Lecture 4.4

1
CRICOS Provider No. 00126G copyright © The University of Western Australia
BL Oil & Gas History, Economics and Geopolitics OENA8433
Topic 4, Lecture 4: Government Revenue – Investment for the Future
Dr. Karin Oerlemans
1
Unit Overview
Topic 1: Introduction – The Founders
Topic 2: The Global Struggle
Topic 3: War and Strategy
Topic 4: Oil and Gas Economics
Lecture 1: Fundamentals of Oil and Gas Economics
Lecture 2: Oil Pricing & Petroleum Rents
Lecture 3: Natural Gas Markets & LNG pricing
Lecture 4: Government Revenues and taxation
Lecture 5: OPEC - Oligopoly & Oil Shocks
Topic 5: Oil and Gas Technology in context
Topic 6: The Energy Industry Today
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Lecture Outcomes
Upon successful completion of this lecture you

should be able to:
Understand that the flow through to rest of economy is very big for
oil and gas projects
Appreciate how Oil & Gas production adds value to the Australian
economy
Understand why governments impose taxes on the oil and gas
industry
Assess the impact of taxes on investment and consumption
decisions
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Recommended Reading
http://www.abare.gov.au
http://www.abs.gov.au/
http://www.aip.com.au/
http://www.appea.com.au/
http://www.ret.gov.au/
http://www.treasury.gov.au/documents/930/PDF/02_International.pdf
Clements, K. W., Ahammad, H., & Qiang, Y. (1996). New mining and
mineral-processing projects in Western Australia: Effects of
employment and the macro-economy. Resources Policy, 22(4), 293-
346.
5
Lecture Outline
Role of Governments
Energy Investment
Energy Industry Employment
Economy wide industry effects
Petroleum Revenues
Taxation
Dutch Disease
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3
Role of Governments
Policy
Legislation
Regulation
Taxation
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Role of Government
The Department of Resources, Energy and Tourism
The National Offshore Petroleum Safety Authority (NOPSA)
Policy examples:
Carbon Capture and Storage
Offshore Petroleum and Greenhouse Gas Storage
Offshore Petroleum Act Updates
Definitions of coastal waters
United Nations Convention of the Law of the Sea
Access Authority
Environmental approvals processes
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4
Role of Government
Legislation and regulations
The legal framework within which petroleum exploration and

development activity takes place in Australia is a result of
certain agreements including the Offshore Constitutional
Settlement and the division of responsibilities between the
Australian Government and the state/Northern Territory (NT)
Governments under the Australian Constitution
The Offshore Petroleum Legislation, Regulation and Guidelines

provide for orderly exploration for and development of
petroleum resources, and sets out a basic framework of rights,
entitlements and responsibilities of governments and industry
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Role of Government
The PSLA (Petroleum Submerged Lands Act) has been
rewritten as Offshore Petroleum Act 2006 (the OPA), related
Acts will come into effect during 2008, PSLA will be repealed
Department will implement the consolidated regulations by the

end of 2008-09 covering:
Exploration
Offshore Petroleum Development
Occupational Health & Safety
Environmental Issues (Carbon Capture and Storage)
Fees and taxation
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5
Energy Industry Investment
Contribution to
GDP Investment Exportsa Employment
($m) ($m) ($m) ('000)
Coal, oil & gas 64,895 N/A 35,750 35
Metal ore mining N/A 26,717 44
Other mining N/A 325 28b
Services to mining 4,983 N/A N/A 29
Total 69,879 35,615 62,792 136
Mining and oil and gas extraction directly account for eight per cent of
Australia's Gross Domestic Product (GDP)
80 per cent of the resources sector's production is exported, in 2006-07 this
included
Crude oil and other refinery feedstock $8.3 billion
LNG $5.2 billion
Thirty nine energy projects totalling $16.8 billion in capital expenditure – 7
large petroleum projects, including the $2.4 billion NW Shelf Extension and $1
billion Vincent oilfield development, together with one natural gas pipeline
project, account for over half the total value of energy projects
Scheduled for completion by the end of 2008
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The petroleum sector is a major investor in the Australian
economy:
Exploration expenditure over $2000 million per annum 06/07
Capital Expenditure 06/07 over $6 billion
Combined average of $2,000 million over the last 10 years
Expenditure on petroleum exploration for the September quarter

