House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 2 - Extension to onshore projects and the North West Shelf

Outline of chapter

2.1 This chapter outlines the provisions in Schedule 1 to the Petroleum Resource Rent Tax Assessment Amendment Bill 2011 (Main Bill) which amends the Petroleum Resource Rent Tax Assessment Act 1987 (PRRTAA 1987) to:

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extend the Petroleum Resource Rent Tax (PRRT) to onshore oil and gas projects and to the North West Shelf project;

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apply the PRRT to coal seam gas and oil shale projects, without taxing resources which are subject to the Minerals Resource Rent Tax (MRRT); and

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prescribe the factors to be considered by the Resources Minister when deciding whether an onshore project should be combined with one or more other projects.

2.2 All legislative references throughout this chapter are to the Main Bill unless otherwise indicated.

Context of amendments

2.3 The PRRT has applied to certain offshore petroleum projects since 1 July 1986. The Bass Strait project has been subject to PRRT since 1 July 1990.

2.4 The North West Shelf project and onshore petroleum projects have not previously been subject to the PRRT. Instead, these projects have been subject to other resource taxation arrangements, including State and Commonwealth royalties, crude oil excise and the Resource Rent Royalty.

2.5 On 2 July 2010, the Government announced as part of its revised resource tax arrangements that the PRRT regime would be extended to all Australian onshore and offshore oil and gas projects, including the North West Shelf project, from 1 July 2012.

2.6 However, the PRRT is not being extended to projects within the Joint Petroleum Development Area in the Timor Sea, recognising that these projects are governed by the Timor Sea Treaty.

Summary of new law

Extending the PRRT to onshore projects

2.7 For the purposes of the PRRT, a petroleum project is taken to exist where a production licence is in force.

2.8 Under the current law, the definition of a production licence is limited to one within the meaning of the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (unless it relates to the Western Greater Sunrise area). This definition effectively limits the application of the PRRT to offshore projects because it does not extend to onshore or coastal production licences issued by a State or Territory.

2.9 The new law extends the application of the PRRT by extending the definition of 'production licence' to capture relevant licences issued by a State or Territory.

2.10 The extended definition includes 'an authority or right (however described) under another Australian law to undertake activities for the recovery of petroleum from an area (other than an authority or right that is an exploration permit or a retention lease)'.

Extending the PRRT to the North West Shelf project

2.11 The North West Shelf project area encompasses the area covered by the exploration permits known as WA-1-P and WA-28-P and retention leases or production licences derived from these permits.

2.12 Under the current law, the North West Shelf project is explicitly excluded from the PRRT. An eligible production licence is defined as any production licence except for one which relates to one of the North West Shelf project exploration permits (WA-1-P and WA-28-P).

2.13 This Schedule extends the PRRT to the North West Shelf project by repealing the definition of eligible production licence and by linking the concept of a petroleum project to the presence of any production licence.

2.14 The Main Bill deems the North West Shelf project as a single project for the purposes of the PRRT.

Clarifying the resources subject to the PRRT

2.15 The taxable resource under the PRRT is 'petroleum'. Under the current PRRT law what constitutes petroleum is the same as the meaning given to it in the Offshore Petroleum and Greenhouse Gas Storage Act 2006 .

2.16 Under the new PRRT law, the definition of 'petroleum' is amended to:

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explicitly include oil shale; and

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exclude a taxable resource within the meaning of the Minerals Resource Rent Tax Bill 2011 (MRRT Bill).

2.17 Specifically, subsection 20-5 (1) of the MRRT Bill includes within its definition of 'taxable resource' 'anything produced from a process that results in iron ore or coal being consumed or destroyed without extraction' and 'coal seam gas extracted as a necessary incident of mining coal'. These resources are not taxed under the PRRT.

2.18 This approach ensures that no resource can be subject to both the PRRT and the MRRT.

Combining PRRT projects

2.19 The Resources Minister may, in certain circumstances, decide to combine petroleum projects into a single petroleum project for the purposes of the PRRT. This authority is extended to onshore projects.

2.20 In considering whether or not to combine certain petroleum projects into a single project, the Resources Minister has regard to certain specified criteria.

2.21 Under the new law, different criteria are used to assess whether projects are to be combined, depending on whether the projects are offshore or onshore. The criteria for assessing whether offshore projects should be combined are unchanged.

2.22 An additional criterion, examining the level of downstream integration, is now used by the Resources Minister in deciding whether onshore projects should be combined. However, other features of the onshore production licence areas, such as their geological, geophysical and geochemical relationship to each other, will not be a relevant factor for onshore projects.

2.23 The existing procedural rules, governing matters such as the manner in which a combination application must be made and how decisions may be reviewed, generally apply to onshore projects in the same way as they do to those offshore.

2.24 However, participants in existing onshore projects transitioning into the PRRT are provided with additional time in which to make a combination application.

