Esso Australia Resources Pty Ltd v Federal Commissioner of Taxation
[2011] FCAFC 154
•6 December 2011
FEDERAL COURT OF AUSTRALIA
Esso Australia Resources Pty Ltd v Commissioner of Taxation [2011] FCAFC 154
Citation: Esso Australia Resources Pty Ltd v Commissioner of Taxation [2011] FCAFC 154 Appeal from: Esso Australia Resources Pty Ltd v Commissioner of Taxation [2011] FCA 360
Esso Australia Resources Pty Ltd v Commissioner of Taxation (No 2) [2011] FCA 521Parties: ESSO AUSTRALIA RESOURCES PTY LTD (ACN 091 829 819) v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA File numbers: VID 480 of 2011, VID 481 of 2011
VID 482 of 2011, VID 483 of 2011
VID 484 of 2011, VID 485 of 2011
VID 486 of 2011, VID 487 of 2011
VID 488 of 2011, VID 489 of 2011
VID 490 of 2011, VID 491 of 2011
VID 492 of 2011, VID 493 of 2011Parties: BHP BILLITON PETROLEUM (BASS STRAIT) PTY LTD (ABN 29 004 228 004) v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA File numbers: VID 536 of 2011, VID 537 of 2011
VID 538 of 2011, VID 539 of 2011
VID 540 of 2011, VID 541 of 2011
VID 542 of 2011, VID 543 of 2011
VID 544 of 2011, VID 545 of 2011
VID 546 of 2011, VID 547 of 2011
VID 548 of 2011, VID 549 of 2011
VID 550 of 2011, VID 551 of 2011
VID 552 of 2011, VID 553 of 2011
VID 554 of 2011Parties: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA V BHP BILLITON PETROLEUM (BASS STRAIT) PTY LTD ABN 29 004 228 004 File numbers: VID 560 of 2011, VID 561 of 2011
VID 562 of 2011, VID 563 of 2011
VID 564 of 2011, VID 565 of 2011
VID 566 of 2011, VID 567 of 2011
VID 568 of 2011, VID 569 of 2011Judges: KEANE CJ, EDMONDS & PERRAM JJ Date of judgment: 6 December 2011 Corrigendum 20 April 2012 Catchwords: TAXATION - assessable petroleum receipts - marketable petroleum commodity - excluded commodity - liability to tax on profits derived from receipts of a petroleum project - whether assessable petroleum receipts derived upon the sale of gas or liquefied petroleum gas (LPG) are to be ascertained by reference to the net sale price received on the sale of gas or LPG, or at the first point in the production process when the hydrocarbons satisfy the technical definition of sales gas or LPG - single integrated project for the process of petroleum recovery - when a product is “produced” - concept of “marketability”
STATUTORY INTERPRETATION - extrinsic materials - ordinary meaning conveyed by the text - context of the Act - legislative history - whether the meaning of a term defined can be construed by reference to its definition
CONTRACT - annual minimum “take or pay” amounts for gas - whether “shortfall payments” from previous years were brought to account as assessable petroleum receipts in the years to which the payments related or when the “Make Up Gas” was taken - whether a variation of the sales agreement to increase the range of the maximum quantity of gas to be delivered on a given day was consideration for the sale of gas
Legislation: Acts Interpretation Act 1901 (Cth)
Federal Court Rules
Petroleum Resource Rent Legislation Amendment Act 1991 (Cth)
Petroleum Resource Rent Tax Act1987 (Cth)
Petroleum Resource Rent Tax Assessment Act 1987 (Cth)
Petroleum (Submerged Lands) Act 1967 (Cth)
Petroleum Resource Rent Tax Assessment Regulations 2005 (Cth)
Petroleum Resource Rent Tax Assessment Bill 1986 (Cth)
Petroleum Resource Rent Tax Assessment Bill 1987 (Cth)
Taxation Laws Amendment Act (No 6) 2001 (Cth)
Tax Laws Amendment (2011 Measures No 8) Act 2011
Petroleum Resource Rent Legislation Amendment Bill 1991, Explanatory Memorandum
Petroleum Resource Rent Tax Assessment Bill 1986,
Explanatory Memorandum
Petroleum Resource Rent Tax Assessment Bill 1987, Explanatory MemorandumCases cited: Alliance Petroleum Australia NL v Australian Gas Light Co (unreported, Supreme Court of South Australia, Lander J, 23 December 1994)
Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27
Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) (1948) 77 CLR 143
Australian Communications Network Pty Ltd v Australian Competition and Consumer Commission (2005) 146 FCR 413
Dearman v Dearman (1908) 7 CLR 549
Delaney v Staples (trading as De Monfort Recruitment) [1992] 1 All ER 944
Diamond Shamrock Explorations Co v Hodel 853 F.2d 1159 (5th Cir. 1988)
Esso Australia Resources Pty Ltd v The Commissioner of Taxation [2011] FCA 360
Federal Commissioner of Taxation v Orica Ltd (1998) 194 CLR 500
Fox v Percy (2003) 214 CLR 118
MacDonald (Inspector of Taxes) v Dextra Accessories Ltd [2005] 4 All ER 107
Oxfordshire County Council v Oxford City Council [2006] 2 AC 674
Owners of Shin Kobe Maru v Empire Shipping Co Inc (1994) 181 CLR 404
PMT Partners Pty Ltd (In liq) v Australian National Parks and Wildlife Service (1995) 184 CLR 301
Project Blue Sky Inc & Ors v Australian Broadcasting Authority (1998) 194 CLR 355
Richardson v Austin (1911) 12 CLR 463
Robshaw Brothers Ltd v Mayer [1957] 1 Ch 125
Simpson v Connelly [1953] 1 WLR 911
Spencer v The Commonwealth (2010) 241 CLR 118
Sun World International Inc v Registrar, Plant Breeders’ Rights (1998) 87 FCR 405
Visa International Service Association v Reserve Bank of Australia (2003) 131 FCR 300
Wacal Developments Pty Ltd v Realty Developments Pty Ltd (1978) 140 CLR 503
Woodside Energy Ltd v Federal Commissioner of Taxation (2009) 174 FCR 91
Woodside Energy Ltd v Federal Commissioner of Taxation (No 2) (2007) 69 ATR 465Dates of hearing: 7, 8, 9 November 2011 Place: Brisbane (Heard in Melbourne) Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 208 Counsel for Esso Australia Resources Pty Ltd (ACN 091 829 819): Mr JW de Wijn QC and Mr AT Broadfoot Solicitor for Esso Australia Resources Pty Ltd (ACN 091 829 819): Allens Arthur Robinson Counsel for BHP Billiton Petroleum (Bass Strait) Pty Ltd (ABN 29 004 228 004): Mr DJ O’Callaghan SC and Mr GP Harris Solicitor for BHP Billiton Petroleum (Bass Strait) Pty Ltd (ABN 29 004 228 004): Allens Arthur Robinson Counsel for the Commissioner of Taxation: Mr GJ Davies QC, Mr H Foxcroft SC, Mr SJ Sharpley and Mr AD Pound Solicitor for the Commissioner of Taxation: Australian Government Solicitor FEDERAL COURT OF AUSTRALIA
Esso Australia Resources Pty Ltd v Commissioner of Taxation [2011] FCAFC 154
CORRIGENDUM
1.In paragraph 14 of the Reasons for Judgment, in the second sentence, the word “BHP” should read “BHPBP”.
2.In paragraph 18 of the Reasons for Judgment, in the first sentence, the word “licenses” should read “licences”.
3.In paragraph 38 of the Reasons for Judgment, in sub-section (b) after the semi-colon, the word “or” should be erased.
4.In paragraph 40 of the Reasons for Judgment, in the first sentence, the word “license” should read “licence”.
5.In paragraph 52 of the Reasons for Judgment, in the first line of the quotation, the character “(1)” should be erased.
6.In paragraph 52 of the Reasons for Judgment, after the semi-colon at sub-section (a) and the last semi-colon at sub-section (c), the word “and” should be inserted.
7.In paragraph 106 of the Reasons for Judgment, in the first sentence, third line, the phrase “the word” should read “that word”.
8.In paragraph 110 of the Reasons for Judgment, at bullet point 2 on page 51 in the first sentence, the word “Act” should read “Bill”.
9.In paragraph 138 of the Reasons for Judgment, in the last sentence, the phrase “the 1991 Amendment Act” should read “the Petroleum Resource Rent Legislation Amendment Act 1991 (Cth) (the 1991 Amendment Act)".
10.In paragraph 164 of the Reasons for Judgment, in the first sentence, the word “as” in the sixth line should be erased and the quotation “explained in the Shamrock Case, the payment was not for the gas taken, but for the failing to take the gas” should read “[a]s explained in the Shamrock Case, the payment was not for the gas taken but for the failing to take the gas”.
I certify that the preceding ten (10) numbered paragraphs are a true copy of the Corrigendum to the Reasons for Judgment herein of the Honourable Chief Justice Keane and Justices Edmonds and Perram. Associate:
Dated: 20 April 2012
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 480 of 2011
VID 481 of 2011
VID 482 of 2011
VID 483 of 2011
VID 484 of 2011
VID 485 of 2011
VID 486 of 2011
VID 487 of 2011
VID 488 of 2011
VID 489 of 2011
VID 490 of 2011
VID 491 of 2011VID 492 of 2011
VID 493 of 2011
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: ESSO AUSTRALIA RESOURCES PTY LTD ACN 091 829 819
AppellantAND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent
JUDGES:
KEANE CJ, EDMONDS & PERRAM JJ
DATE OF ORDER:
6 december 2011
WHERE MADE:
brisbane (heard in MELBOURNe)
THE COURT ORDERS THAT:
1.The parties confer and thereafter by 4:00 pm on 20 December 2011 file minutes of any further orders (including orders as to costs), and in the event of disagreement, file and serve written submissions as to the contentions of the parties.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 536 of 2011
VID 537 of 2011
VID 538 of 2011
VID 539 of 2011
VID 540 of 2011
VID 541 of 2011
VID 542 of 2011
VID 543 of 2011
VID 544 of 2011
VID 545 of 2011
VID 546 of 2011
VID 547 of 2011
VID 548 of 2011
VID 549 of 2011
VID 550 of 2011
VID 551 of 2011
VID 552 of 2011
VID 553 of 2011
VID 554 of 2011
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: BHP BILLITON PETROLEUM (BASS STRAIT) PTY LTD ABN 29 004 228 004
AppellantAND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent
JUDGE:
KEANE CJ, EDMONDS & PERRAM JJ
DATE OF ORDER:
6 december 2011
WHERE MADE:
brisbane (heard in MELBOURNE)
THE COURT ORDERS THAT:
1.The parties confer and thereafter by 4:00 pm on 20 December 2011 file minutes of any further orders (including orders as to costs), and in the event of disagreement, file and serve written submissions as to the contentions of the parties.
Note:Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 560 of 2011
VID 561 of 2011
VID 562 of 2011
VID 563 of 2011
VID 564 of 2011
VID 565 of 2011
VID 566 of 2011
VID 567 of 2011
VID 568 of 2011
VID 569 of 2011
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
AppellantAND: BHP BILLITON PETROLEUM (BASS STRAIT) PTY LTD ABN 29 004 228 004
Respondent
JUDGE:
KEANE CJ, EDMONDS & PERRAM JJ
DATE OF ORDER:
6 december 2011
WHERE MADE:
brisbane (heard in MELBOURNE)
THE COURT ORDERS THAT:
1. The parties confer and thereafter by 4:00 pm on 20 December 2011 file minutes of any further orders (including orders as to costs), and in the event of disagreement, file and serve written submissions as to the contentions of the parties.