2008 fell $75.9m (8.9%) to $781.3m
Expenditure on exploration on production leases rose $48.1m
(31.9%), while exploration on all other areas fell $124.0m (17.6%)
this quarter
Offshore exploration fell $70.3m (9.6%) in the September quarter
2008, while onshore exploration expenditure fell $5.6m (4.4%).
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Private exploration, actual and expected expenditure
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Petroleum Exploration, Original series
http://tonto.eia.doe.gov/dnav/pet/hist/rwtcD.htm
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Oil and gas extraction is a capital-intensive industry and
therefore its direct employment impact is less than its direct
impact on GDP
Construction phase (< 12 months) – high levels

Operating phase (10 to 20 years) – relatively low
Processing phase – see below
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Energy industry Employment

Table below presents a time series for selected variables, from 2004–05 to
2006–07
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8
140,000
120,000
100,000
Employment
80,000
60,000 Contract employment by

minerals companies
40,000
20,000
0
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
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There has been a steady increase since 2001-2002, reflecting:
Growth in volume of oil output
Increased capital expenditure on exploration
Increases in the gas industry
QUARTER 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
Employment 82,875 83,717 86,963 95,644 109,764 117,464
Percentage change 1.0 3.9 10 14.8 7.0
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Employment Multipliers
On average, it was estimated that for each 100 additional
people employed in the mining industry, approximately 300
jobs were created in other parts of the economy (Clement et,
al., 1996)
Employment Cost and Value (1995 data)

Wages and salaries
Oil & Gas average $76,500 (1994-1995)
Mining industry average $64,900 (1994-1995)
Value-added per employee

Oil and Gas $1,600,000 (1994-1995)
Mining $342,000 (1994-1995)
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Related Employment Sectors
Engineering Services
Drills, platform steelwork, pipelines, turbines, generators, cooling
and heating equipment, switchboards, control systems, cranes,
pressure vessels, pumps, cables, insulation
Ship Building
Dredges, transport barges, service boats, drilling rigs, tankers
Construction
Housing, platform accommodation, sheds, roads, wharfs, handling
facilities, plant buildings, offices, laboratories, shopping centres,
motels, hospitals, schools
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Science and Technology
Computers, seismic survey equipment, telecommunications, control
rooms
Transport
Road, plane, ship and helicopter services
Geoscience
Geologists, geophysicists, paleontologists
Environment, Health and Safety

Environmental scientists, occupational health and safety, medical
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Administration Services
Management, legal, financial, clerical, secretarial, logistics,
communications, public affairs
Support Services
Banking, legal, office equipment, computers, public service, media
services, graphical, printing, insurance, medical, teaching, training
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Petroleum-Dependent Employees by Company
Other 30
Managerial Services 80
Transport 700
Geoscience 1180
Technical Services 2240
Support Services 2650
Materials/Goods Supply 2770
Engineering/Construction 7700
0 1000 2000 3000 4000 5000 6000 7000 8000 9000
Number of Employees
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Economy-wide (Macroeconomic) Effects
ABARE (1996) studied the result of a 20% increase in oil, LPG
and gas production using the general equilibrium model
(ORANI-E) of the Australian economy
Incorporating:
Volume and price linkages between industries
Economy-wide constraints, e.g. amount of skilled labour in the
economy
New investment
Technical advances
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Economy wide Effects of a 20% Increase

Effects of a 20% Increase in Oil, LPG and Gas Production
Short run Long run

GDP 0.47% 0.35%
Consumption 0.00% 0.23%
Investment 0.35% 0.75%
Employment 0.38% 0.00%
Real wages 0.00% 0.40%
Balance of trade (1995 $b) 0.47 0.32

