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Offshore Petroleum (Royalty) Bill 2006

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2004-2005

 

 

 

 

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

 

 

OFFSHORE PETROLEUM (ROYALTY) BILL 2005

 

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

 

 

 

 

 

 

 

 

 

(Circulated by the authority of the

Minister for Industry, Tourism and Resources,

the Hon Ian Macfarlane, MP)

 

 



OFFSHORE PETROLEUM (ROYALTY) BILL 2005

 

GENERAL OUTLINE

 

The Act proposed to be created by this Bill is consequential on the repeal of the Petroleum (Submerged Lands) (Royalty) Act 1967 and is its replacement in conjunction with the Offshore Petroleum Bill 2005 and other Bills achieving the rewrite of the Petroleum (Submerged Lands) Act 1967 and incorporated Acts. This Bill sets out the royalty payable in respect of petroleum produced in the North West Shelf project area under the proposed Offshore Petroleum Act. For a reason explained in the notes on individual clauses, certain provisions about determining the rate of royalty are also proposed to be transferred from what is currently in the Petroleum (Submerged Lands) Act to this Bill. On the other hand, provisions about when provisional or determined royalty is due for payment, late payment penalty and recovery of royalty debts are proposed to no longer be part of the Royalty Act and have been placed instead in Part 4.6 of the Offshore Petroleum Bill 2005.

 

The existing Petroleum (Submerged Lands) (Royalty) Act applies, and this Bill, as its proposed replacement would apply, only in the abovementioned geographic area. The basis of this is a decision by Parliament in 1987 to introduce petroleum resource rent tax for all petroleum projects except those in areas covered by production licences granted on or before 1 July 1984 and the wider exploration permit areas from which those production licences were drawn. Production from these titles remained subject to royalty under the Petroleum (Submerged Lands) (Royalty) Act. Following another subsequent amendment to the petroleum resource rent tax legislation, the only titles that now remain under the coverage of the Petroleum (Submerged Lands) (Royalty) Act are those in the North West Shelf project area.

 

FINANCIAL IMPACT STATEMENT

 

The intention of rewriting the Petroleum (Submerged Lands) (Royalty) Act is to maintain current policy, meaning there would be no financial consequences from the rewrite itself. However, an incidental policy change with a minor financial impact is proposed in this Bill. This is the provision whereby, if a royalty payer, in monthly remittances of royalty, has made an overpayment, through finalisation of a provisional payment or by an error in calculation or procedure, and the petroleum operation comes to an end with no further royalty payments, the royalty payer would be able to obtain a refund equal to any overpayment in the final remittance.

 

This differs from the provisions of the existing Royalty Act, which allows overpayments to be accounted for by means of credits in future months’ payments but recognises no possibility of a refund when all payments have ended. This policy inconsistency is proposed to be rectified in this Bill. The change is not expected to have any significant impact on Australian Government revenues as the cessation of production operations in the North West Shelf project area will be a rare event and the total of any refund, assuming one were required, would be unlikely to exceed an amount in the thousands of dollars.

 

 

 

NOTES ON INDIVIDUAL CLAUSES

 

Clause 1 - Short title

 

This clause is a standard provision setting out the title by which the proposed Act is to be cited if it becomes law.

 

Equivalent provision in P(SL) (Royalty) Act : section 1.

 

Clause 2 - Commencement

 

This clause provides that clauses 1 and 2 would commence on Royal Assent to this Bill. The remaining clauses and Schedule 1 would commence together with the bulk of the provisions in the Offshore Petroleum Bill. This is to be on a date fixed by proclamation. However, a separate proclamation of the Offshore Petroleum (Royalty) Act would not be required.

 

Equivalent provision in P(SL) (Royalty) Act : section 2.

 

Clause 3 - Application of Chapter 1 of the Offshore Petroleum Act 2005

 

The main effect of this clause is that, where terms are used undefined in this Bill, they could be defined in Chapter 1 of the Offshore Petroleum Bill, in which case they would have application to this Bill.

