In the Federal Budget, released on May 11th 2004, the government announced a taxation incentive to encourage petroleum exploration in Australia's remote offshore areas. The measures will allow an immediate uplift to 150% on petroleum resource rent tax (PRRT) deductions for exploration expenditure incurred in designated offshore frontier areas.

"This concession should generally improve the after tax economics when assessing whether to explore for petroleum in the designated frontier areas. It should act as an incentive to search for new oil and gas fields in what are usually higher cost 'deep water' areas", said Rod Henderson, Tax Partner from KPMG's Energy and Natural Resources Group.

Comment

Based on the wording of the government's announcement, KPMG provides the following comments on the new rules:

Whilst early reports are that the new incentive is generally welcomed by the petroleum industry, interested parties should be mindful that the incentive is specifically targeted. There are very strict requirements in order to qualify for the incentive.

In particular, petroleum exploration companies will need to take care to confirm that an area of interest is specifically covered by the new concessions via the designation process.

Further, the measures are stated to be limited to pre-appraisal exploration in the initial term of the exploration permit granted for a designated area. Therefore, clarification of the cut-off time between pre-appraisal and post- appraisal exploration will need to be obtained through the legislation (when it is released).

The measures are more likely to be of greater value to current PRRT payers where the qualifying exploration also qualifies as 'transferable exploration expenditure'. In which case, the uplifted exploration costs could be deducted against existing producing fields, which are PRRT paying, to reduce current PRRT liabilities.

However, care must be taken to ensure that the current transferability provisions of the PRRT are satisfied before any decisions are made with the new measures in mind.

The new rules are PRRT specific and will not increase income tax exploration deductions.

Petroleum exploration companies will need to carefully consider the wording of the legislation, when released, by reference to their own circumstances prior to making an investment decision on the basis of the new concessions.

Summary of proposed measure The key points from the government announcement are summarised below.

Application of the new measure

• The measure applies to the annual offshore acreage releases for 2004 to 2008.
• The 150% uplift applies to pre-appraisal exploration expenditure in the initial term of the exploration permit granted for a designated area.
• Qualifying uplifted expenditure will also retain access to the transferability and annual uplift provision of the PRRT.

Designated offshore petroleum exploration frontier areas

• The government states that half of Australia's offshore basins that display signs of petroleum potential remain unexplored due to the cost and high-risk nature of exploration in remote frontier areas.
• Accordingly, under the new measure, the government may allocate up to 20% of each year's offshore petroleum exploration acreage release areas as designated frontier areas.
• Designated areas will be more than 100 km from an existing commercial oil discovery and will not be adjacent to an area designated in the previous year's acreage release.
• The 2004 offshore petroleum exploration areas were announced on March 29th 2004. Further to that announcement, the following areas will be designated as frontier areas for the purpose of the new measure:
  • T04-5 located off the west coast of Tasmania near Port Davey in the Sorell Basin.
  • W04-2 and W04-4 located in the deep water frontier areas of the Exmouth Plateau, over 400 km west of Karratha.
  • W04-15 and W04-16 which begin around 70 km west of Shark Bay in the Houtman Sub-basin, part of the northern Perth Basin. o NT04-3 located in the eastern Timor Sea about 300 km north of Darwin in the northern Bonaparte Basin.
• The government advises that all of these areas remain open for bidding until March 31st 2005.
• For further detailed information on all of the 2004 acreage release areas, see page 25 of this edition of PESA News, or visit the website: www.industry.gov.au/petexp.

For any further comments, please contact:

Rod Henderson
Tax Partner
KPMG Energy and Natural Resources, Australia
Ph: +61 2 9335 8787
Mobile: 0412 250 784
Email: rbhenderson@kpmg.com.au