Woodside Energy Ltd (ABN 63 005 482 986) v Commissioner of Taxation

Introduction [1] - [6] Procedural background [7] - [12] The issues in this appeal [13] - [14] The witnesses [15] - [16] The Woodside Group [17] - [19] The Agency Deed [20] - [26] The Laminaria Project - assessment and commitment - 1996/1997 [27] - [39] The Scheme of Arrangement - 1998 [40] Market for crude oil and Laminaria crude [41] - [43] Woodside's hedging policy - 1997-2001 [44] - [55] Laminaria's effect on the Woodside Group's oil price hedging policy - 1997 [56] - [68] Woodside Energy's hedging policy reviewed 1999-2001 [69] - [99] Management responsibility for hedging activities [100] - [104] Classes of hedge transactions used with respect to Laminaria sales [105] - 108] Oil production and sales from Laminaria - 1999-2004 [109] - [112] The sale of crude oil - the use of term contracts and the role of production forecasts [113] - [114] Production forecasts and Laminaria contracts [115] - [124] Laminaria oil sales [125] - [128] An example of sales and hedging relationships

• July to September 2001 [129] - [130] Strategic hedging [131] - [135] Sample of strategic hedging by swap transaction 1999-2001 [136] - [143] Cargo specific hedges [144] - [147] Rationale and practice of oil futures contracts [148] - [156] Basis risk [157] - 159] Recording strategic hedges 1999-2002 [160] - [163] Highlander transaction [164] - [166] The return, the assessment and the objection [167] - [173] The quantum of the claimed hedge losses
• Ms Rapinet's evidence [174] - [182] Expert opinion evidence of Professor Ross Garnaut [183] - [207] Expert evidence of Professor Graham Walker [208] - [218] Expert evidence of Alan Miller [219] - [227] Statutory framework - The PRRTA and the PRRTAA [228] - [234] Statutory framework - Section 15AB Acts Interpretation Act [235] Legislative history and extrinsic materials [236] - [259] Key findings of fact [260] The construction of s 24(b) of the PRRTA and its application to hedging expenses [261] - [274] The construction of s 38 of the PRRTAA and its application to hedging expenses [275] - [276] Conclusion [277]

WESTERN AUSTRALIA DISTRICT REGISTRY WAD 282 OF 2004

AND: THE COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA

REASONS FOR JUDGMENT Introduction 1 Since the late 1990s Woodside Energy Limited (Woodside Energy), subsidiary of Woodside Petroleum Ltd (Woodside Petroleum) has been a joint venture participant in a petroleum project in the Timor Sea known as the Laminaria Project. Because of the volatility of oil prices it had at all times in place an oil risk management policy under which it entered into hedging transactions with respect to certain percentages of anticipated production and sales from the project. The company's profits from the project are taxed under the Petroleum Resource Rent Tax Assessment Act 1987 (Cth) (the PRRTAA). The company suffered substantial losses associated with its hedging transactions in the years ended 30 June 2000 to 30 June 2002 inclusive. 2 The company was assessed for petroleum resource rent tax for the year ended 30 June 2002 on the basis that its taxable profit was calculated without regard to losses which it had incurred in connection with its hedging transactions. The company filed its return and paid the assessment on the basis that the losses were not to be deducted as it did not wish to expose itself to substantial penalties. However it lodged an objection to the assessment which issued. It did so on the basis that its taxable profit for the year ended 30 June 2002 should be reduced by hedging losses referable to that year and losses transferred under specific provisions of the PRRTAA for the two preceding years. The losses were respectively $148 million for the year ended 30 June 2000, $299 million for the year ended 30 June 2001 and $106 million for the year ended 30 June 2002. 3 The Commissioner of Taxation (the Commissioner) disallowed the objection. Woodside Energy contended that its taxable profit should have been reduced by reference to the hedging losses. One of the components of "taxable profit" explained in the PRRTAA is "assessable petroleum receipts" defined in s 24 so as to exclude expenses in relation to the sales of marketable petroleum commodities. Woodside Energy says that its hedging losses were expenses of that kind. 4 In my opinion, on its proper construction, the expenses to which s 24 referred are expenses directly related to particular sales in a way that hedging losses are not. In so finding I had regard to the fact that the Act has extensive separate provisions relating to deductible expenditures which do not include such losses. A reference to "expenses" in s 24 was included as an amendment to the Bill to meet specific concerns about such things as freight, insurance and demurrage costs connected with particular sales. To give it the broad construction for which Woodside Energy contends would, in my opinion, undercut the essential scheme of the legislation and its specific provision for deductible expenditures. 5 In the course of the hearing evidence was received from an economist, Professor Garnaut, about the model for taxing economic rent which he first proposed in 1975. In his opinion losses on hedging transactions designed to minimise risk of price fluctuations associated with sales of a commodity can properly be treated, in the taxation of economic rent, as an expense in relation to sales. While not doubting the correctness of that opinion within the framework of the model which Professor Garnaut proposed, it turned upon an assumption, which he was asked to make, that the petroleum resource rent tax was intended to be a tax on "economic rent". The Court, however, is constrained by the language of the Act. Having regard to the language of s 24, its context in the overall scheme of the Act and its drafting history in the Parliament, it cannot accommodate hedging losses as expenses of sale as the economic rent model would allow. 6 The application is dismissed. Woodside Energy will have to pay the Commissioner's costs of the application. Procedural background 7 Woodside Energy's financial accounts for the calendar years ending 31 December 1999 through to 31 December 2002 set out sales revenue derived from its Laminaria Oil Project after allowing for losses incurred in each of those years in relation to its hedging transactions. In relation to the financial years ending on 30 June 2000, 30 June 2001 and 30 June 2002, the losses incurred in relation to hedging transactions were said to be: Year Loss (A$) 2000 148,784,120 2001 299,593,710 2002 106,399,732 8 The company claims that its entry into the hedging transactions was undertaken in accordance with its oil price risk management policy as set out in 1997 in Woodside Petroleum's Treasury Policies Manual. That Manual provided that: The aim of oil price risk management is to establish a prudential policy framework for the management of oil price risk associated with Woodside's forecast sales. Furthermore, the objective of the oil price risk management ("OPRM") hedging policy is to contain the potential for financial loss arising from unfavourable movements in oil prices. … oil price hedging can only be undertaken in respect of identified barrel of oil equivalent (BOE) exposures, taking into consideration known and forecast product sales. … Speculative positions are not permitted. 9 In 1997, Woodside Petroleum resolved to fix the permissible hedge levels for sales of Laminaria crude oil as follows: (a) Between 2 and 3 years in advance of anticipated production, up to a total of 20% of anticipated production from the Laminaria Project ought to be permitted to be hedged; (b) Between 1 and 2 years in advance of anticipated production, up to a total of 35% of anticipated production from the Laminaria Project ought to be permitted to be hedged. According to Woodside Energy, it would not have entered into the hedging transactions but for the forecast production and sale of oil from the Laminaria Project. 10 Tax is payable by the company in respect of the project under the provisions of the Petroleum Resource Rent Tax Act 1987 (Cth) (PRRTA)and the PRRTAA. The two production licences in which it has an interest are treated by the Commissioner, pursuant to a Ministerial Certificate, as sufficiently related to be regarded as a single petroleum project. The PRRTAA imposes tax in respect of the taxable profit of a person in the year of tax in relation to a petroleum project. The company did not have a taxable profit for the years ended 30 June 2000 and 2001 in relation to the Laminaria Project and no assessment under the Act was issued in either of those years. 11 Woodside Energy lodged a Petroleum Resource Rent Tax Return for the year ended 30 June 2002. An assessment was issued on 26 September 2002 in which the taxable profit was assessed at $429,825,898 and tax assessed at $171,930,359. On 21 November 2002 the company lodged a Notice of Objection to the assessment which, as its public officer indicated in a covering letter, related '… principally to a claim by Woodside Energy Limited … to deduct expenses incurred on hedges undertaken in relation to sales from the Laminaria Project as 'expenses incurred in relation to the sale' under section 24 of the PRRTA.' An amended assessment was issued on 24 December 2003. This showed a lower taxable profit figure of $371,202,675 and tax assessed at $148,481,070. 12 In a letter dated 15 October 2004 to Woodside Energy a Deputy Commissioner of Taxation informed the company that claims in its objection dated 21 November 2002 in relation to hedge expenses had been disallowed. Claims in the objection in relation to non-hedge matters were finalised by notices of adjustment for the 2000 and 2001 years of tax and by notice of amended assessment for the 2002 year of tax, all of which were issued on 24 December 2003. Woodside Energy lodged an application in the original jurisdiction of this Court on 10 December 2004 appealing against the Commissioner's decision of 15 October 2004 disallowing its objection dated 21 November 2002 against the Petroleum Resource Rent Tax Assessments issued on 26 September 2002 for the year of income ended 30 June 2002. The issues in the appeal 13 The issue in the proceeding is whether expenses incurred by Woodside Energy in hedging part of its forecast production and sales of oil from the Laminaria Project are to be taken into account in calculating the amount on which it is liable to pay petroleum resource rent tax. Paragraphs 25 to 28 of the Statement of Grounds of Appeal set out the contentions which it advances: 25. On a proper construction of the PRRT Act the hedging losses incurred by Woodside Energy in relation to the Laminaria Project in the 2002 PRRT year in the sum $106,399,732 were "expenses payable" by Woodside Energy in relation to sale of a marketable petroleum commodity (being stabilised crude oil) from the Laminaria Project within the meaning of s 24 of the PRRT Act. 26. Alternatively, under s 24 of the PRRT Act the calculation of "consideration receivable" by Woodside in relation to the sale of a marketable petroleum commodity from the Laminaria Project in the 2002 PRRT year required that the hedging losses incurred by Woodside Energy in relation to the Laminaria Project in the 2002 PRRT year be taken into account by deducting such amount from gross receipts. 27. Alternatively, the hedging losses incurred by Woodside Energy in relation to the Laminaria Project in the 2002 PRRT year in the sum of $106,399,732 are to be taken into account in calculating Woodside Energy's class 2 augmented bond rate general expenditure being general project expenditure within the meaning of s 38 of the PRRT Act. 28. Further, the hedging losses incurred in relation to the Laminaria Project in the 2000 PRRT year and the 2001 PRRT year ought to be taken into account in ascertaining Woodside Energy's taxable profit in relation to the Laminaria Project for the 2002 PRRT year. 14 References to the PRRTA in the grounds appear to be intended as references to the PRRTAA. The Commissioner takes issue with each of the alternative contentions. The debate in the end turned on the construction and application of s 24 of the PRRTAA. I have also considered the application of s 38 as it was formally before the Court, although not the subject of any substantial argument. The Witnesses 15 There were six witnesses for Woodside Energy. They were: 1. Robert Carroll who was, until his retirement in July 2002, Chief Financial Officer for Woodside Petroleum. 2. John Richards. Mr Richards is the General Manager, Marketing and Commercial Services with Woodside Energy (UK) Limited (Woodside Energy (UK)). Between April 1996 and June 2000 he was Woodside Energy's Oil Marketing and Shipping Manager. From June 2000 until May 2002 he was its Manager, Marketing and Commercial Services within the Australian Oil Division of the group. Between April 1996 and June 2000 he worked closely with the Laminaria Project team to ensure that Laminaria crude oil was introduced smoothly into the market. 3. Alan Miller. Mr Miller is a Director of Basis Risk Ltd (Basis Risk) who provided expert opinion evidence about the alternative and best forms of risk management for Woodside Energy in relation to the volatility of crude oil prices. 4. Laurel Jean Rapinet. Ms Rapinet is the Assistant Treasurer Corporate for Woodside Energy's Treasury Department. In November 2001 she was Treasury Accountant for Woodside Petroleum. In 2003 she became a funding analyst and was appointed an insurance advisor for about a year before being promoted to her current position in September 2006. 5. Ross Garnaut. Professor Garnaut is Professor of Economics at the Australian National University. He gave expert opinion evidence, received subject to an objection as to relevance, as to the underlying rationale of resource rent tax (RRT). 6. Robert Graham Walker. Professor Walker is Professor of Accounting at the University of Sydney. He gave expert opinion evidence, subject to objection as to relevance, relating to the accounting treatment of hedging transactions. No witnesses were called by the Commissioner. 16 I accepted the evidence of all witnesses so far as it related to primary facts. As to them there was little, if any, dispute. The identification of corporate and individual purposes, the characterisation of hedging policy and transactions formed the bulk of the factual contest. I found the following facts, set out in the evidence of the various witnesses, outlined in the reasons that follow: (i) The history and structure of the Woodside Group. (ii) The formation and content of the Woodside intragroup Agency Deed. (iii) The process of assessment leading to the decision to commit to the Laminaria Project. (iv) The approval of a scheme of arrangement affecting the structure of the Group. (v) The nature of the market for crude oil as described by Mr Richards. (vi) The content and development of the Woodside Group's general hedging policy between 1997 and 2001 as described by Mr Carroll. (vii) The process leading to the variation of the hedging policy in relation to the Laminaria Project as described by Mr Carroll. (viii) The administrative arrangements within the Woodside Group for implementing and recording hedging arrangements as described by Mr Carroll, Mr Richards and Ms Rapinet. (ix) The classes of hedging transaction used with respect to Laminaria oil production as described by Mr Carroll. (x) The oil production and sales from the Laminaria Project for the period 1999 to 2004. (xi) The use of term contracts and production forecasts in relation to sales of Woodside Energy's crude oil as described by Mr Richards. (xii) The practical operation of the Woodside Group's hedging arrangements as described by Mr Carroll in a sample period from July to September 2001. (xiii) The way in which the Woodside Group used strategic hedging as described by Mr Carroll. (xiv) The use of cargo specific hedges as described by Mr Richards. (xv) The nature and use of futures contracts as described by Mr Richards. (xvi) The nature of basis risk as described by Mr Carroll and the way in which the Woodside Group dealt with it. (xvii) The recording of strategic hedges as described by Mr Carroll. (xviii) The Highlander transaction as described by Mr Carroll and the way in which hedges relevant to it were applied to the Laminaria Project. The Woodside Group 17 Woodside Energy is a wholly owned subsidiary of Woodside Petroleum and is its principal Australian operating entity. It was incorporated in 1954 as Woodside (Lakes Entrance) Oil NL to explore for oil in the Gippsland region of Victoria. In 1963 it acquired petroleum exploration permits over an area of 367,000 square km off the north west coast of Western Australia. It entered into what became known as the North West Shelf Joint Venture, initially with Burmah Oil and Shell, to secure funding for the exploration and for ongoing development costs. In the 1970s it discovered significant hydrocarbon resources primarily in the form of gas and condensate fields. The North West Shelf Joint Venture today produces, through its projects, liquefied natural gas (LNG), liquefied petroleum gas (LPG) and natural gas. It produces condensate as a by-product of gas production. Condensate is a light oil used as a refinery feedstock. The North West Shelf Joint Venture also produces crude oil. 18 Woodside Energy's first sales were effected in the 1980s under contracts with the State Energy Commission of Western Australia for the supply of natural gas to the domestic Western Australian market. In 1985 it signed long term contracts with eight Japanese power and gas utility companies for the supply of LNG over a 20 year period. The first shipments commenced in 1989. The contracts incorporated an element of price risk sharing. They contained price "caps" and "floors" limiting the fluctuation ranges of the sale prices. The potential upside attributable to significant price rises was limited as was the potential downside attributable to falls. There however remained a risk that the price of LNG would fluctuate between the caps and the floors. From 1989 Woodside Energy tried to "insure" against that risk by hedging. 19 The Woodside Group expanded its operations into crude oil production in late 1995 with the Cossack and Wanea oil fields. The participants in that project were the North West Shelf Joint Venturers. The Group was small by comparison with other oil and gas production companies around the world and could not take significant financial risks in relation to any project. Hedging contracts were entered into in relation to a proportion of the sales of crude oil made from the Cossack project to ensure that revenue was underpinned and to mitigate loss of revenue in the event of a decline in world oil prices. The Agency Deed 20 The hedging transactions which lie at the heart of these proceedings were said, by Woodside Energy, to have been made by Woodside Petroleum on its behalf pursuant to an intragroup Agency Deed dated 5 November 1992. Under the deed Woodside Petroleum had the responsibility for entering into certain classes of transaction on behalf of members of the Group. It was defined in the deed as the "Agent". Woodside Petroleum Development Pty Ltd (Woodside Petroleum Development), Woodside Oil Limited (Woodside Oil) and Mid-Eastern Oil Limited (Mid-Eastern Oil) were defined as the "Principals". Woodside Oil was then the name of Woodside Energy. The Deed recited that the Agent was the beneficial owner of all the shares held or was the beneficial owner of all the shares in the capital of the Principals. It also recited: B. The Principals produce and sell in Australia and overseas petroleum in a gaseous and liquid state and in connection with that business enter into marketing and shipping transactions and related investment, interest, currency and product hedging transactions. C. In relation to transactions referred to in recital B entered into or to be entered into by the Principals, the Principals have requested the Agent to act as the agent of the Principals and to enter into such transactions on their behalf. 21 The term "Business Transaction" was defined in cl 1 and included: 1(a)(i) any monetary hedging transaction including but not limited to transactions known as and described by the International Swap Dealers Association as Interest Rate Swaps, Currency Swaps, Interest Rate Caps, Interest Rate Collars, Interest Rate Floors, Swaptions, Currency Options and Forward Rate Agreements; (ii) any hedging transaction relating to the management of oil price exposure in respect of sales of petroleum and petroleum products including but not limited to natural gas, liquified natural gas, liquified petroleum gas, oil and condensate. 22 It was stated in cl 1(b) that for the purposes of the Agency Deed the Participating Percentage of each Principal should be: Woodside Oil 50% Woodside Petroleum Development 33 1/3% Mid-Eastern Oil 16 2/3% 23 By cl 4 of the Agency Deed each Principal was entitled to a proportion of all rights and benefits under each business transaction equal to its Participating Percentage. 24 Clause 2 provided: Each Principal hereby acknowledges and confirms the authority of the Agent to negotiate and execute, and appoints the Agent to be its agent to administer and perform (herein together with any other authority granted to or duties imposed upon the Agent pursuant to this Agreement called "the Duties"), all Business Transactions on behalf of the Principal and each Principal hereby ratifies all acts of the Agent done in negotiating, executing, administering and performing Business Transactions on behalf of the Principal prior to the date hereof. The liability of each Principal for obligations and liabilities under a business transaction was to be several or joint and several (cl 4(b)). 25 By cl 5 each of the Principals agreed with the Agent that it would have authority to do and perform all acts and things required of, or allocated to, the Principals for which they are entitled to do or perform under the terms and conditions of any business transaction. The Agent was authorised to do all further acts and execute all further agreements and documents as should be reasonably required in order to perform and carry out its duties. Each of the Principals agreed to indemnify the Agent against a proportion, equal to its participating percentage, of any loss, damage, claim or liability resulting from the acts or omissions of the Agent (cl 5(c)). Each Principal also agreed to pay promptly to the Agent when requested a proportion, equal to its participating percentage, of all costs, expenses, fees, duties, charges and liabilities reasonably incurred by the Agent pursuant to a business transaction or the Agency Deed. 26 Having regard to the Agency Deed and the evidence, referred to later in these reasons about the accountancy records relating to the hedge transactions in issue, I accept that they were properly attributed to Woodside Energy. The Laminaria Project - assessment and commitment - 1996/1997 27 In 1970 the Woodside Group had acquired exploration permits in the Timor Sea in an area now known to contain the Laminaria and Corallina oil fields. In 1991 three Woodside Group companies, Woodside Petroleum Development and Mid-Eastern Oil and Woodside Energy, then Woodside Oil, together with Shell Development (Australia) Proprietary Limited (Shell Development (Australia), BHP Petroleum (North West Shelf) Pty Ltd (BHP) and BP Petroleum Development Australia Limited (BP Petroleum), acquired exploration permit AC/P8 which largely covered the Laminaria field. The Woodside parties' participation in the permit was as follows:

