest, there is just no way for project net income to catch up, ever,” Boué said.

The chance of Australia receiving payment for gas used at Gorgon and Prelude was further reduced by cost overruns of about 45 per cent at both projects and years of schedule delays that allowed losses to escalate further.

Prospects for change?

After the Callaghan Review, the Government reduced the most excessive uplift for some exploration expenditure from 15 per cent above the long term bond rate to 5 per cent above the LTBR. This change was effective from mid-2019, so it would be allowed for in Shell’s forecast.

The Government is still considering one change to PRRT: gas transfer pricing. This determines the notional price attributed to raw gas before it enters an LNG plant, and this price is used to calculate PRRT payable. The review commenced in November 2018 and is not yet complete.

The Shells spokesperson said the company believed for taxes, “it is up to governments to set their policies and the rules for individual and business taxes.”

“Governments make deliberate fiscal policy decisions on tax rates, reliefs, exemptions and allowances or disallowances,” the spokesperson said.

Oil and gas lobby group APPEA, which Shell is a member of, last week called for the Government to “close out the PRRT gas transfer pricing review without change.”

In WA, Shell also owns one-sixth of the North West Shelf LNG project, and in Queensland it has 50 per cent of Arrow Energy and a majority take in QGC LNG. These gas projects are not subject to PRRT but other regimes to pay for the oil and gas extracted.

Each company owning equity in a project subject to PRRT could have different exposures to paying the tax as some accumulated losses can be shared with other projects, and this opportunity varies for each company.


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Supporting calculations:

Shell free gas calculation.xlsx
Microsoft Excel Workbook

Main image: Shell graphic. Source: Boiling Cold.