Comparison of key features of new law and current law

Detailed explanation of new law

Extending the PRRT to onshore projects

2.25 The concept of a petroleum project is central to the operation of the PRRT. A petroleum project is defined with reference to one or more production licences. [Section 19 of the PRRTAA 1987]

2.26 Under the current law, a production licence (except for the special case of the Western Greater Sunrise area) means a petroleum production licence within the meaning of the Offshore Petroleum and Greenhouse Gas Storage Act 2006 . [Section 2 of the PRRTAA 1987]

2.27 This means that only offshore petroleum projects are subject to PRRT, under the current law.

2.28 The new law extends the PRRT to onshore projects by broadening the definition of a 'production licence'.

2.29 A 'production licence' now includes an authority or right (however described) under an Australian law to undertake activities for the recovery of petroleum from an area. Neither an exploration permit nor a retention lease is a production licence. [Schedule 1, item 19, section 2, (definition of 'production licence')]

2.30 The meaning of an 'Australian law' is the same as it is in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997). It includes a Commonwealth law, a State law or a Territory law.

2.31 To provide further clarity, the Resources Minister may determine whether or not a given authority or right under an Australian law is taken to satisfy the meaning of production licence. This determination is a legislative instrument. [Schedule 1, item 24, section 2AA]

2.32 To align with the broader definition of 'production licence', the related definition of 'production licence area' is broadened in a similar way. [Schedule 1, item 20, section 2, (definition of 'production licence area')]

2.33 The applicable commencement date of onshore projects and the North West Shelf project for the purposes of the PRRT is 1 July 2012. [Schedule 1, items 2 and 3, section 2, (definition of 'applicable commencement date')]

Example 2.1: An onshore production licence

In early 2013, Platypus Petroleum decides to develop a project in northern New South Wales to convert coal seam gas into liquefied natural gas (LNG) for export. The company successfully applies to the New South Wales Government for a production lease under the Petroleum (Onshore) Act 1991 (NSW).

Under section 41 of that Act holding this production lease gives Platypus Petroleum the exclusive right to conduct petroleum mining operations in the area covered by the lease, as well as the right to construct and maintain certain related structures and equipment.

The production lease held by Platypus Petroleum is an authority or right under an Australian law to undertake activities for the recovery of petroleum from an area. Accordingly, the lease is a production licence for PRRT purposes. The production licence area is the area which is covered by the New South Wales production lease.

2.34 The operation of the PRRT also draws on several other concepts which are currently defined solely by reference to the Offshore Petroleum and Greenhouse Gas Storage Act 2006 . These defined terms include:

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exploration permit;

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retention lease;

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pipeline licence;

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infrastructure licence; and

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access authority.

2.35 The definition of each of the above terms is broadened to also extend to equivalent authorities or rights (however described) existing under an Australian law, which includes a law of a State or Territory.

2.36 The Resources Minister may determine, by legislative instrument, whether or not a given authority or right under an Australian law is taken to satisfy the meaning of any of these terms (or of production licence, see paragraph 2.31), for the purposes of the PRRT. [Schedule 1, item 24, new section 2AA]

Exploration permit

2.37 An 'exploration permit' now means an authority or right under an Australian law to explore for petroleum in an area or to recover petroleum on an appraisal basis in that area, or to undertake necessary associated work in that area. However an authority or right to recover petroleum beyond on an appraisal basis cannot be an exploration permit (because it is instead a production licence). An exploration permit also retains its previous meaning which refers back to the Offshore Petroleum and Greenhouse Gas Storage Act 2006 . [Schedule 1, item 7, section 2, (definition of 'exploration permit')]

2.38 To align with the broader definition of an exploration permit, the related definition of an exploration permit area is broadened in a similar way. An 'exploration permit area' is simply the area covered by an exploration permit. [Schedule 1, item 8, section 2, (definition of 'exploration permit area')]

Example 2.2: An onshore exploration permit

Echidna Explorer Company is an onshore petroleum explorer. In December 2012 it obtains an exploration permit from the Northern Territory Government in relation to an area near the Queensland border. This permit is issued under Part II, Division 2 of the Petroleum Act 2010 (NT).

As described in section 29 of that Act, the exploration permit gives Echidna Explorer Company the exclusive right (subject to certain conditions) to explore for petroleum and to carry on necessary related works within the area specified in the permit. Accordingly, this Northern Territory permit is one which satisfies the new PRRT definition of an 'exploration permit'.

For the purposes of the PRRT, the exploration permit area is the area which is covered by the Northern Territory exploration permit.

Retention lease

2.39 In the course of exploring for petroleum a company may discover petroleum which it expects to be of a certain quality and quantity. In some circumstances, the company may then apply for a production licence and seek to recover the petroleum as soon as practicable.

2.40 However, in other circumstances it may not be immediately commercially viable to recover the petroleum, although it may become commercially viable to do so at some point in the future. In such cases, the holder of the relevant exploration permit can usually apply for a retention lease over the discovery.

