Referral of the inquiry
1.1
The Offshore Petroleum (Laminaria and Corallina Decommissioning Cost Recovery Levy) Bill 2021 (the OP levy bill) and the Treasury Laws Amendment (Laminaria and Corallina Decommissioning Cost Recovery Levy) Bill 2021 (the TLAB levy bill) were introduced in the House of Representatives and read a first time on 20 October 2021.
1.2
On 21 October 2021, the Senate referred the provisions of the bills to the Senate Economics Legislation Committee (Legislation Committee) for inquiry and report by 18 November 2021.
Purpose of the bills
1.3
The purpose of the bills is to implement a new, temporary levy on offshore petroleum production to recover the Commonwealth's costs of decommissioning and remediating the Laminaria and Corallina oil fields and related infrastructure, including the Northern Endeavour.
1.4
The intent of the changes was explained by the Assistant Treasurer, the Hon Michael Sukkar MP, on 20 October 2021:
This bill imposes a temporary levy on offshore petroleum production. The purpose of the levy is to recover the costs of decommissioning the Laminaria-Corallina oilfields and associated infrastructure. It will ensure that taxpayers are not left to pay these costs.…
The levy will be in place until the net costs associated with the decommissioning have been recovered or 30 June 2030 at the latest. Once net costs have been recovered, the levy will cease.
1.5
The levy will apply at a rate of $0.48 per barrel of oil equivalent produced, based on the annual physical production at the wellhead. It will apply to petroleum produced on or after 1 July 2021 and will be levied annually in arrears with the first payment due the first half of 2022–23.
1.6
The levy will remain in place until all costs are covered, up until the financial year commencing 1 July 2029, with a mechanisms to terminate the levy early or lower the levy to prevent 'over-collection' by the Government. The levy will not be deductible for any other form of Commonwealth taxation, including company tax, petroleum resource rent tax, the North West Shelf royalty or crude oil excise.
Background
1.7
Following events leading to the shutting down of the Northern Endeavour offshore oil and gas floating production storage and offtake facility (FPSOF) in 2019–2020 and placing it into 'lighthouse mode', the federal government in February 2020, stepped into ensure the safety and security of the facility. The government committed to decommissioning the facility and remediating the marine environment, with the project undertaken in three phases and forecast to take several years:
Phase 1: decommissioning and disconnection of the facility from the subsea equipment
Phase 2: permanent plugging and abandonment of wells
Phase 3: removal of subsea infrastructure and remediation.
1.8
In July 2021, the government sought expressions of interest for Phase 1 and repairs and maintenance are being undertaken to prepare the facility for decommissioning.
1.9
A cost recovery levy was announced on 11 May 2021 as part of the 2021–22 Budget measures and the bills give full effect to the measure Decommissioning Costs—Laminaria-Corallina oil fields and associated infrastructure.
1.10
The government budgeted $75.344 million over two years for the program, including nearly $9 million to Woodside for the provision of expert advice.
Other relevant reviews and inquiries
1.11
As part of the development of the enhanced decommissioning framework DISER told the committee during 2020-2021 Budget Estimates, that in 2018 financial securities, including bonds, were considered by the department as a possible mechanism to recoup any Commonwealth costs. DISER noted that 'where similar offshore renewable energy frameworks are being developed internationally, it is common for security, such as a bond, to be required prior to construction commencing'.
1.12
The Productivity Commission's (PC) 2020 review of resources sector regulation found that:
Surety arrangements for rehabilitation generally have been inadequate, but are being strengthened. Bonds that cover the full cost of providing rehabilitation offer the highest level of financial assurance for governments, and provide companies with full incentives to complete rehabilitation in a timely way. Surety requirements should be adjusted to reflect and encourage progressive rehabilitation. Jurisdictions are heading in this direction, but a leading practice jurisdiction has not been identified.
1.13
The PC also noted that having financial assurance arrangements in place provides incentives for companies to meet their obligations and reduces the risk of costs being borne by the government, and hence taxpayers.
1.14
The Senate Economics References Committee is presently undertaking an inquiry into Australia's oil and gas reserves. It received evidence and considered matters relating to future decommissioning of oil and gas infrastructure, the Northern Endeavour and a subsequent review by Mr Steve Walker, and options for decommissioning cost recovery, including a levy. The inquiry's report is due to be tabled on 2 December 2021.
Provisions of the bills
Overview of the amendments
1.15
The new, temporary decommissioning cost recovery levy is given effect through two bills, which share an Explanatory Memorandum (EM):
Offshore Petroleum (Laminaria and Corallina Decommissioning Cost Recovery Levy) Bill 2021 (the OP levy bill); and
Treasury Laws Amendment (Laminaria and Corallina Decommissioning Cost Recovery Levy) Bill 2021 (the TLAB levy bill).