Note:Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 480 of 2011
VID 481 of 2011
VID 482 of 2011
VID 483 of 2011
VID 484 of 2011
VID 485 of 2011
VID 486 of 2011
VID 487 of 2011
VID 488 of 2011
VID 489 of 2011
VID 490 of 2011
VID 491 of 2011VID 492 of 2011
VID 493 of 2011
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: ESSO AUSTRALIA RESOURCES PTY LTD ACN 091 829 819
AppellantAND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 536 of 2011
VID 537 of 2011
VID 538 of 2011
VID 539 of 2011
VID 540 of 2011
VID 541 of 2011
VID 542 of 2011
VID 543 of 2011
VID 544 of 2011
VID 545 of 2011
VID 546 of 2011
VID 547 of 2011
VID 548 of 2011
VID 549 of 2011
VID 550 of 2011
VID 551 of 2011
VID 552 of 2011
VID 553 of 2011VID 554 of 2011
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: BHP BILLITON PETROLEUM (BASS STRAIT) PTY LTD ABN 29 004 228 004
AppellantAND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 560 of 2011
VID 561 of 2011
VID 562 of 2011
VID 563 of 2011
VID 564 of 2011
VID 565 of 2011
VID 566 of 2011
VID 567 of 2011
VID 568 of 2011
VID 569 of 2011
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: the commissioner of taxation of the commonwealth of australia
AppellantAND: BHP BILLITON PETROLEUM (BASS STRAIT) PTY LTD ABN 29 004 228 004
Respondent
JUDGES:
KEANE CJ, EDMONDS & PERRAM JJ
DATE:
6 december 2011
PLACE:
brisbane (heard in MELBOURNE)
REASONS FOR JUDGMENT
THE COURT:
Esso Australia Resources Pty Ltd (Esso) and BHP Billiton Petroleum (Bass Strait) Pty Ltd (BHPBP) are co-venturers in off-shore petroleum recovery operations in Bass Strait and associated onshore processing and storage facilities at Longford and Long Island Point. Esso is the operator of the joint venture.
Each of the co-venturers appealed to the Federal Court of Australia against decisions by the Commissioner disallowing objections to the Commissioner’s assessments of their liability to tax pursuant to the Petroleum Resource Rent Tax Assessment Act 1987 (Cth) (the Act) for the years ended 1 July 1991 to 30 June 2002 (the years of income). The Act provides for the assessment of tax imposed by s 4 of the Petroleum Resource Rent Tax Act 1987 (Cth) “in respect of the taxable profit of a person of a year of tax in relation to a petroleum project”. Under s 5 of that Act, the rate of tax is 40%.
The Act commenced operation on 15 January, 1988, but it did not apply to the Bass Strait until 1 July 1991.
Orders were made pursuant to O 29 r 2 of the then Federal Court Rules for the separate hearing and determination of 13 questions. Broadly speaking, these questions were concerned with whether certain payments for the products of the joint venture which were treated by the Commissioner as “assessable petroleum receipts”, should be excised from the taxable profit of each of Esso and BHPBP in the relevant years of income.
THE ISSUES
We shall refer to the 13 questions addressed to the primary judge and to his Honour’s answers in due course. For the sake of coherence of discussion, however, it is convenient to retain the grouping of the issues raised by these 13 questions into the four categories used by the learned primary judge. These categories of issues are the “taxing point issues”, the “take or pay issues”, the “MLMDQ issue”, and the “surplus electricity generation issue”.
The taxing point issues were agitated in Questions 1 to 9. They are concerned with:
·whether the assessable petroleum receipts in respect of sales gas produced from petroleum recovered from Bass Strait were to be ascertained by reference to the net sale price received for the gas or the market value of the gas at one or other of a number of earlier points in the production process at each of which points it was possible to identify the presence of hydrocarbons satisfying the definition of “sales gas” in the Act could be identified;
·whether the assessable petroleum receipts in respect of liquefied petroleum gas (LPG) produced from petroleum recovered from Bass Strait (but excluding that produced from already taxed sales gas) were to be ascertained by reference to the net sale price received on the sale of the LPG, or the market value of the mixture at the point in the production process at which hydrocarbons satisfying the statutory definition of “LPG” could be identified;
·whether ethane and stabilised crude oil produced from petroleum recovered from Bass Strait gave rise to assessable petroleum receipts.
The resolution of these issues turned on the interpretation of s 24 of the Act. Because a legislative amendment to the definition of “sales gas” took effect on 1 April 2002, it was necessary for the primary judge to consider the position both before and after the amendment in relation to receipts from sales gas.
The take or pay issues were raised by Questions 11 and 12. They concern a payment of $11,753,357.87 by Generation Victoria (Genvic), the successor to the State Electricity Commissioner of Victoria (SECV) to Esso in January 1997 (the 1997 payment). Question 11 was concerned with whether the 1997 payment was an assessable petroleum receipt for the 1997 fiscal year given that Genvic made the payment under a contract with the co-venturers whereby it was obliged to pay an annual minimum amount for gas regardless of the amount of gas it required. Under the contract, if SECV took less than the fixed minimum amount of gas, it was entitled to apply the excess payment to discharge its obligations in respect of the price of extra gas required in succeeding years (Make Up Gas). The 1997 payment was made by Genvic in the final year of the contract, and so Genvic had no opportunity to benefit from that payment by applying it to reduce the cost of Make Up Gas in later years.
Question 12 arose if the 1997 payment was truly an assessable income receipt of the 1997 year. The further issue arose in relation to payments returned by the co-venturers as assessable petroleum receipts in the 1991, 1993, 1995 and 1996 years. In these years, SECV or Genvic took Make Up Gas to which the payments related and it was only when the Make Up Gas was taken that the shortfall payments from previous years were brought to account as assessable income receipts. If the payments received by the co-venturers were not returnable when SECV took the Make Up Gas but in the years when the payments were made, then the co-venturers assessable income receipts would need to be adjusted for the 1991, 1993, 1995 and 1996 years.
The MLMDQ issue arose in relation to Question 13. It concerns the assessability of payments (the MLMDQ payments) that the co-venturers received from the Gas and Fuel Corporation of Victoria (GFC) and its successor, Gascor, in consequence of a variation of the terms of the supply agreement between the co-venturers and GFC. Under the variation, GFC was obliged to give Esso advance notice of the maximum amount of gas it might require each day under the long-term arrangements between GFC and the co-venturers.
The fourth category of issue concerned the sale by Esso of surplus electricity generated at Longford. This category concerned Question 10.
The primary judge upheld in Esso Australia Resources Ltd v The Commissioner of Taxation [2011] FCA 360 (Reasons) the Commissioner’s submissions relation to the “taxing point” issues and the “take or pay” issue. On the other hand, the co-venturers succeeded on the MLMDQ issue and the electricity generation gas issue. The questions posed for determination were answered accordingly. The parties accepted that the primary judge’s answers to the questions provided the basis for the determination of the co-venturers’ appeals.
The primary judge also made orders in relation to the costs of the proceedings at first instance which were substantially in favour of the Commissioner. An appeal against these orders has not been pressed.
Each of the co-venturers has appealed in relation to the taxing point issues and take or pay issues. It is fair to say that, as between the co-venturers, the burden of the argument in this Court was borne by Esso; but as Esso’s arguments were adopted by BHP, it is appropriate to refer to the submissions made by Esso’s counsel as having been made on behalf of the co-venturers.
The Commissioner has appealed in relation to the MLMDQ issue but not the electricity generation gas issue.
We propose to deal, in turn, with each of the three categories of issues still in dispute. Before turning to a discussion of the issues, however, it is desirable to describe the Bass Strait project, its facilities and processes in an endeavour to make what follows intelligible.
THE PROJECT FACILITIES AND PROCESSES
The following description of the project facilities and processes is taken largely from the findings of the primary judge at Reasons [20]–[81]. His Honour’s findings in this regard were based on the evidence of Mr Heath, a director of Esso and a chemical engineer and the contents of the “Esso Manual”, a document which contains information on the recovery and processing of Bass Strait petroleum.
Esso and BHPBP each hold a number of production licenses for Bass Strait and its environs which, by virtue of s 19(1A) of the Act, are treated as establishing a single petroleum project for the purposes of the Act. On behalf of the co-venturers, Esso recovers petroleum from wells on a series of offshore platforms in the Bass Strait which are connected to onshore processing storage facilities at the Longford Gas Processing and Crude Stabilisation Plant (Longford) and the Long Island Point Fractionation Plant (LIP) in order to separate the recovered petroleum into a number of hydrocarbon products for sale.
Petroleum consists of different kinds of hydrocarbons which are found in naturally occurring underground deposits. In Bass Strait this occurs in petroleum pools about 1, 200 to 2, 500 metres beneath the sea floor.
Hydrocarbons are described by the chemical formula CnH2n+2, where C refers to the carbon atom and H refers to the hydrogen. The expression “lighter hydrocarbons” refers to methane, ethane, propane and butane (C1–C4) whereas “heavier hydrocarbons” refers to pentane and hydrocarbons (C+5). Heavier liquid carbons have a range up to C20. A hydrocarbon changes from liquid to gas at boiling point. The boiling point is higher the heavier the hydrocarbon is, and is also dependent on pressure. Increasing pressure increases the boiling point, and vice versa. That different hydrocarbons have different boiling points is important because it allows temperature and pressure to be used to separate different hydrocarbons from a stream of mixed hydrocarbons.
The five commercial products which Esso produces from petroleum obtained from Bass Strait are:
·Sales gas which is about 85% methane with small amounts of ethane, nitrogen and carbon dioxide.
·Commercial ethane which is about 99% ethane.
·Commercial propane which is about 97% propane with small amounts of ethane and butane.
·Commercial butane which is about 97% butane with small amounts of propane.
·Stabilised crude oil which is about 97% pentane and heavier hydrocarbons.
The facilities which produce these are:
·the platforms in the Bass Strait;
·the pipelines linking the Bass Strait platforms to the Longford Plant;
·the Longford Plant;
·the pipelines linking the Longford Plant to the LIP; and
·the LIP.
The production process begins with wells in Bass Strait recovering liquid and gaseous raw petroleum from the petroleum pools. A well is a hole drilled from the platform down to the petroleum pool and lined with metal called a casing. Petroleum flows upwards through the well due to the pressure differential, and in the case of gaseous pools through Esso’s processing facilities to the end user, without the use of pumping. One platform normally services a number of wells. By way of example, the Snapper platform hosted 27 wells in its structure which accessed up to 31 petroleum pools at the Snapper field. The “wellhead” is the point at the top of the well where the petroleum exists onto the platform.
There are six platforms which recover raw petroleum. They are:
·The Barracouta and Marlin platforms, which are two large platforms servicing mainly gas fields;
·The Snapper platform, which is a large oil and gas platform; and
·The Tuna, West Tuna and Flounder platforms, which are three smaller oil platforms servicing oil fields.
Water, in the form of liquid or vapour, is recovered along with the petroleum. After exiting the wellhead the material undergoes partial separation into heavier liquid and lighter gaseous hydrocarbon phases. The expression “phase” is a reference to whether the substance is a solid, liquid or a gas. A device called a “separator” on the platforms performs the task of separation. All well effluent, being the stream of petroleum at the wellhead, from both the gas and oil wells passes through a separator. The composition of the gaseous and liquid phases leaving the separator will vary depending on separator temperature and pressure.
On the platforms, the partially separated streams can either be recombined or sent into separate gas and liquid pipelines. The point at which a pipeline departs from the platforms is called the Last Valve Off (LVO). Prior to gas passing through the LVO to exit the platform, glycol is added to the stream to prevent the formation of solids in the stream. Not all of the gaseous phase petroleum stream exiting the separator is sent from the platform; some of it may be used as a source of fuel for the platform or re-injected into oil wells so as to improve the efficiency of recovery from those wells. The volume and source of gaseous petroleum piped to the Longford Plant can fluctuate on a daily basis, as the rate at which gaseous petroleum is extracted from each well is able to be varied according to daily production requirements.