2.41 A 'retention lease' is an authority or right to do the same things as an exploration permit, but which is granted on the basis that the area it covers contains petroleum and that recovery of that petroleum is likely to become commercially viable at some future time. [Schedule 1, item 22, section 2, (definition of 'retention lease')]

2.42 In the same way that the definition of exploration permit area is amended to align with the new definition of exploration permit, the definition of retention lease area is amended to align with the new definition of retention lease. A 'retention lease area' is simply the area covered by a retention lease. [Schedule 1, item 23, section 2, (definition of 'retention lease area')]

Example 2.3: An onshore retention lease

In the 10 months after receiving the exploration permit referred to in Example 2.2, Echidna Explorer Company undertakes preliminary drilling across its exploration permit area. It finds what it considers could be significant amounts of petroleum in the North-West and South-East corners of its permit area.

Echidna Explorer Company applies to the Northern Territory Government for two retention licences covering the areas within its exploration permit area it considers to potentially have petroleum of a commercial quality and quantity. The Northern Territory Mining Minister considers that the application meets the criteria set out in Part II, Division 3 of the Petroleum Act 2010 (NT) and issues the two retention licences, on behalf of the Northern Territory Government. As section 35 of that Act explains, Echidna Explorer Company's exploration permit remains in force.

Having the retention licences allows Echidna Explorer Company to (subject to any conditions set out by the Mining Minister) carry on works, such as appraisal drilling, as are reasonably necessary to evaluate the development potential of the petroleum in the specified areas.

These retention licences are an authority or right under an Australian law (the Petroleum Act 2010 (NT)) to explore for petroleum in an area related to an exploration permit. They are granted on the basis that the areas contain petroleum, recovery of which is likely to become commercially viable. Accordingly, they each satisfy the PRRT definition of a retention lease. The area specified in the Northern Territory retention licence is the retention lease area for the purposes of the PRRT.

Pipeline licence

2.43 The products of a petroleum project are often transported away from the project by one or more pipelines. A licence is generally required to construct and operate such pipelines.

2.44 Under the current PRRT law, a pipeline licence means one that is issued under Part 2.6 of the Offshore Petroleum and Greenhouse Gas Storage Act 2006 . That Act makes it an offence to construct or operate a pipeline in an offshore area without a pipeline licence, and provides for the grant of pipeline licences in offshore areas.

2.45 As well as retaining its current meaning, the definition of a 'pipeline licence' in the new law extends to an authority or right under another Australian law to construct and operate a pipeline (along with specified pumping stations, tank stations and valve stations) in a specified area. [Schedule 1, item 17, section 2, (definition of 'pipeline licence')]

Example 2.4: An onshore pipeline licence

Galah Gas operates a pipeline which transfers petroleum from its operations in the Canning Basin to Port Hedland. The operation of this pipeline is subject to the Petroleum Pipelines Act 1969 (WA). Galah Gas has a current licence under that Act. This licence authorised the construction of the pipeline along a specified route and provides for its ongoing operation and maintenance, subject to certain conditions.

Galah Gas's licence under the Petroleum Pipelines Act 1969 (WA) is a pipeline licence for the purposes of the PRRT. This is because it provides the right under an Australian law to construct and operate a pipeline (along with directly related infrastructure such as pumping stations) in a specified area.

Infrastructure licence

2.46 The construction and operation of petroleum-related infrastructure is regulated under various Australian laws.

2.47 In offshore areas, such infrastructure is regulated by Part 2.5 of the Offshore Petroleum and Greenhouse Gas Storage Act 2006 . That Act provides for the grant of infrastructure licences and makes it an offence to construct or operate infrastructure in an offshore area except under such a licence (or as otherwise provided under that Act).

2.48 Under the current PRRT law, an infrastructure licence means one that is issued under Part 2.5 of the Offshore Petroleum and Greenhouse Gas Storage Act 2006 . In the new law, this definition is extended to also include an authority or right (other than one that is an exploration permit, retention lease or production licence) under an Australian law to construct and operate certain petroleum-related infrastructure in a specified place.

2.49 The activities which can be covered by an infrastructure licence are:

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remote control of facilities, structures or installations used to recover petroleum in a production licence area;

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processing or converting petroleum;

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storing petroleum before it is transported to another place; and

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preparing petroleum for transport (for example, by pumping or compressing the petroleum).

2.50 Activities which relate to any of the above things can also be covered by an infrastructure licence. [Schedule 1, item 10, section 2, (definition of 'infrastructure licence')]

2.51 The concept of an infrastructure licence is also used in calculating the future closing-down expenditure of a project [section 2D of the PRRTAA 1987] . The PRRTAA 1987 was amended in 2003 to allow expenditures associated with closing-down a facility that has ceased to be used in relation to a PRRT project, where the facilities are under an infrastructure licence, to be deductible against the project's PRRT receipts at the time the production licence ceases.

Example 2.5: An onshore infrastructure licence

Bilby Fuel operates a coal seam gas extraction project in the Cooper Basin. It operates subject to a production licence issued under the Petroleum and Geothermal Energy Act 2000 (SA), which is also a production licence for PRRT purposes.

Bilby Fuel pipes partially processed gas several kilometres to its secondary processing plant, which is located outside the production licence area. The company's authority to operate this processing plant is provided by (and subject to) an associated activities licence issued by the South Australian Government under Part 9 of the Petroleum and Geothermal Energy Act 2000 (SA).

