Ruling Compendium

There may be a stronger basis for addressing issues that arise in particular integrated GTL operations by way of Private Rulings rather than a public ruling.

If it is concluded that a ruling is required, a step by step comparison of the provisions contained in the draft ruling with the Regulation to ensure a consistent treatment is applied should take place. As advised previously, this should involve the respective policy agencies.

The Commissioner's perspective, as outlined at the NTLG, is that it is inappropriate for new law to be accompanied by a plethora of rulings. Clarity on the common case is to be intuitively found in the law and in the EM and Second Reading Speeches and other extrinsic material. Generally, no great level of risk aversion is necessary for taxpayers who take a reasonable approach.

A public ruling dealing point by point with each provision in the Regulations is not appropriate. However where experience has demonstrated particular questions on which uncertainty, or difficulty in interpretation and application have arisen, the Commissioner seeks to give all taxpayers the benefit of the clarification which some have required.

The public ruling will reduce the administration costs for the Tax Office and compliance costs for the petroleum industry. In addition, the Tax Office will help those planning integrated GTL operations if the Commissioner's views can be made known before any integrated GTL operations subject to the PRRTA Regulations commit to commence production on any different interpretation. A number of Australian integrated GTL operations that will be subject to the PRRTA Regulations are likely to come on board in the next decade.

At the workshop held in Perth on 5 September 2008, it was concluded that a public ruling that provides a step-by-step guide on how the PRRTA Regulations apply would not be necessary as the Explanatory Statement (Select Legislative Instrument 2005 No. 329) itself provides a step by step explanation of the provisions contained in the PRRTA Regulations.

Given the comments received before and at the workshop and the limited nature of the changes suggested and proposed to be made, a revised draft ruling was circulated to the workshop delegates with two weeks for further comment, along with a preliminary draft of this Compendium of Comments. The Ruling as finalised and this Compendium have had the benefit of this additional opportunity for comment.

Where project sales gas is processed into another product (for example, LPG) that would otherwise be capable of being a marketable petroleum commodity, the product produced from project sales gas does not constitute a marketable petroleum commodity to that extent and is not again subject to PRRT.

(Refer to paragraphs 57 and 96 of the final ruling. There is further discussion on this topic below.)

Gaseous condensate is not within the definition of sales gas at the ring fence (the PRRT taxing point) and therefore the regulations can have no application.

Gaseous condensate is not petroleum (natural gas) from which sales gas will be produced and processed into LNG. Rather, at best, gaseous condensate is petroleum (natural gas) from which condensate is produced.

While 'petroleum (natural gas)' may include gaseous condensate (a point for which there is no clarity of definition), it is irrelevant as it does not have the necessary nexus with the sales gas at the ring fence.

The ATO's inclusion of gaseous condensate within the definition of sales gas results in the regulations then determining the 'value' of the sales gas at the ring fence to determine the PRRT liability.

Gaseous condensate is not typically part of the sales gas for which assessable receipts are determined at the ring fence. However, gaseous condensate constitutes petroleum that is recovered in a gaseous state and is 'petroleum (natural gas)'. Pursuant to subregulation 4(2) of the PRRTA Regulations, the 'petroleum (natural gas)' from which project sales gas that will be processed into liquefied product is to be produced is project natural gas.

The RPM framework works out the assessable receipts in relation to the project sales gas by working out an amount that covers those costs that relate to the recovery and processing of the project natural gas into project sales gas as the cost-plus component of the RPM price. It also works out an amount that reduces the market value of the project liquid by those costs that relate to producing the project liquid from the project sales gas as the netback component of the RPM price. Essentially the RPM price averages the cost-plus and netback components.

The processes necessary for the production of project sales gas from project natural gas include the recovery and transport of the project natural gas and the processes necessary to produce project sales gas from the project natural gas. These processes include removal of many things from the project natural gas, including gaseous condensate.

The removal of condensate from project natural gas does not itself give rise to a phase point at which the ratio of project product to total product changes. The removal of condensate from project natural gas is a necessary requirement in order to produce project sales gas. The PRRTA Regulations treat these costs as costs incurred in producing project sales gas.

The PRRTA Regulations also provide for the apportionment of costs where an integrated GTL operation involves activities which process project product, that is, the project natural gas, the project sales gas or the project liquid, and also process other petroleum product.

