Research Paper 29 2000-01

Crude Oil Excise and Royalties

Richard Webb
Economics, Commerce and Industrial Relations Group
22 May 2001

The rise in fuel prices has stimulated interest in the taxation of crude oil⁽¹⁾ produced in Australia. Commonwealth revenues from crude oil consist of excise,⁽²⁾ royalties and the petroleum resource rent tax (PRRT).⁽³⁾ This Research Note was written to help Members of Parliament understand the crude oil excise/royalties regime and complements an earlier Research Note on the PRRT.⁽⁴⁾

Constitutional Framework

Taxation of petroleum reflects the constitutional division of responsibility between the Commonwealth and the States.

Offshore projects are located outside the three nautical mile boundary and so fall within the Commonwealth's jurisdiction. Offshore projects incur either the PRRT or crude oil excise and royalties.⁽⁵⁾ The PRRT applies to offshore projects (principally Bass Strait) except the North West Shelf.⁽⁶⁾ The Commonwealth levies crude oil excise and a royalty on the North West Shelf. Nearly 70 per cent of production not subject to the PRRT is from the North West Shelf (Wanaea/Cossack). The Commonwealth shares the royalty with Western Australia.

Coastal waters projects lie between the low tide water mark and the three nautical mile boundary. Coastal water projects are subject to the crude oil excise and State royalties, which the State shares with the Commonwealth.

Onshore projects are land-based. They are subject to the crude oil excise⁽⁷⁾ and State royalties.

Rationale for the Excise

The Whitlam Government introduced the crude oil excise in August 1975 to redistribute to the community some of the gains producers received from increased world prices. Subsequent determination of the level of excise has sought to balance the return to the community against the need to ensure incentives remained for companies to explore for and produce oil in Australia. To ensure adequate incentives, excise rates have been adjusted from time to time. For example, on 23 October 1984, the Government announced that it would introduce arrangements to encourage development of fields that had not been developed because of inadequate returns under the 'old' oil excise scale. These fields became eligible for concessional treatment under the new 'intermediate' excise scale.

Pump and Producer Prices

The crude oil excise (like the PRRT and royalties) does not affect pump prices or the prices that producers receive. But the excise is in effect a tax on profits and so reduces producers' returns. The world oil market sets the prices producers receive. The Hawke Government effectively ended import parity pricing of crude oil (which the Fraser Government introduced in the 1978-79 Budget) when it fully deregulated domestic crude oil supply and marketing arrangements on 1 January 1988. Since then, prices of domestic crude oil have reflected world market prices.⁽⁸⁾

Excise Imposition

Excise is levied under the Excise Tariff Act 1921 and the Petroleum Excise (Prices) Act 1987. The basis on which excise is levied is the volume-weighted average (VOLWARE) of sale prices. Excise rates are expressed as a percentage of VOLWARE, and depend on whether oil is 'old', 'intermediate' or 'new'. The first 4 770 megalitres (30 million barrels) from each project are excise-free. Thereafter, rates rise with annual volume (Table 1).

Royalties

The Commonwealth royalty on the North West Shelf is levied under the Petroleum (Submerged Lands) (Royalty) Act 1967 and is shared with Western Australia under section 129 of the Petroleum (Submerged Lands) Act 1967.⁽⁹⁾ The Commonwealth generally does not receive royalties from onshore projects because mineral rights are vested in the States. But under the Offshore Constitutional Settlement, the Commonwealth receives four percentage points of the royalty revenue Western Australia receives from a number of developments located in coastal waters.⁽¹⁰⁾ The Commonwealth also shares royalty revenue from Barrow Island in Western Australia. Under the Petroleum Revenue Act 1985, Commonwealth excise may be waived if a State imposes a resource rent royalty (RRR) on petroleum produced within the State's jurisdiction and enters a revenue-sharing agreement with the Commonwealth. The Commonwealth receives 75 per cent of RRR revenue from Barrow Island.

Revenue Comparison

Revenue from excise and royalties is small compared with revenue from excise on petroleum products (Table 2). But crude oil excise and royalty revenue rose sharply in 1999-00 because of increased output and higher crude oil prices.

1. Section 4 of the Petroleum Excise (Prices) Act 1987 defines crude oil as stabilised crude petroleum oil.
2. Crude oil excise should not be confused with the excises on petroleum products, notably petrol and diesel.
3. The Commonwealth also receives company tax on oil producers.
4. See 'Petroleum Resource Rent Tax', Research Note, no. 20, Department of the Parliamentary Library, 2000-01 at http://www.aph.gov.au/library/pubs/rn/2000-01/01RN20.htm
5. LPG used to be subject to excise but is now exempt.
6. Exploration permit areas WA-1-P and WA-28-P. The North West Shelf is subject to excise because planning for the LNG plant was on the basis of the crude oil/LNG excise regime in place before the PRRT was introduced.
7. Currently, no excise is collected from onshore production.
8. The ability to trade oil internationally ensures that domestic prices reflect international prices since differences between the two prices would result in imports or exports as the case may be.
   For further information see: http://www.accc.gov.au/media/mediar.htm
9. The royalty is levied as a percentage of the wellhead value with the rate depending on the size of the area covered by the production licence.
10. The developments are Harriet, South Pepper/North Herald/Chervil and Saladin/Yammaderry/Cowle.

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