This associated activities licence held by Bilby Fuel allows it to construct and operate certain petroleum-related infrastructure (to store and process petroleum) in a specified place. The licence is an infrastructure licence for PRRT purposes.

Access authority

2.52 The Offshore Petroleum and Greenhouse Gas Storage Act 2006 provides for the granting of petroleum access authorities (see Part 2.8 of that Act) over offshore areas. Such authorities permit the holder to carry on certain limited petroleum exploration and recovery operations in the specified area (but not, for example, to make a well).

2.53 A petroleum access authority issued under that Act is an access authority for the purposes of the PRRT. Under the new PRRT law, this definition of access authority is extended to also include an authority or right (however described) under an Australian law to carry on, in relation to petroleum, specified operations in a specified area.

2.54 However, an authority or right that is an exploration permit, retention lease, production licence or infrastructure licence is not an access authority. [Schedule 1, item 1, section 2, (definition of 'access authority')]

Example 2.6: An onshore access authority

Quoll Resources is a small company interested in exploring onshore for petroleum in South-East Victoria. It applies for, and is granted, a special access authorisation of the kind described in Part 6 of the Petroleum Act 1998 (Vic.).

The special access authorisation allows Quoll Resources to carry out some petroleum exploration operations in the specified area, but does not allow it to make a well. The authorisation does not give Quoll Resources any exclusive rights over the area.

This special access authorisation under the Victorian Petroleum Act 1998 (Vic.) is an authority under an Australian law to carry on specified petroleum-related operations in a specified area. It meets that part of the PRRT definition of access authority.

However, the authorisation might also satisfy the PRRT definition of an exploration permit. If the authorisation is an exploration permit for the purposes of the PRRT, then it cannot also be an access authority.

The law (subsection 2AA) provides for the Resources Minister to determine whether or not a particular authority or right, such as this special access authorisation, is taken to satisfy the meaning of exploration permit. If this authorisation is not an exploration permit for PRRT purposes, then it is an access authority.

Other terms

2.55 In addition to those discussed above, the meanings of several other terms which previously were defined only with reference to the Offshore Petroleum and Greenhouse Gas Storage Act 2006 are also broadened so as to capture equivalent concepts under other Australian laws, including those of a State or Territory.

2.56 The terms which are redefined in this way are:

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block;

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excluded fee;

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registered holder; and

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holder of a registered interest.

Blocks

2.57 A block is a common unit of area which is used under several Australian laws to form the basis of, for example, production licence areas and exploration permit areas.

2.58 Section 33 of the Offshore Petroleum and Greenhouse Gas Storage Act 2006 explains how blocks are constituted in offshore areas. A typical block is a square area measuring 5 minutes of latitude by 5 minutes of longitude, where the surface of the Earth is taken to be divided into graticular sections (with the equator and the meridian of Greenwich serving as the reference axes).

2.59 This meaning of block is the one used in the current PRRT law. In the new PRRT law, while retaining its current meaning, a 'block' also means an area (however described) referred to in another Australian law relating to the exploration for, or recovery of, petroleum. [Schedule 1, item 4, section 2, (definition of 'block')]

Example 2.7: Blocks under different Australian laws

Each of the following is a block for the purposes of the PRRT:

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A block within the meaning of the Offshore Petroleum and Greenhouse Gas Storage Act 2006 .

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A block within the meaning of the Petroleum (Onshore) Act 1991 (NSW).

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An area referred to in a licence or permit issued under the Petroleum Act 1998 (Vic.).

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A block or sub-block within the meaning of the Petroleum and Gas (Production and Safety) Act 2004 (Qld.).

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An area referred to in a licence or permit issued under the Petroleum and Geothermal Energy Act 2000 (SA).

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A block within the meaning of the Petroleum and Geothermal Energy Resources Act 1967 (WA).

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A block within the meaning of the Petroleum Act 2010 (NT).

Excluded fees

2.60 Certain fees are expressly excluded from counting towards the exploration expenditure or the general project expenditure of a project. These fees are called excluded fees.

2.61 Under the current law, certain amounts referred to in the Offshore Petroleum and Greenhouse Gas Storage Act 2006 are excluded fees. Such amounts include cash bidding type fees paid to obtain a petroleum exploration permit or a retention lease or a petroleum production licence under that Act.

2.62 Such amounts remain excluded fees under the new law. Amounts that are similar in nature but payable under another Australian law, for the grant of an exploration permit, retention lease or production licence are now also excluded fees. [Schedule 1, item 6, section 2, (definition of 'excluded fee')]

Example 2.8: A fee paid to obtain an exploration permit, retention lease or production licence is an excluded fee

Exploration permits, retention leases and production licences are typically subject to a fee, which is specified in the relevant legislation.

Each of the following is an example of an excluded fee:

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The prescribed application fee referred to in paragraph 16(1)(j) of Part II, Division 2 of the Petroleum Act 2010 (NT) which would be payable by Echidna Explorer Company for the grant of the exploration permit discussed in Example 2.2. The annual fees associated with this permit (see section 26 of that Act) are also excluded fees.

