Chapter 5


Chapter 5

Cost recovery arrangements and changes to the administration of royalties and fees

Royalty Act amendments

5.1        The Offshore Petroleum (Royalty) Amendment Bill 2011 amends the Offshore Petroleum (Royalty) Act 2006 (the Royalty Act) to replace references to the Designated Authority with the new Titles Administrator.

5.2        The Explanatory Memorandum provides little detail regarding the consequences of this change, although in his Second Reading Speech, the Minister stated that the bill 'has no impact on the level of royalties paid by industry or on the sharing of those royalties with Western Australia'.[1]

5.3        In its submission, the WA Department of Mines and Petroleum, while considering that the amendments would not be likely to impact the State's revenue,  submitted that the effect of the amendment will be that a number of responsibilities will move from the Western Australian Government to the Titles Administrator, including:

  • involvement in setting the royalty rates;
  • negotiation of wellhead royalty schedules (agreements) with holders of licences;
  • determination of the wellhead point and the value of petroleum at the wellhead;
  • assessment/determination of the quantity of petroleum recovered;
  • assessment and audit of monthly royalties payable;
  • exemption from royalties; and
  • forecasting and assessment of North West Shelf royalties.[2]

5.4        The removal of WA's involvement in forecasting, assessing and negotiating royalties associated with the North West Shelf Project was a particular concern. The WA Department put forward that the State would no longer be aware of what revenue it would receive from these royalties until after the Commonwealth transferred the payments. This would have implications for the ability of the State to undertake its Budget forecasting.[3] At its appearance before the committee, officials from the WA Department of Mines and Petroleum advised the committee that the effect would be that the WA Government would not know what the royalty payments would be until three to six months after they were collected.[4]

5.5        The representatives from the Commonwealth department acknowledged that, under the proposed arrangements, the WA Government would not have a firm legislated role in the administration of the royalties. However, as noted in chapter 4, an MoU is being developed between the Commonwealth and WA to determine the functions which could be performed by Western Australian officials on a cost recovery basis. DRET suggested that the royalty issue:

...is probably a good example of where a service-level agreement might be able to be entered into, whereby the Western Australian department continues to undertake its current roles in relation to the collection and verification of the royalties and they would still be in the same position that they are now in the calculation of their estimates.[5]

Cost recovery

5.6        In accordance with the Commonwealth's Cost Recovery Guidelines for Regulatory Agencies, NOPSA is currently funded on a full cost-recovery basis with levies raised from the offshore petroleum industry, although the existing levies do not extend to the regulation of environmental matters. As noted previously in this report, the new NOPSEMA will be given responsibilities under the OPGGS Act and associated regulations regarding environmental management.

5.7        It is also proposed that the functions of the new national Titles Administrator be funded in a similar fashion to NOPSA/NOPSEMA. As the Titles Administrator is a new national body replacing the State/Territory-based Designated Authorities, this involves the Commonwealth retaining the revenue it currently distributes to the States and the Northern Territory.

5.8        Accordingly, the Offshore Petroleum and Greenhouse Gas Storage Regulatory Levies Legislation Amendment (2011 Measures No. 2) Bill 2011 will amend the Offshore Petroleum and Greenhouse Gas Storage (Regulatory Levies) Act 2003 to impose cost recovery levies (an annual titles administration levy and an environment plan levy) on the registered holders of offshore petroleum and greenhouse gas storage titles to fund the operations of the Titles Administrator and NOPSEMA.

5.9        The Offshore Petroleum and Greenhouse Gas Storage (Registration Fees) Amendment Bill 2011 will also amend the Offshore Petroleum and Greenhouse Gas Storage (Regulatory Levies) Act 2003 to replace references to the Designated Authorities with references to the Titles Administrator. The effect of the bill will be that the registration fees collected will be retained by the Commonwealth to recover the establishment costs of the Titles Administrator and NOPSEMA.

Current arrangements

5.10      Under the present arrangements, there are two categories of offshore petroleum, mining and greenhouse gas storage fees—registration fees and non‑registration fees. Registration fees apply to the registration of a transfer or dealing, and are either a minimum fee or an ad-valorem fee of 1.5 per cent of the consideration. Non‑registration fees consist of set fees for titles applications and annual fees.

5.11      Revenues from these fees are paid to the States and the Northern Territory to compensate them for their costs in the day-to-day administration of petroleum operations.[6] However, DRET suggests that:

While the current offshore petroleum and mining fees are used to reimburse states/NT administrative costs the quantum of the fees has not been determined on a cost recovery basis, and do not recover any of the Commonwealth’s administrative costs.  Offshore mining and greenhouse gas storage fees have not been determined on a cost recovery basis.[7]

5.12      The Western Australian Government's view on the payments was put to the committee:

The registration fees are fees that have existed since 1967, I believe. They were given to the states or the DAs in lieu of a stamp duty that applied at the time. In our case of Western Australia, those are not used for petroleum administration fees. I do not think that they are directed anywhere in the act to direct those towards covering the cost of administration. In fact, they go into our general revenue, and our treasury views that as an equivalent to stamp duty. We have got about $10 million a year in Western Australia on the average over the past five years, and we do not have access to those for administration costs.[8]

Proposed arrangements

5.13      The Regulatory Levies Bill will introduce two new levies for the ongoing recovery of the operating costs of NOPSEMA and the Titles Administrator:

  • Annual titles administration levy—for each year of the term of that title; and
  • Environment plan levy—to be imposed on a titleholder when an application is made for either acceptance or revision of an environmental plan.