In order to bring the partially separated streams of liquid and gaseous petroleum ashore, pipelines are in place linking the Bass Strait platforms to the Longford Plant. There are six pipelines:
·Three gas pipelines linking the main gas platforms Barracouta, Marlin and Snapper to Longford;
·An oil platform linking Barracouta to Longford; and
·Two other oil platforms which service Marlin and Snapper as well as the remaining oil platforms.
The material carried in the gas pipelines may consist of “wet gas”, containing heavier hydrocarbons and water, or “dry gas” from which water and heavier hydrocarbons have been removed. “Crude oil” passes through the oil pipelines.
At the Longford Plant there is further separation and filtering of the substantially gaseous stream in order to produce the commercial product “sales gas” and a raw LPG stream of propane, butane and ethane. There is also further separation and filtering of the substantially liquid petroleum stream in order to produce the commercial product stabilised crude oil and to remove the raw LPG and gas that is piped to the gas plants. The Longford Plant has two main sections being the Crude Stabilisation Plant, designed to further separate and filter the contents of the three incoming oil pipelines, and the three gas plants.
All of the three gas plants further filter and remove impurities, such as hydrogen sulphide and water. As the gas exits the pipelines from the platforms and enters the Longford gas plants high speed liquid materials in the stream called “slugs” enter apparatus called “slug catchers” which slow down the slugs and store them for processing. The incoming gas from the pipelines is separated into three constituent streams: the first stream consists principally of methane and is sold as sales gas to buyers at the exit from Longford; the second stream is “raw LPG” consisting principally of ethane, propane and butane which is piped to LIP in liquid form for further separation and processing, and the third stream consists of heavier liquid hydrocarbons (C5+) which are sent to the Crude Stabilisation Plant to be processed along with the crude oil from the oil platforms. Gas Plant No 1 uses a separation method, known as lean oil absorption, whereas Gas Plants Nos 2 and 3 use cryogenic separation.
Not all of the sales gas produced at Longford is sold: some is used as a fuel source for Esso’s own electricity generation; and any excess generation capacity is sold to Genvic for use in the Victorian power grid.
Connecting the Longford Plant to LIP are two pipelines that transport the raw stabilised crude oil and raw LPG mixture of ethane, propane and butane. Initially the raw LPG mixture is gaseous. It is converted to a single liquid form, after passing through the plant designed to cool and then compress the substance, for pumping along the pipeline from the Longford Plant to LIP.
At LIP the stabilised crude oil is stored for sale, and the raw LPG stream is further separated (fractionated) into the commercial products ethane, propane and butane for sale. The propane and ethane are processed to meet the buyers’ demands and sold in liquid form at LIP. Ethane is not sold at LIP but is transported by pipeline to Altona where it is sold for use in the petrochemical industry. The pipeline is owned and operated by the co-venturers.
The sale of the sales gas took place at Longford. The sale of the commercial propane, butane and stabilised crude oil took place at LIP. The sale of commercial ethane occurred at the end of the pipeline to Altona. It was accepted by the co-venturers that at no earlier point in the production process has any commodity been offered for sale or been the subject of an offer to purchase.
In relation to the integrated nature of the project the primary judge concluded at Reasons [26]:
In summary, the process is integrated and continuous, involving the following steps:
(a)The use of wells on the Bass Strait platforms to recover liquid and gaseous raw petroleum from the petroleum pools.
(b)Some separation of the recovered petroleum on the platforms into substantially liquid and substantially gaseous streams, which is then piped to shore. In some cases, these streams are recombined prior to being piped to shore.
(c)Further separation and filtering of the substantially gaseous petroleum stream in the gas plants at Longford so as to produce the commercial product ‘sales gas’ and a raw LPG stream (condensate) of propane, butane and ethane. Some liquid petroleum extracted from this stream is added to the stabilised crude oil stream from the Longford [sic]. The sales gas is sold at the exit of the Longford Plant.
(d)Further separation and filtering of the substantially liquid petroleum stream in the Longford Plant so as to produce the commercial product stabilised crude oil and to remove the raw LPG and gas that is piped across to the gas plants.
(e)Transport of the raw LPG and stabilised crude oil by pipeline to the LIP. At that plant the stabilised crude oil is stored for sale while the raw LPG stream is further separated (fractionated) into the commercial products ethane, propane and butane for sale. Ethane is not sold at Long Island Point; it is transported by pipeline to Altona where it is sold.
THE “TAXING POINT” ISSUES
The issues of most moment for the parties, and to which most attention was devoted, both before the primary judge and on appeal, are the “taxing point” issues. The co-venturers’ principal submission under this heading focuses upon the definitions of “marketable petroleum commodity” and “excluded commodity” in the Act. The co-venturers’ contention is that any marketable petroleum commodity produced from petroleum recovered from the Bass Strait project became an excluded commodity as defined in the Act before it was sold on behalf of the co-venturers. It is said that the assessable petroleum receipts derived by the co-venturers upon the sale of gas or LPG were not the net consideration receivable on sale of such products, but the market value of the marketable petroleum commodity at the earliest point in the separation and extraction process at which the product became an excluded commodity. This point, so it was said, was the point at which the constituents of the stream being processed conformed to the technical description of one or more of the marketable petroleum commodities referred to in the definition of that expression.
The relevant terms of the Act
The term “petroleum” is defined by s 2 of the Act as having the same meaning as the term has in the Petroleum (Submerged Lands) Act 1967 (Cth) (the PSL Act). Throughout both periods, s 5 of that Act defined “petroleum” as follows:
(a)any naturally occurring hydrocarbon, whether in a gaseous, liquid or solid state;
(b)any naturally occurring mixture of hydrocarbons, whether in a gaseous, liquid or solid state;
(c)any naturally occurring mixture of one or more hydrocarbons, whether in a gaseous, liquid or solid state, and one or more of the following, that is to say, hydrogen sulphide, nitrogen, helium and carbon dioxide;
and includes any petroleum as defined by paragraph (a), (b) or (c) that has been returned to a natural reservoir.
The expression “excluded commodity” is defined in s 2 of the Act to mean:
… a marketable petroleum commodity that:
(a) has been sold;
(b) after being produced, has been further processed or treated; or
(c)has been moved away from the place of its production other than to a storage site adjacent to that place; or
(d)has been moved away from a storage site adjacent to the place of its production.
The expression “marketable petroleum commodity” is defined in s 2 of the Act to mean:
... any of the following products produced from petroleum:
(a) stabilised crude oil;
(b) sales gas;
(c) condensate;
(d) liquefied petroleum gas;
(e) ethane;
(f)any other product declared by the regulations to be a marketable petroleum commodity;
not being a product produced from another product of a kind referred to in paragraphs (a) to (f) (inclusive).
Section 19 of the Act establishes that a petroleum project exists by reference to the existence of a production license issued under the PSL Act. It provides relevantly:
(1)Subject to subsection (1A), for the purposes of this Act, where an eligible production licence is in force and is not specified in a project combination certificate that is in force, there shall be taken to be a petroleum project in relation to the eligible production licence.
(1A)For the purposes of this Act, there is taken to be a single petroleum project in relation to all production licences that are related to the Bass Strait exploration permit and that are in force from time to time, unless those licences are specified in a project combination certificate that is in force.
…
(4)For the purposes of this Act, a reference to the operations, facilities and other things comprising a petroleum project is a reference to:
(a) operations and facilities for the recovery of petroleum from the production licence area or production licence areas in relation to the project; and
(b) such of the following as are carried on or provided:
(i)operations and facilities involved in moving petroleum so recovered between any storage or processing facilities prior to the production of any marketable petroleum commodity from the petroleum;
(ii)operations and facilities involved in the storage, processing or treatment of petroleum so recovered to produce any marketable petroleum commodity from the petroleum;
(iii)operations and facilities involved in the moving or storage of any such marketable petroleum commodity before it becomes an excluded commodity;
(iv)services, or facilities for the provision of services, in connection with the operations, facilities, amenities and services referred to in this section;
(v)employee amenities in connection with the operations, facilities and services referred to in this section.
Section 21 of the Act creates the liability to pay the tax. It provides:
Subject to this Act, tax imposed in respect of the taxable profit of a person of a year of tax in relation to a petroleum project is payable by the person.
The expression “taxable profit” is described in s 22 of the Act:
Where, in relation to a petroleum project and a year of tax, the assessable receipts derived by a person exceed the sum of:
(a) the deductible expenditure incurred by the person; and
(b)the total of the amounts (if any) transferred by the person to the project in relation to the year of tax under section 45A; and
(c)the total of the amounts (if any) transferred by another person to the person in relation to the project and the year of tax under section 45B;
the person is taken for the purposes of this Act to have a taxable profit in relation to the project and the year of tax of an amount equal to the excess.
The expression “assessable receipts” is defined in s 23 to mean:
(a) assessable petroleum receipts;
(b) assessable exploration recovery receipts;
(c) assessable property receipts;
(d) assessable miscellaneous compensation receipts;
(e) assessable employee amenities receipts.
For the first period, i.e. the period up to 1 April 2002, the expression “assessable petroleum receipts” was explained by s 24 of the Act:
For the purposes of this Act, a reference to assessable petroleum receipts derived by a person in relation to a petroleum project is a reference to:
(a)where any petroleum, or a constituent of petroleum, recovered from the production licence area or areas in relation to the project is or was sold, whether processed or unprocessed, before any marketable petroleum commodity is or was produced from it – the consideration receivable, less any expenses payable, by the person in relation to the sale;
(b)where any marketable petroleum commodity produced from petroleum recovered from the area or areas to which paragraph (a) applies becomes or became an excluded commodity by virtue of being sold – the consideration receivable, less any expenses payable, by the person in relation to the sale; and
(c)where any marketable petroleum commodity produced from petroleum recovered from the area or areas to which paragraph (a) applies becomes or became an excluded commodity otherwise than by virtue of being:
(i)sold; or
(ii)treated or processed, or moved, for re-injection or destruction or for use in carrying on or providing operations, facilities or other things of a kind referred to in section 37, 38 or 39 in relation to the petroleum project;
so much of the market value of the commodity immediately before it becomes or became an excluded commodity, or, where there is insufficient evidence of that market value, of such amount as, in the opinion of the Commissioner, is fair and reasonable, as is taken by section 26 to be derived by the person.
Section 26 of the Act, as amended, provides:
Where paragraph 24(1)(c), 24(1)(e) or 25(c) applies in relation to any marketable petroleum commodity, the market value or other amount referred to in that paragraph in relation to the marketable petroleum commodity shall, for the purposes of this Act, be taken to have been derived by the person or persons entitled to receive receipts from the sale of marketable petroleum commodities produced in relation to the project and, where there are 2 or more such persons, in the same respective shares as those persons are or were entitled to receive those receipts.
The expression “deductible expenditure” is defined in s 32 of the Act:
For the purposes of this Act, a reference to the deductible expenditure incurred by a person in a financial year in relation to a petroleum project (not being an ineligible project in relation to the financial year) is a reference to the total expenditure of the following kinds incurred by the person in the financial year in relation to the project:
(a) class 1 augmented bond rate general expenditure;
(b) class 1 augmented bond rate exploration expenditure;
(c) class 2 augmented bond rate general expenditure;
(d) class 1 GDP factor expenditure;
(e) class 2 augmented bond rate exploration expenditure;
(f) class 2 GDP factor expenditure;
(g) closing-down expenditure.