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The prescribed application fee referred to in paragraph 32(1)(j) of the Petroleum Act 2010 (NT) which would be payable by Echidna Explorer Company for the grant of each of the retention leases discussed in Example 2.3. The annual fees associated with these leases (see section 39 of that Act) are also excluded fees.

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The lodgement fee and the petroleum title fee referred to in section 93 of the Petroleum (Onshore) Act 1991 (NSW) which would be payable by Platypus Petroleum for the grant of the production licence discussed in Example 2.1.

Registered holders

2.63 For the purposes of the PRRT, a registered holder of a title is either the registered holder within the meaning of the Offshore Petroleum and Greenhouse Gas Storage Act 2006 , or, in relation to an authority or right under another Australian law the person whose name is shown in the register kept under that law. [Schedule 1, item 21, section 2, (definition of 'registered holder')]

2.64 This broadened meaning of registered holder flows through to the definition of 'holder of a registered interest'. A 'holder of a registered interest' (in relation to a production licence), can now mean a person holding an interest created by a dealing in relation to which an entry has been made in a register referred to in the definition of registered holder. [Schedule 1, item 9, section 2, (definition of 'holder of a registered interest')]

Example 2.9: Registers under different Australian laws

Australian laws which regulate petroleum related activities typically provide for the maintenance of a register of instruments issued under those laws. Each of the following is an example of a register of the kind referred to in part (b) of the definition of registered holder:

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The register described in section 97 of the Petroleum (Onshore) Act 1991 (NSW).

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The petroleum register described in Part 14, Division 1 of the Petroleum Act 1998 (Vic.).

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The register described in Part 9 of the Petroleum and Gas (Production and Safety) Act 2004 (Qld.).

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The public register and the commercial register described in Part 13, Divisions 2 and 3 of the Petroleum and Geothermal Energy Act 2000 (SA).

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The register described in section 70 of the Petroleum and Geothermal Energy Resources Act 1967 (WA).

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The register described in Part IV of the Petroleum Act 2010 (NT).

2.65 An 'onshore area' is defined as that part of a State or Territory that is not part of that State or Territory's offshore area within the meaning of the Offshore Petroleum and Greenhouse Gas Storage Act 2006 and is not part of the Joint Petroleum Development Area. [Schedule 1, item 14, section 2, (new definition of 'onshore area')]

2.66 An 'onshore petroleum project' is one where all of the production licence area is an onshore area [Schedule 1, item 15, section 2, (new definition of 'onshore petroleum project')]. This means that a combined project will be treated as an offshore project unless all of the pre-combination projects are themselves onshore projects. Whether a project is an onshore petroleum project or an offshore one determines the criteria used to assess applications to combine projects (see the discussion from paragraph 2.90 onwards). It also is relevant for the PRRT consolidation regime (see Chapter 6), because those rules only apply to interests in onshore projects.

2.67 The meaning of each State and Territory's offshore area is described in section 8 of the Offshore Petroleum and Greenhouse Gas Storage Act 2006. Coastal waters are generally not considered to be part of an offshore area. Therefore for the purposes of the PRRT, coastal waters are considered to be 'onshore'.

2.68 PRRT is typically collected from taxpayers throughout the year of tax in quarterly instalments (as provided for by Division 2 of Part VIII of the PRRTAA 1987). However, these provisions do not apply in relation to projects transitioning into the PRRT, in relation to the year of tax commencing 1 July 2012. The instalment provisions will revert to their normal operation for all PRRT taxpayers from 1 July 2013. [Schedule 1, item 46]

Extending the PRRT to the North West Shelf project

2.69 The North West Shelf project is subject to crude oil excise and to Commonwealth royalties, under the Petroleum (Offshore) Royalty Act 2006 . It has not previously been subject to the PRRT even though it is an offshore project. The North West Shelf project area encompasses the area WA-1-P and WA-28-P and retention leases or production licences derived from these permits.

2.70 The current law excludes the North West Shelf project from the PRRT regime by linking relevant provisions to the concept of 'eligible production licence'. An 'eligible production licence' is any production licence except for one related to one of the North West Shelf project exploration permits.

2.71 The new law no longer contains the concept of eligible production licence. [Schedule 1, item 5, section 2]

2.72 As a consequence, all references previously made in the PRRT law to an eligible production licence are replaced with references to a production licence generally. [Schedule 1, items 18, 27, 28, 30 to 35, 37, 39 and 41]

2.73 The effect of removing the concept of an eligible production licence and replacing any previous references to this concept with references to a production licence generally is that the North West Shelf project becomes subject to the PRRT.

2.74 The 'applicable commencement date' of the North West Shelf project for the purposes of the PRRT is 1 July 2012. [Schedule 1, items 2 and 3, section 2, (definition of 'applicable commencement date')] .

2.75 The 'starting day' of the North West Shelf project is the day when the first of the North West Shelf project exploration permits (WA-1-P and WA-28-P) was granted [Schedule 1, items 42 and 43, Clause 1 of the Schedule, (definition of 'starting day')] . The 'starting day' definition is used in Schedule 1 and sets the starting day for the application of rules related to the transfer of exploration expenditure.