Volume of exports 2.45% 0.51%
Volume of imports -0.08% 0.48%
Value of exports (foreign currency) 2.27% 0.54%
Value of imports (foreign currency) -0.08% 0.48%
Terms of trade -0.17% 0.03%
Real exchange rate -0.63% 0.22%
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Short term
Export volumes to be increased to produce a trade surplus
No movement in real wages provides a boost to competitiveness
Real exchange rate falls, helping export and import competing
industries
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Long term
Increased national income and competition for limited resources,
including labour, drive up the cost of inputs, including real wages
Real exchange rate rises to above baseline and reduces payments
in Australian Dollar terms, adversely affecting all exporting
industries and restoring the trade balance in foreign currency terms
0.5% increase in the volume of both imports and exports but the
terms of trade and real exchange rate have improved so that the
value of exports is higher than imports, producing a trade surplus of
$0.3 billion in 1995 prices
Greater investment funds to the oil and gas extraction industry
produces benefits for related industries, both upstream and
downstream
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14
Output multiplier
between 1.8 and 2.4
Service Companies
Operating Company + $0.1 million
+ $0.5 million
+ $0.1 million
+ $0.1 million
+ $1 million
+ $0.5 million
+ $0.1 million
29

Employment
Oil related – 18% increase
LPG related – 14% increase
Gas related – 7% reduction (as higher real wages provide an
incentive for the industry to use more capital and less labour)
Short-term increase of 0.4% to employment

Real wages are assumed to be sticky, any boost to income is
reflected in higher employment
Long term increase of 0.4% to real wages
Assumed to be no spare capacity in the economy so expansion in
oil and LPG employment is offset by declines in other industries
If there was spare labour capacity (the unemployed), then increase
of 0.4% to employment
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Downstream, those industries that use the oil and gas sector’s
output benefit the most
The petroleum refining industry gets a boost
Electricity generation from:
gas turbines +13.2%
combined cycle turbines + 6.1%
Direct gas provision +7.7%
Demand for coal reduces in the long run due to substitution
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Dutch Disease
The harmful consequences of large increases in a country's
income
The term originated in Holland after the discovery of North Sea

gas
The deindustrialization of a nation's economy that occurs when

the discovery of a natural resource raises the value of that
nation's currency
This makes manufactured goods less competitive with other

nations increasing imports and decreasing exports
32
16
Government Revenue
Which Taxes Impact on the Oil and Gas Industry?
Positives in the Tax System
Economic Rent
Ad Valorem Well-head Taxes
Petroleum Resource Rent Tax (PRRT)
Excises on Refined Petroleum Products
Taxation of Natural Gas
Payroll Tax
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Government Revenue
Companies in the oil and gas extraction industry are subject to
resource taxation, which provides a return to the community
for private companies exploiting Australia’s natural resources
Which Taxes Impact on the Oil and Gas Industry?
Commonwealth Excise or Rent Royalties
Company income tax system
Excise on refined petroleum products
GST
Payroll tax
Personal income tax
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Positives in the Tax System
Exploration incentives
Investment incentives
Research and development
incentives
All based on using the tax system to
encourage certain activities that
effectively require a subsidy
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Why Provide Tax-based Incentives?

Exploration generates positive Forms of the Tax-based
externalities Incentives
Self sufficiency as an objective Special Treatment of
Industry development exploration expenses
Research and development has Accelerated depreciation
positive spillover effects Deduction for research and
development expenses
But why use the tax system
rather than direct payments? Investment allowance
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Economic Rent
Rents are differences between revenue and cost where cost
includes normal profits
Price determines rent
2 Types of Rent Collecting Taxes

On the value of production as a proxy for the underlying economic
rents
The ad valorem well-head value
On the economic rents directly

The Resource Rent Tax
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Ad Valorem Well-head Taxes

