Shell predicts free gas forever from Gorgon and Prelude LNG projects

by | Mar 31, 2021 | Energy & Environment

Shell’s accountants predict the Dutch giant will never pay Australia for gas extracted at the Gorgon and Prelude LNG projects that it can sell for up to about $4 billion a year. Peter Milne from independent energy and climate news site Boiling Cold has the story.

Dutch giant Shell forecasts it will never pay Australia for oil and gas extracted for the Gorgon and Prelude LNG projects that it can sell for up to almost $4 billion a year.

Shell owns 25 per cent of the Chevron-operated $US54 billion Gorgon LNG project and 67.5 per cent of its Prelude floating LNG project that are both liable to pay Petroleum Resources Rent Tax.

Shell’s outlook of no PRRT payments is recorded in notes to the 2020 financial accounts for the global group released last week.

The note may not be apparent to a layperson, but the meaning is plain to an accountant: free gas forever from Australia.

PRRT is payable when a project’s income exceeds losses, and this would not be expected for some years after production starts due to the enormous cost of LNG projects.

To keep track of future PRRT payments, accountants recognise accumulated losses as a deferred tax asset and accumulated income as a deferred tax liability. Eventually, income should exceed losses, and PRRT is then paid at a rate of 40 per cent of the profit.

However, Shell’s accounts state that “deferred tax assets are recognised only to the extent it is considered probable that those assets will be recoverable.”

In other words, the accountants cannot record or “recognise” losses as a deferred tax asset if it is unlikely that Shell will pay any tax.

Shell accumulated “unrecognised” PRRT losses of $US39.4 billion to June 2020 and “based on business forecasts at existing commodity price levels, and the annual augmentation of the unused PRRT losses, this amount is expected to increase in the near future.”

While Shell’s assessment at the end of 2020 that it would never pay PRRT may have been based on the relatively low oil and gas prices of 2020, the multinational made the same assessment in its 2019 accounts before the pandemic hit commodity prices. It is possible that very buoyant gas prices in the future could alter Shell’s assessment.

Revealed: Australia’s Top 40 Tax Dodgers for 2021

Boiling Cold calculated that Shell’s share of production from the Gorgon and Prelude projects at full capacity was worth about $2.4 billion at 2020 prices and $3.8 billion in the more normal oil and gas market of 2019 (see spreadsheet link below).

Despite the pandemic, Shell made $US4.8 billion ($6.3 billion) profit in 2020.

A Shell spokesperson said the company complies with all its legal and tax obligations and is committed to paying the right amount of tax under the letter and the spirit of the law in all countries it operates in.

“Despite being in a heavy investment phase and net cash flow deficit, the Shell Australia Group made total taxation payments of around $5.8 billion during the last 10 years ended 31 December 2019,” the spokesperson said.

Much of this would be company tax that, like PRRT, is applied as a proportion of a calculated profit.

But the two taxes are levied for very different reasons.

All companies in Australia are liable to pay company tax, at 40 per cent of profit for large companies like Shell, for the same reason individuals pay income tax: to contribute to the community they are part of.

PRRT is an additional payment for a business input: oil and gas in the ground owned by the Australian Government that companies extract for profit.

The Australian Government does not give free meat to butchers or free flour to bakers, but with the PRRT, it gives away vast quantities of gas to multinational LNG makers.

Juan Carlos Boué, counsel at international law firm Curtis that advises countries on oil and gas policy, said the poor PRRT revenue outlook was not a recent phenomenon.

“Even before the pandemic, the likelihood of these projects ever paying taxes was recognised to be essentially zero by the Australian Government itself,” Boué said.

“Shell is saying nothing that the Government and everybody in the know has not been aware of for some time now.”

The 2017 Callaghan review into the PRRT concluded that at an oil price of $US65 a barrel, “most of the major LNG projects do not pay any PRRT.”

The main reason projects do not pay PRRT is that the legislation increases or “augments” accumulated losses each year.

“Simply put, the uplift rate applicable to the unrecovered expenditure is so great that, with the miracle of compound interest, there is just no way for project net income to catch up, ever,” Boué said.

The chance of Australia receiving payment for gas used at Gorgon and Prelude was further reduced by cost overruns of about 45 per cent at both projects and years of schedule delays that allowed losses to escalate further.

Prospects for change?

After the Callaghan Review, the Government reduced the most excessive uplift for some exploration expenditure from 15 per cent above the long term bond rate to 5 per cent above the LTBR. This change was effective from mid-2019, so it would be allowed for in Shell’s forecast.

The Government is still considering one change to PRRT: gas transfer pricing. This determines the notional price attributed to raw gas before it enters an LNG plant, and this price is used to calculate PRRT payable. The review commenced in November 2018 and is not yet complete.

