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$10m at stake for Greymouth Petroleum in tax plea

Wednesday 17th February 2010

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Unintended consequences of a tax change in 2008 will cost the privately owned New Zealand oil and gas explorer Greymouth Petroleum an unexpected $10 million on a $30 million Chilean venture, a tax adviser representing the company in select committee hearings said today.

Greymouth was expecting to spend around $30 million on exploring four licence areas in southern Chile, and under old tax law would have been able to deduct that expense against New Zealand income, David Patterson from law firm MinterEllisonRuddWatts told the finance and expenditure select committee.

Greymouth's appearance was the latest representation in a long saga for the company, which was caught on the wrong side of tax changes announced in 2008 that prohibit foreign-owned oil companies with production assets in New Zealand to offset exploration expenses against New Zealand income.

The company has been unsuccessful so far in seeking a grandfathering clause to cover its Chilean activities, claiming it has been affected in an unintended way, and the select committee promised last year to return to the issue if necessary, following discussions between Greymouth and the Inland Revenue Department.

While there have been exchanges of legal opinions and discussions with IRD, Greymouth is unaware of the tax department's most recent recommendation to Ministers, with the company now seeking this under the Official Information Act.

The closed loophole was used for the best part of a generation by foreign-owned oil majors, including Shell New Zealand, part-owner of the giant Maui gas field, to minimise tax payable in New Zealand. This anomaly was only removed in legislation last year, but was first announced by then Finance Minister Michael Cullen in March 2008 as a surge in commercial oil finds threatened to allow a new generation of foreign oil companies exploit the New Zealand revenue.

Greymouth had met with the Inland Revenue Department just days before Cullen's announcement to confirm that expenditure on a work programme agreed with Greymouth's partner, the Chilean government oil company, would be tax deductible in New Zealand.

It was unable to back out of the deal with the Chilean government without substantial loss of reputation and initial bonds worth US$400,000. Now that the company was committing to the project, bonds worth US$28 million were at stake.

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