A percentage of the well-head value
Well-head value=sale price less transport and processing costs
to the point of sale
Well-head value=rent+ cost of production
Well-head tax=Tax rate (rent+cost of production)
Well-head tax is a tax on the cost of production
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Impact of Ad Valorem Tax
Adds to costs of production

Net present values fall
Size of the investment outlay is 20
P r i c e o f o i l ($ B )
reduced 15
10
Oil and gas left in the ground
5
High grading in the minerals
sector
0 Tax effect
1 2 3 4 5 6 7 8 9 10
Fails to discriminate between Number of wells
high and low rent operations
No Ad Valorem Royalty With Ad Valorem Royalty
Price of Oil ($Barrel)
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Commonwealth Benefits Ad Valorem

Royalties are levied at 10-12.5% of the net well-head value of
petroleum produced
Applies to crude oil production from:
North West Shelf Project area
onshore areas
coastal areas within a defined territorial sea
Revenue:
1984/85 at $4,202 million
2003/04 Natural resource royalties expenses for the Oil and gas
extraction industry were $2,231 million
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Petroleum Resource Rent Tax (PRRT)
A net cash flow tax applied to all taxable profits
Government sets the tax rate @ 40%
Undeducted expenditures transferable to other projects
Assessed on project basis or production licence area
Applies to offshore projects under the control of the Commonwealth

Government, with the exception of the North West Shelf Project, which
is subject to excise and royalty arrangements
Does not apply to downstream activities, such as refining and

transportation
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PRRT Example
Table: Normal profit rate of 25% and tax rate of 40%
Year Net Cash Flow Carry forward Total loss (-) Tax @ 40%
of previous or rent (+)
year losses @
25%, the
normal profit
rate
1 -500 0 -300 Nil
1
2 -300 -625 -925 Nil
2
3 100 -1156 -1056 Nil
3
4 200 -1350 -500 Nil
4
5 900 -1400 275 Nil
5
6 900 -625 900 110
7 900 0 360
Notes: 1. 500*1.25=625
2. 925*1.25=1156
3. 1056*1.25=1320
4. 1120*1.25=1400
5. 500*1.25=625 42
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Taxation of Refined Petroleum Products
GST Levied on the cost of business
GST is added to all sales of inputs such as materials and
refined petroleum products labour
Buyers of natural gas as an Charged on the sale of product,
input get a refund of the GST on although most oil and LNG is
refined petroleum products sold overseas so is exempt
purchases Thus, most companies receive
Buyers of refined product for a tax credit against the GST
consumption use pay the GST expended
Refined products pay fuel Federal income
excise
Natural gas is not subject to any Payroll
excise duty Levied against the employment
Distortion created in the price cost for those paid in the State
of natural gas 5.5% of salary
State income
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Excises on Refined Petroleum Products
44
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Multiple Levels of Taxation
Primary Taxes
Corporation tax
Royalty
Excise
Payroll
Secondary Taxes
PRRT
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Conclusions
Is the community getting a fair return on it’s resource?
ABARE found that Australia's PRRT is a competitive and efficient resource
taxation system and has provided the community with a direct return on the
extraction of petroleum resources.
ABARE also found that the PRRT represents a major advance over
alternative production based royalties, including specific and ad valorem
royalties.
The results of ABARE's report do not support claims that the PRRT is
discouraging exploration and development in deepwater areas and gas
projects. Industry continues to engage in significant frontier and deepwater
exploration activities, and domestic and international gas markets are
expected to further significantly development over time.
ABARE reported that Australia is ranked 6th in the global ranking of
deepwater exploration wells. This is greater than what would be expected in
view of Australia's low level of prospectivity
http://assistant.treasurer.gov.au/atr/content/speeches/2003/011.asp
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Conclusions
Are we giving the right incentives to the multinationals?
ABARE Outlook 2002
47
In Summary
Role of government
Energy Investment
Economy wide industry effects
Petroleum Revenues
Taxation
48
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Lecture Conclusion
This is the end of lecture 4 for topic 4
You may now progress to Lecture 5 of this topic
Using the information you have gained from this lecture, and
drawing on the sources given, in your online discussion
examine whether we are giving the right incentives to the
multinationals in the light of the changing economic
circumstances?
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CRICOS Provider No. 00126G copyright © The University of Western Australia