1.16
The OP levy bill implements a new, temporary levy on offshore petroleum production to recover the Commonwealth's costs of decommissioning and remediating the Laminaria and Corallina oil fields and related infrastructure, including the Northern Endeavour.
1.17
The OP levy bill contains a number of provisions which enable the levy, noting that there is no equivalent current law. These include:
the application of the levy to registered holders of petroleum production licences under the Offshore Petroleum and Greenhouse Gas Storage Act 2006;
setting the levy rate at 48 cents per barrel of oil equivalent produced each levy year;
a mechanism to prevent over collection of levy over and above the Commonwealth's unrecovered costs;
the establishment of the period of operation for the financial years beginning between 1 July 2021 and 1 July 2029; and
a mechanism to terminate the levy once the Resources Minister is satisfied that public costs have been recovered.
1.18
The TLAB levy bill has one schedule and amends the Income Tax Assessment Act 1997, the Petroleum Resource Rent Tax Assessment Act 1987 and the Tax Administration Act 1953 to specify administrative features of the cost recovery levy, including those relating to:
modification of the Income Tax Assessment Act 1997 to specify that the levy is non-deductible;
modification of the Petroleum Resource Rent Tax Assessment Act 1987 to add payments of levy to the list of excluded expenditure. 'This ensures, amongst other things, that the levy is an excluded cost for the purposes of calculating upstream and downstream costs under the residual pricing method'; and
modification of the Tax Administration Act 1953 to limit the objection period and period of review for the levy, specify that the levy is payable to the Commissioner of Taxation, and to ensure that ordinary tax collection and recovery provisions apply.
Detailed explanation of the new laws
Offshore Petroleum (Laminaria and Corallina Decommissioning Cost Recovery Levy) Bill 2021
1.19
The bill introduces the Offshore Petroleum (Laminaria and Corallina Decommissioning Cost Recovery Levy) Act 2021.
1.20
The bill also makes provision for the development of regulations.
Who is liable to pay the levy
1.21
The levy will apply to all registered holders of a petroleum production licence during the levy year.
When the levy is payable
1.22
A levy year is each financial year beginning between 1 July 2021 and 1 July 2029.
Levy payable
1.23
The levy rate is the lesser of:
48 cents per barrel of oil equivalent of petroleum recovered at the wellhead by an entity in offshore licence areas during the licence period; and
the Commonwealth's unrecovered costs at the end of the levy year, divided by the total barrels of oil equivalent of petroleum produced under all licences in the levy year (the distributed levy rate), based on information reported to or available to the Commissioner of Taxation.
1.24
Petroleum has the same meaning as defined in the Offshore Petroleum and Greenhouse Gas Storage Act 2006.
1.25
The EM notes that barrel of oil equivalent is not defined in the bill, but that it is commonly understood in the industry to be a unit of energy approximately equal to one barrel of crude oil (158.8973 litres) and can be applied to both oil and natural gas production.
1.26
The Society of Petroleum Engineers' 'commonly used calculation method for gas conversion for intercompany comparison purposes is: 1 barrel of oil equivalent = 5.8 thousand standard cubic feet (Mscf) or 164.24 cubic metres (cu.m) of gas at STP (15°C and 1 atm)'.
Mechanisms to prevent levy over-collection
1.27
The bill provides two mechanisms designed to prevent over-collection of the levy from relevant entities:
determination by the Resources Minister in relation to the Commonwealth's unrecovered costs (leading to the application of the distributed levy rate); and
early termination of the levy.
1.28
Under the unrecovered costs mechanism, the Commonwealth's total unrecovered costs incurred by decommissioning-related activities—or the amount by which the total amount of the levy assessed for previous levy years falls short of the net decommissioning costs—is calculated within six months after the end of the levy year.
1.29
The distributed levy rate (less than 48 cents per barrel of oil equivalent) is then applied to prevent over-collection of the levy.
1.30
The EM advises that it is not anticipated that this mechanism will be used in the first few levy years, but that it is expected to be applied towards the end of the levy to ensure that the total levy collected approximately equates to the Commonwealth's decommissioning costs.
1.31
Under the early termination mechanism, the Resources Minister may determine by legislative instrument that no financial year after the current year (up until 1 July 2028) is a levy year, effectively terminating the levy as of 30 June following the determination.
1.32
The minister is only permitted to make this determination if they are satisfied that the total decommissioning cost at the end of the current year would not exceed the total of the levy collected and that further decommissioning related costs are unlikely to be incurred beyond the current year.
1.33
The EM notes that this mechanism is limited in its application to ensure that the levy achieves its core purpose of recovering Commonwealth costs:
Due to the uncertain nature of the decommissioning and remediation activities, it is not possible to provide for an early termination mechanism on the face of the law because doing so would add significant complexity and risk the legislation not achieving its core purpose.
