Wednesday, May 29, 2024

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HomeIssue 5We get 10% of wellhead price for our gas

We get 10% of wellhead price for our gas

p2222-Palm-Valley-Gas-1By ERWIN CHLANDA
“What’s in it for me” is a frequent question asked by people trying to get their heads around the many, many zeros in the numbers denoting the quantity and value of natural gas beneath our feet.
Apart from what mining companies pay to suppliers of goods and services, the revenue mostly is royalties paid “to the Northern Territory Government as the owner of the petroleum, in consideration of a right granted to extract and remove” it – and that includes gas.
At the moment royalties are “calculated at the rate of 10%of gross value at the wellhead on petroleum production”.
Excepted from that is a “substance which, in its naturally occurring state, is not recoverable from a well by conventional means”. Fracking is not a conventional means.
So, at the moment we’re selling our gas for 10% of what buyers are prepared to pay for it where it comes out of the ground.
That may change if the government decides to adopt a recommendation in the Hawke Report – dealing most notably with fracking – which suggests the government should be charging 20% on profit.
While the present system is simple, the proposed one is less so.
The only complexity of the scheme in place it that mining companies may deduct the cost of transport of gas – in tankers, pipes, whatever – if the handover of the product cannot occur at the wellhead. After all, that could be on top of a ragged mountain or some other inaccessible place.
In such a case the producer can deduct the (limited) costs of transport to a place where the handover can take place, and pay royalties on the balance.
For example, if the wellhead price at Palm Valley (pictured; photo by STEVE STRIKE) is the current $4 per 1000 cubic feet of gas, and it costs 50c to transport it to the Alice Springs railhead, then the royalty due to the government is 35 cents which is 10% of $3.50.
The cost qualifying for such a reduction doesn’t include huge payments to an accounting firm in Barbedos or a new company headquarters in Zurich.
Allowed costs, which the government is entitled to audit, “will generally include field gathering costs … pipeline tariffs or costs of transporting the petroleum to the refinery or the first point of sale,” according to an “overview” published by Grant Parsons, Commissioner of Territory Revenue.
“Labour, office and management costs are generally deductible if the work was performed solely in the Northern Territory and was directly attributable to the petroleum operations conducted on the licence area.”
Prohibited are “the deduction of pre-wellhead costs such as exploration … and prospecting … and outlays on plant and other items of capital equipment required to develop petroleum from a well [and] bringing petroleum to the surface.”
However, in the profit based scheme, which already applies to all mineral commodities except petroleum, no royalties would be payable until the venture turns a profit.
While a broader range of deductions may be claimed under the profit based scheme, only head office and labour costs incurred in the Territory are permitted and production expenses are generally confined to the mine site itself.
Says a treasury spokeswoman: “There is merit in having a consistent royalty regime in the Territory applying to all commodities no matter their nature.
“Profit based royalties are also widely acknowledged as more efficient than those based on production or value.
“The recent Hawke review recommended that the Territory consider this option. The Government is still considering the proposal.”
Still, some may think 10% of a certainty is better than 20% of blue sky.
[We put some questions to Palm Valley gas operators Central Petroleum. No answers were provided by the time of publication.]


  1. From what I see the royalties are about 3.5 cents a liter. The Palm Valley demand has dropped 7 to 10 percent. Their biggest customer is Power Water Corporation. What will the average person in the street receive? A few years ago we went mining for iron ore. Now most are shut due to low price of ore @ US$55. I hope this does not end up as a pie in sky.

  2. The problem with a profit based rate is that businesses are extremely good at reducing their assessed profits (taxable income), and there is an army of accountants out there making a (tax deductible) fortune showing them how to do it.


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