2.76 Part 4 of Schedule 1 to the PRRTAA 1987 deals with transferable exploration expenditure. Because the North West Shelf project was not previously subject to the PRRT, the exploration permits and retention leases which are part of (or related to) the project were excluded from the operation of these rules. Because the North West Shelf project is now subject to PRRT, this exclusion is also repealed. [Schedule 1, items 44 and 45, repeal of Subclause 13(3) of the Schedule]

2.77 All projects associated with the North West Shelf project are deemed to be a single petroleum project. All production licences that are in force from time to time and relate to the North West Shelf project exploration permits are part of this project. [Schedule 1, item 29, new subsection 19(1B)]

2.78 The specific definition of the 'North West Shelf project' as a single petroleum project operates to the exclusion of the general definition of a petroleum project in subsection 19(1). [Schedule 1, item 26, subsection 19(1)]

2.79 The definition of the North West Shelf project (as described in the preceding paragraphs) is included in the list of defined terms in section 2. [Schedule 1, item 12, section 2, (new definition of 'North West Shelf project')]

Clarifying the resources subject to the PRRT

2.80 The PRRT applies to petroleum projects and takes into account the receipts derived from petroleum produced from petroleum projects, or marketable petroleum commodities produced from the petroleum. Under the current law the definition of petroleum is the same as the meaning given to it in the Offshore Petroleum and Greenhouse Gas Storage Act 2006 , which can be summarised as including any naturally hydrocarbon or naturally occurring mixture of occurring hydrocarbons, whether in a gaseous, liquid or solid state.

2.81 Under the new law, the definition of 'petroleum' for PRRT purposes is amended to:

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include oil shale; and

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exclude a taxable resource within the meaning of the Minerals Resource Rent Tax Bill 2011 (MRRT Bill).

[Schedule 1, item 16, section 2, (definition of 'petroleum')]

2.82 The PRRT is extended to oil shale as it is an oil-like substance.

2.83 'Oil shale' is defined to mean any shale or other rock (except coal) from which a fluid consisting of or including hydrocarbons may be extracted or produced. [Schedule 1, item 13, section 2]

2.84 Because oil shale is included in the definition of petroleum, the marketable product which will generally be produced from it, shale oil, is added to the list of marketable petroleum commodities. [Schedule 1, item 11 and item 25, section 2, (definition of 'marketable petroleum commodity')]

2.85 Excluding from the PRRT those resources which are subject to the MRRT ensures that a resource cannot be subject to both of these taxes.

2.86 Subsection 20-5(1) of the MRRT Bill defines what a taxable resource is under the MRRT. As well as iron ore and coal, this definition includes 'anything produced from a process that results in iron ore or coal being consumed or destroyed without extraction' and 'coal seam gas extracted as a necessary incident of mining coal'. These resources are not petroleum for the purposes of the PRRT.

Example 2.10: The PRRT does not apply to resources subject to the MRRT

Part of Cassowary Coal's mining operations involves the production of 'syngas' that is sold to the local town. The 'syngas' is obtained from the controlled burning of underground coal, which is uneconomic to be mined conventionally. The 'underground coal gasification' consumes the coal, and so is taxed under the MRRT.

The 'syngas' is not included within the definition of 'petroleum', so is not taxed under the PRRT.

2.87 An advantage of the approach illustrated in Example 2.10 is it avoids subjecting coal that is mined and then converted into gas to a different tax regime from coal that is converted into gas before extraction. Such a difference could undesirably distort commercial behaviour.

Example 2.11: Extraction of coal mine methane where it is a necessary and integral part of a coal mining operation is not subject to the PRRT

Chudditch Coal operates a coal mine in central Queensland. To minimise safety risks, Chudditch Coal extracts coal seam gas from the mine as an incident of its coal mining operation.

The coal seam gas which is extracted by Chudditch Coal is a taxable resource under the MRRT because it represents 'coal seam gas extracted as a necessary incident of mining coal' and therefore satisfies paragraph 20-5(1)(d) of the MRRT Bill.

Because it is a taxable resource under the MRRT, the coal seam gas extracted in this way is excluded from the PRRT definition of petroleum, and so is not taxed under the PRRT regime.

2.88 In theory it would be possible to tax such incidental gas under the PRRT regime and the coal under the MRRT but that would increase compliance and administration costs for no significant difference in outcome. To avoid these unnecessary compliance and administration costs, the gas is taxed under the MRRT in such cases, consistent with rest of the coal mining operation.

2.89 Chapter 3 - Core Rules in the explanatory memorandum to the MRRT Bill explains (in paragraph 3.80) that there can be reasons other than safety to extract coal seam gas as a 'necessary incident' of mining coal. Such reasons could be, for example, to satisfy environmental requirements or other State legislation.

Combining PRRT projects

2.90 Section 20 of the PRRTAA 1987 contains rules governing the combining of petroleum projects under the PRRT. Where two or more projects are combined they are treated as one project for PRRT purposes.