Treasury Laws Amendment (Laminaria and Corallina Decommissioning Cost Recovery Levy) Bill 2021
1.34
The bill's only schedule, Schedule 1, proposes to amend the Income Tax Assessment Act 1997, the Petroleum Resource Rent Tax Assessment Act 1987 and the Tax Administration Act 1953 to specify administrative features of the cost recovery levy.
Income Tax Assessment Act 1997
1.35
The bill inserts proposed section 26-96 preventing the Laminaria and Corallina decommission levy paid being deducted from an entity's assessable income when calculating taxable income.
1.36
The bill also makes consequential amendments to definitions.
Petroleum Resource Rent Tax Assessment Act 1987
1.37
The bill inserts proposed paragraph 44(1)(ga) which defines levy payments as excluded expenditure. The EM states that 'this ensures, amongst other things, that the levy is an excluded cost for the purposes of calculating upstream and downstream costs under the residual pricing method'.
Tax Administration Act 1953
1.38
The bill proposes to modify the Tax Administration Act 1953 to:
limit the period within which an objection to an assessment of the levy amount can be lodged to 60 days after the levy assessment is provided. This period is intended to provide certainty to both the government and industry about the amount of levy required to be paid and help ensure appropriate collection of the levy;
specify a requirement to give the Commissioner of Taxation a return relating to the Laminaria and Corallina decommissioning levy within 6 months after the end of the financial year, even if the levy liable to be paid is nil. This timeframe provides sufficient time to accurately report production figures for the levy year;
specify that the Commissioner of Taxation will make assessments and issue notices of assessment to liable entities, based on production figures and the standard rate of 48 cents per barrel of oil equivalent or, if the Resources Minister has made a determination, based on the distributed levy rate
specify that the levy is payable to the Commissioner of Taxation within 21 days of provision of the notice of assessment or amended notice of assessment;
limit the standard period of review for an assessment of the levy amount to six months; and
define the levy and shortfall interest charge as tax-related liabilities and ensure that ordinary taxation collection and recovery provisions apply in relation to the levy, including, for example, confidentiality obligations, objections, reviews and appeals, and use of the Commissioner of Taxation's enforcement and penalty powers.
1.39
The bill also makes provision for a person to be liable for shortfall and general interest charges on amended assessments and outstanding payments to ensure they do not benefit 'in the form of a free loan over those who assess correctly', and consequential amendments to definitions.
Consultation
1.40
The EM does not reference any consultation activities in relation to the bills. However, DISER conducted consultation in relation to the levy and its operation and Treasury conducted public consultation on the exposure bills between 16 and 23 September 2021. Responses have not been published for either consultation.
1.41
During his second reading speech, the Assistant Treasurer, the Hon Mr Sukkar MP told the House of Representatives that the government had conducted public consultation and worked with the oil and gas industry in relation to the design and operation of the levy:
Public consultation occurred, and the government accepted a number of recommendations put forward by industry in the final design and operation of the levy.
As such, the final design of the levy ensures it's temporary, targeted and effective at recovering costs with as little regulatory burden as possible.
Commencement
1.42
The OP levy bill commences on the day after Royal Assent.
1.43
The amendments to the various acts enabled by the TLAB levy bill commence at the same time as the OP levy bill, and apply in relation to financial years starting on or after 1 July 2021.
Financial impact
1.44
The financial impact of the bills on recipients of the measure is 'not for publication reflecting commercial sensitivities'. The compliance cost impact was assessed as minimal.
Regulatory impact
1.45
The EM is silent on any regulatory impact and no Regulatory Impact Statement has been published in relation to the bills.
Human rights implications
Statement of Compatibility with Human Rights
1.46
As discussed in the EM, the Statement of Compatibility with Human Rights (Compatibility Statement) states that the bills are compatible with the human rights and freedoms recognised in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011, and thus do not raise any human rights issues.
Human rights scrutiny report
1.47
The Parliamentary Joint Committee on Human Rights has not yet considered the two bills, however to date the secretariat has not identified any issues that are likely to engagement human rights, promote human rights, and/or permissibly limit human rights.
Conduct of the inquiry
1.48
The committee advertised the inquiry on its website and wrote to relevant stakeholders and interested parties inviting written submissions by 8 November 2021.
Submissions and public hearings
1.49
The committee received a total of 14 submissions which are listed in Appendix 1. The committee also received additional information, including answers to questions taken on notice (as listed in Appendix 1).
1.50
Evidence provided to the inquiry into Australia's oil and gas reserves, undertaken by the References Committee, was also considered by this committee in the development of its report.
1.51
A public hearing was held on 8 November 2021. The names of witnesses who appeared at the hearings are listed at Appendix 2.
Acknowledgements
1.52
The committee thanks all the individuals and organisations who assisted with the inquiry, especially those who made written submissions and participated in the public hearing. The committee also notes its appreciation to References Committee for their consideration of matters relating to the levy and secretariat members for their research into the bills.