Labor’s got neither the taxing nor reserving of gas right
by Tony Wood
Just when we needed a clear way forward on energy policy, Australians have been left with a half-hearted and a half-developed combination of responses to one of the greatest challenges facing our energy transition, and by extension, our future economy.
Australia is a globally significant producer of natural gas, and how we choose to use the opportunity and responsibility that goes with our energy resources will define our position in a low-emissions world. These are difficult choices with big consequences for our long-term prosperity. Instead, we’ve been shortchanged with shortsighted decisions.
Taxing the extraction and development of our natural gas resources and ensuring we have access to enough gas at affordable prices while addressing climate change seem simple in concept. They are far from simple in practice.
The Petroleum Resource Rent Tax (PRRT) doesn’t deliver a fair return for Australians for the use of our gas resources. This is because the design of the PRRT is based on profit, and the calculation of “profit” for highly capital-intensive investment results in many years when little or no tax is collected. It is an unacceptable outcome. Efforts to “fix” the PRRT have failed. It is arguably unfixable.
Any change to taxes will create winners and losers. In this case, any increase in tax on gas resources will be resisted by the gas producers and the customers who would bear the cost. Ultimately opining on what is fair requires a political judgment.
The federal government has been bombarded with new tax suggestions, including a flat 25 per cent tax, and a tiered royalty like that levied by the Queensland government. Having assured our major LNG customers that Australia would remain a trusted supplier through a global energy crisis, and faced with strong objections to any change from the industry, the government seems to have ruled out any new tax.
This result is politically understandable, although economically disappointing.
There is every reason for the government to impose a windfall profit tax in two parts:
- For domestic sales, 100 per cent on revenue above the long-term market average market price. This would protect domestic consumers from extreme volatility in international prices.
- For exports, 50 per cent on revenue indexed to the Brent crude oil price. This would give all Australians a share of the conflict-based windfall profits.
A windfall profit tax would not affect our international customers who are already paying the high prices and, if well-designed, would not affect the investment attractiveness of the sector, since prices would remain at levels where the companies were prepared to invest.
Equally urgently, the federal government needs to finalise a design for the domestic gas reservation scheme it announced in December.
For more than a decade, there have been concerns that LNG exporters are drawing excessively from the east coast domestic market and exposing Australian gas users to what have become high and volatile international prices.
Last week, the government announced key features of its prospective Domestic Gas Reservation Scheme. It will “require gas exporters supply a proportion of their total production to the Australian market – equivalent to 20 per cent of exports”. The hypothesis is that over-supplying the domestic market will ensure lower prices.
It was immediately clear that there are three problems with this announcement:
- There was a major misunderstanding across media and industry as to whether existing contracts would be included in the proportion calculation, and the statements by ministers seemed unclear. The difference is huge, given annual exports are about 1300 petajoules under the long-term contracts and 90 petajoules as spot cargoes.
- Whichever calculation applies, there is insufficient detail yet announced to be confident that the domestic market will respond to the reservation proportion as the government hopes.
- Reserving a fixed percentage of production to the domestic market is both arbitrary and static. Any reservation scheme must be flexible to the inevitable changes in domestic demand and supply of gas in coming years.
The government must immediately clarify the reservation calculation. The lack of detail means the planned consultation must be more comprehensive than is common at this stage if the reservation scheme is to be effective.
Australia’s energy resources, even including our fossil gas, can make a material contribution to global decarbonisation in a world where energy security is a global priority. The announcements of the last fortnight mean we have some way to go to craft a future gas strategy that also protects the economic interests of all Australians in such a world.