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Labor’s first mistake? No windfall tax on oil and gas

by Callum Foote | Jun 10, 2022 | Energy & Environment, Latest Posts

The new Labor government has ruled out a UK style windfall profits tax on the oil and gas sector as the industry begins to make superprofits by selling at international prices in the domestic market, reports Callum Foote.

Just as gas companies’ profits skyrocket, energy minister Chris Bowen and treasurer Jim Chalmers have closed ranks and ruled out a Putin-windfall profits tax such as the one introduced last month by the UK government.

A levy introduced by the UK government will charge a 25% windfall profits tax on companies operating in the oil and gas industry. 

Bowen has ruled out implementing a similar levy in Australia despite oil and gas producers charging international market prices in the domestic market, making a massive mark-up. 

According to the Australian Energy Regulator, wholesale energy costs for retailers “have risen by 41.4% in New South Wales, by 49.5% in Queensland, and by 11.8% in South Australia” since last year. 

The Australian Workers Union on Wednesday called on the federal government to put a windfall tax on the table to “force multinational gas exporters to give Australian manufacturers access to affordable Australia gas”.

But Bowen told the ABC on Wednesday morning that Treasurer Jim Chalmers had made it clear that a windfall tax was not on the cards.

The UK levy will fund £19 billion in assistance for low-income households struggling with a sharp spike in the cost of living. This assistance will be in the form of a one-off payment of £650 to 8 million low-income households struggling with their energy bills as well as cancelling £400 loans to those same households.

The 25% levy is on top of the 40% rate the companies in this sector already pay, which is higher than the 19% general corporate rate.

Cleverly, the UK government has decided that the oil and gas companies will not be allowed to offset the prior year’s losses and costs to reduce their tax. By not allowing these deductions, the UK’s oil and gas sector will not be able to avoid paying tax like many of those same operators do in Australia. Woodside and Santos have predicted they won’t ever pay tax on massive offshore projects because of establishment costs and generous offset allowances.

The last time Australia attempted a similar tax to the one in the UK was between 2012 and 2014 with the additional 22.5% mining tax. However, even then the tax was flawed as it allowed mining companies to revalue their mines using commodities boom prices and then set off this new higher “starting base allowance” against any tax.

The result was no material Australian tax was ever paid before the Minerals Resource Rent Tax was repealed by the Abbott government.

Big Gas v The People: acute energy crisis puts Albo straight to the test

Why have prices skyrocketed?

New research from the clean energy advocate Institute for Energy Economics and Financial Analysis suggests that contrary to the claims of the gas industry that it is the fault of renewables in the system, which haven’t seen any drop in production, the failure of the east coast gas market can be linked directly to a regulatory failure in 2015.

According to energy analyst Tim Buckley, “East Australia’s energy market worked fine until 2015 when 5-6 gas firms opened Gladstone LNG exports. A regulatory failure at that time to protect our domestic market first now sees those firms making supernormal profits and 22 million of us pay the price.”

The Gladstone LNG export terminal, co-owned and developed by Santos exported a record high of 23.28 million tonnes of LNG in 2021, according to data from the Gladstone Ports Corporation.

Santos CEO Kevin Gallagher’s comments to The Australian Financial Review last week that the industry can’t “conjure up gas magically” ignores the industry’s failure to honour their commitment to the Australian government to expand new gas production to feed their export plants, Buckley says.

The oil and gas industry has repeatedly ignored commitments to shore up Australia’s domestic gas supply made when developing new export infrastructure.

The West Australian energy market works fine, says Buckley. “Previous governments put existing domestic industry and consumer needs first, and new exports had to accommodate this.”

Buckley suggests that the federal government trigger the Australian Domestic Gas Security Mechanism which requires “to limit their exports or find new gas sources” in case of “a supply shortfall in the domestic market” according to the Department of Industry.

This week Bowen explained the difficulties behind the activation of this mechanism until January 2023. 

Beyond this, roadblocks to new renewable energy infrastructure should be removed, says Buckley. “We can’t afford to solve this new immediate crisis only to make the bigger climate crisis worse. Locking in massive new fossil fuel projects to come on stream in five years’ time will do nothing to solve Australia’s energy crisis, but it will certainly make decarbonisation harder.”

The tax currently in place to capture rising gas energy exports has been woefully inadequate at doing so. Many projects expect never to pay tax on multibillion-dollar offshore oil and gas extraction projects.

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 worth of LNG a year.

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

Rising energy prices, driven by the extraordinary gas prices, contributed to the RBA’s decision to aggressively raise the interest rate affecting all Australian mortgages.

According to Shane Oliver, chief economist at AMP, “the RBA cited more inflation pressures from power and petrol prices” and expected rates to peak at 2-2.5% next year.

Gas money

The oil and gas industry is a donor to both Labor and Liberal alike.

An analysis by the anti-fossil fuel lobby of eight oil and gas companies contributed almost a million to the Labor, Liberal and National parties between 2020 and 2021, an increase of $80,000 from the previous year. The majority of this sum went to the Liberal Party, which received $506,810. Labor receiving $392,354 and the Nationals $59,991. 

Santos and Empire Energy – leading the Narrabri gas project and Beetaloo Basin fracking respectively – were major contributors. Santos donated $44,000 to the ALP, while Empire gave $40,000 to the Liberal Party and $25,000 to Labor. 

The Verdict: Labor tax solution better than Coalition, worse than Donald Trump

Callum Foote was a reporter for Michael West Media for four years.

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