1. Woodside Petroleum Development - sixteen and two thirds per cent
2. Mid-Eastern Oil - eight and one third per cent
3. Woodside Energy - twenty five per cent This gave the Woodside Group a 50% interest in the permit. In 1992 the three Woodside participants in the Laminaria field entered the Agency Deed referred to above. 28 Mr Carroll described the discovery of the Laminaria oil field and the adjacent Corallina oil field as significant in the history of the Woodside Group. They were the first discoveries in respect of which the Group was the principal participant with a 50% share prior to unitisation. The size of the reserve is known to be in excess of 300 million barrels of economically recoverable oil. It was inevitable, he said, that a significant capital commitment would be required to develop the project. 29 The process leading to the decision to go ahead with production on the Laminaria field involved extensive testing and appraisal and modelling of various kinds of design for the development of a profitable petroleum producing project. The use of a floating, production, storage and off-loading (FPSO) vessel was identified as the best way to exploit the field. Following that decision, which was taken in early 1996, production forecasts were prepared of the volumes of crude oil to be produced and sold from the project. Mr Carroll said that production forecasts generally become more accurate as a project is defined and developed and more information becomes available about the reserve. They were updated and revised throughout the life of the project from testing and appraisal to the final investment decision and through project development to the point when "first oil" is produced and thereafter. 30 The Woodside Group's Northern Business Unit, later renamed the Australian Oil Division, used production forecasts to produce predicted balance sheet, profit and loss and financial data for the Laminaria Project. These formed the basis for the Business Proposal. Woodside Energy used the production forecasts to prepare "lifting schedules". The schedules set out on a monthly basis when the FPSO was required to have product available for collection by tankers to be taken to customer refineries. They were prepared by Woodside Energy in its capacity as "Off-take Coordinator" of the joint venture facility on behalf of all joint venture parties so as to enable allocation of cargoes between the joint venturers in accordance with an Off-take Agreement between them. 31 One of the significant price risks associated with the Laminaria Project was price volatility which is a feature of the market for crude oil. Long term contracts are not generally used in that market. Another significant risk was that the project production profile anticipated high volumes of production taking place over a short time. 32 A Business Proposal for the project was prepared in October 1996. It appears to have been prepared by Woodside Offshore Petroleum Pty Ltd (Woodside Offshore Petroleum). The executive summary of the Proposal included the following statement (at [1]) : Total Capital Expenditure for the development is A$1074 million (MOD) with a Project Master Schedule Ready for Start-Up (RFSU) date of 1 February 1999 (50/50). Base case NPV 10% of the development is A$318 million (RT '96), with a Real Terms Earning Power (RTEP) of some 27% and Value/Investment Ratio VIR (10%) of 0.39. The development is economically robust over a range of sensitivities to oil price, production, capex, opex, RFSU date and reserves. In the event of a low reserves outcome and shortened field life, the residual value of the FPSO provides significant protection against low or negative NPV. [emphasis added] The sentence emphasised was the focus of some debate in these proceedings about the characterisation of the hedging arrangements in issue in these proceedings and going to the question whether they were necessary to the viability of the Project. 33 The economic analysis of the proposed development was carried out using project economic assumptions (PEAs) set out in Table 5.1 of the Proposal. 1996 1997 1998 1999 2000 2001+ WT1 Oil Price (US$/bbl, RT 1.1.96) 17.00 16.50 16.32 16.22 16.11 16.08 Premium/Discounts (US$/bbl - RT 1.1.96) -1.50 -1.45 -1.41 -1.36 -1.31 -1.27 Australian inflation rate (% pa) 4.0 4.5 4.5 4.5 4.5 4.5 USA inflation rate (% pa) 3.0 3.5 3.5 3.5 3.5 3.5 Exchange rate (US$/A$) 0.76 0.76 0.76 0.76 0.76 0.76

Basic assumptions underpinning the economic analysis were also set out in Table 5.2:

1. Oil price A$20.4/bbl (RT 1.1.96) in 1996
2. No revenue attributed to associated gas
3. Capital Expenditure A$1074 million (MOD) which equates to A$988 million (RT 1.1.96)
4. Operating costs A$60 million (RT 1.1.96)
5. Field abandonment cost of A$60 million (RT 1.1.96) IN 2008
6. FPSO salvage (NPV 10% effect is A$13 million)

The Proposal noted that the development would attract petroleum resource rent tax at 40% of net revenue after deductions. 34 The project economics were tested to sensitivities. Their effects on project NPV were set out in Table 5.4. Project NPV Reserves MMbbl RTEP (%) NPV (10%) NPV (10%) Incremental Base Case 182 27 318 0 20% lower oil price 179 18 145 -173 20% higher oil price 185 36 493 175 20% higher capex 182 20 231 -87 50% higher opex 174 25 265 -53 20% higher capex and 3 month delay to RFSU 181 19 211 -107 P90 Ultimate Recovery 99 9 -12 -330 P10 Ultimate Recovery 282 36 629 311 Production Constrained to 145,000 bbl/d 181 25 303 -15 RFSU 1.10.98 183 29 336 18 RFSU 1.04.99 181 25 300 -18

