In February one of the best things ever happened for gas companies: Russia illegally invaded Ukraine. Since then they have been making out like … well, like bandits – profiting off the human misery of that invasion.
No one is disputing this. Once we might have questioned profiteering from a war. Now it is just an unfortunate event for Ukrainians that delivers massive fortunes to gas companies.
Gas prices – and here we are mostly talking about Australia’s exports to Asia – are greatly affected by events.
In the past 15 years the price of liquefied natural gas (LNG) in Japan has spiked because of three events, including two earthquakes – one in 2007 that shut down the Kashiwazaki-Kariwa nuclear plant, and another in 2011 that caused the Fukushima nuclear plant disaster.
The third is the Ukraine invasion:
If the graph does not display click here
Most LNG is sold according to long-term fixed contracts that are not affected by these price shocks.
But about 40% of all LNG exports are short-term contracts that very much do take advantage of higher prices.
That means windfall profits – profits that are largely one-offs, due to events that had nothing to do with good management or investment by gas companies, but rather (in this case) because Vladmir Putin decided to invade a sovereign nation.
The UK has announced a windfall tax on energy companies and it is expected to raise £5bn, but no such tax was announced in our October budget, despite some chatter that it would.
As Australians feel the impact of soaring living costs – especially from energy price rises – it’s worth asking: how much more revenue would the government have had we had one in place? If gas companies are making big profits, shouldn’t the Australian taxpayers, who actually own the resources, be getting a windfall bonus as well?
First, we need to realise we have been extremely poor at taxing resources. In 2021, the Parliamentary Budget Office estimated that had the Abbott government not removed the resources super profits tax, in 2019-20 alone the government would have raised an extra $12.1bn:
If the graph does not display click here
That is roughly $2bn more than was spent this year on either the childcare subsidy or higher education, about 85% of the amount spent on jobseeker and two-thirds of the pharmaceutical benefits scheme (PBS) budget.
So just how much have gas companies benefited?
Earlier this year my colleague Mark Ogge at the Australia Institute estimated the value of Australia’s LNG exports increased from $30.5bn to $70.2bn in 2021-22, and yet the volume exported increased “just 6% from 77.4m tonnes to 82.2m tonnes”.
Basically, the industry got $40bn more revenue with virtually no increase in costs – because they exported much the same amount as the year before.
That $40bn is probably an overestimation of the windfall profit given not all of 2021-22 was affected by the Russian invasion.
Ogge calculates that based on long-term averages of export volumes and prices, given how much was exported in 2021-22, the expected revenue was $44bn.
Instead the industry received $70.2bn, which he argues means the “windfall gain from the Russian invasion is around $26bn”.
Of that, how much to tax?
The former treasury secretary Ken Henry recommends taxing those profits at a rate of 100%.
And to be honest, why not? They did nothing to cause prices to rise, they still keep the expected $44bn profit, but just lose the amount they gained due to the war.
Let’s think about what that $26bn means:
If the graph does not display click here
It’s enough to cover schools spending (both public and private) or what the federal government gives the states for public hospitals, or what it spends on aged care.
Heck, you could almost double jobseeker.
Or you could make use of this revenue from fossil fuels to completely rewire the nation and assist the change to renewable energy.
Instead, it is gone – and mostly overseas.
But windfall profit taxes are essentially one-offs and our problems are much larger.
To explain, look at the level of tax and royalties paid by the gas industry (here I am using the figures from Appea, which is the peak national body representing Australia’s oil and gas sector):
If the graph does not display click here
In the decade prior to the opening of the Gladstone LNG port when Australia’s LNG exports soared, company taxes and the petroleum resource rent tax (PRRT) paid by the industry averaged about 15% of revenue. Since then, it has averaged 6%, and was just 3.3% in 2019-20.
This is weird, and to see why let us first compare production with revenue:
If the graph does not display click here
Unsurprisingly the huge increase in production has led to a massive jump in revenue, and one not too far off the long-term trend.
But now look at the relationship between production and company tax revenue:
If the graph does not display click here
And now the relationship between industry revenue and company tax revenue:
If the graph does not display click here
It is clear Australians are no longer getting the level of tax revenue they should or have in the past from gas companies given the level of production and industry income.
How much has been lost?
If the oil and gas companies had merely paid a level of PRRT and company tax consistent with the ratio to revenue they had paid in the decade before 2014-15 we would be looking at about $32.3bn in extra revenue over six years and $9.1bn in 2019-20 alone:
If the graph does not display click here
Australia was supposed to have a gas-led recovery. Instead, all that has happened is a boom in gas profits off the back of human suffering.
But we don’t just need a windfall tax. The corporate tax system and PRRT need to be reformed to ensure Australians benefit properly from the sales of our resources.
Greg Jericho is a Guardian columnist and policy director at the Centre for Future Work
