Petroleum resources are owned by the community and a royalty is a purchase price for the resource. The community expects a fair return for the loss of its non-renewable petroleum resources.
A key aspect to Western Australia’s low sovereign risk status is its royalty system which provides industry with a straightforward, transparent, stable and predictable arrangement.
A fair, consistent and appropriate value of petroleum resources must apply when calculating royalties, regardless of where or how a commodity is sold. If the State Government finds that new industry practices are testing its commitment to the community receiving a fair return for the State’s globally traded resources, it will adjust the laws to ensure that the integrity of our royalty system is not compromised and the community continues to receive a fair return.
Petroleum royalties are administered and collected under State and Commonwealth legislation.
Royalties collected for onshore projects are retained by the State Government, while offshore royalties are shared between the State and Commonwealth in accordance with the relevant legislation.
In Western Australia, all petroleum and geothermal energy existing in their natural form within State jurisdiction are owned by the State, being held in trust by the government on behalf of the community.
In 1967, Commonwealth and State officials reached agreement on an Offshore Constitutional Settlement. The agreement includes a 60:40 revenue sharing arrangementof the 10 per cent royalty rate of the well-head value. Any royalties exceeding 10 per cent royalties go entirely to the State.
New petroleum projects landward of the outer limit of the territorial sea are subject to either the Petroleum (Submerged Lands) Act 1982 or Petroleum and Geothermal Energy Resources Act 1967.
There are five Acts that apply to petroleum projects in Western Australia. These are the:
- Offshore Petroleum and Greenhouse Gas Storage Act 2006 - covers production from fields originating from the North West Shelf project areas covered by permits WA-1-P and WA-28-P. This is an area of Commonwealth jurisdiction in which a wellhead value royalty system is used.
- Petroleum (Submerged Lands) Act 1982 - covers fields within a defined coastal waters area, generally being three nautical miles seaward from the baseline, as well as certain ‘subsisting’ permit areas located within State inland waters. The State administers a wellhead value royalty system.
- Petroleum Resources Rent Tax Assessment Act 1987 - applies to all petroleum projects. The Commonwealth administers a resource rent tax, for each project.
- Petroleum and Geothermal Energy Resources Act 1967 - applies to onshore areas and waters landward of the baseline of the coastal waters, other than ‘subsisting’ permit areas under the Petroleum (Submerged Lands) Act. The State administers a wellhead value royalty system.
- Barrow Island Royalty Variation Agreement Act 1985 only applies to Barrow Island. This royalty regime was agreed between the producer and, the State and the Commonwealth Governments as an incentive for the continued maintenance of the wells on Barrow Island to ensure optimal oil recovery. This Resource Rent Royalty (RRR) replaced the wellhead royalty and excise system that had previously applied. The RRR is a royalty based on a percentage of net cash flow.
For Further information on resources taxation please visit the Commonwealth website
Petroleum royalties are levied on petroleum production onshore, within coastal waters and the North West Shelf Project. The rate of royalty is normally set at 10% of the wellhead value for a primary production licence and 12.5 per cent of the wellhead value for a secondary production licence.
In addition to State royalties, Commonwealth legislation provides for an excise on all oil and condensate produced onshore, or within three nautical miles of the Australian coastline, as well as some offshore production in the North West Shelf.
Generally, there are three systems used for the collection of petroleum royalties:
- Resource Rent Royalty (RRR)
- Petroleum Resource Rent Tax (PRRT).
Wellhead and resource rent royalties are administered and collected under State and Commonwealth legislation. Royalties collected for onshore projects (except Barrow Island) are retained by the State Government, while offshore projects are shared between the State and Commonwealth Governments in accordance with the relevant legislation. Barrow Island onshore royalties are also shared between the State and Commonwealth Governments.
The Petroleum Resource Rent Tax is administered and collected by the Australian Taxation Office.
The wellhead value is derived by taking the gross value of petroleum recovered, and deducting all costs incurred between a defined valve on the christmas tree (pipes and valves fitted to a production well-head to control flow of oil or gas) and the point of sale. Deductible costs are normally confined to processing, storage and transport of the petroleum recovered by the producer to the point of sale. All other costs, including those associated with exploration, drilling, recovery and abandonment, are not deductible.
The defined location of the wellhead and the methodology for calculation of wellhead value are usually included in a royalty schedule specific to each producer.
Gross value is the value of petroleum recovered. It includes the value of arms-length sales (genuine commercial transactions between un-related participants) and the change in stocks of petroleum products. Opening and closing stocks are valued according to the weighted average unit price of the past month’s sales.