The conclusion was offered: It can be concluded that the Laminaria/Corallina project is economically very robust with a positive value (NPV 10%) for a wide range of downward sensitivities and substantial upside in value for the P10 STOIIP and higher oil price scenarios. 35 The Business Proposal was submitted by Woodside Offshore Petroleum to the Woodside participants, to Shell Development Australia and to BHP on 15 October 1996. The covering letter sought what was called the "Prime Scope Approval". Mr Carroll called it "the go ahead" from the other joint venture participants. 36 Mr Carroll discussed the project economic assumptions used in the Business Proposal. One was that the West Texas Intermediate (WTI) price of US$17 per barrel would hold for 1996 with prices in real terms in 1996 dollars of US$16.50, US$16.32, US$16.22 and US$16.11 for each of the years 1997 to 2000. An assumed price of US$16.08 was adopted for the year 2001. The assumption of declining oil prices reflected the fact that oil futures markets set prices for periods closer in time higher than for periods later in time. The sensitivity analyses showed a base case net present value (NPV) of the project as a whole, assessed on the basis of a 10% discount rate, as A$318 million after tax. A 20% decline in oil price would have seen a 54% decline in the net present value of the project from A$318 million to A$145 million. Mr Carroll said that this demonstrated the extent to which the project was highly sensitive to changes in the oil price. 37 The final decision on whether the Woodside Group would go ahead with the Laminaria Project was taken by the board of Woodside Petroleum at a meeting held on 6 November 1996. The other joint venturers also decided to proceed. 38 In 1997 the Woodside Group and its joint venture partners entered into contracts for the construction of the Northern Endeavour which was to be the FPSO vessel for the production of oil from the field. Total capital expenditure on the development of the project and the construction of the Northern Endeavour was ultimately in excess of A$1.35 billion, of which the Woodside Group's contribution was 50%. This expenditure exceeded the base case estimated costs set out in the Business Proposal by approximately 25%. It represented a major commitment. 39 Mr Carroll agreed in cross-examination that the decision to invest in the Laminaria Project was based upon the assumption that the initial price of oil sold from the project would be US$17 per barrel and that it would decline to US$16.08 by 2001. The Business Proposal considered the extreme case of a 20% decline in oil prices. Mr Carroll, rightly I think, did not accept that this meant the project would have been regarded as viable even in that extreme event. That was not the way in which, on the face of it, the Business Proposal was presented. The extreme case was a risk to be weighed up in deciding whether to proceed. Mr Carroll accepted that the Business Proposal said nothing about the need to implement hedging to protect against the risk of oil price volatility. Nor was hedging mentioned in the minutes of the board meeting which approved the Project. It was not a condition of board approval. The hedging of Laminaria oil sales was first raised at the Finance Committee meeting in July 1997, eight months after the final investment decision was taken. This was relevant to a line of argument advanced by the Commissioner that the hedging arrangements the subject of these proceedings, were not related to risk management on particular sales of oil. The Scheme of Arrangement - 1998 40 By a scheme of arrangement approved by the Supreme Court of Western Australia in 1998 all the undertakings and property, liabilities and obligations of Woodside Offshore Petroleum, Mid-Eastern Oil and Woodside Petroleum Development were assumed by Woodside Energy. Following that reorganisation hedging transactions entered into by Woodside Petroleum under the Agency Deed were said, by Mr Carroll, to have been entered into by it as agent for Woodside Energy. It was Mr Carroll's evidence that all of the revenue earned from the Laminaria Project (which did not start producing until late 1999) was earned by Woodside Energy. All of the hedge expenses, the subject of the present proceedings, were paid by Woodside Energy. Payments and receipts arising upon the settlement of the hedging transactions were recorded in the accounting records of Woodside Energy rather than in the books of Woodside Petroleum. They were brought to account as part of Woodside Energy's sales revenue. The recording of hedge expenses as part of Woodside Energy's accounts in its general ledger as items 6350H and 6350SH. Market for crude oil and Laminaria crude 41 It is a feature of the world oil market, as described by Mr Richards, that crude oil cargoes are sold by reference to inherently volatile pricing bases. Crude oil is generally priced by reference to one of a number of benchmark grades. Prices of benchmark grades for crude oil are published at varying intervals. These benchmark prices are as follows: (a) West Texas Intermediate (WTI), or low viscosity oil which is "sweet", meaning low in sulphurous compounds. WTI futures contracts are traded on the New York Mercantile Exchange (the NYMEX). (b) Brent crude, which is heavier than WTI and is produced in the North Sea. The principal market for exchange traded Brent crude oil derivatives is the International Petroleum Exchange based in London. (c) Tapis crude is produced in Malaysia and traded in Singapore. The Tapis price is a regional benchmark in the Asia Pacific. It is based on the Asian Petroleum Price Index published daily in newspapers or other media. During the time that Mr Richards was responsible for what he described as the Laminaria "cargo specific" hedging program, there were no exchange traded derivatives operating by reference to Tapis. 42 The use of price benchmarks to sell crude oil contrasts with the pricing bases for the sale of other hydrocarbon products such as domestic gas and liquefied natural gas. The world oil market is subject to particular volatility because: (a) Refineries are generally suited to processing specific types of crude. Crude oil is fungible and can be blended if necessary and economical to do so at a particular plant. (b) Refineries are unlikely to obtain all of their crude from one source. Because crude oil is relatively easy to transport, buyers shop around. (c) Demand fluctuates according to seasonal and economic factors - eg a mild winter in North America could lead to a decrease in the use of heating oil which would be reflected in a decline in crude oil prices. (d) Supply fluctuates because of a variety of factors such as the discovery or development of new fields and the imposition and periodic adjustment of production quotas by the Organisation of Petroleum Exporting Countries (OPEC). The sale of crude oil between a producer and a refiner is typically priced by reference to a premium or discount on one of the benchmark prices at a given point of time or over a period of time. So Woodside Energy might agree to sell a cargo of Laminaria crude oil for a price of "Tapis plus 10 cents per barrel". 43 Laminaria crude oil was never sold on the basis of a fixed dollar price per barrel. During the time that Mr Richards was responsible for marketing all Laminaria sales were undertaken by reference to one or another of the benchmark grades of crude oil, usually Tapis or WTI. This did not extend to oil sold to Shell International Eastern Trading Company (SIETCO) under a term contract which was entered into and ran from May 2000 until May 2003. Woodside's hedging policy - 1996 - 1997 44 Mr Carroll's testimony included a number of statements about the reasons or purpose of Woodside Petroleum or Woodside Energy for adopting particular policies or practices. In the area relevant to his function as Chief Financial Officer for the Group, I take them to be statements of reasons and purposes which he adopted or treated as his own. Given his senior position and subject to challenges to specific elements of such testimony in cross-examination, I accept that his statement of purposes and reasons can be regarded in this respect as those of Woodside Petroleum and Woodside Energy. Much of what he had to say in this respect was reflected in documentary evidence setting out the relevant policies and practices of the Woodside Group concerning risk management and hedging. 45 Mr Carroll's evidence was that, as a crude oil producer, Woodside Energy's reasons for entering hedging transactions differed from those of other actors in that field such as traders or speculators. As a producer it was concerned about falls in the price of oil and entered into hedging transactions in respect of anticipated oil production and sales to ensure that its revenue in relation to the hedged proportion of anticipated production and sales was guaranteed at an amount determined by reference to a "forward oil price curve". The oil price curve was produced by plotting the future prices for WTI contracts traded on the NYMEX. That curve was based on information about the market's expectation of future oil prices. 46 It was Mr Carroll's evidence that because Woodside Energy was exposed to a price risk arising from specific underlying sales of crude oil it accounted for hedging "losses" or "gains" by offsetting them against gross revenue derived from the sale of crude oil. The "net" revenue amount after allowing for such gains or losses was reported as sales revenue in Woodside Energy's accounts in accordance with "hedge accounting" principles. Woodside Energy had always accounted for hedging transactions in that manner. Its approach was later recommended by the Australian Accounting Standards Board in its Urgent Issues Group Paper produced in May 2000 entitled "Abstract 33: Hedges of Anticipated Purchases and Sales". That approach was made mandatory in the 2001 calendar year when Accounting Standard AASB 1033 was introduced. The accounting treatment differed from that which would have applied if Woodside Energy had entered into hedges for speculative purposes, that is to say, where there was no underlying sale. 47 The Woodside Group was small (by world standards) compared to other major oil producing companies such as Shell. The size and extent of productive assets and reserves held by major companies provided them with a natural hedge as did their vertical integration into the market for the sale of petroleum. At the end of 1996 Woodside Energy had relatively few "proven" and viable reserves. Its only producing assets were in the North West Shelf area. 48 The hedging of projected sales within the Woodside Group was implemented before 1996 under the direction of the Oil Marketing Department which was monitored by the Treasury Department. The Treasury Department then became responsible for implementing "strategic" hedges. The Oil Marketing Department retained responsibility for cargo specific hedges. Strategic hedges were long term hedges placed as much as three years in advance of anticipated production and sale of crude oil from a particular project. Cargo specific hedges were short term hedges intended to manage the risk of prices decreasing between the time of ascertaining a lifting schedule by which cargoes were allocated to the joint venturers and the time that oil was actually sold to a customer. 49 Mr Carroll produced a document, current as at April 1996, called the "Finance Register". It set out Woodside Petroleum's hedging policy at that time. In a section headed "Risk Management Overview" it stated that Woodside Petroleum had a policy of "active management" of its exposures to oil price inter alia. Management was subject to the guidelines approved by the Board of Directors. The document stated: Woodside's approach is one of risk minimisation. Hedging transactions are only undertaken against an identified underlying exposure. There is no speculative trading. If it became apparent that hedge levels were expected to exceed sales volumes for a period, eg if there were a plant shut down or a down turn in production not foreseen at the time hedges were placed, a proportion of any hedge loss or gain attributable to excess hedges would immediately be brought to account as a loss or gain in Woodside's profit and loss account as an ineffective hedge. It would not be offset against sales revenue at the time of an underlying sale. Losses attributable to such hedges do not form part of Woodside's claimed deduction. 50 In 1997, Mr Carroll developed a Treasury Policies Manual. This set out the basis for the hedging transactions which gave rise to the losses the subject of this proceeding. It was formally approved by the board of Woodside Petroleum at a meeting on 3 September 1997. The document began with a statement of Treasury Policy Objectives. They included the following: 1.1 PURPOSE The purpose of this document is to establish a prudential policy framework for the management of Woodside's financial risks associated with the treasury function. This is an essential component of Woodside's corporate governance. 1.2 POLICY The objective of these policies is to specify Woodside's approach to financial risk. The policies also state the parameters within which these financial risks are to be managed. A number of areas of financial risk were then set out. Woodside's Petroleum approach was said to be one of "risk mitigation". The statement of policy went on: Speculative transactions are prohibited. Hedging transactions are only undertaken against an identified underlying exposure. 51 Treasury policies were designed to ensure that financial risk was managed so that: . Shareholders obtain some protection against adverse price movements whilst maintaining some participation in favourable price movements; and . Protection of net profit and cashflow through the active management of Woodside's exposures is achieved, which is crucial to the Group's long term stability and the achievement of a competitive return on shareholders' funds. Under the heading "APPROACH" it was stated that consistently with the preceding principles, policies were to be reviewed and any changes approved by the board annually for identified areas of financial risk which included: Oil Price Risk - to contain the potential for financial loss through the unfavourable movement in oil prices. 52 Section 4 of the document dealt with "OIL PRICE RISK MANAGEMENT" and included the following provisions: 4.1 PURPOSE The aim of oil price risk management is to establish a prudential policy framework for the management of oil price risk associated with Woodside's forecast sales. Furthermore, the objective of the oil price risk management ("OPRM") hedging policy is to contain the potential for financial loss arising from unfavourable movements in oil prices. 53 Under the heading "POLICY", the following statements appeared: . Oil price hedging can only be undertaken in respect of identified barrel of oil equivalent (BOE) exposures, taking into consideration known and forecast product sales. … . Speculative positions are not permitted. … . Writing of options is permitted only when premium income is used to offset the cost of purchasing option cover or otherwise applied in reducing the cost of cover. Writing of exposed option positions for the sole purpose of generating premium income or mismatching the timing of bought and sold option positions is not permitted. . The maximum duration for an oil price hedge is 3 years. . Hedges may be lifted prior to maturity on approval of the Finance Committee 54 A weekly meeting was required between the Treasurer, Assistant Treasurer - Risk Management, Treasury Officer, the Liquids Marketing Manager and the Liquids Marketer to discuss the current market, Woodside's strategic oil price exposure and future hedging strategies. Three people, including one from the Commercial Division, were required to form a quorum. Minutes were to be kept of those meetings. 55 Mr Carroll said that the aim of the hedging policy set out in the manual was borne out in 1998 as explained in the Managing Director's report to shareholders for that year contained in the Woodside Petroleum 1998 Annual Report. A record profit by Woodside for that year of A$300.2 million was obtained despite a drastic decline in oil prices. Laminaria's effect on the Woodside Group's oil price hedging policy - 1997 56 The relatively small size of the Woodside Group, the fact that Laminaria was a new project in a new area and involved technical and other risks, meant that the Group was not prepared to take the full risk of a decline in oil prices. Woodside Petroleum's management and its board considered it desirable from the outset to implement a level of hedging in respect of anticipated sales from the Laminaria Project to help protect against falls in the oil price. This consideration did not appear anywhere in the Business Proposal. However the minutes of a meeting of the Finance Committee of Woodside Petroleum held on 15 July 1997 recorded that the Managing Director, Mr Akehurst, proposed that an exercise be carried out to quantify the benefits of hedging half of Woodside's Laminaria sales volume in the period 1999-2001 when the output from the project was at its peak. The minutes recorded that he said: In the context of the 10 Year Business Plan, this may present a unique opportunity to lock-in sales revenue at a defined level and provide cash flow to fund growth opportunities in a period of possible low oil prices. The Committee agreed that this option should be analysed thoroughly and a report on the issue presented at its meeting in August 1997. It also supported the recommendation that current cover be increased to maximum levels at prices above US$19.00. 57 A Ms Del Vescovo presented a hedging analysis to the meeting which confirmed previous results. The minutes record her as saying that the company could meet peak commitments over the following three years even with oil prices down to US$12 with the existing loan facility and hedge cover in place. 58 In his evidence-in-chief Mr Carroll described the expected production profile for the Laminaria Project as "peaky" with an anticipated spike in production and sales shortly after the first oil of some 18 months duration. Production and sales would peak followed by a decline in sales over the remaining life of the project. This was illustrated by the project cashflow projections in the Business Proposal. With many oil projects production typically has a steady increase to a peak which may be several years after production begins. Given that Laminaria was especially "peaky" it was highly desirable that the sale price should meet the PEAs as set out in the Business Proposal in the early years and, in particular, during the 18 month peak when a significant proportion of the reserves were to be extracted. In Mr Carroll's opinion if the PEAs were not fulfilled the project might have been unviable. 59 Mr Carroll said that hedging was more important for Laminaria than for the North West Shelf project because the production profile in respect of the North West Shelf development was relatively flat and the project life expected to be in excess of 20 years. Peaks and troughs in oil prices could be ridden out over the life of the project. The Laminaria Project on the other hand had an 18 month window in which production was expected to peak. 60 It was put to Mr Carroll in cross-examination that the Finance Committee, at its meeting in July 1997, was concerned about the opportunity that production of Laminaria oil would afford in terms of achieving the Group's corporate objectives. He said that the Committee's consideration was "based on the achievement of certain levels of cash flow". He said that the reason for hedging in the first place was "to make sure we can protect cash flow [sic] and maintain the business in a healthy basis to achieve our long term objectives to shareholders". He said: … the raison d'etre for risk management was to look at securing the cash flow against the downside in oil price to meet our ongoing commitments; to pay dividends to shareholders and obviously to secure the cash for our long term objects. He agreed that Mr Akehurst by his memorandum was "perhaps considering an extension of the rason d'etre" [sic]. The Finance Committee discussion about Laminaria on 15 July 1997 took place, Mr Carroll agreed, in a context in which Woodside Petroleum had a prudent level of cover in place and that it could meet its current commitments, that the Laminaria exercise was considered. 61 As a result of Mr Akehurst's request, Mr Carroll undertook an analysis of a specific hedging policy for Laminaria. He said in cross-examination that a specific hedging policy for Laminaria would lock in revenues "… to allow the company to be robust to meet all sorts of situations, including any possible growth opportunities". The presentation was about the benefits of a specific hedging policy for the project. It involved a number of PowerPoint slides which included the following statements: . Laminaria startup in 1999 causes oil production to increase significantly . Currently, opportunity exists to "lock in" oil prices above 1997 PEA's of USD 18.50 . Provide some cashflow certainty with regards to the spike in oil production 1999-2001 . Positions Woodside for business opportunities . Specific Laminaria hedging policy . Woodside's forecast oil production jumps in 1999 due to Laminaria startup . Laminaria oil field depleted rapidly, and oil production tapers off 62 Mr Carroll told the meeting that Woodside's revenue would spike in 1999-2001 because of Laminaria and the opportunity existed to lock in some of that spike at prices above the 1997 PEAs of USD18.50. He presented a slide with a table in the following terms: Laminaria Exposure (MMbbl) 1998 1999 2000 2001 Other Exposures (MMbbl) 24.7 28.2 22.4 11.6 Total BOE Exposure (MMbbl) 24.7 27.8 26.4 27.0 Current Cover in place 41% 56.0 48.8 38.6 Current Laminaria Cover (MMbbl) 15% 3% Current Other Cover (MMbbl) 4.1 0.6 Total Cover (MMbbl) 10.2 4.0 0.7 Ave Hedge Price (USD/bbl) 10.2 8.1 1.3 19.5 19.8 20.1

The presentation also included a table showing the impact of hedging and various graphs. At one point the following statement appeared: Prices within a band of USD18-22 are possible. 63 He offered the following conclusions: . Oil prices predicted to remain within a band of USD18-22 . However, the potential for price spikes due to just in time inventory policy and inherent volatility in oil markets exists . Increasing Laminaria hedging cover would involve significant volumes which may have a negative impact on the oil futures market . Futures market illiquid, therefore placement would take time, even given immediate approval to place additional cover . May wish greater participation in possible upside . Consider the inclusion of options . Upfront cost should be regarded as the premium paid for this "insurance" 64 Mr Carroll told the meeting that he agreed with Mr Akehurst's suggestion at the July meeting that at current prices the opportunity existed to lock in oil prices above the 1997 PEAs of US$18.50. He accepted in cross-examination that the purpose of the proposed hedging policy for Laminaria was to provide cash flow certainty in light of the spike in oil production and to position Woodside Energy for business opportunities should the oil price drop significantly. He agreed that his focus was on locking in oil prices above PEAs of US$18.50 "for the purpose of making sure that the Woodside group could exploit business opportunities in the future." He added that it was primarily "to ensure that Laminaria's cash flows were available for us to do that". Mr Carroll accepted that if his proposal had not gone forward existing hedging policies would have adequately covered hedging arrangements with respect to Laminaria. It was put to Mr Carroll that the hedging he proposed above US$19.00 per barrel was not essential. He responded: Absolutely, in terms of the company's strategy. I mean Woodside is a public company, its objective was to maximise value to shareholders and to pay dividends. 65 Mr Carroll prepared a memorandum to the board of Woodside Petroleum in the name of the Managing Director. He stated in the memorandum that oil price hedging policy had been reviewed in the light of the significant increases in oil production which the company would experience upon the start up of Laminaria in the first quarter of 1999. He identified as the options available to the company:

