Driller in tax fight for Chile venture

Greymouth Petroleum's oil exploration programme in Chile has been hit only indirectly by the earthquake in that country but continues to battle a tax problem here.

The company's Chilean subsidiary, PetroMagallanes, has rights to explore in four areas totalling - 14,900km - in the Straits of Magellan in the south of the country.

While the company avoided the full force of the quake, it continues to battle the IRD here over a tax law change it says has unfairly penalised it, could cost millions of dollars in potential tax refunds and the forfeiture of a US$400,000 bond if it is unable to meet work programme obligations.

In addition, Greymouth could be legally liable to a claim for breach of contract from the Chilean Government for contractual damages including consequential loss.

In November 2007, Greymouth won its bid for four blocks in Chile but four months later a change to the tax regime shut off a loophole exploited for decades by foreign-owned New Zealand oil and gas producers which could write off exploration costs against income from NZ assets.

In Greymouth's case, these assets are gas and condensate fields located in Taranaki.

The company has been lobbying the NZ Government to have tax write offs applied to five years of work in Chile "grandfathered" or treated as if under the previous tax regime. It was banking on tax write-offs of around $10 million of the $30 million it would spend in the five year period and the company says that such a financial hit could impact on its business here.

In submissions to the finance and expenditure select committee last month it said New Zealand's reputation could be damaged in Chile as a result of any failure to complete its work programme.

It also points out that it faces the real risk of being sued for the cost of work it has not done. In contrast to another explorer that pulled out and was not sued, there was no underbidder or natural replacement for Greymouth, should it pull out.

But Greymouth appears to be fighting a losing battle. A spokesman for Revenue Minister Peter Dunne said the "Government is not prepared to change the legislation in the way they [Greymouth] have requested and will not be amending the petroleum mining foreign branch ring-fencing rules".