The Shells spokesperson said the company believed for taxes, “it is up to governments to set their policies and the rules for individual and business taxes.”

“Governments make deliberate fiscal policy decisions on tax rates, reliefs, exemptions and allowances or disallowances,” the spokesperson said.

Oil and gas lobby group APPEA, which Shell is a member of, last week called for the Government to “close out the PRRT gas transfer pricing review without change.”

Gas Lies: Santos tries to ram through coal seam gas at Narrabri with fake claims

In WA, Shell also owns one-sixth of the North West Shelf LNG project, and in Queensland it has 50 per cent of Arrow Energy and a majority take in QGC LNG. These gas projects are not subject to PRRT but other regimes to pay for the oil and gas extracted.

Each company owning equity in a project subject to PRRT could have different exposures to paying the tax as some accumulated losses can be shared with other projects, and this opportunity varies for each company.

This article was republished from Boiling Cold: independent energy and climate news.

ABOUT THE AUTHOR

Peter Milne

Peter Milne

Peter Milne covers energy, industry and climate in WA at Boiling Cold with a focus on the energy transition and benefits to the community, not companies. He previously covered energy for The West Australian and has written for The Saturday Paper. Prior to journalism he worked in oil and gas for 25 years in engineering, economic analysis and commercial negotiation roles.

8 Comments

  1. Avatar

    Thank you Peter. The tradition continues of raping Australia for resource based profit minus tax of course. Keep it up mate – change is coming – soon.

  2. Avatar

    It’s depressing when you realise that Both sides of Australia’s Political system know exactly what is going on in regards to TAX EVASION in Australia, and it never gets a mention in Parliament, nor the MSM……..Both sides of politics are “compromised”(Bought) by the Multi Nationals………Is it any wonder that Australians have sneering contempt for Politicians, and the ‘bovine excreta that they spruik….?

  3. Avatar

    I had an experience with Shell that convinced me that they are just plain dishonest. On a trip from Brisbane to Sydney I bought Shell petrol at Maitland. Immediately after I left the servo my Express van (’96 I think, last model with carby) began to cut out at idle. At every set of traffic lights I had to keep the revs up to stop it stalling. Eventually I got home and at the local servo drained the tank. A big black jelly like thing came out. I took the van to a carby specialist who cleaned black gunk out of the carby. I’m not a very greedy person so I only asked Shell for the cost of the tank of petrol + the carby clean.
    I was messed around and around by sharp operators who pretended to be in the process of compensating me but eventually sent a letter claiming that there had been no contamination.
    I was way too busy to think of suing them for a couple of hundred dollars so I let it go but I’ve never bought their petrol since and my regard for them is similar to my regard for organised crime.

  4. Avatar

    There is a simple solution to the PRRT Scrap it and charge a price per Kg of gas extracted regardless of tax fiddles.

  5. Avatar

    I find this so depressing, in terms of environment, government incompetence/graft, that I have to take time away from the screen.
    What are the answer?
    1) Nationalise the resource and charge outsiders outside prices and keep % for home.?
    Build a sovereign fund for when it is gone a la Norway..
    2) Convert to Hydrogen?
    3) Keep the stuff in the ground?

    Whatever, I certainly would not allow shifting of “losses” from one country to another, however the company is structured.
    I would also be investigating the people involved in the original contract process.

  6. Avatar

    Just makes my blood boil when they get away with stuff this huge and government and media are so scared they won’t mention it.

  7. Avatar

    So the LNP would declare that LNG is not being subsidised by Australian Taxpayers. Because under the rule of law, no tax needs ever to be paid. Sounds like legalised theft.

  8. Avatar

    Australia’s resource tax structure is simple lunacy. I can’t think why Australia would want to give away resources and when I say “Australia” let’s remember that is the people of Australia. It’s very apparent that in all financial issues the LNP Government only ever looks at lines in balance sheets, including Australia’s (balance of payments etc) without ever assessing who benefits; i.e. economic equity.
    Or maybe they do, economic inequality is driving too many Australians in to poverty. History shows us that those with power and control (and I don’t just mean Governments) will always try and extract the maximum while giving the minimum. Get the balance wrong and you end up with war, international and/or civil. Humans just don’t seem to learn from history.

Secret Rich List

Secret Rich List banner

Tax Dodgers

Rortswear by Slush

QED

Case for Federal ICAC

Quad Erat Demonstrandum

Revolving Doors

Revolving Doors

Video Channel

The West Report

Support Us

subscribe to michael west media
Rortswear and ClimateCards
The West Report Banner
Michael West Email

Get Our Weekly Newsletter

Unsubscribe anytime.

Thank you! We'll also confirm via email.

Pin It on Pinterest

Share This