Where an integrated GTL operation processes only project natural gas which includes gaseous condensate, there is no processing of project natural gas that is also processing other petroleum product. Consequently the conditions for apportionment of costs are not satisfied and the costs of removing the condensate from project natural gas are part of the costs of producing project sales gas from the project natural gas and are included in the cost-plus component of the RPM price.

In effect, the PRRTA Regulations provide that notwithstanding that condensate is itself a marketable commodity, the 'included' cost of removing condensate from project natural gas is included in the cost-plus component of the RPM price of the project sales gas.

The apportionment of costs between project product and other petroleum commodities is discussed in more detail from paragraph 72 in the final ruling.

The PRRTAA does not assess condensate according to its cost and does not double count by including the same costs in assessable receipts twice, once in relation to project sales gas and once in relation to condensate.

The starting point of the RPM analysis is the project sales gas that is subject to PRRT at the ring fence point. In this regard, the calculation of the cost-plus price should exclude costs attributable to natural gas that will form MPCs other than the project sales gas.

This approach should result in a cost-plus price that is representative of the minimum price that the upstream stage of an integrated GTL operation would sell its sales gas for in order to cover its upstream costs, without being contaminated by costs associated with the production of other MPCs, for example other project product, domestic gas sales, LPGs and gaseous condensate.

The Tax Office view is that 'upstream costs as defined' are the upstream costs that are included as components of the cost-plus calculation as defined by the PRRTA Regulations. Such costs include the full 'included' cost of removing things included in project natural gas so as to produce project sales gas, whether the things removed are themselves marketable or valuable (as marketable petroleum commodities, or otherwise) or not. Refer to paragraph 78 of the final ruling.

It could be argued that under absorption costing principles, the calculation of the minimum price for project sales gas could include a reasonable apportionment of the cost of producing it between the project sales gas and any other things of value arising in the process. Any such method would require a basis for apportionment and would raise questions as to how much of any particular cost properly related to project sales gas and how much to something else. In principle, this would need to reflect engineering questions and questions about capital and operational cost. The PRRTA Regulations do not provide a mechanism to apportion such costs in such a way. Rather, the Regulations take a set account of all costs so far as they are costs of an integrated GTL operation, apportioning those costs between those relating to project natural gas, project sales gas or project liquid and those relating only to other petroleum or petroleum products according to relative energy content. The Regulations ignore some costs which are included in deductible expenditure under the PRRTAA, and do not seek to apportion any costs to any products that do not have energy content.

At the moment that any condensate produced from project natural gas becomes an excluded commodity, there will be an assessable petroleum receipt in relation to it pursuant to section 24 of the PRRTAA. Refer to paragraph 66 of the final ruling.

Refer to paragraph 66 of the final ruling.

Several lighter gases (eg LPG gases) including ethane, propane and butane are included within the definition of sales gas for conversion into project liquid. When liquefied they are included in project liquid. They will not give rise to a separate assessable receipt when made into other products than LNG from the sales gas that already became an excluded commodity. Refer to paragraph 96 of the final ruling.

The Regulations do not include the value of gaseous condensate in the RPM price using the residual pricing method. They include only the cost of separating gaseous condensate from the project natural gas as part of the cost-plus price component. That cost is no more than a very small part of the market value of the condensate and does not include significant costs of transport and storage of the condensate after it is separated. That cost is a cost of producing the project sales gas from the project natural gas and is part of the cost-plus price component.

No part of the value of gaseous condensate is included as part of the netback component in working out the RPM price. Refer to paragraph 78 of the final ruling.

Paragraph 61 of the final ruling (previously paragraph 60 of the draft ruling) states that pentane and heavier hydrocarbons must be removed from the gaseous mixture before it can meet the definition of sales gas. In an integrated GTL operation, if it is possible that a substance containing some pentane or heavier hydrocarbons or other inclusions can meet all of the conditions contained in the definition of project sales gas which includes the condition that it be suitable to be used as feedstock for the project's intended process of conversion to a liquefied product, then the substance will meet the definition of project sales gas.

Paragraph 61 of the final ruling has been updated to reflect this possibility.

It may be technically possible in an LNG project for the substance to be sent for liquefaction to contain some pentane and heavier hydrocarbons.

Paragraph 61 of the final ruling has been updated to reflect this possibility.

The point at which project sales gas is produced from the project natural gas in a particular integrated GTL operation is the point at which the upstream stage ends and the downstream stage commences.

