Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
Error! Unknown document property name.
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)
Error! Unknown document property name.
2
Error! Unknown document property name.
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.
Error! Unknown document property name.
3
Error! Unknown document property name.
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.
Error! Unknown document property name.
4
Error! Unknown document property name.
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
Error! Unknown document property name.
5
Error! Unknown document property name.
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)
Error! Unknown document property name.
6
Error! Unknown document property name.
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
Error! Unknown document property name.
7
Error! Unknown document property name.
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.
Error! Unknown document property name.
8
Error! Unknown document property name.
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
Error! Unknown document property name.
9
Error! Unknown document property name.
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
Error! Unknown document property name.
10
Error! Unknown document property name.
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
Error! Unknown document property name.
11
Error! Unknown document property name.
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
Error! Unknown document property name.