 

Equivalent provision in P(SL) (Royalty) Act : section 3

 

Clause 4 - Definitions

 

This clause effectively defines the geographic area to which this proposed Act would apply. It is the North West Shelf project area, as defined in the Petroleum Resource Rent Tax Assessment Act 1987 , consisting of areas under permits, leases or licences derived from the North West Shelf exploration permits WA-1-P and WA-28-P.

 

The policy background to the existence of primary and secondary production licences is as set out in explanatory note to clause 2 in the Schedule 4 to the Offshore Petroleum Bill. In summary, when petroleum is discovered in an exploration permit area in the North West Shelf project area, a location may be declared which consists of the blocks which overlie the petroleum pool. The exploration permittee may then apply for a production licence over approximately half (or less) of the blocks of the location as a primary entitlement. If granted, this is called a primary production licence . Once a production licence has been granted over all blocks constituting the primary entitlement, a production licence granted over any or all of the other blocks in the location constitutes a secondary production licence.

 

Alternatively, the permittee could seek a retention lease over the blocks and thus delay applying for a production licence. Eventually, a similar arrangement will apply to the lessee as would have applied if that party had sought a licence as a permittee.

 

The royalty periods are defined as calendar months, or parts thereof, for reasons of administrative efficiency.

 

Equivalent provision in P(SL) (Royalty) Act : sections 4 and 4A

 

Clause 5 - Imposition of royalty

 

This clause imposes a petroleum royalty on the registered holder of an exploration permit, retention lease or production licence in the North West Shelf project area only.

 

Royalty is levied as a percentage of the wellhead value which is calculated by subtracting, from sales receipts: excise, operating costs such as processing and transportation, and allowances for post-wellhead capital assets and depreciation.

 

While petroleum production would normally occur under a production licence, it is conceivable that saleable petroleum could be produced during the exploration phase of a well development under an exploration permit or a retention lease, especially where appraisal testing is being carried out.

 

The royalty payment arrangements applicable to the registered holder of any one of these titles are set out in Division 3 of Part 4.6 of the Offshore Petroleum Bill. In summary, royalty on petroleum produced in one calendar month is payable by the last day of the following calendar month. 

 

Equivalent provision in P(SL) (Royalty) Act : subsection 5(1) and section 11

 

Clause 6 - Rate of royalty—production licences

 

Subclause 6(1) provides for a number of different rules for determining the royalty rate applicable to a production licence depending on the circumstances under which the licence is granted.

 

Item 1 of the table sets the standard royalty rate for a primary production licence at 10% of the value of the petroleum at the wellhead, that is, the value as the petroleum is extracted.  This value is derived from the sales value by deducting the costs of transport, separation and storage.

 

Item 2 of the table allows for a higher royalty rate to be payable for a secondary production licence. The policy background to this is explained in the explanatory memorandum note about clause 2 in the Schedule 4 to the Offshore Petroleum Bill.

 

Items 3 of the table allows for an increase in the royalty rate for a production licence when a secondary production licence is taken out in respect of all or some of the remaining blocks in the location. The increased royalty rate will apply from the beginning of the next month.

 

Item 4 of the table refers to the provision in the proposed Offshore Petroleum Act whereby the Joint Authority, when so requested by the holder of a production licence, must give the holder two or more separate licences in lieu of the initial licence, assuming the initial licence area consists of two or more blocks. This item applies the same royalty rate to the derived production licences as applied to the initial production licence. 

 

Item 5 of the table provides that the royalty rate on a renewed production licence remains the same rate as on the previous licence.

 

Subclause 6(2) provides that, when an application for a secondary production licence is made, the Joint Authority must determine a royalty rate to be applied to all petroleum recovered subsequent to the grant of the secondary licence, whether in the area covered by the primary licence or the area covered by the secondary licence. This provision has been transposed from the provisions that appear in the Petroleum (Submerged Lands) Act and placed in this Bill rather than in the Offshore Petroleum Bill. This is for reasons indicated in the note about clause 341 in the explanatory memorandum to that Bill. Essentially, this provision is proposed to be inserted in this Bill because it is about the creation of the royalty liability and discussion of the royalty base and, as such, it more appropriately belongs in the enactment that imposes the royalty.

 

Subclause 6(3) limits the royalty rate on secondary production licences to between 11% and 12.5% inclusive. The background to the inclusion of this provision in this Bill is the same as the one applicable to subclause 6(2).