1. Continue with the current hedging policy limits (see table overleaf);
2. Reduce the approved maximum hedge percentages;
3. Increase the approved maximum hedge percentages. The existing approved hedge limits and planned minimum hedge price at the time, as set out in a table were 50:25 and 10 for the first, second and third years on a minimum hedge price of US$18.50/bbl. He continued: Analysis of the company's projected future cash flow profiles incorporating existing oil price hedges has confirmed that, utilising existing debt facilities and maintaining a reasonable gearing ratio, currently planned capital and operating expenditures can be achieved and reasonable levels of dividend paid even if prolonged periods of low oil prices ($12.00/bbl real terms) are experienced. While this could be argued to remove the previous justification for defensive hedging, requirements for additional capital expenditure are expected to be firmed up as a result of exploration success and the definition of other new business opportunities. It is also expected that the years immediately following the start-up of Laminaria will provide a key opportunity for a corporate acquisition, particularly if oil prices are low. He made three recommendations. His first recommendation was that the approved maximum hedge percentage remain at 50% for year one of the project. His second recommendation was that the minimum hedge price should be increased to US$19/bbl. In support of this recommendation his memorandum stated: This reflects the reduction in the requirement for defensive hedging at lower prices. It is also recommended to increase the flexibility to achieve longer term hedges in the 24 and 36 month periods at or above this higher minimum hedge price. The third recommendation was that the approved maximum hedge percentages for years 2 and 3 be increased to 35% and 20% respectively. At that time they were 25% and 10%. 66 Mr Carroll agreed in cross-examination that his reference to "defensive hedging" was a reference to the risk minimisation which he called "the low end of your hedging profile". Two key elements in moving away from defensive hedging were the Group's additional capital expenditure requirements that would be firmed up as a result of exploration success and the identification of new business opportunities. 67 The Finance Committee met on 2 September 1997 and considered Mr Carroll's recommendations. The minutes recorded two views. Mr JL Stitt reminded the Committee that the current hedging policy involved the management of financial exposure. Hitherto, the hedging policy had been based on risk management linked to identified commitments such as bank loans, capital expenditure and dividends. He expressed concern that the proposal represented a significant change in the raison d'ętre for hedging and was driven by desire to lock in future revenues unrelated to underlying commitments. The level of hedging proposed was based on a view of market prices and increased the potential for hedging at a time when Woodside's financial position was strengthening. Other committee members were said to have supported the recommended approach which they saw "… as an appropriate way to provide certainty in planning investments and to lock in profit expectations". 68 The Finance Committee's recommendation was considered by the board of Woodside Petroleum on 3 September 1997. The minutes recorded an extended discussion with all directors expressing their views. Most were supportive, recognising the need to protect planned revenues in order to achieve the company's future growth targets. Mr Stitt maintained his opposition to what he regarded as a fundamental shift in hedging policy. Mr Carroll accepted that the existing hedging policy was "… based upon risk management linked to identified commitments such as bank loans, capital expenditure and dividends".The minutes stated: Any perceived difficulty with the wording of "speculation" in the Treasury policy needed to be reassessed to accommodate the desirability of protecting and supporting sound business judgements. Mr Carroll said in cross-examination so long as there was an identified underlying exposure that the Group was hedging they would not have considered that to be speculation. The proposals contained in his memorandum were adopted. Woodside Energy's hedging policy reviewed 1999-2001 69 The period 1999 to 2001 saw a continuing process of review of the Woodside Group's hedging policy which became more focussed as the Group emerged from the initial predicted spike in oil production associated with the Laminaria Project. Late in 1998 Woodside Petroleum retained Westpac to report on Woodside Petroleum's Treasury function. Westpac prepared a report which was circulated to members of the Finance Committee on 4 February 1999. Management's response was sent to the Committee with a covering memorandum from Mr Carroll on 10 February. A Mr Gunston from Westpac made a presentation to the Committee about the review on 17 February. 70 Westpac recommended adoption of a "proactive hedging philosophy". This would allow percentage cover limits to be varied from time to time based on a strategic approach to exposure and associated cover. Management saw the recommendation as consistent with its view of the Woodside Group as a mature group with strong and steady cashflow. It proposed "a more proactive approach in seeking to add value in executing its risk management transactions". It accepted that such a "fundamental change" could only be implemented after Treasury had developed the requisite competency. 71 Mr Carroll said that the board endorsed the adoption of a more proactive approach but "… within the confines of active management as defined in the policy". He said that in reality there was no shift to a more proactive practice. Treasury remained within the overall policy guidelines and simply finetuned their wording. The same principles continued to be applied. Hedging was done within pre-approved limits having regard to underlying exposures with the objective of protecting cashflow. In this context he defined "active management" as "the ability to place or lift hedges within existing policy guidelines at the most opportune time, because we've got experienced and skilled treasury people to implement that outside of finance committee approval". 72 In June 1999, Westpac was undertaking a further review of the oil price hedging policy with respect to maximum and minimum levels of cover. Mr Nelson, who was by then the Treasurer, made a presentation to the Finance Committee at its meeting on 15 June 1999 He reported on a recent upward trend in oil prices which had been affected, inter alia, by high compliance with OPEC agreed production cutbacks. He reported on recent oil swap deals and the current status of the oil price hedging portfolio. In relation to the Westpac review he told the Finance Committee that because of the recent recovery in oil price the company profile had changed significantly since 1997 and it was time to review oil price hedging philosophy. 73 The Finance Committee recommended to the board an interim portfolio balance in circumstances in which oil prices exceeded US$17 per barrel of 50:35:30 swaps and 12:12:12 options in years 1, 2 and 3 respectively. This meant that in year one Treasury staff would be able to effect swap transactions up to a maximum level of 50% plus option transactions up to a maximum of 12% for an overall maximum hedging level of 62%. The board adopted the Finance Committee recommendation at a meeting held on 15 and 16 June 1999. As at 16 June 1999 therefore the maximum permissible hedge percentage levels for years 1, 2 and 3 were as follows: (a) swaps 50:35:30 (b) options 12:12:12 (c) cargo specific hedges - balance of exposure Cargo specific hedges could be entered into up to 184 days (6 months) in advance of sales. 74 A statement of "Treasury Risk Management Objectives" was attached to the minutes of the Finance Committee meeting. Mr Carroll identified the attachment in cross-examination as produced by Westpac to say where it thought Woodside sat in terms of Treasury risk management. The attachment stated, inter alia: Woodside's Treasury does not operate as a profit centre and is therefore not empowered to take speculative positions. As such hedging transactions may only be undertaken against clearly identified underlying exposures. Mr Carroll agreed that the statement of policy did not preclude him from taking what was put to him as "your active approach" to maximise value provided that hedging remained within the prescribed limits of cover. 75 On 20 July 1999 the Finance Committee approved a level of year 4 cover hedging above US$17.50 in increments of 0.5 million barrels was recommended. That approval was noted by the board at its meeting held on 20 and 21 July 1999. On 17 August 1999 the Finance Committee resolved that, pending a review by Westpac of the year 4 hedging level approved at the July meeting, the level would be revised. The minimum hedge price target would be lowered to US$17 per barrel with cover to be placed in small tranches of no more than 0.5 million barrels. The change was noted at the meeting of the board held on 17 and 18 August 1999. Those limits remained in place until March 2001. 76 The second Westpac review was completed in September 1999. Westpac recommended setting hedge parameters for all of Woodside Petroleum's price risks including commodity prices, foreign exchange and interest rate risks. As a result of the review, Mr Carroll prepared a memorandum dated 2 September 1999 for the Finance Committee. He recommended that hedge parameters should be set with minimum and maximum levels within which Treasury, with Finance Committee approval, would have the flexibility to increase or decrease cover as appropriate. Treasury also wanted to identify performance measures at benchmarks and manage and report currency exposure in US dollars. The proposal was not approved by the Finance Committee. 77 In a PowerPoint presentation to the Committee Mr Carroll described the objective of hedging thus: … to facilitate and complement the business unit pursuit of … growth by focusing on reducing the earning volatility around the growth rates achieved by the underlying business. Earnings volatility management, not absolute earnings growth, is the risk management focus. He observed in cross-examination that the stated objective could be achieved by protecting cashflow. 78 Further into his presentation Mr Carroll observed that, as Laminaria production reduced, Woodside Petroleum would be proportionately less influenced by oil and currency changes. He also noted that, in undertaking any analysis of hedging, oil price risk could not be divorced from exchange rate risk. They were looking at "a corporate plan". He accepted that the discussion in his presentation went well beyond issues relating to Laminaria. 79 Mr Carroll's recommendations were considered by the Finance Committee on 15 February 2000. The Committee did not accept the recommendation that maximum hedge cover limits in year 1 be lifted to 70%. It recommended that management review the wording of the Group's hedging philosophy. Mr Carroll rejected the suggestion in cross-examination that there had already been a shift in hedging policy. Rather there had been a shift in the risk profile of the business. In answer to the proposition that Woodside Petroleum was managing its hedge portfolio more actively within the specified parameters, he said that the staff were much more experienced and adept in their ability to implement hedges. Asked by the Court to explain what he meant by "active management", Mr Carroll said: … basically it is giving the expertise within treasury the flexibility to use the skills they have got in terms of what is the most appropriate instrument and what is the most appropriate timing in which to place the hedge. He agreed that so called "active management authority" had been in place for the whole of the first half of 2000. The authority extended to place, lift, adjust and reallocate hedges. There was a price risk involved every day. 80 In cross-examination Mr Carroll explained that "placing" a hedge referred to entering the market to buy a contract. "Lifting" referred to negotiating with the bank to cancel a hedge. "Early lifting" was a term used to describe a change in the timing of a hedge. The term "closing a hedge" was used to refer to settlement by expiry or renegotiation of the hedge to close it out early. He initially denied that reallocation of hedges between projects occurred. He then accepted that there had been a reallocation to the Laminaria Project of hedges placed in relation to an abortive acquisition (referred to below as "Highlander"). Reallocation in that case was just an administrative process of identifying certain hedges with the Laminaria Project. 81 Late in 2000 consideration was given, by the Finance Committee, to its remit, which was changing because of the risk management responsibilities of other committees, the issue of petroleum resource rent tax and the reduction in hedge cover generally. These matters were discussed at a meeting held on 7 December 2000 which was not attended by Mr Carroll. At about this time BHP had announced that it intended to cease hedging. 82 On 10 February 2001 a memorandum on the 2001 oil hedging strategy for members of the Finance Committee was prepared over Mr Carroll's name. He recommended the following oil hedging strategy for consideration by the Finance Committee: . no additional oil hedges to be placed in 2001, 2002 or 2003 hedge periods . use price opportunity to reduce current committed hedging cover levels in 2001 and 2002 . limited additional hedge cover to be placed in 2004 and 2005. Cover to be placed within policy limits and with the objective of ensuring that the company's gearing levels remain below 60% . the strategy to be reviewed periodically or whenever a significant acquisition or development is contemplated which could significantly increase the company's exposure to oil prices or has the potential to push gearing above the 60% level. 83 A PowerPoint presentation made with the paper identified hedging policy objectives as the mitigation of risk, the pursuit of growth and the addition of value. In that presentation Mr Carroll made the point that there was little market risk or need to mitigate risk under current forecasts but hedging could not be ceased as Woodside Energy was not diversifying. Small amounts of hedging in 2004/2005 would protect the company's future financial security, reduce risk, increase financial flexibility and support growth targets. Value could be added by opportunistically reducing cover in 2001/2002. Committed hedges could be rolled into uncommitted hedges wherever possible. Basis risks should be covered opportunistically and advantage taken of anomalies in the oil curve. 84 At its meeting on 20 February 2001 the paper from Mr Carroll was presented by Mr Hill of the Treasury Department and the recommended hedging strategy for 2001 was approved. Mr Carroll said in cross-examination that the Group had successfully risk managed the peak of the Laminaria cashflows in the first two years of high production. He agreed that as a result the review had been carried out to determine whether or not a revised hedging strategy reflected the increased capacity to withstand risk while continuing to support corporate growth objectives. Asked about the meaning of the term "adding value" used in the paper of 10 February 2001, he said: Adding value is to optimise the placing of your hedges over and above the target price where appropriate. 85 Early in 2001 a paper was prepared within the Group entitled "Financial Risk Management - Policy, Objectives and Implementation". It set out further revised hedging limits. It stated, inter alia: Woodside's risk management approach is currently positioned towards an opportunistic/active management method… Hedging transactions could only be undertaken against clearly identified underlying real exposures. In relation to oil price risk management the paper stated: The minimum and maximum permissible hedge cover limits, expressed as a percentage of Woodside's total "barrels of oil equivalent" (BOE) oil exposures, shall be as follows:

Minimum Committed Maximum Committed & Uncommitted Committed Uncommitted & Uncommitted 1 year 30% 50% 20% 70% 1 year to 2 years 20% 35% 15% 50% 2 years to 3 years 10% 30% 10% 40% 3 years to 4 years 0% 15% 10% 25%

86 The paper led to changes to the hedging parameters most significantly by the implementation of a minimum hedging policy. It was approved by the Finance Committee at its meeting on 26 March 2001 subject to minor modifications. A draft was presented to the board on 27 March 2001 with advice that a final paper would be presented for review. The revised policy was presented by the chairman of the Finance Committee, Mr Vines, at the board meeting held on 3 May 2001. The board agreed to adopt that policy on the basis that the company's hedging philosophy would be reviewed again in October 2001. No new oil price hedges could be entered into until the fundamentals of the philosophy had been reviewed and agreed upon. Under the new policy, minimum and maximum permissible hedge cover limits, expressed as a percentage of BOE's, were as follows: Maximum Minimum Committed Uncommitted Committed & Uncommitted Committed & Uncommitted 1 year 30% 50% 20% 70% 1 year to 2 years 20% 35% 15% 50% 2 years to 3 years 10% 30% 10% 40% 3 years to 4 years 0% 15% 10% 25%