BL Oil & Gas History, Economics and Geopolitics OENA8433

Topic 4, Lecture 4: Government Revenue – Investment for the Future

Dr. Karin Oerlemans

CRICOS Provider No. 00126G copyright © The University of Western Australia

 Upon successful completion of this lecture you

 The legal framework within which petroleum exploration and

 The Offshore Petroleum Legislation, Regulation and Guidelines

 Department will implement the consolidated regulations by the

Energy Industry Investment

 Expenditure on petroleum exploration for the September quarter

Energy Industry Investment

 Construction phase (< 12 months) – high levels

Energy industry Employment

60,000 Contract employment by

Energy Industry Employment

QUARTER 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

Employment 82,875 83,717 86,963 95,644 109,764 117,464

Percentage change 1.0 3.9 10 14.8 7.0

 Employment Cost and Value (1995 data)

 Value-added per employee

Related Employment Sectors

 Environment, Health and Safety

Petroleum-Dependent Employees by Company

Technical Services 2240

Support Services 2650

Materials/Goods Supply 2770

0 1000 2000 3000 4000 5000 6000 7000 8000 9000

Economy wide Effects of a 20% Increase

Short run Long run

Balance of trade (1995 $b) 0.47 0.32

Economy wide Effects of a 20% Increase

Operating Company + $0.1 million

Economy wide Effects of a 20% Increase

 Short-term increase of 0.4% to employment

 The term originated in Holland after the discovery of North Sea

 The deindustrialization of a nation's economy that occurs when

 This makes manufactured goods less competitive with other

 Positives in the Tax System

 Ad Valorem Well-head Taxes

 Petroleum Resource Rent Tax (PRRT)

 Excises on Refined Petroleum Products

 Taxation of Natural Gas

Why Provide Tax-based Incentives?

 Price determines rent

 2 Types of Rent Collecting Taxes

 On the economic rents directly

Ad Valorem Well-head Taxes

 Adds to costs of production

Commonwealth Benefits Ad Valorem

 Government sets the tax rate @ 40%

 Undeducted expenditures transferable to other projects

 Assessed on project basis or production licence area

 Applies to offshore projects under the control of the Commonwealth

 Does not apply to downstream activities, such as refining and

CRICOS Provider No. 00126G copyright © The University of Western Australia

Excises on Refined Petroleum Products

ABARE Outlook 2002

 Energy Industry Employment

 Economy wide industry effects

Das könnte Ihnen auch gefallen

Upon successful completion of this lecture you

The legal framework within which petroleum exploration and

The Offshore Petroleum Legislation, Regulation and Guidelines

Department will implement the consolidated regulations by the

Expenditure on petroleum exploration for the September quarter

Construction phase (< 12 months) – high levels

Employment Cost and Value (1995 data)

Value-added per employee

Environment, Health and Safety

Short-term increase of 0.4% to employment

The term originated in Holland after the discovery of North Sea

The deindustrialization of a nation's economy that occurs when

This makes manufactured goods less competitive with other

Positives in the Tax System

Ad Valorem Well-head Taxes

Petroleum Resource Rent Tax (PRRT)

Excises on Refined Petroleum Products

Taxation of Natural Gas

Price determines rent

2 Types of Rent Collecting Taxes

On the economic rents directly

Adds to costs of production

Government sets the tax rate @ 40%

Undeducted expenditures transferable to other projects

Assessed on project basis or production licence area

Applies to offshore projects under the control of the Commonwealth

Does not apply to downstream activities, such as refining and

Energy Industry Employment

Economy wide industry effects