5.14      These levies will replace the non-registration fees. The registration fees will also be abolished once the establishment costs associated with NOPSEMA and the Titles Administrator have been recovered.

5.15      The Minister explained:

Following the recovery of these establishment costs expected in 2013, the 1.5 per cent registration fee will be scrapped and replaced with a cost recovery fee which reflects the actual cost of administration with the required expertise. This will create significant savings for the industry.[9]

5.16      DRET estimates that the changes will the lead to an increase in fees paid by the industry of approximately $10 million per year for two years while the establishment costs of NOPSEMA and the Titles Administrator are recovered. However, after this establishment period, it is estimated that the overall fees paid by industry will be lower by about $6 million per year, compared to current levels (see Table 5.1).[10]

5.17      It is not clear, however, if the estimates provided by DRET provide the full picture. The WA Department indicated that it 'would still be required to cost recover its costs of operations, and in the state waters, the islands and onshore it would have to levy other cost recovery fees'.[11]

Table 5.1: Estimated cost impacts on industry

 

Existing Regime
Full year costs
($ million)

Establishment Phase (a)
Full year costs
($ million)

Final Regime (b)
Full year costs
($ million)

Registration Fees

15

15

-

Non-registration Fees

7

-

-

NOPSA

15

-

-

NOPSEMA

-

23

23

NOPTA

-

8

8

Total

37

46

31

Notes:

(a)    Establishment Phase refers to the period after the commencement of NOPSEMA and NOPTA during which the Commonwealth retains registration fee revenues to recover the establishment costs of NOPSEMA and NOPTA.

(b)    Final regime refers to the period following the abolition of registration fees.

Source: Department of Resources, Energy and Tourism, Submission 1, Attachment A, p. 5.

5.18      DRET argued that an additional benefit will arise from the proposed arrangements. As a result of the use of a special account to contain the revenue and the application of formal cost recovery guidelines, there will be significantly increased transparency of the payments:

Because we are bringing all the regulation within Commonwealth agencies, we can make sure that they comply with the Commonwealth government guidelines on cost recovery, which includes the preparation of cost recovery impact statements involving opportunity for stakeholders to comment on what is being proposed. To the existing arrangements, whereby you have seven different state and NT departments providing their cost information but where we do not have any ability to query those costs, we are now introducing transparency for the first time.[12]

Parliamentary scrutiny of the levies

5.19      The annual titles administration levy and environment plan levy that is proposed will equal 'the amount that is specified in, or worked out in accordance with, the regulations'.[13]

5.20      The Offshore Petroleum and Greenhouse Gas Storage (Regulatory Levies) Act 2003 also includes other levies which are determined by regulations. The Senate Standing Committee for the Scrutiny of Bills relevantly considered these issues when examining the Offshore Petroleum and Greenhouse Gas Storage Regulatory Levies Legislation Amendment (2011 Measures No.1) Bill 2011 earlier this year. The committee noted it has:

...consistently drawn attention to legislation that provides for the rate of a levy to be set by regulation. This creates a risk that the levy may, in fact, become a tax. In the Committee’s opinion, it is for Parliament, rather than the makers of subordinate legislation, to set a rate of tax.[14]

5.21      Although the Scrutiny of Bills Committee acknowledged there could be situations where it is appropriate for the amount of a levy to be sent in regulations, such as where 'where the rate of a levy needs to be changed frequently and expeditiously', this is subject to some limit on the exercise of this power being imposed (such as an upper limit for the levy being stated or the formula to be used being described in the bill).[15]

5.22      In that case, the Scrutiny of Bills Committee requested that the Minister provide additional information. After this was provided, it resolved to leave:

...to the Senate as a whole the question of whether the proposed arrangements for determining and reviewing the amount of each levy is appropriate in the circumstances.[16]

Committee view

5.23      The committee considers it is appropriate and desirable that the national regulators are funded on a full cost-recovery basis with levies raised from the offshore petroleum industry, in accordance with the Commonwealth's Cost Recovery Guidelines for Regulatory Agencies. The committee also considers that the proposed changes will bring about significant benefits to industry, through lower overall fee payments once the initial establishment costs of NOPSEMA and the Titles Administrator have been recovered. The committee also believes that the increased transparency of what the payments are ultimately used for is an important improvement on the current arrangements.

5.24      The committee acknowledges that the Western Australian Government should be able to access timely estimates of the revenue it will receive from the royalty payments to assist its budget processes. However, the committee agrees with the Commonwealth Department of Resources, Energy and Tourism that issues regarding the administration and estimates of royalty revenue are best addressed through subsequent agreements between the Commonwealth and Western Australia governments.

5.25      With respect to the matter of levies being determined by regulations, the committee notes the issue but considers the Senate Scrutiny of Bills Committee is best placed to give it due consideration in its report on the bills.

Recommendation 1

5.26      The committee recommends that, subject to consideration by the Senate Standing Committee for the Scrutiny of Bills, the following bills be passed:

  • Offshore Petroleum and Greenhouse Gas Storage Amendment (National Regulator) Bill 2011;
  • Offshore Petroleum and Greenhouse Gas Storage Regulatory Levies Legislation Amendment (2011 Measures No. 2) Bill 2011;
  • Offshore Petroleum and Greenhouse Gas Storage (Registration Fees) Amendment Bill 2011; and
  • Offshore Petroleum (Royalty) Amendment Bill 2011.

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