87 The term "committed hedge cover" referred to hedge cover under which a member of the Woodside Group had contracted a financial obligation (such as swaps). Uncommitted hedge cover referred to the case in which the Group member had been granted the right to exercise a hedge but had no contractual or financial obligation to do so. 88 By July 2001 PricewaterhouseCoopers had been engaged to assist management to undertake a philosophical and fundamental review of risk management. The PricewaterhouseCoopers' team included Mr Alan Miller who was called as an expert witness in these proceedings. Macquarie Bank was also engaged to review risk management operational areas. These matters were discussed at a meeting of the Finance Committee held on 17 July 2001. The Finance Committee also considered a paper entitled "2001 Oil Hedging Strategy Update" which presented a review of Woodside's crude oil risk mitigation strategy in relation to risk profile and the internal outlook for crude oil prices. Mr Hill outlined progress to that point in ensuring that the methodology used to determine exposure recognition criteria for hedging was as accurate as possible. Having noted from another paper that early closeout of hedges did not have an accounting impact on profits until the underlying transaction matured, the Finance Committee: . confirmed that active management authority (ie authority to lift, close or reallocate hedges) was not limited to the current financial year; . endorsed the strategy of extending premium on purchasing call options for 2001 and 2002; and . approved the allocation of an additional US$5 million budget for the payment of option premium 89 Mr Carroll prepared a paper entitled "Hedging Philosophy and Fundamentals Review" for members of the Finance Committee on 9 October 2001. He attached to it a paper outlining the results of the PricewaterhouseCoopers' review. His paper offered the following conclusions: . Hedging should remainpart of Woodside's financial risk management strategy; . Hedging should not be implemented by way of a base cover level requirement, but rather individual hedging decisions should be made based on the specific circumstances facing the company at any point in time; . At the current time, no increase is required in Woodside's oil price, currency or interest rate hedging (modelling supporting this conclusion will be demonstrated at the Finance Committee meeting of 16 October). Questions posed for the Finance Committee by Mr Carroll were: . To what extent should hedging activities be directed toward managing accounting profit?; . What is the company's attitude toward risk leveraging (ie profit motivated) hedging activities, such as position taking, trading etc? He described the existing hedging strategy as one which included an element of risk mitigation where the intention was to reduce exposure to market risk and risk leverage which implied taking positions based on a year of market prices or otherwise driving superior business performance from market volatility. He accepted in cross-examination that the hedging strategy at that time also included a small element of "risk leverage". Risk mitigation did not preclude risk leverage. Individual discretion could be used to place and lift hedges. When it was put to him that there was a profit motive in that aspect of hedging practice he said: Motivated by optimising the placement or the withdrawal of hedges. 90 In an associated PowerPoint presentation under the heading "Should risk mitigation be extended to risk leverage?", Mr Carroll said that the role of risk leverage could include strategic position taking, tactical trading, operation of hedging and enhanced customer contracts, optimising execution and optimising investment and production profiles. It was put to him that each of those things was done under the existing strategy at the time in managing the portfolio. He said: Yes, it was done under the policy in terms of our active management approach. 91 A meeting of the Finance Committee held on 16 October 2001 endorsed the approach proposed in the paper. The minutes noted that while future policy or guidelines would be drafted to ensure that recommendations were consistent with the Committee's consensus, Mr Akehurst, the Managing Director, recommended that in the meantime Woodside Petroleum should begin to test the proposed hedging model against its current activities in order better to understand any issues associated with its application. 92 At the same meeting management recommended that the existing strategy of a phased approach to reducing hedges be continued and accelerated. Directors supported the recommendation. A report prepared by Macquarie Bank was taken and noted as read. The key findings of the report were that Woodside Petroleum required: . a clearer structure to underpin its hedge management activities, and . further investment in Treasury systems and experienced staff for the purposes of moving to, and the implementation of, active management in a prudent and effective manner. The minutes record that Mr Carroll advised that the general thrust of the findings was anticipated by management and that work had already been undertaken before and during the review to address many of the shortcomings described in it. 93 The Macquarie Bank report made the point that in practice because active management involved both the implementation or removal of strategic hedges as well as undertaking specific active hedges, it was sometimes difficult to clearly establish what was an active decision and what was not. In many cases Chief Financial Officer approvals did not differentiate between the strategic and active hedges. Mr Carroll said in cross-examination that he disagreed with that statement. Asked about the dichotomy between strategic and active hedges, he said: Well, this is the difficulty we had with Macquarie. Our view was that for a start hedging was all strategic and that active was just fundamentally how you implemented your hedges based on approvals. 94 It was put to Mr Carroll that the Macquarie Bank report recognised current practice of seeking to increase returns through selectively increasing or reducing hedge levels based upon expected market price movements. He said: If I can just put that in context again. These issues are all within policy and within the treasury staff lifting or implementing hedges using their own industry experience and expertise and doing it probably at the most optimal level. Mr Carroll's position was that they had room to move within existing parameters sufficient to adopt what he regarded as an active management approach. It was put to him that the active management approach was based on profit motivation rather than risk management. He denied that proposition. 95 Counsel for the Commissioner pressed Mr Carroll with the proposition that risk leveraging was an element of Woodside Petroleum's hedging policy in the way described in his memorandum to the board in October. He said: I would say again, in my considered view of managing that area for five years we never had a profit motivation. We were always a treasury cost centre and we were only looking at optimising the placement of hedges, under an approval from either the finance committee, or within policy and nothing more than that. 96 Asked by the Court whether there was a "basket of hedging" which could properly be described as taking advantage of favourable price movements, he said: … it is quite difficult to do that with an ongoing rolling hedge portfolio, that you are always going to have a base there which is based on previous decision-making. He said one would always be looking forward against exposures and against oil price and policy limits: So that is why our view was that we said we couldn't see a poor element of a portfolio, it was a homogeneous portfolio and you just had to manage it going forward once you got a level in it, you would manage that going forward against the underlying exposures. He accepted that there were two objectives which he described as risk minimisation and risk leverage. He also accepted in cross-examination that management acknowledged that the current draft of the policy was inadequate and did not accurately reflect the current operational structure of Treasury. 97 Mr Carroll prepared a paper for the Finance Committee on 30 November 2001 entitled "Implementing the New Hedging Philosophy Policy". He requested that the Committee approve the policy amendment proposal which involved the removal of limits governing minimum hedge cover and uncommitted hedge cover and the removal of specific maximum limits on uncommitted cover. His paper was generally endorsed at a meeting of the Finance Committee held on 10 December 2001 but further amendments were required. The recommended hedge levels were incorporated into a revised financial risk management policy which he circulated to the Finance Committee under an explanatory note entitled "Interim Financial Risk Management Policy". At its meeting on 19 February 2002 the Committee approved the revised policy without amendment as an interim measure until a revised comprehensive treasury policy was adopted. The hedge levels referred to in that policy remained in place until Mr Carroll retired in May 2002. The revised treasury policy was completed in December 2002. 98 According to Mr Carroll despite the fact that maximum permissible hedge limits changed over time, it was never the case that the maximum permissible limits could exceed BOE exposures. If, in practice, at any time it became apparent that the hedge levels were expected to exceed sales volumes for a period a proportion of any hedge loss or gain attributable to the excess hedges was immediately brought to account as a loss or gain in Woodside's profit or loss account as an ineffective hedge rather than being offset against sales revenue at the time of an underlying sale. 99 Mr Carroll agreed in cross-examination that there was to be no fixed minimum hedge cover level from the implementation of the PricewaterhouseCoopers' report. Targets were to be determined based on the company's position. There were to be maximum levels but no minimum levels. Despite the fact that there had been reviews consistent with what had gone on over the five years from 1997 through to 2002, there were still issues about what was to happen in the 2002 year in relation to hedging policy. Ultimately the decision was taken that there would be very little hedging. Woodside Petroleum's new approach to financial risk management diverged from the recommendations contained in the Westpac review which had begun from the premise that an aim of financial risk management was to reduce the volatility of operating results, including profit. The new philosophy was to focus primarily on ensuring sufficient cashflow to secure strategic aims. This was because the company was more mature. By hedging the Laminaria spike they had fundamentally brought the company through its riskest period. He agreed that by the term "more mature" he meant that people in the company were smarter and its asset base had broadened. It was financially stronger so that the elements impacting on its financial risk had changed. Management responsibility for hedging activities 100 Mr Carroll reported to the Woodside Petroleum board and to the Finance Committee. He attended almost all of the relevant meetings by invitation in his capacity as Treasurer and later as Chief Financial Officer. The Committee usually met monthly and monitored and received reports from Treasury staff about Woodside's oil hedging program. Mr Carroll himself oversaw strategic oil hedging activities which were implemented by other Treasury staff who reported to him and who placed hedge cover after negotiating with counterparties in "layers". The parameters for the "layers" were recorded in s 4.3.1 of the Treasury Policies Manual. Before the manual was introduced, the approach had been recorded in the Finance Register. Mr Carroll referred to s 4.3.1 of the Treasury Policies Manual which provided as follows: Strategic OPRM The following parameters have been approved by the Board: The maximum and minimum permissible strategic coverage of BOE exposures shall be as follows: Minimum Maximum < 1 year - 50% 1 year to 2 years - 25% 2 years to 3 years - 10%

Strategic hedges are to be placed in layers of the following maximum size unless a variation is specifically authorised by the Finance Committee: < 1 year 10% 1 year to 2 years 5% 2 years to 3 years 5% 101 Treasury could enter into "strategic" hedging contracts in relation to forecast sales from a period beginning three years before the oil was to be sold from a particular project. Mr Carroll explained the application of the parameters thus (at [74]): Between three and two years in advance of production and sale of oil, up to 10% of that year's total production was permitted to be hedged, and only 5% of that year's total production was permitted to be hedged at any one time. Between two and one years in advance of production and sale, up to 25% was permitted to be hedged, again with only 5% to be hedged at any one time. From one year onwards until production and sale actually took place, up to 50% of production was permitted to be hedged. He said that in addition the Oil Marketing Department was permitted to place cargo specific hedges in a six month period before sale for the balance of the projected sales. 102 By way of numerical example if at 1 January 1997 Woodside had forecast production for the 2000 calendar year (year 1) of 120,000 barrels from Laminaria, Treasury could hedge 10% of that expected production, namely 12,000 barrels, during the 1997 year, with only 5%, that is 6,000 barrels, being permitted to be placed at any one time. Generally swaps would be placed to expire on a month by month basis with volumes commensurate with anticipated sales for that month as ascertained by reference to the production forecast data. So if the production profile for 2000 was expected to be "flat" with 10,000 barrels produced each month, swaps in respect of 500 barrels would be entered into for each month in order to place a 5% layer. Mr Carroll said the policy was, in effect, implemented on a rolling year basis, initially by way of quarterly tranches and later monthly. In practice, he and Treasury staff responsible for implementing hedge transactions would monitor market conditions and report to the Finance Committee, and the Committee would then set a "target price" for hedges to be placed. If target prices could not be achieved the hedges would not normally be placed. 103 The Finance Committee monitored hedging activity which was also overseen by Mr Carroll. He received monthly Treasury reports showing the view of staff about anticipated oil prices and hedge transactions which were in place. Monthly updates in relation to hedging and the Treasury view on oil prices was given to the Finance Committee. 104 Neither Mr Carroll nor his department had responsibility for the marketing of the oil products from the Laminaria Project. That was a matter for Woodside Energy's Sales and Marketing Department. Mr Carroll and Treasury were concerned with the overall financial position of the Woodside Group. He agreed in cross-examination that one of the tools he used to manage the Group's overall financial position and its financial risk management position was hedge contracts. The performance of Treasury staff within the Group was measured by reference to outcomes set by the Finance Committee and the board. He did not agree that they were focussed on financial gains to the Group from their activities. He said: We focussed on the optimisation of the portfolio. The portfolio he referred to was that for the entire Group broken down into segments relating to interest rates, foreign exchange and commodity price risks. Classes of hedge transactions used with respect to Laminaria oil production 105 The hedge transactions which Woodside Energy entered into in relation to Laminaria oil production were predominantly swap contracts. Mr Carroll described the swap contract thus (at [62]): A swap is a contract where Woodside agrees with a counterparty to pay or receive the difference between a fixed price negotiated at the time of entry into the contract and an average of prices prevailing in the market for a 4 week or 3 month period immediately prior to the time of expiry of the contract (the floating price). He gave an example. Woodside Energy could have entered into a swap on 1 January 1997 with a counterparty with an expiry date of 31 January 2000 for 500 barrels at a fixed price of US$18.50 per barrel. If the average prevailing price of that class of oil for the month of January 2000 was US$19 per barrel, Woodside would be obliged to pay the counterparty US$0.50 per barrel for each of the 500 barrels, ie US$250. On the other hand if the prevailing price were US$18 per barrel Woodside would receive US$250. The effect of the swap would be to "lock in" a predetermined amount of US$18.50 per barrel on the 500 barrels hedged regardless of fluctuations in the oil price between the time of entering into the swap and its expiry date. 106 Woodside entered into hedging contracts priced by reference to the WTI pricing benchmark. However it sold most of its Laminaria crude oil by reference to Tapis and GPW pricing benchmarks. The Tapis benchmark is a South East Asian crude oil price which is published regularly. The GPW price was that determined by a term contract between Woodside and SIETCO under which Woodside sold a substantial amount of its Laminaria crude oil between 2000 and 2003. The WTI price was the most suitable price to use for hedging contracts because of the liquidity of the market for WTI crude oil contracts traded on the NYMEX. There was a risk of variations in the difference between GPW and Tapis pricing benchmarks and the WTI price. Mr Carroll referred to this as basis risk. Woodside entered into hedging transactions to protect against that risk. In addition to the swap contracts Woodside entered into a relatively small number of hedging transactions known as options and collars. 107 It was put to Mr Carroll in cross-examination and he agreed that, at the time at which each of the hedge contracts the subject of these proceedings was entered into, the oil to which it related had not actually been produced. He accepted that it was possible that, at that time, it might not be produced. He seems thereby to have acknowledged the obvious proposition that the production forecasts on which hedging arrangements were based were estimates only. Production was subject, inter alia, to process interruptions, unexpected geological abnormalities and bad weather. Actual start-up production on the Laminaria Project had been delayed by 10 months. It did not come on line until November or December 1999. Mr Carroll also accepted that the actual production fell short of forecasts. By way of example, the forecast production for July to September 2001 was 5.14 million barrels. Actual production for the period was 4.6 million barrels. 108 Mr Carroll further accepted that the contracts for the sale of oil the subject of these proceedings were not in existence at the time the hedge contracts were entered into. That concession was not strictly accurate as there were cargo specific hedges that were entered into after the contracts to which they related had been made. That point having been made by counsel for Woodside Energy, Mr Carroll did accept that the timing of the entry by Woodside into a sale contract was not dependent in any way upon the pre-existence of a hedge contract. He did not, however, accept the proposition that: … there is no necessary relationship between a hedge contract giving rise to a gain and loss in these proceedings and the sale of oil from Laminaria.? It was put to him that it was never part of the case for Woodside Energy that, when strategic hedges were entered into, there was necessarily a contract for the sale of oil in place to which they related. He agreed. He agreed also that it was never the case that three years out Woodside Energy had specific contracts that it sought to hedge. Oil production and sales from Laminaria 1999-2004 109 Production from the Laminaria and Corallina oil reservoirs was effected using the Northern Endeavour. A combination certificate was issued to the participants in the project under s 20 of the PRRTA on 11 October 1999. 110 In March 1999 following extensive analysis of the Laminaria reservoir a unitisation agreement called "The Laminaria Unit Operating Agreement" was entered into between the joint venturers. The parties to the agreement were Woodside Energy, BHP and Shell Development (Australia). Its effect was that Woodside Energy had a 44.925% overall share of the resource. BHP Billiton Petroleum (North West Shelf) Pty Ltd had 32.6125% and Shell Development (Australia) had 22.4625%. 111 A tariff arrangement operated to ensure that Woodside Energy was remunerated appropriately to allow for the fact that it had met 50% of the capital cost of the project. This was set out in a "tie in agreement" called the "Laminaria Tie-in Agreement" made on 16 March 1999. Schedule 5 to the Tie-in Agreement incorporated production forecasts in existence at that time which, as Mr Carroll said, illustrated the anticipated "peakiness" of the production. It showed a forecast production of 154,710 barrels per day for the first 14 months of production followed by a decline. This was on the assumption that the Northern Endeavour would have been in operation for 91% of the time. 112 Revenue earned by Woodside Energy on the sale of oil produced from the Laminaria Project for the calendar years ended 31 December 1999 through to 31 December 2004 were set out in annual accounts. The figures were as follows: (i) 31 December 1999 $90,862,000 (ii) 31 December 2000 $978,645,000 (iii) 31 December 2001 $816,621,000 (iv) 31 December 2002 $565,337,000 (v) 31 December 2003 $347,594,000 (vi) 31 December 2004 $275,627,000 These sales revenue figures were calculated and reported in Woodside Energy's statutory accounts net of hedging losses and gains. They reflected the early production spike associated with Laminaria. The sale of crude oil - the use of term contracts and the role of production forecasts 113 Mr Richards said that crude oil is usually sold under agreements with a duration of one or two years, commonly referred to in the oil industry as "term" agreements. They are generally priced by reference to a premium or a discount to a benchmark grade of crude oil. The premium or discount is usually fixed for the duration of the contract but the actual price may fluctuate over the life of the contract depending upon increases and decreases in the chosen benchmark price. 114 A number of factors specific to Laminaria militated in favour of term contracts in relation to a portion of the Laminaria production. These factors included: 1. Due to the physical properties of Laminaria oil which has a relatively high Naphtha component, relatively few refineries around the world would be prepared to pay high premiums on spot sales to purchase Laminaria crude for use as refinery feedstock. Most refineries serve markets which primarily demand gasoline. Splitting Laminaria crude would have yielded some gasoline and jet fuel and production rates in respect of those products would have been lower than obtainable from other grades of crude oil. Consequently other grades of crude oil could have been more attractive from the point of view of refinery economics. 2. Very high volumes of Laminaria crude oil were to be produced particularly in the early years of the project. The anticipated production was 170,000 barrels per day in the early phases. Mr Richards was of the view that it would have been difficult to sell all of the anticipated production by way of spot sales for an acceptable price. Laminaria oil was an untried product. Production forecasts and Laminaria contracts 115 In 1997 and 1998 before Laminaria commenced production, Mr Richards formed the belief that it was important to try to enter into a number of term contracts to secure customers for the sale of the product over a medium term. He regarded this as particularly important in the then prevailing economic environment which, from late 1997, had seen significant falls in the price of crude oil as a consequence of the "Asian financial crisis". A number of term contracts were entered into but he identified two as particularly significant to Laminaria sales. The first of these was a contract with Nova Chemicals Ltd (Nova Chemicals). The second was the contract with SIETCO. 116 Mr Richards negotiated the sale of oil to Nova Chemicals in 1998. Nova Chemicals is a North American petrochemical company which has a refinery in Ontario suited to the splitting of Laminaria crude. It had access to crude oil by way of pipelines running from Portland, Maine in the United States. Mr Richards' rationale for the term contract expressed in a memorandum of 7 October 1998 was that, absent such contracts, the marginal volume of Laminaria crude produced at the time of peak production had the potential to depress the value of the bulk of the volume sold. The contract with Nova Chemicals was made on 23 March 1999. Because crude oil could take up to 40 days to transport to Portland and as the price was to be determined at delivery, Woodside Energy was subject to oil price risk from the time that lifting schedules were prepared to the time of discharge. 117 The Nova Chemicals' contract did not yield the best price for Laminaria oil. It was a contract for 4.2 million barrels or 11.5 thousand barrels/day (calculated over 12 months). According to a memorandum dated 24 May 1999 from Mr Richards, Nova Chemicals was the only customer prepared to purchase well ahead of RFSU. The contract was for a 15 month term (1 October 1999-31 December 2000). It allowed that the first shipment might not be loaded until 15 December. Each cargo was subject to a two to three month loading window. The contract provided for flexibility in the grades of oil delivered. According to Mr Richards it gave Woodside Energy "significant control of shipping, scheduling and pricing basis exposure". 118 The SIETCO contract arose because the Shell Group had a large shareholding in the Petrochemical Corporation of Singapore Pte Ltd which required Naphtha as a raw material for petrochemical production. SIETCO was considering building a new splitting unit at its refinery at Pulau Bukom in Singapore. One application of the splitter was to produce Naphtha for supply to PCS. This provided an opportunity for Woodside Energy to enter into a term contract for the sale of a significant proportion of its Laminaria crude entitlement. The pricing arrangement with SIETCO was based on Gross Product Worth (GPW). This arrangement was intended to provide SIETCO with an incentive to build the splitter by reducing its exposure to refining margins and ensuring that the price it paid for Laminaria crude oil would be determined on the same basis as the prices which it received from the sales of the products of that crude. The SIETCO contract was entered into on 11 May 1999. It was for a three year term to commence after Laminaria production had begun and after the splitter had been built at the Bukom refinery. The contract ultimately ran from May 2000 to May 2003. SIETCO purchased, on a GPW pricing basis, approximately 60% of Woodside's entitlement to crude during that period. 119 The GPW formula sought to price crude oil by reference to prevailing prices for refined petroleum products in Singapore weighted according to the proportion of the products which could be produced from Laminaria crude. As Naphtha was the predominant component of Laminaria crude, the price was influenced by the price of Naphtha. Under a "net back" arrangement the price arrived at by applying the GPW formula would be reduced to allow for shipping costs to be borne by SIETCO as well as fixed and variable refining costs. It would also allow SIETCO a margin on the capital cost of constructing the splitter. 120 The GPW formula, which appears in cl 9 of the SIETCO contract, was determined by reference to a published LPG price for the month after the bill of lading and by reference to the average prices for Naphtha, jet fuel and other products quoted by Platts and Argus during the 15 days around the bill of lading date for which prices were quoted. Sales made pursuant to the SIETCO contract were priced by reference to a 15 day period in the case of the non-LPG constituents of the crude oil and by reference to a month long period in the case of LPG constituent components. Mr Richards described SIETCO as a "virtual joint venturer" in the Laminaria Project. 121 Mr Richards had expected at the time of negotiating the SIETCO contract and at the time of placing cargo specific hedges that there would be a good correlation between GPW and the crude oil price as determined by reference to Tapis and WTI. Nevertheless, the Woodside Group continued to monitor variations between GPW and Tapis prices. Mr Richards was continually aware of the differential between the two benchmarks. 122 Other term contracts for the sales of Laminaria crude oil between one and four cargoes were entered into with a number of customers between 1999 and 2002. These included: (a) Vitol Asia Pte Ltd, which entered into a term contract on 24 September 1999 for the purchase of four cargoes of 650,000 barrels (plus/minus 5%) for the year 2000 with one cargo to be lifted in each quarter. Pricing was determined by reference to either the monthly average price for Tapis for the month of the bill of lading less US$0.27 per barrel or, at the buyer's option, the average price for Tapis for the three week period surrounding the bill of lading date less US$0.27 per barrel. (b) Mobil Oil Australia, which entered into a term contract on 29 September 1999 to purchase three cargoes of 650,000 barrels (plus/minus 5%). Pricing was determined by reference to the average price of North West Shelf condensate published by the Asia Petroleum Price Index for the three week period surrounding the bill of lading plus US$0.03 per barrel plus freight. (c) Marubeni Petroleum Company Ltd, which entered into a term contract on 21 October 1999 for a 12 month period from March 2000 to February 2001 for the purchase of one 650,000 barrel (plus/minus 5%) cargo per quarter. Pricing was determined by reference to the average Tapis price for the three weeks surrounding the bill of lading date, minus US$0.15 per barrel. 123 When Mr Richards was Oil Marketing and Shipping Manager and Manager: Marketing and Commercial Services, cargoes sold individually (ie as spot sales) were usually priced by reference to the average price of the relevant benchmark during either a three week period around the bill of lading or a one month period being the month of the bill of lading. The benchmark was usually Tapis. 124 Mr Richards' strategy overall involved entering into a diversity of contractual arrangements that would enable Woodside Energy to meet its key business objectives which included operational control of shipping and protection of the Project against production curtailment. Laminaria oil sales 125 From the first production of Laminaria oil in late 1999 to the end of June 2002 Woodside Energy lifted approximately 126 cargoes of Laminaria oil. Mr Richards produced a spreadsheet giving a summary of each of the cargoes lifted, the purchaser of the cargo, the volume and the basis of pricing. Cargoes shown in the list as "Bukom" were sold to SIETCO under the SIETCO contract. As noted, about 60% of Woodside Energy's entitlement was allocated to SIETCO. 126 Each of the joint venture participants was entitled to an equity share of the oil produced. Woodside Energy was the operator of the joint venture. Rather than each joint venture participant taking a share of each cargo they accrued individual entitlements to a quantity of oil and each would lift separate cargoes to reduce those entitlements. Each participant arranged for the sale of its own share of the production. 127 An offtake coordinator was provided with production forecasts by the Operations Group. These were used approximately three months before the expected date of production and loading to prepare lifting schedules which identified the quantities of oil available for lifting by each joint venturer participant. The Bukom refinery was treated as if it were a separate or virtual joint venture for the purpose of preparing the schedules. The schedules identified likely dates on which cargoes could be lifted and the quantity available. Each lifting schedule received by Woodside Energy gave details of the quantity of Laminaria oil which it would be able to lift over the following three months and the expected date range within which each lift was expected to be made. 128 Terms and conditions governing the spot sales undertaken by Woodside Energy of Laminaria oil were usually set out in correspondence between Woodside Energy and the purchaser. General terms and conditions usually incorporated in such contracts provided that sales made FOB were subject to Woodside Energy's general provisions for spot FOB crude oil or condensate sales. An example of sales and hedging relationships - July to September 2001 129 Mr Carroll endeavoured to explain how the relationship between hedges and sales operated in practice by taking a sample period of sales from the Laminaria Project and explaining the hedges he put in place in relation to those sales. His sample comprised swap transactions said to have been entered into in relation to sales made from July to September 2001. He exhibited a spreadsheet showing sales and the price obtained for each cargo sold for the period from the end of the 1999 calendar year until the beginning of the 2005 calendar year. The spreadsheet was a copy of a business record kept by the Oil Marketing Department and updated regularly to record sales information from the project. It recorded the "counterparty" or purchaser details, the name of the vessel which lifted the oil from the Northern Endeavour, the loading date range within which the oil was scheduled for lifting and the date of the bill of lading issued when lifting was completed. A ninth column was headed "Price marker" and recorded the benchmark used to determine the price of each particular sale. A table was prepared from the spreadsheet setting out 12 cargoes of Laminaria crude oil lifted on behalf of Woodside Energy from the Northern Endeavour during the period July to September 2001. Bill of Lading Counter-party Volume Date (barrels)

