Wellhead Royalty

The defined location of the well-head and the methodology for calculation of well-head value are usually included in a royalty schedule specific to each producer.

New petroleum projects landward of the outer limit of the Territorial Sea are subject to either the Petroleum (Submerged Lands) Act 1982 (WA) or Petroleum Act 1967 (WA).  In either case the well-head royalty regime applies with the following elements:

• Royalty return - generally required to be submitted on a monthly basis
• Gross value - value of petroleum recovered, generally the arms length sales plus the change in petroleum inventories
• Royalty rate - 10 per cent or 12.5 per cent (refer royalty rate section) 
• Allowable deductions - post well-head costs
• Deduction limit - 50 per cent of gross value for oil projects and 90 per cent of gross value for gas projects

Gross Value

Gross value is the value of petroleum recovered. It includes the value of arms length sales and the change in stocks of petroleum products.  Opening and closing stocks are valued according to the weighted average unit price of the past month's sales. Transactions denominated in foreign currency are converted to Australian dollars based on Reserve Bank of Australia (RBA) mid-rates as published weekly by the RBA and daily in the Australian Financial Review.

Allowable Deductions

Three types of costs are allowed to be deducted against the gross value to determine well-head value:

• Post well-head operating costs
• Depreciation on commissioned post well-head assets
• Cost of borrowing on commissioned post well-head assets
• Post well-head operating costs

Usually at the beginning of a project expected operating costs are itemised by a prospective producer. Post well-head percentages are then agreed between the State and for each operating cost item.

Depreciation on commissioned post well-head assets

Usually at the beginning of a project a depreciation calculation is negotiated between the State and producer and set out in an agreed schedule. A straight line depreciation calculation normally applies.

Cost of borrowing on commissioned post well-head assets

The well-head value system allows a producer to deduct from the gross value an amount in recognition of the cost of raising funds related to post well-head assets of the project. This amount is calculated from the time each post well-head asset is commissioned.

Not all costs of raising funds are allowed. A gearing allowance is determined at the beginning of the project, usually set at a maximum of 50 per cent of the total cost of post well-head assets. The term or write-down period of the deduction is also determined at the beginning of a project and proxies the length of time it will take for the project owners to repay their borrowed funds.   A standard interest rate is used instead of the actual interest rates paid for funds by individual project owners. The standard rate is usually the 5 year term bond rate as published in the preceding month by the RBA.

Deduction Limits

Deductible costs can vary up to a limit of 50 per cent of the gross value of production for oil projects or 90 per cent of the gross value of production for gas projects for each royalty period. The choice of the deduction limit is determined by the 'predominant' nature of the project, and may change as a project shifts from a predominantly oil to a predominantly gas project. Any undeducted expenditure is carried forward to the next month.

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