2.91 The Resources Minister may, in certain circumstances, decide to combine petroleum projects into a single project.

2.92 The Resources Minister's authority to combine petroleum projects, and the rules governing exercise of this authority, applies to all petroleum projects whether located onshore or offshore. [Schedule 1, item 36, subsection 20(1)]

2.93 However, in recognition of the special circumstances of the North West Shelf project it cannot be combined with another project. Nor can an onshore project which existed prior to 1 July 2012 be combined with an offshore project. [Schedule 1, item 36, subsection 20(1A)]

2.94 This prevents the recognition provided by the starting base of investment made in existing onshore projects from shielding a different offshore project from its PRRT liability.

2.95 In deciding whether to combine petroleum projects, the Resources Minister is required to have regard to certain factors which go to whether the projects in question are sufficiently related to be treated as a single project. [Subsection 20(1) of the PRRTAA 1987]

2.96 The set of factors to be considered in relation to onshore projects is different to the set of factors to be considered in relation to offshore projects.

2.97 The factors which are relevant in the current law are also the factors which are relevant in the new law for offshore projects. However, to the extent that the projects under consideration are onshore projects, the Minister must have regard to the relatedness of certain activities (including proposed activities) downstream of the respective projects. [Schedule 1, item 36, paragraph 20(1)(c)]

2.98 For example, coal seam gas and other unconventional gas projects may involve a large number of tenements and wells, and a broader geographic boundary than conventional petroleum projects. The ability to combine tenements which feed a common processing facility is accommodated by the new law.

2.99 The extent of geological, geophysical and geochemical relatedness of production licence areas is only relevant when considering offshore projects. It is not relevant for onshore projects. [Schedule 1, item 36, paragraph 20(1)(d)]

2.100 Although geology is an appropriate factor to consider in relation to offshore projects, if it were to apply to onshore projects it is likely that few, if any, projects would be able to be combined. This, in turn, would greatly increase complexity and compliance costs for both taxpayers and administrators.

2.101 An onshore project is able to be combined with an offshore project, providing the Resources Minister is satisfied the projects are sufficiently related, and the onshore project (or any constituent onshore project of a combined project) did not exist prior to 1 July 2012. In these circumstances the combined project is treated as an offshore project.

2.102 In assessing whether an onshore project is sufficiently related to an offshore project, the Minister has regard to all four criteria listed in subsection 20(1).

2.103 The qualifying period within which the Resources Minister considers whether projects should be combined is amended to ensure that, for existing onshore projects, the 90-day period does not commence until 1 January 2013. This date, six months after PRRT first applies to these projects, recognises that participants in these projects may need additional time to consider whether they wish to pursue combination, and, if so, to prepare the necessary documentation. [Schedule 1, item 38, paragraph 20(2)(a)]

2.104 The Resources Minister only accepts combination requests where the applicant(s) are entitled to receive at least half of the relevant receipts in relation to each of the projects. An amendment is made to clarify that relevant receipts include those from the sale of petroleum from the project, as well as from the sale of marketable petroleum commodities. [Schedule 1, item 40, subsection 20(4)]

Example 2.12: Onshore projects which are integrated downstream can be combined into a single project

XYZ is an unincorporated joint venture of X Company, Y Company and Z Company. This joint venture will construct and operate an LNG plant to process sales gas into LNG for sale.

The sales gas will be purchased from X Company, Y Company and Z Company, which each operate an onshore project which produces sales gas. These projects (P1, P2 and P3) are themselves joint ventures between various combinations of X Company, Y Company, Z Company and other parties.

The production licence areas associated with P1, P2 and P3 are not adjacent to each other.

XYZ committed to the construction of the LNG plant after determining potential sources of sales gas including the capacity of the upstream joint ventures to deliver sales gas. The downstream joint venturers have entered into legal agreements with the upstream parties dedicating the sale of gas from specified permits of the upstream parties to the downstream joint venture for processing in the LNG plant.

X Company, Y Company and Z Company apply to have projects P1, P2 and P3 combined into a single project for the purposes of PRRT.

Between them, X Company, Y Company and Z Company are entitled to receive at least half of the relevant receipts produced in relation to each project, therefore satisfying the requirement in subsection 20(4).

The Resources Minister has regard to the factors contained in subsection 20(1) when considering whether the projects are sufficiently related to be treated as a single PRRT project. Because P1, P2, P3 are all onshore projects, criterion (d) is disregarded and plays no part in the Minister's consideration of the issue.

The respective operations, facilities and other things that comprise P1, P2 and P3 are not especially related to each other. It is unlikely that they would satisfy the criterion set out in paragraph 20(1)(a) if it were considered in isolation.

However, the projects would satisfy the criterion in paragraph 20(1)(c); this criterion being a test of the downstream integration of the projects. The respective operations and facilities (especially the LNG plant) which will be involved in further processing the sales gas produced from P1, P2 and P3 are closely related to each other. It does not matter whether the downstream LNG plant is operated by one of the joint ventures, such as X Company as in this example, or by any other party.