11.07.01 Bukom 330,000 17.07.01 SKE 678,071 20.07.01 Bukom 330,000 31.07.01 Bukom 314,112

07.08.01 Bukom 300,000 13.08.01 SIETCO 681,432 13.08.01 Bukom 32,740 22.08.01 Bukom 265,095 28.08.01 Bukom 347,109 1,626,376

05.09.01 Nova Chemicals 709,179 11.09.01 Bukom 330,000 17.09.01 Bukom 325,000 1,364,179 OVERALL TOTAL 4,647,738

130 Nine of the sales set out in the table were designated "Bukom" indicating that they were made under the SIETCO contract. Another sale was to Nova Chemicals. There were two spot sales mentioned, one to SK Energy Asia Pte Limited and another to SIETCO. The prices obtained for each of the cargoes was shown in the thirteenth column of the spreadsheet headed "Realised Marker". For the 11 July 2001 transaction the marker estimate was US$24.50/bbl. The realised marker was US$23.001/bbl. For the 17 July 2001 the marker estimate was US$26.50/bbl and the realised marker US$26.056/bbl. Strategic hedging 131 Mr Carroll explained the nature of strategic hedging in relation to Laminaria oil. The volumes of Laminaria oil sold from July to September 2001 had been the subject of production forecasts made several years before. The hedges placed in relation to those sales were implemented over a period of several years in advance. 132 The Woodside Group's Treasury staff had a Microsoft Excel spreadsheet designated as the "Oil Cover Model". It facilitated monitoring of the level of hedges in place and allowed production of reports used by Treasury staff, the Treasurer and Mr Carroll to monitor the level of hedges in place and to place additional hedges if circumstances so required. Production forecasts for each of the Woodside Group's petroleum projects was fed into the Oil Cover Model. Laminaria Project forecasts were received from the Northern Business Unit. The information in the model was used by Treasury staff to ascertain what levels of "strategic hedging cover" shall be put in place and to record on a project by project basis and on a company wide basis what hedging cover was being placed. It was also used to assist in monitoring hedging cover levels to ensure that the levels in place were appropriate given the target prices set by the Finance Committee. Regard had to be paid to hedging parameters which could not be exceeded. 133 The Oil Cover Model allowed Woodside to track its hedge performance against forecast oil prices as demonstrated by the prices at which light sweet crude oil futures contracts were traded on the NYMEX for a variety of different closing dates. Details of prices at which futures contracts for various closing dates were traded on the NYMEX were regularly downloaded from the NYMEX or another data service provider into the Oil Cover Model. On the basis of this data Woodside Energy would produce a Woodside oil price curve used to determine the target price at which the company would be prepared to enter into oil price swaps and as a basis for negotiating the price of oil price swaps with counterparties. 134 The primary accounting and management tool used by Woodside Energy to record hedging transactions was a computerised Treasury accounting system known as the "Quantum" system. Entries in relation to individual strategic hedge transactions were made in the Quantum system at the time of placing hedges and again when they expired or were settled. Upon expiry of a strategic hedge the Treasury Department put in the settlement rate for the transaction by entering a separate but offsetting transaction in relation to the settlement or expiry of the hedge. Mr Carroll set out a table showing strategic oil price swap transactions in relation to Laminaria sales for the months of July, August and September 2001. Approval Number Deal Number Dale Date Expiry Date Volume (barrels Strike Rate Settlement Rate July 178 6622 18/08/99 31/07/01 85,333 17.900 26.174 174 6370 14/07/99 31/07/01 85.333 18.040 27.500 174 6403 28/07/99 31/07/01 85,333 17.500 27.500 177 6553 12/08/99 31/07/01 85,333 17.690 27.530 162 6133 28/10/98 31/07/01 93,000 17.600 27.830 Total 434,332 August 178 6623 18/08/99 31/08/01 85,333 17.900 26.838 174 6404 28/07/99 31/08/01 85,333 17.500 27.380 174 6371 14/07/99 31/08/01 85,333 18.040 27.380 162 6134 28/10/98 31/08/01 93,000 17.600 27.770 177 6554 12/08/99 31/08/01 85,333 17.690 27.480 Total 434,332 September 178 6624 18/08/99 28/09/01 85,334 17.900 27.300 174 6372 14/07/99 28/09/01 85,334 18.040 27.280 174 6405 28/07/99 28/09/01 85,334 17.500 27.280 162 6135 28/10/98 28/09/01 93,000 17.600 26.755 177 6555 12/08/99 28/09/01 85,334 17.690 26.755 Total 434,336 Overall Total 1,303,000

135 Mr Richards observed that although the Treasury assumed responsibility for strategic hedges in about 1996 it continued to receive advice from the Oil Marketing and Shipping Department about the implementation of the hedging policy. Mr Richards regularly met with Mr Carroll, usually on a weekly basis, to discuss Woodside Energy's exposure to a decline in oil prices in respect of its production from the Northern Endeavour and other facilities. They discussed price risks and agreed on recommendations about how strategic hedges would be placed. Sample of strategic hedging by swap transaction 1999-2001 136 Mr Carroll illustrated the swap transactions used in relation to the Laminaria Project by describing a particular transaction which related to the sale of 85,334 barrels of Laminaria crude oil in September 2001. 137 On 10 August 1999 the Treasurer asked for an approval numbered 177 to place strategic oil swap transactions in relation to a number of projects including Laminaria. The request sought approval to implement oil price swaps in relation to the following volumes of sale of Laminaria oil in the following periods: April 2000 - June 2000 331000(Group B) April 2000 - June 2000 331000 (Group C) July 2001 - September 2001 256000 (Group I) October 2001 - December 2001 256000 (Group J) April 2002 - June 2002 256000 (Group K) April 2002 - June 2002 256000 (Group L)

