Esso, BHP resolve Victoria tax dispute

Esso Australia Ltd. and BHP Petroleum Pty. Ltd. have resolved their long Petroleum Resource Rent Tax (PRRT) dispute with Victoria state. The settlement represents after-tax amounts to each firm of about $225 million (Australian) in payment for past and future PRRT claims on Bass Strait gas supplied to Victoria's state-owned Gascor and Generation Victoria.

Dec. 16, 1996

2 min read

Esso Australia Ltd. and BHP Petroleum Pty. Ltd. have resolved their long Petroleum Resource Rent Tax (PRRT) dispute with Victoria state.

The settlement represents after-tax amounts to each firm of about $225 million (Australian) in payment for past and future PRRT claims on Bass Strait gas supplied to Victoria's state-owned Gascor and Generation Victoria.

Resolving the dispute also enabled restructuring of a gas supply contract with Gascor to allow direct access to Victoria and interstate gas customers. This accelerates supply competition in Victoria and allows Bass Strait gas to be supplied to other states, making it a major milestone in the push toward a national free market for gas.

The immediate effect is to clear the way for Victoria to approve the BHP/Westcoast Energy Australia proposals to lay a pipeline to move Bass Strait gas to New South Wales.

Dispute background

The 5-year wrangle centered on whether BHP and Esso had the right to pass through the PRRT under contract with the two Victorian state entities.

The previous excise/royalty regime for Bass Strait was abolished in 1990 in favor of the PRRT scheme, which hitherto had been used only for Australia's virgin offshore areas, such as the Timor Sea.

However, the sales contracts for Bass Strait in place at the time contained provisions to pass on to buyers costs or benefits of any increase or decrease in taxes (excluding corporate tax) on gas supply or production.

Esso/BHP immediately gave notice of their intention to pass through the PRRT, a move disputed by Generation Victoria and Gascor. Arbitration to resolve the dispute with Generation Victoria came in April-June 1994, and in November 1994, independent arbiters found in favor of the producers. Generation Victoria appealed the decision. Arbitration of the dispute with Gascor began last June but was adjourned to allow settlement talks to begin.

Under the new contract with Gascor, Esso/BHPP will maintain existing supply commitments (about 1.86 tcf), and Gascor will take 167.4 bcf/year during 1996-2009. There will be no change in the price of gas supplied to Gascor until 2001 for residential gas and until 2000 for industrial users.

The new contract also gives Esso/BHP flexibility to supply other purchasers directly and allows Gascor to obtain gas from other producers, eliminating mutual exclusivity clauses in the previous contract.