P1, P2 and P3 are also closely related for the purposes of the criterion in paragraph 20(1)(b). X Company and Y Company have a significant stake in each of the three projects as well as the downstream facilities. Z Company has a significant stake in two of the three projects as well as the downstream facilities.

In this example, P1, P2 and P3 are closely related to each other on two of the three criteria to which the Resources Minister must have regard. The Minister considers the projects are sufficiently related to be treated as a single project for the purposes of the PRRT. The ownership of the downstream facilities is not a factor the Minister needs to consider when granting a combination certificate. A combination certificate would also be granted if the LNG facility was a separate Joint Venture or separately owned by an unrelated party.

Example 2.13: Projects cannot be divided into multiple projects

Following on from Example 2.12, the three original projects have now been combined into a single PRRT project (P4).

Nearby the LNG plant, A Company, B Company and C Company also have a joint venture project (P5) which produces sales gas. A Company has an interest of 5 per cent in this joint venture.

A Company enters into a gas sales agreement with X Company (a related party) for the sale of sales gas to the XYZ joint venture which operates the LNG plant (as described in the previous example). That joint venture processes the sales gas into LNG. Under the terms of the gas sales agreement, XYZ has control over the timing and quantities of the gas it purchases to enable it to coordinate its need for sales gas in its LNG processing operations. However, the majority of the gas from P5 (that belongs to B Company and C Company), does not go to the LNG plant and is transported and sold elsewhere.

Notwithstanding that A Company is a related party of X Company, the Resources Minister cannot consider a request from A Company to combine P5 with the already merged project P4 without the consent of B Company or C Company or without the consent of all the participants in the merged project. Because A Company is only entitled to receive 5 per cent of the relevant receipts from P5, its application would not satisfy the requirement in subsection 20(4) that an application be lodged by parties entitled to receive at least half of the relevant receipts from each project.

A fundamental feature of the PRRT is that projects are defined with reference to production licence areas. Accordingly, although it is appropriate in certain circumstances for projects to be combined, where they are sufficiently related, it is not appropriate for projects to be separated.

Example 2.14: Projects with a common processing hub can be combined into a single project

ABC is an unincorporated joint venture of A Company, B Company and C Company. ABCD is an unincorporated joint venture of A Company, B Company, C Company, and D Company ABE is an unincorporated joint venture of A Company, B Company and E Company. Between them A Company and B Company have a majority of ownership in each joint venture.

All three joint ventures recover petroleum from multiple onshore production licence areas and fields, with the petroleum being sent to a common processing hub (which is itself a joint venture between A Company, B Company and C Company) via interconnected pipelines (other than some crude which is trucked), where the petroleum is stabilised and processed into sales gas, condensate and liquid petroleum gas.

As in the previous examples, all of these petroleum projects are onshore projects. This means that the Resources Minister has regard to only the first three factors contained in subsection 20(1) when considering whether the projects are sufficiently related to be treated as a single PRRT project.

The respective operations and facilities that comprise the projects under consideration are closely related to each other. The single processing hub (which forms part of the separate projects) represents a cost effective investment in infrastructure and allows the most profitable and efficient recovery of petroleum from the respective licence areas.

The level of common ownership of the projects also means the projects are closely related according to the criterion in paragraph 20(1)(b).

The Resources Minister would also have regard to the level of downstream relatedness of the projects, as set out in paragraph 20(1)(c). The projects produce common products, so there is nothing in this criterion which would make the Minister less likely to consider the projects should be combined.

The Minister considers the projects are sufficiently related to be treated as a single project for the purposes of the PRRT.

2.105 The relatedness of two projects' downstream activities (new paragraph 20(1)(c)) goes to the respective operations, facilities and other things involved in any further processing or treating of petroleum or marketable petroleum commodities produced in relation to the projects. As shown in Examples 2.12 and 2.14, an LNG plant and a common processing hub are the kinds of facilities that are taken into account.

2.106 However, if the petroleum (or marketable petroleum commodities) produced from separate projects does not undergo any common further processing or treating, but instead only shares transportation or storage facilities, such as port facilities, this will not be sufficient to demonstrate that the projects are downstream related.

Lodging PRRT returns for a combined project

2.107 A taxpayer does not have to lodge separate PRRT returns for any pre-combination projects in the year that the projects are combined. This is because any assessable receipts derived or any expenditure incurred in relation to the pre-combination projects are included in the PRRT return for the combined project. [Subsection 23(2) and Division 3 of the PRRTAA 1987]

Example 2.15: Lodging a return for a combined project

Natco owns and operates project Abbey and project Bobby in Western Australia. Natco has been recovering petroleum from these projects for a number of years.

Natco applied to the Resources Minister on 10 September 2012 to combine the projects. The Resources Minister issued a certificate on 18 November 2012 and the two projects became a combined project from that date. As the Resources Minister issued the certificate in the 2012-13 year, Natco is only required to lodge a 2012-13 PRRT return for the combined project. Any assessable receipts derived by Natco in relation to the Abbey and Bobby projects prior to 18 November 2012 and any expenditure incurred in relation to these pre-combination projects will be included in the PRRT return for 2012-13 for the combined project.