Note that in addition to meeting the other conditions of the definition of project sales gas, the point at which something produced from the project natural gas meets the definition of project sales gas is the point at which the substance is suitable for liquefaction in that integrated GTL project.

My issue is whether the energy content of the LPGs (or more precisely propane and butane) form part of project natural gas and project sales gas. The outcome of whether LPGs do or do not form part of these definitions impacts on the calculation of the relevant energy coefficients which drive the phase based allocation of cost to determine the cost-plus.

Is it confirmed that LPGs form part of the energy content of project natural gas and project sales gas?

In an integrated GTL operation, the petroleum (natural gas) from which project sales gas is to be produced is defined as project natural gas. The 'included' costs incurred in processing the project natural gas to produce project sales gas are included in the cost-plus calculation of the RPM price.

As propane and butane themselves are in a gaseous state when at a temperature of 15ºC and a pressure of one atmosphere, a mixture including them is also ordinarily within the meaning of sales gas as defined in section 2 of the PRRTAA.

In an integrated GTL operation, the sales gas will constitute project sales gas to the extent that the sales gas will be processed into liquefied product of any kind. Such liquefied product includes liquefied petroleum gas (LPG) which is also defined in section 2 as a mixture that includes propane and butane, where the propane and butane comprise more than 50% by weight of the mixture, as well as leaner LNG products and liquid ethane, liquid butane and liquid propane. The 'included' costs associated with producing LPG or other liquefied products from project sales gas are included in the net-back price calculation component of the RPM price for the project sales gas.

The costs associated with processing propane and butane included in the project natural gas and project sales gas will not give rise to a 'multiple use' based allocation to reduce the costs used in the calculation of the RPM price.

Propane and butane that are components of project sales gas will not give rise to separate MPCs that are taxed separately. So far as they are produced from project sales gas that is itself an MPC, they will not be MPCs.

Refer to paragraphs 78 and 96 of the final ruling.

The word 'project' in project natural gas, project sales gas and project liquid is used to differentiate between the petroleum recovered from the project from which sales gas is to be produced that is to be processed into a liquefied product of the integrated GTL operation (or used up in the process of doing so) and all other petroleum.

The costs of processing petroleum (natural gas) that is not project natural gas and sales gas that is not project sales gas and of liquefied product that is not project liquid are excluded from the calculation of the RPM price for project sales gas. The provisions that give effect to this are regulations 6, 7 and 37 of the PRRTA Regulations. Refer to paragraph 72 et seq in the final ruling.

Where LPGs are mixed with LNG in the final liquid to be shipped to customers to increase the heating value, the combined sales gas flow (including propane and butane) is subject to PRRT at the ring fence point prior to liquefaction and the RPM applies to the whole gas stream. This is based on acceptance of the proposition that the propane and butane is within the project natural gas, project sales gas and within PLVal as the case requires.

In this situation the energy content of the sales gas is inclusive of the energy content of the propane and butane in determining the energy coefficients for the relevant phases.

The LPGs, that is.. propane and butane in this instance are not otherwise subject to the operation of sub-paragraphs 24(1)(a), 24(1)(b) or 24(1)(c) of the PRRTAA.

Consequently, whether LPGs are mixed into LNG in the final liquid to be shipped to customers to increase the heating value or not, the RPM method is applied in the same way to determine the taxable profit of the project sales gas at the ring fence point. As project sales gas constitutes an MPC, its processing into LPG or other liquid products as well as LNG does not give rise to assessable receipts for another MPC or to an additional taxing point.

PLVal as defined in subregulation 23(1) of the PRRTA Regulations is the total market value of the project liquid produced in the year of tax. As the project liquid has been produced from project sales gas which is itself an MPC, each separate product included in the project liquid produced will not separately constitute an MPC that is subject to the operation of subparagraphs 24(1)(a), 24(1)(b) or 24(1)(c) of the PRRTAA.

However, the PLVal of the project liquid produced in the year of tax must be included in the calculation of the RPM price to establish the assessable petroleum receipts derived from the production of the project sales gas. This is discussed further at paragraph 96 of the final ruling.

Where LPGs are sold separately and not mixed with LNG, for the gas stream to qualify as sales gas it must be at a point where it satisfies the sales gas definition and importantly must be processed capable for use as LNG feedstock.

The removal of propane and butane for separate sale means at a minimum the gas flow is not yet capable of being feedstock for LNG (there may be further processing but this is largely irrelevant in this scenario as it will merely move the ring fence point for the sales gas to the point it is capable of becoming feedstock).