The expressions listed in sub-paragraphs (a) to (g) of s 32 are defined elsewhere in the Act. The only expression with which one need be concerned here is “general project expenditure” which is defined in s 38:
For the purposes of this Act, a reference to general project expenditure incurred by a person in relation to a petroleum project is a reference to payments (not being excluded expenditure, exploration expenditure or closing-down expenditure), whether of a capital or revenue nature, liable to be made by the person:
(a)in carrying on or providing operations and facilities preparatory to the activities referred to in paragraph (b), including in carrying out any feasibility or environmental study; and
(b)in carrying on or providing the operations, facilities and other things comprising the project;
and includes any production licence or other fee (not being an excluded fee) liable to be paid by the person in relation to the carrying on or providing of any operations, facilities or other things referred to in this section.
During the period from 1 July 1990 until 1 April 2002 (the first period), “sales gas” was defined by s 2 of the Act to mean “a mixture that includes methane, where the methane comprises more than 50% by weight of the mixture”. The Taxation Laws Amendment Act (No 6) 2001 (Cth) (the 2001 Amendment Act) amended s 24 of the Act and the definition of “sales gas” in s 2 of the Act. These amendments took effect on 1 April 2002. As a result of these amendments, for the period from 1 April 2002 to 30 June 2002 (the second period), “sales gas” was defined in s 2 of the Act as follows:
sales gas means a substance:
(a)which is in a gaseous state when at the temperature of 15°C and a pressure of one atmosphere; and
(b)which consists of naturally occurring hydrocarbons, or a naturally occurring mixture of hydrocarbons and non-hydrocarbons; and
(c)the principal constituent of which is methane; and
(d)which:
(i)if it is to be used as a feedstock for conversion to another product – has been processed so that it is suitable for that use; or
(ii)in any other case – has been processed so that it is suitable for direct consumption as energy.
During the whole of both periods, “LPG” was defined by s 2 of the Act to mean “a mixture that includes propane and butane, where the propane and butane comprise more than 50% by weight of the mixture”.
At no time during either period was there a definition of ethane or stabilised crude oil.
At no time during the relevant periods was a regulation made declaring any product to be a marketable petroleum commodity or the purposes of the definition of “marketable petroleum commodity”.
During the second period, s 24 provided:
(1)For the purposes of this Act, a reference to assessable petroleum receipts derived by a person in relation to a petroleum project is a reference to:
(a)where any petroleum, or a constituent of petroleum, recovered from the production licence area or areas in relation to the project, is or was sold, whether processed or unprocessed, before any marketable petroleum commodity is or was produced from it – the consideration receivable, less any expenses payable, by the person in relation to the sale;
(b)where any marketable petroleum commodity (other than sales gas) produced from petroleum recovered from the area or areas to which paragraph (a) applies becomes or became an excluded commodity by virtue of being sold – the consideration receivable, less any expenses payable, by the person in relation to the sale; and
(c)where any marketable petroleum commodity (other than sales gas) produced from petroleum recovered from the area or areas to which paragraph (a) applies becomes or became an excluded commodity otherwise than by virtue of being:
(i)sold; or
(ii)treated or processed, or moved, for re-injection or destruction or for use in carrying on or providing operations, facilities or other things of a kind referred to in section 37, 38 or 39 in relation to the petroleum project;
so much of the market value of the commodity immediately before it becomes or became an excluded commodity, or, where there is insufficient evidence of that market value, of such amount as, in the opinion of the Commissioner, is fair and reasonable, as is taken by section 26 to be derived by the person;
(d)where any sales gas produced from petroleum recovered from the area or areas to which paragraph (a) applies becomes or became an excluded commodity by virtue of being sold:
(i)if the sale is a non-arm’s length transaction – the amount worked out in accordance with the regulations; and
(ii)in any other case – the consideration receivable, less any expenses payable, by the person in relation to the sale; and
(e)where any sales gas produced from petroleum recovered from the area or areas to which paragraph (a) applies becomes or became an excluded commodity otherwise than by virtue of being:
(i)sold; or
(ii)treated or processed, or moved, for re-injection or destruction or for use in carrying on or providing operations, facilities or other things of a kind referred to in section 37, 38 or 39 in relation to the petroleum project;
the amount worked out in accordance with the regulations.
(2) In this section:
non-arm’s length transaction means a transaction where the Commissioner, having regard to any connection between the parties to the transaction or to any other relevant circumstances, is satisfied that the parties to the transaction are not dealing with each other at arm’s length in relation to the transaction.
Regulations were not made under s 24(1) of the Act until 15 December 2005 when the Petroleum Resource Rent Tax Assessment Regulations 2005 came into force.
The primary judge’s approach to construction
His Honour saw what is involved in a “petroleum project” as requiring reference to the commercial purpose which informs the integration of the production facilities. The correctness of this approach is disputed; accordingly, it is as well to set out his Honour’s reasons in this regard. His Honour said at Reasons [212] – [215]:
212…[W]hilst not explicitly defined in the legislation itself, the concept of ‘project’ must envisage a scheme or plan carried out with a particular commercial purpose in mind. Relevantly, in these proceedings, the joint venture.
213The concept of the petroleum project then combines the various operations, facilities and other things comprising a petroleum project as ‘defined’ in s 19(4), taking into account the overall objective of the joint venturers in the carrying out of the various operations within the Gippsland facilities.
214As I have found, the joint venturers implemented the plan to recover petroleum and in an integrated process ‘to yield’ (in the words of Mr Heath) the five hydrocarbon products eventually sold. There was a plan to do this in stages, but such stages were not ends in themselves, but necessary to yield or produce the products in fact sold.
215To interpret the concept of project in this way is not incorporating within s 24 a concept of ‘intention’ or ‘commercial purpose’, which concepts are not there [sic]. However, as s 24 applies not just to Bass Strait, but to other projects of a different nature, one is entitled to look at the objective of the facilities themselves and their overall purpose or object to determine the exact nature and extent of a particular petroleum project for the purposes of the PRRTA Act.
His Honour explained the importance of “marketability” to his view of the scheme of the Act, another point which the co-venturers dispute, at Reasons [222]:
As I have stressed, the PRRTA Act imposes a tax on profits, not on production. Section 24 itself focuses on the ‘consideration receivable’ (s 24(a) and (b)) or ‘market value’ (s 24(c)). Whilst s 24 does envisage the possibility of “insufficient evidence of that market value” (s 24(c)), the whole basis of the liability to the tax, and in determining one part of the equation, is based upon determining receipts following a sale or where there is a market. This points to an actual sale or ‘marketability’ being a concept at the heart of the determination of liability under the PRRTA Act.
As to when products can be said to have been “produced” from petroleum for the purposes of the definition of “marketable petroleum commodity” and “excluded commodity”, the primary judge reasoned that the Act is concerned to tax the profit relating to the petroleum project realisable in the market for the products produced by the project. The primary judge concluded at Reasons [235] – [239]:
235In my view, the concept of products ‘produced’ from petroleum (referred to in s 24 and again in the definition of ‘marketable petroleum commodity’), along with the nature of a petroleum project, envisages the bringing into existence of something that is sold or will create value or command a price. As I have already said, the focus of the tax liability in s 24 is upon sale or market value. A factual enquiry is then to be made as to when liability actually arises in any given tax year in relation to a petroleum project, remembering that the tax is not imposed by reference to units of production, but by reference to taxable profit, and then only as defined in the PRRTA Act.
236The ordinary meaning of ‘produce’ or ‘produced’ in the PRRTA Act should not be read simply to mean ‘derived’, but should be read by reference to its context and the purpose of the petroleum project.
237According to the Oxford English Dictionary “product” means something “produced by any action, operation or work; a production; the result. Now frequently that which is produced commercially for sale…”. The word “produce” means “To bring forth, bring into being or existence… To bring (a thing) into existence from its raw materials or elements, or as the result of a process”.
238The chief current meaning of the word “process” is “a continuous and regular action or series of actions, taking place or carried on in a definite manner, and leading to the accomplishment of some result; a continuous operation or series of operations”.
239The various processes undertaken by Esso are all happening to produce products that are to be sold. There is a production line of considerable size and complexity to produce the sales product. The production phases require the ongoing operation of the Gippsland facilities. In very simple terms, the products sold or to be marketed in the way described by Mr Heath were products of the Bass Strait project. It is these products that the PRRTA Act is primarily focusing upon. In fact, sales occurred in the whole period. If no sale occurs, the legislature has sought to identify a point where the product is in fact marketable or able to be sold, and then determine the ‘market value’ at that point. It may be better to call this point a ‘valuation point’, as distinct from a ‘taxing point’, but whatever term is used, the concept is clear. Even though there may be “insufficient evidence of that market value”, the primary position is that a market can be identified.
The primary judge made reference at Reasons [240] to the Explanatory Memorandum (EM) to the 1987 Bill which led to the Act. We mention this reference because Counsel for Esso make the point that his Honour’s reference should have been to the EM to the 1986 Bill. As will be seen, this may have been no more than a typographical error. His Honour said:
240To the extent that any assistance can be gleaned from the Explanatory Memorandum to the 1987 Bill, the following statement in the Explanatory Memorandum indicates that notwithstanding that otherwise a particular substance may come within the description of one of the products listed in the definition of ‘marketable petroleum commodity’ this is not sufficient:
[the Bill identifies] … in the case of certain petroleum products that have not been sold by the point in the production process at which they become marketable, amounts deemed to be receipts – that are to be assessable for PRRT purposes.
(Emphasis added).The findings and conclusions of the primary judge: sales gas
The primary judge decided Questions 1 to 5 as follows:
Question 1.For what period or periods within each of the tax years during the first period and in what quantities in respect of each tax year did any marketable petroleum commodity, in the form of sales gas within the meaning of the … Act and produced from petroleum recovered from the area or areas to which paragraph (a) of s 24 of the … Act applies, become an excluded commodity (otherwise than by virtue of being sold or treated or processed or moved for re-injection or destruction or for use in carrying on or providing operations facilities or other things of a kind referred to in s 37, s 38 or s 39 in relation to the petroleum project) for the purposes of s 24(c) of the … Act at each of the first period Taxing Points alleged by the applicant?
Answer:None. A single petroleum project existed for the purposes of the Act. Esso and BHPBP recovered petroleum in Bass Strait and in a series of integrated operations that were carried out on the various platforms, and at Longford produced a product from the petroleum for sale. The product so produced was sales gas and was therefore a marketable petroleum commodity. It was sold and as such became an excluded commodity.
Section 24(c) of the Act was not applicable. Section 24(b) applied and the consideration receivable, less expenses payable by Esso in relation to the sale of the gas, constituted the assessable petroleum receipts during the first period.
Question 2.If any quantity of sales gas referred to in question 1 became an excluded commodity, as referred to in question 1, what amounts in respect of the sale of sales gas included by the applicant as assessable petroleum receipts under the … Act during the first period as referred to in paragraph 21 of the applicant’s [contentions] were not assessable petroleum receipts under s 24 of the … Act?
Answer:In light of the answer to question 1, not applicable.
C.SALES GAS – the second period
Question 3.For what period or periods during the second period and in what quantity for the whole of the second period did any marketable petroleum commodity, in the form of sales gas within the meaning of the … Act and produced from petroleum recovered from the area or areas to which paragraph (a) of s 24(1) of the … Act applies, become an excluded commodity (otherwise than by virtue of being sold or treated or processed or moved for re-injection or destruction or for use in carrying on or providing operations facilities or other things of a kind referred to in ss 37, 38 or 39 in relation to the petroleum project) for the purposes of s 24(1)(c) or s 24(1)(e) of the … Act at each of the second period Taxing Points alleged by the applicant?
