On 13 May 2008, the federal government announced that it would remove the current exemption of condensate from the Crude Oil Excise. The amendments were bought in under the Excise Tariff Amendment (Condensate) Bill 2008 which was introduced to amend the Excise Tariff Act 1921 to apply the Crude Oil Excise to condensate produced in the North West Shelf project area and on-shore Australia. Condensate is a light Crude Oil extracted from so called “wet” gas, and is processed mainly to produce petrol. While some Crude Oil (technically called stabilised Crude Petroleum Oil) is subject to excise, condensate has, since 1977, been excise free.
Natural gas comes from three types of wells: oil wells, gas wells and condensate wells. Natural Gas that comes from Oil Wells is typically termed “associated gas”. This gas can exist separate from oil in the formation (free gas), or dissolved in the crude oil (dissolved gas). Natural gas from gas and condensate wells, in which there is little or no crude oil, is termed “non-associated gas”. Gas wells typically produced raw natural gas by itself, while condensate wells produce free natural gas along with semi-liquid hydro-carbon condensate.
The Bill was introduced into federal Parliament on the 15 May 2008, and was passed on 25 September 2008. It received royal assent on 18 October 2008 (after being referred to the Senate’s Economics Committee).
The legislative amendments have the effect of removing the current exemption of condensate from the Crude Oil Excise regime, and will apply to all condensate produced after midnight (Canberra time) from the 13 May 2008. The excise is levied as a percentage of the value of Crude Oil produced from a petroleum field.
The Excise Tariff Amendment (Condensate) Bill 2008 applies a Crude Oil Excise regime to condensate at the rates presently applied to Crude Oil produced from fields discovered after 18 September 1975. The highest rate of Crude Oil Excise, which will be applied to the value of condensate production, is 30%. That rate applies once annual production reaches just over 5 million barrels per year.
The legislation introduces provisions to exempt from the excise the first 30 million barrels of condensate produced from the field. Production of condensate from a petroleum field prior to midnight on 13 May 2008 will contribute towards meeting the threshold before the Crude Oil Excise becomes payable.
The rationale behind the original exemption (which was introduced in the late 1970’s) was to encourage the development of petroleum resources within the North West Shelf project. The government had formed the view that given that most of the petroleum fields in that region had matured and oil prices for non-renewable energy resources remained high, there was no need to retain a concession such as this. Accordingly, the government is of the view that given the similarity between condensate and crude oil, both commodities should be taxed in a similar manner.
Western Australia will be one of the losers in the revamp to the legislation, as it will result in the reduction in the royalties payable to the Western Australian government (given the fact that Crude Oil Excise payments are a deductible expense for calculating the off-shore petroleum royalty). To counter this, the federal government has pledged an initial payment of $80 million to be paid to Western Australia in 2007/08, with payments in subsequent years adjusted to equal the impact of removing the condensate exemption on royalty payments.
By Andrew Bruton.
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