In effect regulation 4 of the PRRTA Regulations provides that project liquid is the whole of the liquefied products produced from project sales gas. As identified in paragraph 95 of the ruling, the liquefied product produced in an integrated GTL operation may include LNG, LPG, liquefied ethane, liquefied propane and liquefied butane.

When the project product meets the definition of project sales gas, it is then capable of being feedstock for not only LNG but also the other liquefied products able to be produced from the gas according to the facts of the particular integrated GTL project.

The propane and butane is not subject to the RPM as it is not sales gas and is subject to PRRT pursuant to sub-paragraphs 24 (1)(a), 24(1)(b) or 24(1)(c) of the PRRTAA. In effect this propane and butane is taxable as a separate MPC being Liquefied Petroleum Gas. As this amount of propane and butane is not sales gas it can never be subject to the RPM regulations and is not part of the 'project' to which the RPM applies.

The RPM may then apply to the sales gas that is to be processed into LNG. However in this case the energy content of the propane and butane to be separately sold is not included in either project sales gas (it is not sales gas) and project liquid. The propane and butane is not included in project natural gas because it is not part of the petroleum (natural gas) from which sales gas will be produced. That is, the propane and butane is not petroleum (natural gas) from which sales gas will be produced. Accordingly, the energy content of propane and butane is excluded from project product to calculate the energy coefficient for that sales gas which becomes LNG which is subject to the RPM.

Propane and butane are likely to be components of sales gas and where they are liquefied and sold separately to the LNG produced from the same sales gas, they will not give rise to separate MPCs that are taxed separately.

Sales gas that does not meet the definition of project sales gas but which becomes an excluded commodity otherwise than by being sold in an arm's length transaction may also give rise to an assessable receipt worked out pursuant to subsections 24(1)(d) or 24(1)(e) of the PRRTAA rather than by application of the RPM methodology. In that case too, where propane and butane are components of the sales gas they will not give rise to separate MPCs that are taxed separately even if they are liquefied from the sales gas and sold separately. Refer to paragraph 66 of the final ruling.

The alternative to Scenario B (treatment 1) is LPGs, while separately sold, are subject to the RPM. This conclusion in my mind can only be reached if the ring fence point for the sales gas stream (including propane and butane) is in effect moved backwards such that the ring fence point for the sales gas is prior to the removal of propane and butane.

In such an instance if sales gas subject to the RPM includes the propane and butane then the natural gas, project sales gas and within PLVal (as the case requires) will include the energy content / sales value of the propane / butane / LPG. However, as an MPC the separate sale of the LPG is not otherwise assessable for PRRT.

The PRRT taxing point or ring fence is the point at which the assessable receipts for the sales gas must be ascertained for the purpose of determining the taxable profit to which PRRT applies. The PLVal component of the net-back price will include the market value of the propane and butane that are produced, regardless of whether they are sold separately or the extent to which they remain in or are mixed back into LNG.

Propane and butane produced from sales gas will not give rise to separate MPCs that are separately taxed. Refer to paragraph 96 of the final ruling.

The reason this alternative is raised is that there is comment in the draft ruling regarding LPG gases such that if LPG gases are mixed with condensate, part of the proceeds will be included in PLVal. The only way I can reconcile this comment is that there by definition needs to be an assumption that LPGs (if not sold as part of project liquid) cross the ring fence as sales gas. Is this because LPGs do not need to be removed from sales gas to make it feedstock? If the LPGs need to form part of PLVal then by definition this can only be achieved because they are part of project liquid which can only be derived from sales gas. If this statement in the draft ruling that LPGs are within PLVal is correct it will be necessary to reduce the assessable receipts for the condensate by the amount of PLVal as there can be no double counting of assessable receipts for an MPC.

Where LPG gases form part of project sales gas for which the RPM methodology has produced assessable receipts, and are mixed into condensate, that LPG part of the condensate is produced from an excluded commodity and is to that extent excluded from being a marketable petroleum commodity.

The LPG gases were part of the project sales gas for which assessable receipts have been worked out and which has become an excluded commodity. To that extent the condensate has been produced from an excluded commodity and is itself excluded from being a marketable petroleum commodity (definition, marketable petroleum commodity , section 2 of the PRRTAA). Refer to paragraph 98 of the final ruling. Valuing project liquid, and the amount included in assessable receipts for the project sales gas, are not the basis of the exclusion.