Answer:None. The same reasons as those in relation to the first period apply.
Question 4.If any quantity of sales gas referred to in question 3 became an excluded commodity, as referred to in question 3, what amounts in respect of the sale of sales gas included by the applicant as assessable petroleum receipts under the … Act during the second period as referred to in paragraph 21 of the applicant’s [contentions] were not assessable petroleum receipts under s 24(1) of the … Act?
Answer:In light of the answer to question 3, not applicable.
Question 5.If any quantity of sales gas referred to in question 3 became an excluded commodity as referred to in question 3, does the fact that no regulations under s 24(1)(e) of the … Act were made during the second period have the consequence that no amount in respect of that quantity of sales gas is to be included in the applicant's assessable petroleum receipts under the … Act in respect of the second period?
Answer:In light of the answer to question 3, not applicable.
In reaching these conclusions, the primary judge proceeded on the basis that the relevant petroleum project is comprised by the joint venture in respect of Bass Strait recovery and production. So far as sales gas for the first period (relevant to Questions 1 and 2) his Honour concluded that the sales gas product was not produced until the point of sale at Longford. His Honour’s conclusions were summarised at Reasons [246]-[250]:
246The Bass Strait production licences give rise to a single petroleum project for the purposes of the PRRTA Act. That petroleum project comprises all of the offshore platforms and all of the onshore facilities and operations involved in the recovery of petroleum and the production of products from that petroleum which are marketable petroleum commodities as defined.
247As part of the petroleum project, during the first period, Esso and BHPBP recovered petroleum and in a series of integrated operations that were carried out on the various platforms and at Longford produced a product from the petroleum for sale, which it described as sales gas or natural gas. The product so described was sales gas as defined and therefore a marketable petroleum commodity. It was a product produced from petroleum recovered from the production licence areas where the product was a mixture that included methane which comprised more than 50% by weight of the mixture.
248The product was not one to which the exclusion in the definition of marketable petroleum commodity applied because it was not a product produced from another product of a kind referred to in paragraphs (a) to (f) (inclusive).
249The sales gas product was sold. By that act of sale the sales gas became an excluded commodity. Accordingly, the consideration receivable less expenses payable by Esso in relation to the sale of the gas constituted assessable petroleum receipts under s 24(b) during the first period. Section 24(c) of the PRRTA Act was not applicable.
250In the present case, the sales gas product was produced by Esso when the petroleum recovered from the various wellheads on the offshore platforms completed the final processing at Longford. Prior to that point the product was not produced. It was in the course of being produced. The mixture of hydrocarbons on the offshore platforms, in the offshore and onshore pipelines and within the gas plant was committed to and being subjected to a continuous process of separation, filtration and commingling carried out for the purposes of creating an end marketable product. The sales gas obtained at the end of the process at Longford was one of the products that Esso produced from the petroleum it had recovered.
In relation to the issue as to sales gas in the first period, the primary judge said at Reasons [252]-[254]:
252In order to succeed Esso must establish that the hydrocarbon mixtures at the various points on the platforms relied upon comprised more than 50% methane by weight (the ‘50% methane by weight criterion’) from time to time across the first period at the various points alleged by it.
253In its evidence, Esso identified the points and monthly periods during the first period at which it contended the 50% methane by weight criterion was satisfied, on an average monthly basis. There were periods of time in which the hydrocarbon streams at some of those points on some of the platforms did not meet the 50% methane by weight criterion. This has been accepted by Esso.
254According to data from a system called the Mass Balance System (‘MBS’), the hydrocarbon streams were more than 50% methane by weight on the main gas platforms (Marlin, Barracouta and Snapper), save for the Whiting gas stream upon entering Snapper, and West Tuna. However, the hydrocarbon streams were not more than 50% methane by weight at all times at Flounder and Tuna. Graphs illustrating the points and times at which Mr Heath in evidence contended that the 50% methane by weight criterion was satisfied for the various taxing points on the platform are contained in various exhibits the detail of which I need not repeat for the purposes of these reasons. In some cases, the methane composition fluctuated between just below and just above 50%.
His Honour held at [272] that “if s 24(c) applied [he] would have concluded that there was an ‘excluded commodity’” at points on the wellheads of the three main gas platforms. He declined, however, to reach the same conclusion in relation to the other platforms. His Honour said at Reasons [272]:
If s 24(c) applied I would have concluded that there was an “excluded commodity” within the meaning of the PRRTA Act at each of the wellhead taxing points on the 3 main gas platforms by reason of the facts that:
(a)the gas met the physical properties required to bring it within the term ‘sales gas’, and was accordingly one of the ‘following products’ produced (ie derived) from petroleum contemplated by the definition ‘marketable petroleum commodity’;
(b)upon the sales gas passing through the wing valve, the choke valve and into the production facilities (with consequential changes in pressure), the gas underwent ‘further processing’ or was ‘treated’ as contemplated by paragraph (b) of the definition of ‘excluded commodity’ such that the point immediately before the sales gas became an excluded commodity is at the exit of the wing valve (or at the exit of the choke valve);
(c)alternatively to (b), the passage of the gas through to the choke valve, on the other side of the firewall isolating the wellheads and which formed part of the production facilities, and then onwards into the further processing infrastructure (the production headers) lead to the gas having been moved away from the place of production (i.e. the wellhead) to a place other than an adjacent storage facility, as contemplated by paragraph (c) of the definition of ‘excluded commodity’.
In relation to the issue concerning sales gas in the second period (Questions 3, 4 and 5), the primary judge rejected the co-venturers’ contentions that the sales gas sold to customers at the exit of the Longford Plant was not a marketable petroleum commodity because it was a product of another petroleum commodity, namely sales gas, and that it was produced at one of 45 alternative points within each of the three gas plants that form part of the Longford Plant. His Honour said at Reasons [318]:
Esso contended that during the second period the whole, or almost the whole, of the sales gas sold to its customers at the exit of the Longford Plant was not a marketable petroleum commodity. According to Esso, the whole, or almost the whole, of the sales gas that was sold was not a marketable petroleum commodity because it was a product that was produced from another marketable petroleum commodity, namely sales gas, which is said to have been produced before a number of alternative points, 45 in total, within each of the three gas plants that form part of the Longford Plant. Esso further submitted that a relevant act occurred at one or other of those points by which the marketable petroleum commodity became an excluded commodity. I reject Esso’s contentions for the reasons given in relation to the first period. Question 3 would be answered ‘None’. Questions 4 and 5 are not applicable.
His Honour went on to make alternative findings based on the assumption that he was in error in his understanding of the operation of the Act. His Honour reviewed the evidence in relation to various alternative taxing points and concluded at Reasons [385]:
I accept that this is a position where satisfaction of the criterion that the stream be gaseous at STP depends on the presence or absence of minute quantities of C11-C14 that are immeasurably small. However, I accept the evidence of Messrs Troupis and Marks as referred to previously, and the evidence given by Mr Henzell, as referred to above, which indicates that I should rely upon the inference sought to be drawn that heavier hydrocarbons were not present from the taxing point 3, which is the separation immediately before the mol sieves. In theses [sic] circumstances, I can be satisfied, that at taxing point 3 and beyond the required gaseous state has been proved as contended for by Esso.
The findings and conclusions of the primary judge: LPG
The primary judge answered Questions 6 and 7 as follows:
Question 6.For what period or periods within each of the tax years during the whole period and in what quantities in respect of each tax year did any marketable petroleum commodity, in the form of liquefied petroleum gas within the meaning of the PRRTA Act and produced from petroleum recovered from the area or areas to which paragraph (a) of s 24 or s 24(1) of the PRRTA Act applies, become an excluded commodity (otherwise than by virtue of being sold or treated or processed or moved for re-injection or destruction or for use in carrying on or providing operations facilities or other things of a kind referred to in ss 37, 38 or 39 in relation to the petroleum project) –
(a)for the purposes of s 24(c) of the PRRTA Act during the first period; and
(b)for the purposes of s 24(1)(c) during the second period, at the exit of the Longford Plant?
Answer:None.
The LPG products produced upon completion of the processing at LIP became an excluded commodity by virtue of being sold at the exit of LIP. Accordingly, the assessable petroleum receipts derived by Esso in respect of LPG were the sales consideration receivable, less expenses payable, in relation to the sale of commercial propane and commercial butane pursuant to s 24(b) of the PRRTA Act (for the first period) and s 24(1)(b) (for the second period).
Question 7.If any quantity of sales gas referred to in questions 1 and/or 3 became an excluded commodity as referred to in questions 1 and/or 3, and/or if any quantity of liquefied petroleum gas referred to in question 6 became an excluded commodity, as referred to in question 6, what amounts in respect of the sale of liquefied petroleum gas included by the applicant as assessable petroleum receipts under the PRRTA Act during the whole period as referred to in paragraph 24 and paragraph 26(a) of the applicant’s [contentions] were not assessable petroleum receipts –
(a)under s 24(b) of the PRRTA Act for the first period;
(b)under s 24(1)(b) of the PRRTA Act for the second period?
Answer:In light of the answer to question 6, not applicable.
As to LPG (Questions 6 and 7), the primary judge held that Esso produces commercial propane and commercial butane at the completion of the integrated process of separation and filtration at LIP. In this regard, the primary judge said at Reasons [404]:
404I make the following findings about the liquefied petroleum gas products and the process of their production:
(a)the liquefied petroleum gas products, together with ethane, were three of the five products which Esso recovered from the petroleum for sale;
(b)they were produced as part of the one integrated process that was applied to the whole of the recovered petroleum, which in essence involved separating the petroleum into its constituent components; and
(c)the hydrocarbon stream at the exit of Longford described as “raw LPG” which was subject and dedicated to the ongoing process of producing the products at the exit of LIP and, at the exit of Longford, was not in a marketable state.
His Honour’s findings in this regard are supported by reference to Esso’s Manual. His Honour said at Reasons [405]:
405 Esso’s Manual sets out the following description:
The petroleum produced from the Bass Strait project yields five commercial products after it has been recovered at the offshore platforms and processed onshore.
Commercial propane and commercial butane are collectively referred to as LPG, liquefied petroleum gas. Raw LPG is a term used to identify the mixture of ethane, propane and butane that is transported by pipeline from the Longford plant to the Long Island Point plant.
The typical unprocessed gaseous petroleum stream arriving at Longford consisted of components which were further processed into saleable products.
Long Island Point … receives raw LPG (ethane, propane and butane) from Longford via a pipeline dedicated for that purpose. LIP has a fractionation plant which splits the raw LPG into its components, namely, ethane, propane and butane. The fractionation plant would normally be part of the gas processing plant, but for economic reasons, the final separation is made at the shipping point at LIP.
Generally speaking, the objectives of processing the raw natural gas is to recover the natural gas liquids and remove the impurities and to produce sales gas. The sales gas must burn well, not burn too hot. This is achieved by producing a sales gas for customers which meets the technical specifications stipulated in the sales agreement. The predominant component of sales gas is methane. The other components of the raw natural gas are separated and sold as propane, butane, ethane, and stabilised crude.
The raw LPG [from the CSP at Longford] together with raw LPG from the gas plants [at Longford] is piped to Long Island Point for separation into its constituent commercial products.
The raw LPG form Longford is processed at Long Island Point (“LIP”) in three parallel processing plants to separate the raw LPG components and produce three products: commercial ethane, commercial propane and commercial butane.
(Emphasis added).His Honour concluded at Reasons [408] – [409] and [413] – [415]:
408The liquefied petroleum gas products produced upon completion of the processing at LIP constituted LPG and therefore a marketable petroleum commodity as defined in s 2 of the PRRTA Act. Prior to that, there was no LPG product. The liquefied petroleum gas products were not products to which the exclusion in the definition of marketable petroleum commodity applied because none of them was a product produced from another product of a kind referred to in paragraphs (a) to (f) (inclusive).