 

Subclause 6(4) provides for consultation between the Joint Authority (consisting of the Commonwealth and Western Australian Ministers responsible for petroleum resources) and the prospective licensee through the Designated Authority (ie the Western Australian Minister responsible for petroleum resources) before the Joint Authority makes a determination of the rate of royalty payable upon the grant of a secondary production licence. The background to the inclusion of this provision in this Bill is the same as the one applicable to subclause 6(2).

 

In accordance with current drafting practice, subclause 6(5) makes clear that a determination under subclause 6(2) is not a legislative instrument in terms of the Legislative Instruments Act 2003.

 

Subclause 6(6) refers to the possibility that a production licence may refer to the payment of royalty at the “prescribed rate” and makes it clear that this rate is the rate determined by the provisions of the proposed Royalty Act. That rate could be different at one point of time than at another, for example because of the licensee taking out a secondary production licence in addition to a primary production licence or because a situation of a potentially uneconomic well has arisen, as referred to in clause 9.

 

Equivalent provisions in P(SL) (Royalty) Act : subsections 5(2), (3), (4), (5), (6) (7) and (8)

Equivalent provisions in P(SL) Act : subsections 42(1) and (2)

Technical change : omitting a redundant mention of a cash-bid production licence possibly having a condition providing a special royalty rate (a vestige of a provision which has not been in force for some time)

 

 

 

Clause 7 - Rate of royalty—exploration permit

 

While commercial petroleum extraction would normally be undertaken under a production licence, during the exploration stage test production may occur and the resulting petroleum may be sold.  This clause applies a 10% royalty to petroleum recovered under an exploration permit, except if a lower rate is determined under clause 9.

 

Subclause (2) refers to the possibility that an exploration permit may refer to the payment of royalty at the “prescribed rate” and makes it clear that this rate is the rate determined by the provisions of the proposed Royalty Act. That rate could be different at one point of time than at another if a situation of a potentially uneconomic well arises, as referred to in clause 9. In the case of an exploration permit, reduction of the royalty rate for this reason would be less likely than under a production licence.

 

Equivalent provision in P(SL) (Royalty) Act : subsection 5(8)

 

Clause 8 - Rate of royalty—retention lease

 

A retention lease may be issued following a discovery of petroleum, specifically where production is not commercially viable but is likely to become so within 15 years. Under a retention lease, appraisal production may occur to provide information on the commercial potential of the lease and the resulting petroleum may be sold.  This clause applies a 10% royalty to petroleum recovered under a retention lease except if a lower rate is determined under clause 9.

 

Subclause (2) refers to the possibility that a retention lease may refer to the payment of royalty at the “prescribed rate” and makes it clear that this rate is the rate determined by the provisions of the proposed Royalty Act. That rate could be different at one point of time than at another if a situation of a potentially uneconomic well arises, as referred to in clause 9. In the case of a retention lease, reduction of the royalty rate for this reason would be less likely than under a production licence.

 

Equivalent provision in P(SL) (Royalty) Act : subsection 5(8)

 

Clause 9 - Reduction of royalty—potentially uneconomic wells

 

This clause allows the Joint Authority to make a determination that the royalty rate be lowered in a particular case if the Designated Authority is satisfied that the rate of recovery of petroleum from the well in question has become so reduced that further recovery would otherwise be uneconomic.  

 

Thus a determination to lower the rate of royalty could be reversed if, for instance, changes in the economics of production warranted it.

 

Equivalent provision in P(SL) (Royalty) Act : section 6

 

 

 

 

Clause 10 - Exemptions from royalty

 

This clause sets out the various scenarios under which recovered petroleum might not be sold, or immediately sold, ie unavoidable loss prior to volume measurement, use by the titleholder in approved petroleum exploration and recovery operations, approved venting or flaring and approved reinjection into a natural reservoir (whether or not the same reservoir as the one from which it was originally produced.) The latter two scenarios could occur, for example, if petroleum were recovered from a well, separated into liquids and gases and, for economic or operational reasons, the gases could not be piped or shipped away from the production facility. Since, in all these cases, there is no sale of a part of the recovered product, that part is not subject to royalty. 