Mr Carroll exhibited a copy of Approval 177. 138 The Oil Cover Model report prepared by Treasury staff as at August 1999 showed that Woodside Energy's anticipated sales of Laminaria oil for the period July to September 2001 was 5,124,000 barrels. On p 5 of Approval 177 under the heading "Group I" the Treasurer requested approval to place oil swap transactions against 256,000 barrels of Laminaria oil at a price above US$17 per barrel which represented 5% of the anticipated sales of 5,124,000 barrels. Five per cent represented the maximum layer or maximum percentage of anticipated sales which could be hedged in a single transaction. On the first page of the document marked "LINK-SWAPCOVER - OIL - APP177" was a spreadsheet which recorded hedges placed following the approval. It only included swaps and futures. A second spreadsheet with the reference "LINK-WPCOVER - OIL - APP177" set out hedges in the form of swaps, futures and options and showed total hedge cover for projected production and sales as at August 1999. 139 It was Mr Carroll's normal practice, before signing an approval, to review the oil hedge program attached to the approval and to meet with the Treasurer, the person responsible for the transaction in Treasury and the Treasury Dealer. During discussions with Treasury staff and the Treasurer he would seek to ensure that oil price swaps proposed accorded with the Manual and any guidance given and the prices at which it was proposed oil price swaps be placed were appropriate given the Woodside oil price curve and expectations about future oil prices. 140 Pursuant to Approval 177 Woodside Petroleum and Morgan Stanley Capital Group Inc (Morgan Stanley) entered into oil swap transaction 3500 on 12 August 1999 in respect of 256,000 barrels of Laminaria oil. The fixed rate was US$17.690. The period hedged was a three month period between July and September 2001. Mr Carroll exhibited copies of the confirmations between Woodside Petroleum and Morgan Stanley relating to this transaction. Under its terms, Morgan Stanley agreed to pay Woodside Petroleum US$17.690 per barrel as of 30 September 2001 and Woodside Petroleum agreed to pay Morgan Stanley the floating price which was defined as the average of the daily settlement closing prices of the second nearby month "Oil WTI-NYMEX" futures contract. At settlement the two amounts were set off against each other. The effect was that Woodside Petroleum had to pay the difference, if any, between the agreed fixed price and the floating price over the three month period to 30 September 2001. 141 Woodside Energy initially entered into hedges for three month periods. However starting in about August 2000 it was decided that it would be preferable to enter into hedge contracts for one month periods. As a result each of the three month hedges was converted into three one month hedges. This was consistent with pre-existing accounting treatment. On 22 August 2000 Woodside Petroleum wrote to Morgan Stanley requesting that deal 3500 be converted into three one month deals. It confirmed that the new oil swap 6555 was for 85,334 barrels (one third of the original deal) at the same strike price of US$17.690. The new effective date was 4 September 2001 and the expiry date was 28 September 2001. A copy of the Woodside Petroleum confirmation was exhibited to Mr Carroll's affidavit. 142 The floating price as at 28 September 2001 was US$26.755. This meant Woodside Petroleum had to pay Morgan Stanley US$9.065 per barrel, being the difference between US$26.755 and the agreed strike price. Assuming that the oil actually produced was sold at the floating price, the hedging transaction would have guaranteed to Woodside Petroleum a net revenue per barrel of US$17.690 in relation to the proportion of the anticipated production which was hedged. Woodside Petroleum overall was required to pay the sum of US$773,552.71 to Morgan Stanley, representing US$9.065 multiplied by 85,334 barrels. 143 The final settlement rate which was the average of the second WTI for the month of the pricing period was entered into Quantum by Woodside Petroleum's Treasury Department at the end of the month, which in this case was September. After entering the data Woodside Petroleum sent a settlement confirmation to Morgan Stanley and received a confirmation confirming the amount payable. Copies of the confirmations showing the close out of the hedge of 85,334 barrels attributable to Laminaria oil on 28 September 2001 in respect of deal number 6555 were exhibited to Mr Carroll's affidavit. Cargo specific hedges 144 Mr Richards' Oil Marketing and Shipping Department was responsible, until 31 December 1999, for entering into futures contracts in relation to specific cargoes of oil or condensate to be sold by Woodside Energy in accordance with the oil price risk management policy. Responsibility for all cargo specific hedging was shifted to Treasury from the beginning of January 2000. The reason for the shift, according to Mr Richards, was that it provided a more effective use of manpower. 145 Cargo specific hedges differed from strategic hedges in that they were usually only placed after a lifting schedule had been prepared and cargo volumes were known. They were intended to have the effect of fixing or locking in the price obtainable on the sale of all or part of a particular cargo to the extent that such portion had not already been hedged by the longer term strategic hedges. Mr Richards said that cargo specific hedges were placed if it was thought that there was a risk of decline in the price between the time at which a lifting schedule became available and the time at which the price was determined under the relevant contract. The period could be as long as five months although it was typically about three months. Cargo specific hedges could be entered into up to six months in advance of sales. They were designed to protect Woodside Energy against declines in the price of oil during the period, after receipt of the lifting schedule, in which the crude oil was being produced, stored, loaded, transported, delivered and sold. 146 It was possible to estimate Woodside Energy's cargo entitlements with a high degree of accuracy during any given six month period, at least in the initial stages of the project. When production was approaching its peak it was consistently at or around 170,000 barrels per day. 147 Mr Richards referred to the policy guidelines for entering into hedge transactions. He observed that futures contracts and collars were two of the authorised financial instruments and that to the best of his recollection the WTI futures contract was the only instrument used to place cargo specific hedges. Rationale and practice of oil futures contracts 148 As noted earlier, about 60% of Woodside Energy's entitlement to Laminaria production between May 2000 and May 2003 was sold under the SIETCO contract by reference to GPW. Other sales of Laminaria crude were priced by reference to various benchmark rates of crude oil. Despite this there were what Mr Richards described as "very sound reasons" for entering into hedging contracts priced by reference to WTI. 149 Mr Richards referred to the good long term correlation between the different pricing bases. There was no market for exchange traded futures in Tapis or in GPW. Oil futures contracts were traded on the NYMEX and the London-based International Petroleum Exchange (the IPE). Mr Richards regarded these as the two principal markets for all oil futures in the world. He described the NYMEX WTI futures contract. It was introduced in 1983. It is one of the world's most actively traded futures contracts based on an underlying physical commodity. 150 A party entering into a NYMEX WTI futures contract commits to either make or accept delivery of a specified quantity of WTI crude during a specific month. Contracts are traded in lots of 1,000 barrels and delivery is required to be made at Cushing, Oklahoma or at certain pipeline delivery locations in North America. The contracts can be entered into in relation to 30 consecutive months as well as "long dated" futures initially listed at 36, 48, 60, 72 and 84 months prior to delivery. A contract to make delivery is a "sell" contract. A contract to take delivery is a "buy" contract. 151 In practice NYMEX contracts are rarely settled by physical delivery of WTI crude. Both sellers and purchasers of crude and refined petroleum products use the futures market as a means of managing price risk even though they may not be selling or purchasing WTI. Rather than physical delivery, producers such as Woodside Energy who enter into sell contracts typically buy back their contracts before the contract expiry date and therefore before the delivery under the sell contracts is required. This is done by purchasing contracts requiring the producer to accept delivery of an equivalent volume of crude oil thereby offsetting or "closing out" the delivery obligation. 152 Against the increasing oil price scenario is the detriment to the producer caused by a decline in the benchmark price between the time of entering into the futures contract and the time for sale of the physical commodity. This can be offset by the net gain which the producer makes by closing out the futures contract, ie the buy back exercise. Contracts to take delivery of crude could be bought for less than the value of the sell contracts already held. The intended outcome from the producer's point of view is to ensure a stable predetermined amount of revenue as a consequence of the sale of the commodity notwithstanding fluctuations in price. 153 Mr Richards could determine from lifting schedules which cargoes were to be allocated to Woodside Energy over the coming three months as well as their expected loading date ranges. He used this information to allocate cargoes to term contracts and also to some extent to allocate cargoes between term and spot sales. As well as being used to plan sales, the lifting schedule information was used as an integral part of the cargo specific hedging program. The Oil Cover Model was also used for cargo specific hedging. He regularly received reports of the Oil Cover Model which enabled him to ascertain how much long term hedging was already in place in relation to sales of Laminaria crude to be made in any given month. 154 In practice Mr Richards would decide whether cargo specific hedges should be put in place in relation to Laminaria sales. He would do so after attending a weekly meeting with Treasury personnel including Mr Carroll at which hedge levels, both strategic and cargo specific, were discussed as well as a range of economic factors. 155 Mr Richards prepared a spreadsheet entitled "Exposure Phasing of Hedges" in or around September 1999. This showed the calculations he had made in order to determine the futures contracts to be entered into at that time. His object in preparing the spreadsheet was to identify the particular periods over which Woodside was exposed to oil price risk. Where 650,000 barrels of Laminaria crude oil were to be delivered in the period 20 to 24 December with a pricing period over three weeks, the spreadsheet divided the quantity of 650,000 barrels in three and allocated one third to each of the week of the bill of lading. Using this mechanism, Mr Richards defined the quantity of oil for which Woodside was exposed to oil price risk week by week. The weekly quantities were totalled to create the information shown at the bottom of the table in the row entitled "Physical exposure (phased by week of pricing)". The total was compared with the total of strategic oil price swaps for the same period. As cargo specific futures were placed, the quantity placed was incorporated within the report. By way of example, in the period ending 19 December, the spreadsheet indicated that 478,000 barrels were covered by cargo specific hedges and 738,000 barrels covered by strategic oil swaps. 156 Mr Richards would buy back the futures contracts as and when the underlying physical oil price exposure fell away as the cargo was priced. He would buy the contracts back rateably over the period during which the price for the relevant cargo was being determined. For example, where a cargo of 100,000 barrels was being priced over a four week period, he would buy back 25,000 barrels (or 25 lots) each week for four weeks. Basis risk 157 Woodside Energy sold most of its Laminaria oil by reference to the Tapis and GPW pricing benchmarks. Its hedging contracts, however, were priced by reference to the WTI pricing benchmark. WTI futures contracts are traded on the NYMEX in a very liquid market. The WTI price is therefore a suitable basis for "over the counter" derivatives entered into with counterparties such as banks. Woodside Energy could not price its hedge contracts by reference to GPW or Tapis prices. GPW was a specific pricing basis used for the SIETCO contract and the market for Tapis was relatively illiquid. 158 In 2000, it appeared to Mr Carroll that the differences between the pricing bases was adversely affecting Woodside Energy. While there was a high correlation between GPW and WTI bases over the long term, there was a lower correlation over shorter periods. He exhibited PowerPoint slides from a presentation made in November 2000 by one of the staff which summarised the results of the correlation analysis conducted by Woodside into the basis risk between GPW and WTI. The two pricing benchmarks were highly correlated beyond 12 months with an acceptable basis risk beyond that period. Alternatives proposed were to close out existing WTI hedges or to hedge using spread locks between WTI and GPW which involved the following options:

