Petroleum royalties are levied on petroleum production onshore, within coastal waters and the North West Shelf Project.
Total petroleum royalties collected in 2007-08 amounted to A$1.25 billion.
The rate of royalty is normally set at between 10–12.5% of the wellhead value of petroleum produced.
In addition to State royalties, Commonwealth legislation provides for an excise on all oil and condensate produced from fields of greater than 4.8 GL (30 MMbbl).
The first 4.8 GL (30 MMbbl) is excise exempt.  Currently there are no onshore fields which are large enough to pay these taxes.
Generally, there are three systems used for the collection of petroleum royalties:

• Wellhead Royalty;
• Resource Rent Royalty;
• Petroleum Resource Rent Tax.

Petroleum royalties are administered and collected under State and Commonwealth legislation. Royalties collected for onshore projects are retained by the State government, while offshore projects are shared between the State and Commonwealth in accordance with the relevant legislation.

Barrow Island onshore royalties are also shared between the Commonwealth and the State.

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.

Resource Rent Royalty

The resource rent royalty (RRR) replaced the well-head royalty and excise system that had previously applied.

RRR is a royalty based on a percentage of net cash flow. The key aspects are as follows:

• All allowable expenditure, both current and capital, is written off when incurred.
  However exploration costs incurred more than a year prior to the application of the RRR are not allowable
• Any excess of costs over revenues are carried forward and compounded at a ‘threshold’ rate
• Any excess income over the threshold rate is charged to RRR at the rate of 40 per cent
• RRR is a primary tax before income tax, and is deductible against that tax
• The revenue is shared 75 per cent to the Commonwealth, 25 per cent to the State

The higher Commonwealth share reflects the far larger proportion of Commonwealth entitlements under the prior royalty and excise regime.

By agreement between the Commonwealth and the State, the State maintains full responsibility for the administration of the RRR regime.

Petroleum Resource Rent Tax

PRRT does not apply to the North West Shelf project or to petroleum operations in the Joint Petroleum Development Area between Australia and East Timor.
Royalties do not apply to fields chargeable to PRRT, but PRRT is deductible against income tax.

PRRT is a profit based project tax.
It is applied at a rate of 40 percent to a project’s taxable profit (project income less project expenditure, project exploration expenditure and exploration expenditure transferred in from other related PRRT projects).

Petroleum projects are generally entitled to deduct exploration expenditure transferred from related projects.

Exploration expenditures that are not deducted in the tax year in which they are incurred can be uplifted and carried forward to be used as deductions in subsequent years.

 All project expenditures and payments of PRRT are tax deductible. In the 2007 Budget, the government announced several changes to the petroleum resource rent tax (PRRT) regime.

These changes are:

• the introduction of a functional currency rule similar to the rule for income tax.
  The functional currency rule will allow oil and gas producers to elect to work out their PRRT position in a foreign currency and this will reduce the costs of compliance;
• the introduction of a ‘look-back’ rule for exploration expenditure.
  This change will ensure that all exploration expenditure is deductible for PRRT purposes; and
• the removal of an inconsistency in the ‘external petroleum’ provisions to address the circumstances where two or more petroleum projects are not independent of each other.
  This will ensure that a tolling fee received is treated as a PRRT receipt and the expense incurred to process the product is treated as a PRRT deduction.

Through its key features it provides a fiscal regime that encourages the exploration and production of petroleum, while ensuring an adequate return to the community for the exploitation of these non-renewable resources.
In 2006/2007, PRRT collections were over $1.56 billion, the majority of which came from Bass Strait.

There are five Acts that apply in Western Australia:

• The Offshore Petroleum (Royalty) Act 2006, which covers production from fields originating from the North West Shelf project areas covered by permits WA-1-P and WA-28-P. This is an area of Commonwealth jurisdiction in which a wellhead value royalty system is used.
• The Petroleum (Submerged Lands) Act 1982 which covers fields within a defined coastal waters area, generally being 3 nautical miles seaward from the baseline, as well as certain ‘subsisting’ permit areas located within State inland waters. The State administers a wellhead value royalty system.
• The Petroleum Resources Rent Tax Assessment Act 1987 applies to all offshore waters seaward of the outer limit of coastal waters other than the North West Shelf project Area. The Commonwealth administers a resource rent tax, which is effectively a profit-based tax levied on a project. It replaced a wellhead royalty and excise system.
• The Petroleum and Geothermal Energy Resources Act 1967 applies to onshore areas and waters landward of the baseline of the coastal waters, other than ‘subsisting’ permit areas under the Petroleum (Submerged Lands) Act 1982. The State administers a wellhead value royalty system.
• The Barrow Island Royalty Variation Agreement Act 1982 applies only to Barrow Island. The royalty regime was developed in negotiations between the WAPET consortium, the State and the Commonwealth. It replaced the wellhead royalty and excise system that had previously applied.