 

Subclause (3) ensures that, if reinjected petroleum is subsequently recovered, the exemption from royalty under subclause (2) no longer operates in relation to that petroleum.

 

Equivalent provision in P(SL) (Royalty) Act : section 7

 

Clause 11 - Meaning of wellhead

 

The wellhead is the point of valuation of petroleum for royalty purposes and would normally be a valve close to the petroleum extraction point. Determining where the wellhead is has significance because it can affect what costs attributed to the construction and operation of plant may be included in calculations leading to the determination of product value at the wellhead.

 

This clause allows the wellhead location to be agreed between the Designated Authority and the petroleum producer or, if no agreement is reached, by determination of the Designated Authority. The Joint Authority must direct the Designated Authority in this matter under clause 14.

 

Equivalent provision in P(SL) (Royalty) Act : section 8

 

Clause 12 - Meaning of value

 

The value of petroleum at the wellhead is derived from the sales value with deductions for processing, transport and storage.  This clause allows for the valuation to be the one agreed by the petroleum producers and the Designated Authority or, if no agreement is reached, by determination of the Designated Authority.  The agreement would normally be in the form of a royalty schedule which lists the agreed deductions.  The Joint Authority must direct the Designated Authority in this matter under clause 14.

 

Equivalent provision in P(SL) (Royalty) Act : section 9

 

Clause 13 - Quantity of petroleum recovered

 

The quantity of petroleum recovered is to be measured by a device approved by the Designated Authority installed at a location approved by the Designated Authority. The measuring device need not necessarily be installed at the wellhead. This is because measuring instruments may be located at various places along the transport routes to allow calculation of wellhead volumes by derivation.

 

If the Designated Authority or the Joint Authority is not satisfied that accurate and proper measurements have been made, the volume may be determined by the Designated Authority. The Joint Authority must direct the Designated Authority in this matter under clause 14.

 

Equivalent provision in P(SL) (Royalty) Act : section 10

 

Clause 14 - Directions by Joint Authority

 

For the offshore area adjacent to Western Australia (the only State affected by the proposed Royalty Act), the Commonwealth Minister administering the proposed Act and the Western Australian Minister responsible for petroleum resources are together the Joint Authority and the Western Australian Minister is the Designated Authority. In relation to clauses 11, 12 and 13, this clause provides that the Joint Authority must give directions to the Designated Authority on how to determine the wellhead position, petroleum value and petroleum volume. A separate direction instrument is to be given in respect of each petroleum producing title that exists in the North West Shelf project area. The Designated Authority must comply with the Joint Authority’s direction.

 

This direction-giving power and responsibility of the Joint Authority relate to the fact that the offshore area is in the Commonwealth marine jurisdiction and the Commonwealth should therefore be in a position to control the policy applying to resource extraction charges.

 

In accordance with current drafting practice, subclause 14(4) makes clear that a direction under subclause 14(1) is not a legislative instrument in terms of the Legislative Instruments Act 2003.

 

Equivalent provision in P(SL) (Royalty) Act : section 10A

Policy change: explicit mention that a separate direction instrument is to be given in respect of each exploration permit, retention lease and production licence that exists in the North West Shelf project area

 

Clause 15 - Provisional payment of royalty

 

This clause deals with the situation where the wellhead value of petroleum produced in a particular calendar month has not been agreed between the producer and the Designated Authority before the end of the following calendar month. This could occur, for instance, because either sales revenues or some post-wellhead deductions are at that time still undetermined. In this situation, the Designated Authority may determine a provisional value on which the royalty liability will be calculated.

 

Equivalent provision in P(SL) (Royalty) Act : section 11A

 

 

Clause 16 - Adjustment of payments of royalty

 

This clause refers to situations where a provisional value for royalty has been determined under clause 15 or an error was made in calculation or procedure. An example of an error of procedure could be some misunderstanding which leads the Designated Authority to believe an agreement has been reached with a titleholder about the value of production during a particular month when in fact there is no such agreement.

 

In these cases, an adjustment to the royalty paid based on the provisional valuation or the erroneous royalty amount will be made, either by an additional amount of royalty payable by the registered holder or a reduction in the subsequent royalty liability of the registered holder. 