409The liquefied petroleum gas products produced upon completion of the processing at LIP became an excluded commodity by virtue of being sold at the exit of LIP. Accordingly, the assessable petroleum receipts derived by Esso in respect of LPG were the sales consideration receivable, less expenses payable, in relation to the sale of commercial propane and commercial butane pursuant to s 24(b) of the PRRTA Act (for the first period) and s 24(1)(b) (for the second period).
…
413On the way I have interpreted the PRRTA Act and upon the findings I have made, nothing occurred at or before the exit of Longford that created from a process of production an end product in the form of LPG. The “raw LPG” at that point was and remained committed and dedicated to a process of production designed to create particular products by subjecting the mixture of hydrocarbons to separation, filtration and commingling.
414Further, the “raw LPG” which left Longford was not a marketable product. It was committed and dedicated to the process of production which commenced on the platforms, continued at Longford and was to be completed at LIP. There were no sales of LPG at the exit of Longford and at that point the “raw LPG” did not meet Esso’s specifications for the commercial propane and commercial butane sold by it. This is not to say that meeting these specifications is necessarily required for a product to be marketable. The fact is that in the relevant tax years the product was not sold or marketed when it left Longford.
415Esso contended that the processing involving the “raw LPG” is comparable to that concerning stabilised crude oil and hence it would be unremarkable for the “raw LPG” to be taxed at the exit to Longford. However, the stabilised crude oil that exits Longford is the final marketable product and is sellable as such. It is moved to LIP for sale as that is the nearest deepwater port. The “raw LPG” that exits Longford is still only in an intermediate and unmarketable state and will undergo further processing at LIP to produce the three marketable products commercial ethane, commercial propane and commercial butane. Further, any later refining of the crude oil in an oil refinery so as to produce (via both separation and chemical reaction) a large variety of oil products is not comparable to the processing that the “raw LPG” undergoes at LIP. The latter processing is merely the last stage in the ongoing separation and filtration that the raw petroleum undergoes to produce the marketable products.
…
His Honour went on to make further findings of fact lest his primary conclusion be wrong. His Honour said, referring to the evidence of Mr Aron at Reasons [421] – [423]:
421 Mr Aron qualified his conclusion by reference to the statement that:
It cannot be discerned from evidence presently on the record as to whether or not there were short-term within-month instances (e.g. operational upsets) when the propane and butane content of the stream flowing through the LPG Taxing Point fell below 50 wt.%, and so I have not been able to conclude my investigations in that regard.
(Emphasis added)422I agree with Esso that such qualification does not result in the conclusion that the statutory requirement has not been met if Esso’s contentions were otherwise accepted for the following reasons:
(a)First, it is not disputed that the average composition exceeded 50% propane and butane by weight by a very substantial margin. Given this, the Court can conclude on the balance of probabilities that the requirement was met in the same way it did in relation to the main gas platforms and the 50% methane by weight criterion.
(b)Secondly, there is no factual evidence of any short term operational upsets having occurred save for the Longford fire in 1998 which resulted in production of LPG ceasing.
(c)Thirdly, Mr Heath responded to Mr Aron’s speculation about possible upsets and within-month incidents and referred to the following factors:
(i)the fact that the ninety or so laboratory tests of LPG samples were, in his view, reliable – the samples were consistent with the conclusions drawn from the MBS and in addition the samples were taken from the debutanisers, which are upstream from the surge tanks. In evidence that was again not challenged in cross-examination, Mr Heath explained that the surge tanks had an effect of “damping out” any possible fluctuations in production;
(ii)the fact that Mr Heath was unaware of any operational upsets as contemplated by Mr Aron which would have been sufficient to result in the stream being less than 50% by weight propane and butane. His evidence was that any operational upset necessary to result in the stream being less than 50% propane and butane would be of such a significant magnitude that the production of LPG would cease. The only such incident in the relevant period was the Longford fire in 1998 which resulted in cessation of production of LPG for several months.
423If Esso’s primary contention was accepted, then when the LPG left the bullets and entered the dedicated LPG pipeline for transport to Long Island Point it would have moved away from the place of its production (either the debutanisers in the Longford Plant or the plant itself) other than to a storage site adjacent to that place, or alternatively would have moved away from a storage site adjacent to the place of production (the “storage site” being the LPG bullets in which LPG is temporarily stored before transport).
The findings and conclusions of the primary judge: ethane and stabilised crude oil
The primary judge answered Questions 8 and 9 as follows:
Question 8.If any quantity of sales gas referred to in questions 1 and/or 3 became an excluded commodity as referred to in questions 1 and/or 3, and/or if any quantity of liquefied petroleum gas referred to in question 6 became an excluded commodity as referred to in question 6, what amounts in respect of ethane included by the applicant its assessable petroleum receipts during the whole period as referred to in paragraph 24 and paragraph 26(a) of the applicant’s [contentions] were not assessable petroleum receipts under s 24 of the … Act?
Answer:Does not arise. No quantity of gas became an excluded commodity as referred to in Questions 1 and 3, and no quantity of LPG became an excluded commodity as referred to in Question 6.
Question 9.If any quantity of sales gas referred to in questions 1 and/or 3 became an excluded commodity as referred to in questions 1 and/or 3, what amounts in respect of stabilised crude oil included by the applicant in its assessable petroleum receipts during the whole period as referred to in paragraph 24 of the applicant’s [contentions] were not assessable petroleum receipts under s 24 of the … Act?
Answer:Does not arise, for the same reasons set out above in relation to question 8.
As to ethane and stabilised crude oil (Questions 8 and 9), the primary judge concluded at Reasons [426] – [427]:
426Ethane, as a marketable petroleum commodity, was produced at the LIP from the “raw LPG” stream sent via pipeline from Longford to LIP. From LIP, the ethane was sent via pipeline owned and operated by the joint venturers to Altona where it was sold to Esso’s customers. Title to the ethane transferred close to the customers’ premises at the end of the pipeline. Ethane became an “excluded commodity” by virtue of being moved away from the place of its production at LIP to Altona. The assessable receipts derived by Esso in respect of ethane were thus the market value of the ethane immediately before it was moved away from LIP pursuant to s 24(c) (for the first period) and s 24(1)(c) (for the second period).
427Stabilised crude oil was produced at Longford and piped to a storage facility (the ‘tank farm’) at LIP, from where it was sold. During the relevant period, Esso sold stabilised crude oil onto ocean going ships at the LIP jetty, for transport to Australian and international refineries, and via a pipeline (known as the WAG pipeline) to refineries in Altona and Geelong. The pipeline is not owned or operated by the joint venturers. Title to the stabilised crude oil passes at the point it is loaded onto the ships or at the exit of LIP into the WAG pipeline. Stabilised crude oil therefore became an ‘excluded commodity’ by virtue of being moved away from the place of its production to the tank farm at LIP. The assessable receipts derived by Esso in respect of stabilised crude oil are thus the market value of that product immediately before it was moved away from Longford pursuant to s 24(c) (for the first period) and s 24(1)(c) (for the second period).
The construction of the Act: the parties’ arguments
We turn now to the arguments advanced on the appeal by the parties in relation to the proper approach to the construction of the Act. The co-venturers argue that the primary judge erred in concluding that only at Longford and not prior to that point, was any product of the kinds listed in the definition of marketable petroleum commodity produced. Only at Longford was there a marketable petroleum commodity which, by being sold, became an “excluded commodity”. Accordingly, s 24(b) applied. The co-venturers contend that s 24(c) applies, particularly in light of the trial judge’s findings at [272], [385] and [423] that, were it not for his view that marketability informs the imposition of liability, he would have accepted that s 24(c) applied in respect of sales gas at the well heads in relation to the first period, at the exit from the slug catchers in the second period, and in respect of LPG at a point prior to sale at Longford.
The co-venturers argue that the primary judge erred in allowing the concept of “marketability” to deflect him from a literal application of the definitions of “marketable petroleum commodity” and “excluded commodity” for the purposes of s 24 of the Act. The co-venturers argue that, on a literal approach, a “marketable petroleum commodity” may emerge within the production process and become “an excluded commodity” by reason of being further processed or treated or moved before it is sold. They argue that because of these terms having been defined specifically and exhaustively in s 2 of the Act, there is “little or no room for elaboration or development”: see Visa International Service Association v Reserve Bank of Australia (2003) 131 FCR 300 at 369.
If the Commissioner were correct in his contentions that the MAP received on the expiration of Part A of the SECV Agreement is either “for” or, alternatively, “in relation to”, the sale of a marketable petroleum commodity produced from petroleum recovered from the production licence areas recovered from the Bass Strait project in the 1996 calendar year, then there would be an apparent inconsistency in the treatment of those earlier Shortfall Payments. As a result, Esso contended, in the alternative to its position in respect of the year of tax ended 30 June 1997, that these amounts were assessable petroleum receipts in the year in which Esso received the Shortfall Payments, and not in the years in which the SECV took its entitlement to Make Up Gas.
The learned primary judge
Question 11
At [499] of his Reasons, the learned primary judge concluded that the 1997 Shortfall Payment of $11,753,357.87 “was consideration for and only for the gas sold and delivered in the year ended 30 June 1997”.
His Honour summarised his earlier reasoning leading to this conclusion at [500] in the following terms:
500As I have indicated, Esso submitted that the 1997 payment was a payment made pursuant to an obligation which arose from the SECV’s failure to take gas during the 1996 contract year and that it was, accordingly, directly related to gas not taken during that year. I accept the Commissioner’s contention that this is an incorrect characterisation of the contractual provisions set out above. The SECV’s obligation to make a Shortfall Payment arose by operation of clauses 7.3 and 19.1 of the SECV Agreement. It arose as a result of the fact that the amounts “otherwise paid” for gas supplied during a contract year were less than the MAP prescribed by clause 7.1. The obligation to make a Shortfall Payment arose not from the failure to take gas, as Esso would have it, but from the failure to make the MAP for the gas taken in a particular contract year.
Earlier, his Honour had observed at [496] and [497]:
496I do not consider that the obligation to pay arises from the failure to take gas as submitted by Esso. There was an obligation to pay at the outset, and it was the consideration that moved the supply of gas actually supplied. This is the effect of clauses 19.1 and 7.3 of the SECV Agreement.
497The construction of clause 19.1 allows for no other conclusion. This applies whether the gas is still in the ground or not. The consideration for the gas taken in a particular year is a certain sum, no matter how much gas is in fact taken. In fact, if no gas is actually taken, the minimum amount would still need to be paid. This conclusion, whilst Esso contends otherwise, arises from the construction and operation of clause 19.1.
And at [498] his Honour made the point that the entitlement to Make Up Gas arose not as a result of making a Shortfall Payment pursuant to cl 7.3, but as a result of the SECV failing to take the MAQ. In a year in which the SECV took its MAQ but nevertheless was required to make a Shortfall Payment, it did not receive any entitlement to Make Up Gas. In his Honour’s words (Reasons at [498]):
498This occurred in the 1994 and 1995 calendar years. In such circumstances, the 1994 and 1995 Shortfall Payments can only have been consideration for the gas sold and delivered in the calendar years ended 31 December 1994 and 1995. The 1994 and 1995 Shortfall Payments were therefore treated by Esso, correctly, as assessable petroleum receipts for the tax years ended 30 June 1995 and 30 June 1996 and Esso does not seek to excise those amounts from its assessable petroleum receipts for those years.