Transactions denominated in foreign currency are converted to Australian dollars, based on the Reserve Bank of Australia (RBA) mid-rates published weekly by the RBA and daily in the Australian Financial Review newspaper.
Costs that are allowed to be deducted against the gross value to determine wellhead value include:
- post-wellhead operating costs
- depreciation on commissioned post-wellhead assets.
Post-wellhead operating and capital costs
Usually at the beginning of a petroleum project, expected operating and capital costs are itemised by a prospective producer. Post-wellhead percentages are then agreed between the State Government and the producer for each cost item.
Depreciation on commissioned post-wellhead assets
Usually at the beginning of a petroleum project, a depreciation calculation is negotiated between the State and the producer and set out in an agreed schedule. A straight-line depreciation calculation normally applies.
Deductible costs can vary up to a limit of 50 per cent of the gross value of production for oil projects or 90 per cent of the gross value of production for gas projects for each royalty period. The choice of the deduction limit is determined by the ‘predominant’ nature of the project, and may change as a project shifts from a predominantly oil to a predominantly gas project. Any un-deducted expenditure is carried forward to the next month.
Resource Rent Royalty (RRR)
The Barrow Island Royalty Variation Agreement Act 1985 was agreed between the producer and the State and the Commonwealth Governments as an incentive for the continued maintenance of the wells on Barrow Island to ensure optimal oil recovery. The RRR replaced the wellhead royalty and excise system that had previously applied. It is a royalty based on a percentage of net cash flow.
The key aspects of the RRR are as follows:
- all allowable expenditure, both current and capital, is written off when incurred. However, exploration costs incurred more than a year prior to the application of the RRR are not allowable
- any excess of costs over revenues are carried forward and compounded at a ‘threshold’ rate
- excess income over the threshold rate is charged the RRR at a rate of 40 per cent
- is a primary tax before income tax and is deductible against that tax
- the revenue is shared 75 per cent to the Commonwealth, 25 per cent to the State. The higher Commonwealth share reflects the larger proportion of Commonwealth entitlements under the prior royalty and excise regime.
By agreement between the Commonwealth and the State Governments, the State maintains full responsibility for administration of the regime.
Petroleum Resource Rent Tax (PRRT)
The PRRT is a secondary tax, based on a project’s profitability, and applies to all petroleum products from a project, such as crude oil, natural gas, liquefied petroleum gas condensate, but not value added products, such as liquefied natural gas.
On 29 March 2012, the Commonwealth Government introduced the extension to the PRRT 1987 with the objective of delivering a fairer return to the Australian community from the extraction of its non-renewable resources. The PRRT regime was extended to all onshore petroleum operations from 1 July 2012. The expanded PRRT regime applies to taxable profits derived from a petroleum project in a financial year and is deductible against income tax. Taxable profit is calculated by deducting eligible project expenditures from the assessable revenue derived from the project. It covers all Australian onshore and offshore oil and gas projects, including the North West Shelf.
Information about the extension to the PRRT can be found in the Petroleum Resource Rent Tax Assessment Amendment Act 2012. It should be read in conjunction with the Petroleum Resource Rent Tax Assessment Act 1987 to appreciate the effects of its amendments.
The PRRT is a profit based project tax. It is applied at a rate of 40 per cent to a project’s taxable profit, such as project income less project expenditure, project exploration expenditure and exploration expenditure transferred in from other related PRRT projects.
An additional amount must be paid if royalty payment is not made by the due date stipulated.
Royalty returns can be submitted through Royalties Online
The department accepts royalty payments by Electronic Funds Transfer (EFT).
Late payment penalties
An additional amount must be paid if payment is not made by the due date stipulated in the relevant legislation. The additional amount is calculated from the time the royalty became payable until it is paid.
All EFT royalty payments must be made within the prescribed time as stated in the respective legislation to the relevant departmental account. These accounts are:
For royalties other than Barrow Island RRR and North West Shelf Project
Bank: Commonwealth Bank of Australia
It is a requirement for your Payer Reference Code to be included on your EFT transaction so that the Department can allocate your payment against the correct payer/project(s).
Due to changes to its Royalties Management System, DMP Regional Offices can no longer accept royalty payments. The only acceptable form of payment method is by cheque or EFT as outlined above.
For Barrow Island RRR / Penalties
Bank: Commonwealth Bank of Australia
For North West Shelf royalties
Bank: Reserve Bank of Australia
Please include your Payer Reference Code on your EFT transaction so that the Department can allocate your payment against the correct payer/project(s).
For information on the Divisions/Branch Quality Assurance.