 

In the event that a subsequent royalty liability does not exist, for example after petroleum extraction has ceased, a refund of the overpaid amount will be made to the registered holder.

 

Equivalent provision in P(SL) (Royalty) Act : section 11B

Policy changes : the introduction of a provision for a refund of royalty in the circumstance where a final royalty payment has been made; making explicit that the erroneous application of a procedure for ascertaining the value of petroleum is classed as provisional royalty

 

Clause 17 - Transitional provisions

 

This clause gives effect to the transitional arrangements in Schedule 1. This will maintain the existing administrative framework for collecting royalty, ie determinations, approvals and other instruments, and enable royalty to be collected without interruption or double imposition despite the repeal of the Petroleum (Submerged Lands) (Royalty) Act and its replacement by the proposed Offshore Petroleum (Royalty) Act.

 

Equivalent provision in P(SL) (Royalty) Act : nil

Technical change : omitting the redundant provisions about royalty arrangements (section 12 of the Petroleum (Submerged Lands) (Royalty) Act) in respect of Barracouta and Marlin Fields production licences, consistent with the omission of provisions about these licences in the Offshore Petroleum Bill

 

Schedule 1 Transitional provisions

 

Schedule 1 clause 1 - Definition

 

For editorial reasons, this clause provides a collective name for the various instruments that form the administrative framework under the Petroleum (Submerged Lands) (Royalty) Act.

 

Equivalent provision in P(SL) (Royalty) Act : nil

 

 

Schedule 1 clause 2 - Pre-commencement royalty periods

 

This clause provides that there will be a smooth interface between royalty accounting periods when the Petroleum (Submerged Lands) (Royalty) Act is repealed as any partially elapsed royalty period at that date will run its course as if there had been no repeal.

 

The definitions of “royalty” and “royalty period” in clause 4 of this Bill do not apply to this clause because the provision in this clause deals with the effect of the old Act. It is therefore appropriate that reference be made to the definitions in the old Act. 

 

Equivalent provision in P(SL) (Royalty) Act : nil

 

Schedule 1 clause 3 - Transitional—eligible instruments

 

This clause provides that the various instruments that form the administrative framework under the Petroleum (Submerged Lands) (Royalty) Act and section 42 of the Petroleum (Submerged Lands) Act will all remain effective for an equivalent purpose under the proposed Offshore Petroleum (Royalty) Act and do not need to be remade. 

 

Equivalent provision in P(SL) (Royalty) Act : nil

 

Schedule 1 clause 4 - Transitional—royalty at the prescribed rate

 

This clause refers to the possibility that a title document may refer to the payment of royalty at the “prescribed rate”. This clause makes it clear that the prescribed rate is the rate as set out in the new Royalty Act, and, for an issue such as the recovery of arrears incurred during the period of effect of the Petroleum (Submerged Lands) (Royalty) Act, the prescribed rate is the equivalent rate that existed under the repealed Act. 

 

Equivalent provision in P(SL) (Royalty) Act : nil

 

Schedule 1 clause 5 - Transitional—rate of royalty

 

This clause refers to determinations made before the repeal of the Petroleum (Submerged Lands) Act of the rate of royalty payable under a secondary production licence. It also refers to a licensee having lodged, before the repeal of the Petroleum (Submerged Lands) Act, an application for two or more separate licences in lieu of the initial licence and the grant of the individual licences being yet to occur at the date of repeal.

 

In these cases, this clause ensures that the determinations will stand under the new Royalty Act and that the rate of royalty applicable to the individual licences resulting from splitting the licence will be the same as the rate applicable to the licence under the repealed Act.

 

Equivalent provision in P(SL) (Royalty) Act : nil

 

Schedule 1 clause 6 - Re-enactment of the Petroleum (Submerged Lands) (Royalty) Act 1967

 

This clause will provide a useful means by which other legislation could refer to the new enactment. If other legislation refers to “the Petroleum (Submerged Lands) (Royalty) Act 1967 or any Act that re-enacts it”, that reference will need no change if and when the proposed new Act comes into effect.

 

Equivalent provision in P(SL) (Royalty) Act : nil