Finally, his Honour made the point at [499] that by reason of the operation of cl 8.3 of the SECV Agreement and the expiry of Part A on 31 December 1996, the 1997 payment did not secure for Gen Vic any entitlement to Make Up Gas.
Question 12
For the reasons given in relation to the 1997 payments, the Commissioner agreed that the 1991 and 1993 Shortfall Payments constituted assessable petroleum receipts in the tax years in which they were receivable, namely, the tax years ended 30 June 1992 and 1994.
It followed, according to his Honour, that the amounts incorrectly included by Esso in its assessable petroleum receipts in respect of Make Up Gas in the tax years ended 30 June 1993, 1995 and 1996 should be excised from its returns for those years and added back to its assessable petroleum receipts in the tax years ended 30 June 1992 and 1994.
However, his Honour came to a different view with respect to the 1987 and 1988 Shortfall Payments made before the date (1 July 1990) from which the Act was to apply to the Bass Strait project.
Esso contended that, consistently with the 1991 and 1993 Shortfall Payments, the 1987 and 1988 Shortfall Payments should be treated as consideration for, or in relation to, the gas supplied in those years. His Honour agreed at [509] that if s 33(4) of the 1991 Amendment Act did not exist, that would be the correct treatment.
An aspect of the extrinsic materials leading to the enactment of the 1991 Amendment Act is relevant to the take or pay issue. On 4 March 1991, the OPC provided to the ATO a draft of the Bill that became the 1991 Amendment Act. The draft Bill contained a transitional clause relating to the application of the PRRT regime to the Bass Strait project. A note under the draft transitional clause raised the following query:
Could receipts be derived before 1 July 1990 in respect of Bass Strait petroleum recovered after that day? If so, may need a provision taking the receipts to be derived in the financial year in which the petroleum is recovered.
In a letter dated 12 March 1991 to the OPC, the Department of Primary Industries and Energy responded to the OPC’s query. It stated:
Discussions with Victorian Government officials confirm that there are instances where Bass Strait petroleum has been paid for but not recovered as of 1 July 1990. The case so far identified relates to commercial gas (natural gas) purchased under a take-or-pay contract between the Bass Strait producers and the State Electricity Commission of Victoria (SECV), under which the SECV has paid for gas that it has not taken (the gas has not been recovered). As the draft Bill now stands this would place the gas paid for but not taken outside the reach of both royalty and RRT.
We are taking up with Victoria whether there might be other instances where Bass Strait petroleum has been paid for but not recovered prior to 1 July 1990.
Section 33(4) of the 1991 Amendment Act provided:
For the purposes of the application of the [Act] as amended by this Act to the Bass Strait project, any consideration received by a person before 1 July 1990 in respect of petroleum recovered on or after that day is taken to be received in the financial year in which the petroleum is recovered.
His Honour’s relevant process of reasoning is in [507] of his Reasons:
507The making of the 1987 and 1988 Shortfall Payments entitled the SECV to take Make Up Gas in the succeeding four years subject to the conditions of clause 8.1 of the SECV Agreement. The SECV exercised that entitlement in the tax years ended 30 June 1991 and 1993 by taking sales gas produced from petroleum which, it is to be inferred, was recovered after 1 July 1990 within the meaning of s 33(4) of the 1991 Amendment Act. The 1987 and 1988 Shortfall Payments therefore constituted consideration received by Esso before 1 July 1990 “in respect of petroleum recovered” on or after 1 July 1990 to the extent that Make Up Gas was taken on or after that day. Accordingly, s 33(4) of the 1991 Amendment Act requires that those payments be taken to have been received in the financial year in which the petroleum (from which the sales gas supplied to the buyer was produced) was recovered, namely 1991 and 1993.
Consideration on Appeal
Question 11
In relation to the principal take or pay issue raised by question 11 in respect of the 1997 Shortfall Payment, the co-venturers’ contentions were no different from those rejected by his Honour below. They should again be rejected for the same reasons.
In our view, it is not possible to construe the relevant provisions of the SECV Agreement, in the context of that agreement, in a way which leads to a characterisation of a Shortfall Payment as being consideration for anything other than the gas supplied in the relevant year. The terms of cll 7.3 and 19.1 of the SECV Agreement make it clear that the MAP for a year is just that, a minimum annual payment for the gas supplied in that year. The Shortfall Payment obligation in cl 7.3 merely complements what is otherwise the consideration for the gas taken in a particular year; a sum certain (the MAP) no matter how much gas is in fact taken.
That conclusion is fortified when it is understood that the entitlement to Make Up Gas arises not out of making a Shortfall Payment pursuant to cl 7.3, but as a result of the terms of cl 8.1, namely, the SECV failing to take the MAQ for that year. So much is exemplified in a year, as occurred in the 1994 and 1995 calendar years in which the SECV took its MAQ but nevertheless was required to make a Shortfall Payment, it did not receive any entitlement to Make Up Gas. In such circumstances, the 1994 and 1995 Shortfall Payments can only have been consideration for the gas sold and delivered in the calendar years ended 31 December 1994 and 1995.
The description in argument of the relevant provisions of the SECV Agreement as “take or pay” provisions is apt to distract attention from the task of determining whether the Shortfall Payment is “consideration receivable … in relation to the sale”. If the Shortfall Payment is “consideration receivable … in relation to the sale”, that is because it is, in substance, part of the payment for gas supplied by the co-venturers to SECV. The resolution of this issue is not assisted by the invocation of the “take or pay” label, or by reference to authorities concerned with the interpretation of different legal language.
The co-venturers, as they did before the primary judge, placed reliance on a decision of the United States Court of Appeal for the Fifth Circuit: Diamond Shamrock Explorations Co v Hodel 853 F.2d 1159 (5th Cir. 1988) referred to with approval by Lander J in Alliance Petroleum Australia NL v Australian Gas Light Co (unreported, Supreme Court of South Australia, Lander J, 23 December 1994) who said (at 12), in relation to a take or pay clause that as “explained in the Shamrock Case, the payment was not for the gas taken, but for the failing to take the gas”. It may be said immediately that those authorities are of no assistance being, as they are, concerned with clauses having different terms and, more importantly, different contractual contexts. The relevant terms and contractual context of the SECV Agreement are not to be construed by reference to conclusions drawn in other cases from decisions about different contracts.
In our view, the learned primary judge correctly answered question 11; there is no error to be found in his Honour’s process of reasoning leading to that conclusion.
Question 12
On the other hand, there are at least two difficulties with his Honour’s approach and conclusion on the issue raised by this question, insofar as it relates to the 1987 and 1988 Shortfall Payments. The first difficulty has its source in the proper construction of the relevant terms of the SECV Agreement; the second, in the terms of s 33(4) of the 1991 Amendment Act. These difficulties cannot be obviated by reference to the extrinsic materials. The language of s 33(4) is not so obscure or ambiguous that the extrinsic materials can be invoked so as to enable s 33(4) to yield a meaning which accords with the Commissioner’s contention. See s 15AB(1) of the Acts Interpretation Act 1901 (Cth).
First, as the learned primary judge found at [498] of his Reasons, the entitlement to Make Up Gas arose, not as a result of making a Shortfall Payment pursuant to cl 7.3 of the SECV Agreement, but as a result of the terms of cl 8.1 and the SECV’s failing to take the MAQ for that year. Thus, in a year in which the SECV took its MAQ but nevertheless was required to make a Shortfall Payment, it did not receive any entitlement to Make Up Gas. Under the terms of the SECV Agreement, the Shortfall Payment in any year, could never be consideration for Make Up Gas taken in a subsequent year. It follows that, if the 1987 and 1988 Shortfall Payments could never be consideration received in respect of Make Up Gas taken in a subsequent year, they could never be consideration receivable in respect of petroleum recovered on or after 1 July 1990, as contemplated by s 33(4) of the 1991 Amendment Act.
Second, the 1987 and 1988 Shortfall Payments were not consideration received by the co-venturers before 1 July 1990 in respect of petroleum received on or after that day; they were received by the co-venturers before 1 July 1990 in respect of the sale (not recovery) of gas (not petroleum) in the relevant year. The deeming worked by s 33(4) of the 1991 Amendment Act is simply not apt in its terms to bring the 1987 and 1988 Shortfall Payments into assessable petroleum receipts under either ss 24(a) or (b) of the Act in a tax year commencing on or after 1 July 1990.
As we have mentioned, the extrinsic materials referred to at [157] above do not alter this conclusion. At best for the Commissioner, they may be said to identify the mischief at which s 33(4) was aimed; they cannot modify the language in which the Parliament addressed that mischief. That language is simply not apt to modify the operation of the SECV Agreement, an accurate appreciation of which appears in the answer to Question 11.
For these reasons, we do not agree with his Honour’s answer in para (a) to question 12. In our view, the answers to paras (a) and (b) should be deleted and replaced by the following:
(a)The amounts of $3,550,209, $4,837,022, $1,910,944 and $5,673,019 respectively should be excised from the Applicant’s assessable petroleum receipts in the years ended 30 June 1991, 1993, 1995 and 1996 respectively.
Paragraph (c) should be redenominated para (b).
THIRD ISSUE: MLMDQ/MDQ PAYMENTS ISSUE
The third issue, this time agitated by the Commissioner’s cross-appeal, concerns what is described by the learned primary judge in his Honour’s Reasons as the “MLMDQ issue”. The issue is raised by the last of the 13 questions set down for separate hearing and determination.
Question 13 is as follows:
Were all or part, and if so how much, of the amounts received by the applicant from the Gas and Fuel Corporation of Victoria pursuant to the Further GFC Agreement (as set out in the table contained in paragraph 15 of the [contentions]) assessable receipts for the purposes of the … Act in the tax years in which those payments were received?
His Honour answered question 13:
The following amounts the subject of Question 13 were not assessable receipts of the Applicant for the purposes of the Act:
In this answer, the reference to ‘the Applicant’ is, again, a reference to both Esso and BHPBP.
The Facts
The learned primary judge summarised his findings of fact relevant to the MLMDQ issue at [456] to [471] of his Reasons. Again, they are not in dispute. Again, it is not necessary to repeat them all but some, such as the relevant terms of the Consolidated Natural Gas Sales Agreement (Sales Agreement) made as of 1 January 1975 between Esso and Hematite Petroleum Proprietary Ltd (which subsequently assigned its rights to the entity that is now BHPBP) (together, the sellers) and Gas and Fuel Corporation of Victoria (GFC), whereunder the sellers agreed to sell and deliver natural gas to GFC, are fundamental to the answer to question 13.
The MLMDQ payments arose from a variation of the Sales Agreement.
The Terms of the Sales Agreement
The Sales Agreement provided for a specified volume of natural gas, sourced from dedicated gas fields, to be sold to GFC. Over the term of the Sales Agreement, the sellers agreed to deliver 50 billion therms of natural gas to GFC.
Under cl 5.1 of Article V, the sellers were only required to deliver the quantity of gas required by GFC each day during the term of the Sales Agreement up to an agreed amount (the MDQ). Under cl 4.3(a) of Article IV, GFC was required to inform the sellers of the MDQ to be set for the contract year five years in advance (the MDQ for the years 1975-1979 was pre-determined and set out in Table I to the Sales Agreement). Subject to a minimum requirement, the MDQ nominated by GFC had to be equal to or less than the sellers’ maximum daily supply capacity (described as the maximum limit to MDQ, or MLMDQ) determined in accordance with the Sales Agreement.
Table I to the Sales Agreement set out the MLMDQ to apply from 1980 to 1989. Under cl 4.3(b), for the contract years from 1990 the sellers were required to nominate their MLMDQ 10 years in advance. When nominating the MLMDQ 10 years in advance, the sellers were required to use their best endeavours to satisfy GFC’s Maximum Daily Requirement (MDR). Under cl 4.3(c), GFC was required to provide the sellers with its bona fide forecast of MDR 10 years in advance.
Importantly, these provisions dealing with the rate at which gas could be taken during any day did not alter the total volume of gas to be acquired by GFC under the Sales Agreement. Nor under the Sales Agreement did GFC pay any specified consideration to Esso under the mechanism by which the parties established the MDQ.
The sellers’ MLMDQ nominations under the Sales Agreement
The sellers made the following MLMDQ nominations for the contract years from 1990-2000:
By letter dated 7 September 1990, GFC advised the sellers that its forecast requirements were as follows:
In August 1990 the GFC approached the sellers about increasing the MLMDQ levels set under the Sales Agreement so that it could access a higher level of MDQ in 1995-2000 if it was required.
The agreement to increase the MLMDQ levels
The parties reached an agreement in mid-1991, which is set out in the letter dated 6 June 1991 (referred to as the Heads of Agreement), and the subsequent letter dated 17 December 1991 as modified by the further letter dated 29 June 1992 (collectively, the MLMDQ Agreement).
Although the letter dated 17 December 1991 states that the sellers agreed to revise the MLMDQ advised to GFC over the period from 1991-2000, the MLMDQ was only actually increased in the years from 1995 to 2000:
Importantly, the increased level of MLMDQ did not increase the amount of gas to be sold. It increased the range in which GFC could nominate the maximum quantity of gas to be delivered on a given day.
The terms of the MLMDQ Agreement were incorporated into a new Gas Sales Agreement between the co-venturers and Gascor dated 20 November 1996 (the 1996 Agreement), which superseded the Sales Agreement.
The increased MLMDQ levels
GFC agreed to make monthly payments for the period from July 1991 through to December 2000, which consisted of a fixed and a variable component (described in cl 1.3 and cl 1.4 of the document enclosed with the letter of 17 December 1991). The MLMDQ payments invoiced and returned as assessable receipts by Esso were:
The difference between the invoiced amount and the amounts that Esso returned as assessable petroleum receipts was due to the accounting treatment of these amounts.
The learned primary judge
The learned primary judge concluded that the MLMDQ payments were not consideration for the sale of gas; they did not move the sale of the gas: Woodside Energy Ltd v Federal Commissioner of Taxation (2009) 174 FCR 91 at [62], [63] (Woodside Energy). No additional gas was recovered, produced or sold for the MLMDQ payments as the variations made by the MLMDQ Agreement did not in any way change the total volume of gas to be sold.
His Honour’s conclusion was summed up at [482] to [486] of his Reasons:
482In my view, in the absence of any additional sale of gas, the MLMDQ payments did not have the relevant and direct nexus with the sales of gas originally agreed in 1975 under the Sales Agreement.
483The PRRT is relevantly imposed on the sale of gas. The focus is upon that sale and the consideration for the sale. The Commissioner submits that the payments made pursuant to the variations to the Sales Agreement do not stand alone, and make no sense without the Sales Agreement. So much is true. However, the question is to determine, within that context, what the consideration was for the sale of the gas.
484In my view, it is important to characterise the transactions, and focus upon the operation of the MLMDQ payments as set out in the contractual documents.
485I accept the characterisation submitted by Esso. The important point is that the sellers were willing to transfer to the buyer the gas for the consideration agreed to in the Sales Agreement excluding the MLMDQ payments. The MLMDQ payments did not move the transfer of the gas, rather they related to a specific variation that did not affect the quantity or quality of the gas sold.
486On this basis I do not accept the position taken by the Commissioner in relation to the MLMDQ payments.
Consideration on Appeal
We agree with his Honour’s conclusion for the reasons his Honour gives.
It is apparent that the MLMDQ payments were to be made, not as consideration for the sale of gas but as consideration for the sellers agreeing to revise the MLMDQ previously advised to GFC over the period 1991-2000. So much follows from the relevant clauses in the heads of Agreement that accompanied the letter of 17 December 1991 referred to in [185] above. Under the heading: Revision of MLMDQ Profile for Period 1991-2000, it is provided:
1.0Sellers agree to revise the MLMDQ advised to Buyer over the period 1991-2000 in exchange for the present value equivalent of 10 annual payments of $25 million (90) escalated at 100% CPI from 1990. The annual payment schedule is based on a 70/30 fixed/variable formulae and is to commence from 1/7/91 in accordance with cl. 1.3 – 1.6.
1.1In accordance with clause 1.0 Buyer may revise its current delivery nominations to the levels indicated below:
TABLE 1
YEAR MLMDQ (M Therms) 1991 8.2 1992 8.3 1993 8.3 1994 8.3 1995 8.7 1996 8.4 1997 9.7 1998 10.0 1999 10.3 2000 10.5
It is clear that this has nothing to do with the price at which gas is sold nor does it in any way vary the terms of Article XII, in particular clause 12.1, of the Sales Agreement.
The Commissioner argues that the words of connection “in relation to”, used in s 24(b) of the Act, are broader in scope than, for example, “consideration for the sale”. It is said to be a connection of the latter kind which is reflected by his Honour’s reasoning. Consideration “in relation to” the sale is sufficiently broad to include payments which are the price paid by the buyer for more favourable terms in relation to the timing of delivery of gas.
In Woodside Energy, this Court was concerned with whether losses incurred by the taxpayer in connection with hedging transactions it had entered into in relation to anticipated sales of crude oil were “expenses payable … in relation to the sale” of the oil under s 24(b) of the Act. That case is a far cry from the present. The hedging transactions in that case were made with parties other than the buyers of the oil. Nevertheless, the observations of the Full Court, following those of Dixon J in Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) (1948) 77 CLR 143 at 152, are pertinent. The Full Court observed that “consideration” in s 24(b) of the Act “would not encompass a passing of money or value which does not move the relevant sale” (Woodside Energy at [63]).
It may be accepted that the connection between the MLMDQ payments and the sale of gas is less remote than the connection between the hedging contracts and the sales considered in Woodside Energy. Nevertheless, the MLMDQ payment was quite evidently not a quid pro for the delivery of gas. Rather, it was a payment for an agreement to an enhancement of the buyer’s rights as to the timing of the delivery of the same quantity of gas.
In this regard it is to be noted that s 24(b) of the Act was concerned (as is s 24(1)(b) of the Act after the 2001 amendment), with the consideration receivable in relation to the sale, not the agreement for sale. The ordinary meaning of the word “sale” is a transfer of property in return for a consideration in money or money’s worth: Simpson v Connelly [1953] 1 WLR 911; Robshaw Brothers Ltd v Mayer [1957] 1 Ch 125 at 131-132; Sun World International Inc v Registrar, Plant Breeders’ Rights (1998) 87 FCR 405 at 406, 412.
In some legal contexts, it may be unduly pedantic to distinguish an agreement for sale from a sale. But in the context of s 24 of the Act, the term “consideration” is concerned with the money or money’s worth “receivable … in relation to the sale” rather than the consideration moving from each party to the agreement apt to make the agreement for sale binding on the other parties. The focus of s 24 is explicitly upon the consideration receivable by the seller in order to entitle the buyer to a transfer of the agreed quantity of the commodity.
Where a long term supply contract obliges the seller to supply a quantity of gas and the buyer to pay an amount for that quantity of gas, the buyer would usually have no entitlement to gas beyond that paid for; and in such a case, the seller would be entitled to recover damages for breach of contract but the seller would not usually be entitled to recover the price payable for the product. Thus, an entitlement in the seller to recover damages for the buyer’s breach of contract would not ordinarily be described as an entitlement to “the consideration receivable … in relation to the sale” for the reason that “the sale” has, ex hypothesi, not occurred.
Long term supply contracts can be expected to contain provisions which regulate, over the life of the contract, the rights and obligations of the parties in relation to a broad range of commercial risks attendant upon the relationship between the parties. Many such provisions will not be concerned with the price to be paid for the goods to be delivered. A provision which entitles one party to vary the time of completion would not ordinarily be seen as relating to the payment which is necessary to oblige the vendor to complete the transfer of the goods. Reference to the statutory context confirms that this view applies here.
Under the Act, the determination of “assessable petroleum receipts” by reference to “the consideration receivable … by the person in relation to the sale” occurs in the context of a scheme whereby tax is imposed on the profit derived from the commercial exploitation of a natural resource. In this context “the consideration receivable in relation to the sale” is readily seen as payment receivable in return for the successful exploitation of the natural resource. Provisions of an agreement for sale which are not concerned with the quantum of money (or money’s worth) payable to the seller in order for the buyer to become entitled to receive a particular quantity of petroleum or marketable petroleum product do not bear upon the extent of the exploitation of the natural resource or the profits derived from the commercial realisation of its value. The natural resource available for exploitation and profitable realisation has not been relevantly depleted by what has occurred.
Finally, we observe that the fact that the parties may have achieved the same commercial or economic result by varying the sale price of gas for the period 1991 to 2000 rather than providing for the MLMDQ payments to be made in accordance with the relevant provisions of the heads of agreement does not provide any assistance in characterising the MLMDQ payments. As was said in the plurality judgment in the High Court in Federal Commissioner of Taxation v Orica Ltd (1998) 194 CLR 500 at [70]:
[L]ittle or no guidance is offered by considering what other transactions the taxpayer might have made to achieve a commercial result substantially the same as the commercial result said to flow from the making of the Principal Assumption Agreement. No doubt the taxpayer might have taken the amount of $62,309,546 which it paid to MMBW and instead of paying it to MMBW under the Principal Assumption Agreement have invested it in Commonwealth Bonds maturing at or about the same time as its debentures were to mature. If it had done that it would have derived income which it might then have applied in satisfaction of most, if not all, of its liabilities to debenture holders. Similarly, it might have invested the same amount as it paid to MMBW on more speculative investments and it might then have obtained returns greater than the amount necessary to pay the debenture holders Examination of those other transactions does not reveal whether or when the taxpayer derived income as a result of the making of the Principal Assumption Agreement. In particular, the characterisation of the gains or receipts obtained in accordance with hypothetical transactions of the kind described is of little, if any, assistance in characterising the nature of the benefits identified as flowing from the making of the Principal Assumption Agreement.
For these reasons, the Commissioner’s cross-appeal on the MLMDQ issue should be dismissed.
CONCLUSIONS AND ORDERS
After these reasons had been prepared, the Court was informed that the Tax Laws Amendment (2011 Measures No 8) Act 2011 received Royal Assent on 29 November 2011. Schedule 2 of that Act makes amendments to the definition of "marketable petroleum commodity" which appear to be directed to confirming the correctness of the decision of the primary judge on the taxing point issues relating to Questions 1 to 9 inclusive. Whether or not these questions should be determined in accordance with the provisions of the new Act, the outcome could be no different. Accordingly, the co-venturers' appeals in relation to Questions 1 to 9 inclusive should be dismissed.
The co-venturers’ appeals should be dismissed save in relation to Question 12. We would amend Question 12 as follows:
(a)The amounts of $3,550,209, $4,837,022, $1,910,944 and $5,673,019 respectively should be excised from the Applicant’s assessable petroleum receipts in the years ended 30 June 1991, 1993, 1995 and 1996 respectively.
The Commissioner’s cross-appeal in relation to Question 13 should be dismissed.
I certify that the preceding two hundred and eight (208) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Chief Justice Keane and Justices Edmonds and Perram. Associate:
Dated: 6 December 2011
Note: The orders foreshadowed at the conclusion of the judgment were not made at the request of the parties. The Court directed that the parties confer and thereafter by 4:00 pm on 20 December 2011 file minutes of any further orders (including orders as to costs), and in the event of disagreement, file and serve written submissions as to the contentions of the parties
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