1. Hedge the three predominant products.
2. Hedge based on a 50.43% Gasoil & 40.41% Jet/Kero basis.
3. Hedge using a single product as a proxy hedge. The conclusion was:
4. Woodside has a basis risk between WTI and GPW.
5. This basis risk is only in the near term.
6. Woodside does not need to close existing WTI hedges. 4. Woodside can close the basis risk by entering into a spread lock between WTI and the constituents of the basket.
7. The suggested hedging alternative satisfied lots FAS 133 requirements. 159 His recommendation was that Risk Management be granted authority to target lifting WTI hedges rolling into the next 12 month period linked to the Bukom sales project and to transact spread locks for one of either:
8. The three predominant products Naphtha, Jet5/Kero & Gasoil.
9. A basket on a 50.43% Gasoil & 40.41% Jet/kero Basis.
10. A single product being the Jet Crack Spread. Mr Carroll explained that the term "spread lock" referred to basis risk hedges designed to minimise the pricing differential between WTI and Tapis and WTI and GPW. In early 2001 Woodside Energy began taking active steps to manage basis risk by entering into these hedges. He made his own presentation about basis risk hedges to the Finance Committee in October 2001. Recording strategic hedges 1999 - 2002 160 Mr Carroll exhibited to his principal affidavit an extract from the Quantum Treasury Accounting System entitled "Laminaria Oil Swaps Realised Gains/Losses for Woodside Petroleum 01-Jan-1999 to 31-Dec-2002". The printout recorded individual swap transactions entered into by Woodside Energy which gave rise to gains or losses between 1 January 1999 and 31 December 2002. The total losses for swap transactions referable to Laminaria during that period amounted to US$257,649,774.61. 161 The details of each basis risk hedge were entered into Woodside's Quantum accounting system at the time of entering into the transaction and was updated at the time of settlement. The report also recorded losses and gains in respect of option hedges referable to Laminaria production and sales. These losses for the period 1 January 1999 to 31 December 2002 came to US$51,121,922.29. 162 Mr Carroll explained that sales revenue from the sale of Laminaria oil was recognised at the time that it was earned. This was usually the time of delivery unloading from the FPSO into the buyer's vessel. Delivery occurred once all the lifting from the FPSO had been completed and the bill of lading issued. 163 Gains or losses on strategic hedge transactions for anticipated sales in a particular month were brought to account as part of sales revenue in Woodside Energy's accounts at the end of the month in which those sales occurred. The amounts entered into the accounts at the end of each month were originally entered using the Australian/US dollar hedge settlement rate average, published by Reuters on the last date of the month. The settlement of the strategic oil price swaps was usually effected on the fifth business day of the following month. The actual amount paid or received in US dollars was able to be converted at that time to Australian dollars using the HSRA rate. An adjustment was made to the amount of the gain or loss reflected in Woodside's accounts to reflect any movement in the HSRA rate during the period from the end of the previous month to the date of settlement. Highlander transaction 164 Mr Carroll gave evidence about a specific transaction which he referred to as the "Highlander transaction". Towards the end of 1999, Woodside Energy commenced negotiations and then bid for an interest in an oil project in the Gulf of Mexico, known as the Angus project. The asset was owned by an American company, Marathon Oil. The bidding process, within Woodside, was code named the "Highlander Project". Had it succeeded the bid would have resulted in Woodside Energy having increased exposure to oil price risk from the date of the bid. Before it was known whether the bid would be successful there was a period during which Marathon Oil's joint venture partners were entitled to exercise pre-emptive rights to acquire Marathon's interest in preference to Woodside Energy. 165 In order to protect the exposure which would have resulted had the Highlander bid been successful, Woodside Energy entered into hedging contracts between 10 and 17 November 1999. These were approved by Approval 183 which was exhibited to Mr Carroll's principal affidavit. 166 In the event, Woodside Energy was pre-empted by another party in late December 1999. Its bid did not succeed. When the hedges to cover the Highlander bid were placed, not all of the expected Laminaria production which could have been hedged with the parameters of the Treasury Policies Manual had been hedged. Mr Carroll said in his affidavit (at [127]): As it was possible that the bid might be unsuccessful, it was considered that any hedges in respect of the Highlander project which were not closed out would be retained as hedges in respect of the Laminaria project in lieu of hedges which would otherwise have been placed. In order to account for these they were referred to in the Quantum system as "LAS" transactions. Early in January 2000 when it became apparent that the bid was not going to succeed, Woodside Energy could have closed out the LAS hedges and immediately realised any loss or gains resulting. Instead of doing this it closed out hedges in relation to about two million barrels and treated the balance of the hedges as referable to expected production and sales from the Laminaria Project. This was an internal administrative reallocation. The return, the assessment and the objection 167 Before Woodside Energy's first PRRT return had to be lodged in August 2000 Mr Carroll took the view, following discussion with Woodside Energy's taxation manager, that rather than incurring the risk of exposure to penalties, the company would prepare and lodge its return on a basis consistent with its understanding of the Commissioner's position and then object to the first assessment received as required by the PRRTAA. The same approach was adopted with respect to subsequent returns. 168 It is the tax assessable for the financial year ended 30 June 2002 that is in issue in this case. In its return for that year Woodside Energy declared total assessable petroleum receipts of $685,444,870. Transferable exploration expenditures totalling $174,572,256 were transferred under ss 45A and 45B of the PRRTAA, leaving taxable profit of $429,825,898. An assessment issued on 26 September 2002 on the basis of the taxable profit declared assessing tax at $171,930,359. 169 On 21 November 2002, Woodside Energy lodged a notice of objection against its assessment for the year of tax ended 30 June 2002. In the objection it claimed that the assessment was excessive and should be altered and reduced by: (i) reducing in whole or in part the amount of assessable petroleum receipts by an amount of not less than $106,399,732; (ii) allowing in whole or in part a deduction of not less than $497,998,422 ; (iii) recalculating the Taxable Profit of the taxpayer for the year of tax and the taxpayable thereon. 170 Woodside Energy asserted that the assessment should be amended so that its taxable profit for the year of tax was computed on the basis that: (a) its assessable petroleum receipts were computed after deduction of the amount of $106,399,732 or some greater or lesser amount representing hedge expenses incurred and being expenses payable by it in relation to the sale of petroleum or a constituent of petroleum recovered from the production licence area or areas in relation to the Laminaria Project; and (b) the amount of transferable expenditure to be deducted under s 22 of the PRRTAA in respect of the year of tax was an amount of $497,998,422 or such greater or lesser amount as was capable of and/or properly to be transferred under s 45A; and (c) alternatively to [(a)], its assessable petroleum receipts be computed on the basis that the consideration received by it from the sale of petroleum or a constituent of petroleum from the Laminaria Project did not include the amount of $106,399,732 representing hedge expenses; (d) alternatively, the class 2 augmented bond rate general expenditure of the taxpayer for the year of tax or other deductible expenditure of the taxpayer for the year of tax should be increased by an amount of $106,399,732 representing hedge expenses incurred. 171 So far as transferable expenditure was concerned, Woodside Energy said in its grounds that it should be calculated after taking into account amounts of $148,784,120 and $299,593,710 representing hedge expenses incurred in the years ended 30 June 2000 and 30 June 2001. Alternatively, the assessable petroleum receipts it derived from the Laminaria Project should be taken not to have included amounts equal to the amount of hedge expenses incurred in each of those years. 172 The objection also sought amendments relating to non-hedging costs by way of freight costs and feasibility expenses and exploration expenditure in the years ended 30 June 2000 to 30 June 2002 inclusive. 173 On 24 December 2003 the Commissioner issued an amended notice of assessment. The taxable profit for the year of tax ended 30 June 2002 was reduced to $371,202,675 and the tax assessed was $148,481,070. An adjustment sheet showed that additional deductions were accepted in relation to transferred exploration expenditure resulting from adjustments made to earlier years totalling $54,538,692 and transferred exploration expenditure resulting from the cost of feasibility studies totalling $4,084,531. As is apparent from the amended assessment, the objection in relation to the deductibility of hedge expenses was disallowed. The quantum of the claimed hedge losses - Ms Rapinet's evidence 174 Woodside Energy relied upon the evidence of Laurel Rapinet, one of its Treasury Insurance Advisors who, until July 2003, was employed by the company as Treasury Accountant with responsibility for the management of its settlement and accounting functions. In 2003, Ms Rapinet reviewed the PRRT objection which the company had lodged and conducted a reconciliation and an inspection of the company's accounting records to validate the amounts claimed in the objection in respect of the three tax years to 30 June 2002. 175 In her first affidavit, Ms Rapinet referred to a computerised Treasury system called "Quantum" which records, monitors and accounts for hedging transactions. She exhibited a summary, in an Excel spreadsheet form, of the losses claimed in each relevant PRRT year ending 30 June. The amounts claimed in the objection had been taken from general ledger accounts. The amounts recorded in her spreadsheet under the column 6350H which came from the general ledger recorded losses and gains from all hedges said to relate to Laminaria sales except cargo specific hedges which were recorded separately under column 6350SH. 176 In a second affidavit Ms Rapinet explained that the general ledger is the primary accounting record maintained by Woodside Energy to record its financial transactions. It is used and relied on each year as a financial record to help prepare financial statements for the Group. Those statements are audited and reported in the Annual Reports of Woodside Petroleum. Within the general ledger many underlying accounts are maintained. Each records particular types of transactions by specific journal entries. Until 31 March 2002 the general ledger was maintained using an accounting computer program called "SUN". The designation "6350H" in her summary referred to an account by that number within the SUN system which was used to record losses and gains from hedges in respect of Laminaria sales except for cargo specific hedges. Thelatter, as noted above, were recorded in that system under the account number 6350SH which is another column heading in her summary. From April 2002, Woodside Energy's general ledger has been maintained by using a different accounting computer program called "Ibis". Losses and gains from all hedges in respect of Laminaria sales were recorded under account 5003101 in the Ibis system. 177 Ms Rapinet explained that journal entries in the general ledger accounts are made by Woodside Energy's accounting staff on the basis of their knowledge of the transactions reflected in those entries or on the basis of information supplied by persons with the relevant knowledge. In the case of hedging transactions, the relevant information was provided by Treasury staff responsible for administering the hedge transactions. She exhibited to her second affidavit a printout showing entries recorded in the SUN system in account 6350H for the period December 1999 to March 2002. Another printout showed entries recorded in that system in account 6350SH for the period November 1999 to December 2001. A further printout showed entries recorded in the Ibis system in account 5003101 for the period April 2002 until June 2002. She described each of the exhibits as a printout of records kept by Woodside Energy in the ordinary course of its business, unlike the summary which she specifically prepared for the review of the PRRT objection. She agreed in cross-examination that the Ibis system records did not contain information about the month in which the hedges to which it referred were entered into nor information about the class of hedge or the period to which it related. She said that the SAP general ledger contained in the Ibis system reflected cash payments and cash receipts in respect of hedges. It recorded the time at which the relevant amount accrued in the accounts. 178 Ms Rapinet's summary table showed how each of the monthly entries in the two general ledger accounts had been derived. They were principally extracted from the Quantum system which separately recorded losses and gains for swap and option hedge transactions in respect of Laminaria as well as basis risk hedges. The amounts in the Quantum system were recorded in US dollars but had been converted to Australian dollars for the purpose of the table. 179 Ms Rapinet said that the losses and gains recorded in the Quantum system did not reconcile entirely with the amount shown in the general ledger. In examining the relevant journal entries she identified general ledger journals which related to transactions not included in the Quantum system. They were set out in two separate columns headed "Sundry" and "Futures Closeouts". She said in cross-examination that she had extracted the journals from archives. The futures closeouts all sat under 6350SH. Sundries came under 6350H. 180 Based on journal details the March 2001 Sundry amount of $32,863.92 related to a payment adjustment to Morgan Guarantee, a hedging counterparty. In October 2001, an amount of $34,509.62 related to an exchange adjustment on oil closeouts was posted in the general ledger. Amounts in the column headed "Futures Closeouts - 6350SH" represented losses referable to cargo specific hedges recorded in the general ledger account maintained in relation to Laminaria. Ms Rapinet said that the table contained a reference to a figure of $71,416 in the 6350SH column for December 2001. That amount was initially posted (in debit to the expense) in October 2000 and subsequently reversed (in credit to the expense) in December 2001. A column headed "Laminaria Write-off" showed figures totalling $3,537,643 for the months January 2002 to April 2002 inclusive. Ms Rapinet explained that as Treasury Accountant she would review hedge transactions each month by reference to underlying exposures or sale exposures. The purpose of the review was to ensure that Woodside Energy was not over-hedging the underlying sales. If hedging exceeded underlying sales exposure then the hedging was considered ineffective to that extent. In her review in December 2001 she determined that for the months of January to April 2002 inclusive the total of the hedges exceeded sale exposure. A decision was taken to write off the profit or loss in the hedges so that they did not go into the general ledger account 6350H. The actual decision was evidently taken by Mr Williams, the manager of the Group accounting area who was responsible for the statutory accounting of the company. 181 Ms Rapinet's general ledger reconciliations recognised postings at journal dates. However the amount described in the objection as hedge expenses referable to the year ended 30 June 2001 excluded the initial posting in October 2000 and as such there was no need for a reversal in the following tax year. The amount of hedge expenses described in the objection for the end of the 2001 year was determined by taking the sum of $299,665,126, the amount listed in the general ledger for the 2000/2001 tax year and subtracting the sum of $71,416. The amount described in the objection as hedge expenses referable to the year ended 30 June 2002 was determined similarly. 182 I accept Ms Rapinet's evidence generally. Specifically, I accept the accuracy of the figures set out in her spreadsheet as reflecting hedge expenses for each of the relevant years. I also accept the breakdown of the totals for each of the relevant years into hedge classes and the entries relating to them under the headings "Sundry" and "Futures Closeouts". I accept her description of her practice of reviewing hedge transactions monthly by reference to underlying exposures and treating as ineffective hedges which exceeded those underlying exposures. Expert opinion evidence of Professor Ross Garnaut 183 Professor Ross Garnaut is Professor of Economics at the Australian National University. By a letter dated 7 October 2005 he was requested by the solicitors for Woodside Energy to provide his expert opinion in relation to a dispute concerning the appropriate treatment of hedge expenses under the PRRTAA. He produced a report, responsive to a number of questions put to him by the solicitors. The report was exhibited to his affidavit of 28 March 2006. Professor Garnaut's evidence was the subject of a ruling as to admissibility in an interlocutory decision published on 4 October 2006: Woodside Energy Ltd v Commissioner of Taxation (2006)155 FCR 357. Under the terms of that ruling it was received subject to relevance. 184 Professor Garnaut served as Principal Economic Advisor to the Prime Minister, Mr RJL Hawke, from 1983 to 1985. From 1985 to 1988 he was Australian Ambassador to the People's Republic of China. He did not occupy any economic advisory role with respect to government when the PRRTAA was enacted in 1987. It appears also that he had no part in the preparation of drafting instructions in relation to the legislation. 185 The questions posed for consideration by Professor Garnaut began by asking for an 'economic perspective' on what is conveyed by the description of a tax as a 'resource rent tax'. He was asked to identify 'from an economic perspective' the features and objectives of such a tax distinguishing it from royalty or excise regimes. He was asked about the relationship between the term 'economic rent' and the profit of a particular resource project in respect of which RRT is payable. Against the background of those questions there were then five specific questions put relating to the hedging losses claimed by Woodside Energy. They were as follows: 5. On the assumption that PRRT is intended to be a tax on "economic rent", would an economist make allowance for amounts received and expenses incurred on the hedging activities undertaken by Woodside in relation to the Laminaria project (as described in the Woodside affidavits) in measuring the amount upon which PRRT is to be levied in relation to the Laminaria project? 6. Would an economist regard the expenses incurred by Woodside in relation to the hedging transactions described in the Woodside affidavits as expenses payable in relation to the sale of petroleum produced from the Laminaria project? 7. Is there any reason why an economist would treat hedging expenses differently from interest paid in respect of monies borrowed for the purposes of assessing economic rent or the amount upon which to levy PRRT? 8. In your opinion, can the hedge expenses incurred by Woodside in relation to the Laminaria project (as described in the Woodside affidavits) be described from an economic point of view as marginal costs associated with the Laminaria project? You should explain what is meant by the description of a cost as a "marginal cost". 9. If one failed to take into account the hedge expenses incurred by Woodside in relation to the Laminaria project (as described in the Woodside affidavits) in measuring the economic rent or the amount upon which to levy PRRT, what would be the consequences of such a failure in terms of meeting or failing to meet the objectives of a resource rent tax? 186 In his statement in response to these questions, Professor Garnaut began by describing how he and another colleague, Professor Anthony Clunies Ross, had developed the concept of a RRT as an instrument for the taxation of what he called 'mineral rent.' He attached to his statement a paper published in The Economic Journal of June 1975 entitled "Uncertainty, Risk Aversion and the Taxing of Natural Resource Projects". He and Professor Clunies Ross also jointly wrote a book on the topic entitled Taxation of Mineral Rents published by Clarendon Press in Oxford in 1983. 187 The substantive part of the statement began with an explanation of the concept of "mineral rent" in a mining or petroleum project. This term was defined as the excess of total revenue derived from the project over the sum of the supply prices of all capital, labour and other "sacrificial" inputs necessary to undertake it. By sacrificial inputs Professor Garnaut meant inputs that have value in alternative uses and whose allocation to the mining project involves an opportunity cost of not applying them to those alternative uses. He then described an "RRT" as a tax imposed on a mineral rent and not the inputs necessary to generate it. Such a tax is applied to economic rent because if appropriately designed and applied it will be economically "neutral". That is to say, it will not cause decisions to apply labour, capital and other resources to the project that differ in any way from the decisions that would be taken in the absence of taxation. He described the aim of the RRT as the generation of revenue "without distorting business decisions on the amount or composition of investment or production". 188 Professor Garnaut went on to say that the RRT is assessed only on the revenue earned in the mineral project that exceeds the total cost of all the inputs essential to production, including the supply price of investments. He compared this system with the royalty which is typically applied to volume or value of production whether or not the project in question is generating revenues in excess of the amount required to cover in full the supply prices of all inputs into production. An RRT does not place a burden on the extraction of minerals or petroleum from parts of the ore body or petroleum field where the extraction costs absorb the whole or nearly the whole of the value of production from that part of the resource. A royalty on the other hand will place some burden on such high cost production even if the costs are nearly equal to the value of production. An RRT will therefore not deter investment in resource deposits which are expected to yield only a small surplus above the costs of all inputs into production. A royalty will deter such investment. An excise, like a royalty, is applied to the value or volume of production. 189 Professor Garnaut described the economic rationale for applying RRTs rather than conventional royalties or excises. The RRT would support the development of all resource deposits for which the expected economic benefit of development would exceed the economic costs of development. An RRT will support the generation of the maximum amount of economic value that can be generated from mineral resources. He discussed "economic rent" which he called "the economist's concept of profit". He contrasted it with accounting profit or taxable income which are approximations of "pure profit". They are constrained by conventions and legal definitions that have emerged from the practical application of the idea of "profit" over time. He then set out various consequences of applying an RRT, including the immediate deductibility of expenditures on the project and the deduction from income of the full opportunity costs of all capital provided to the project. 190 In brief oral evidence-in-chief Professor Garnaut said, by way of clarification of terms, that he used the term "mineral or resource rent" as a particular application of the concept of economic rent in the minerals industry. He accepted also that a definition of economic rent consistent with that which he had given in his report was: … a return to capital in excess of that required to attract and hold in resource industries that capital required to develop those resources. 191 Relevantly to the part played by hedging costs in the theory of an RRT. Professor Garnaut said: Conceptually, the assessment for resource rent tax begins with a calculation of revenues from mineral sales, net of costs of sales. He observed that investors may choose to sell forward part or all of expected production, reflecting judgments about higher prices obtainable in the forward market. He said: Hedging the price of future sales through derivative markets is indistinguishable in economic terms from forward sales. He went on: The hedging process can become complex in detail, but the relationship of hedging to the resource rent tax is conceptually simple. Revenue for resource rent tax should be defined to include any losses or gains from forward contracts or hedging contracts that are part of the sales process. It is irrelevant conceptually whether the hedging process leads to higher or lower prices than, in the event, would have been achieved from spot market sales. And further: … if the hedges were put in place as part of the decisions on sales that underlie investment and production decisions, the losses or gains from them are part of the proceeds of sales. 192 In cross-examination Professor Garnaut accepted that commonly hedge transactions are tradeable and that there is a liquid market for those tradeable instruments. They are used to offset the risks in a market for a tangible commodity. The market for the instrument and the market for the tangible commodity are different markets. 193 It was put to Professor Garnaut that when an investment in hedging instruments "goes sour" it has the potential of depressing net cash receipts from a project. He did not accept the appropriateness of the term "going sour". He said: When a company selling commodities hedges alongside the sale of commodities, it will sometimes very deliberately be locking in a price for the product. If it makes a loss on the financial instrument, it will be making a corresponding increased gain on the commodity. And it will still get the price that it expected to get. So, it is not going sour. It is the hedge of the commodity sale working. 194 Professor Garnaut said in his report that an economist would regard the expenses incurred by Woodside Energy in relation to most of the hedging transactions described in its affidavits as expenses payable in relation to the sale of petroleum produced from the Laminaria Project. He justified that statement by saying: This is because the hedging transactions were an integral part of the sales process, affecting decisions on the production that supported the proposed sales. At the same time, an economist would regard any profits generated from such hedging transactions to be part of the revenues from sales. The one doubtful set of transactions relates to the hedges put in place as part of the preparation for the Highlander project and then transferred to the Laminaria project. Here an economist would seek to apply the principles defined in 5(v) above to the facts of the Highlander-Laminaria transactions. On my reading of the facts, at least part of the expenses incurred by Woodside in relation to the Highlander-Laminaria hedging transactions would be expenses payable in relation to sales from the Laminaria project. I interpolate that it does not appear from the evidence that decisions on production supporting proposed sales were affected by hedging transactions. The hedging transactions were effected by reference to projected production and sales. 195 Professor Garnaut was asked in cross examination what it was that would distinguish some hedging transactions from others that in his mind would lead one class of transactions to be referable to the question of RRT and another not. He said: The question that was in my mind was whether the hedging was part of the sales process. If as part of the sale of oil the company was entering into a hedging arrangement to in effect create a forward sale at a definite price for that oil, then it would seem to fall within the requirements of net assessable receipts for resource rent tax. If on the other hand the company was engaging in hedging transactions that were not related to the sale of the commodity, then that would create different circumstances that would require its exclusion and so everything comes back to a question of fact. He accepted that there were economically relevant limits to the relationship. Hedging transactions that were not part of the sale process should not be included in net assessable receipts for RRT purposes. He accepted also that the position was less clear where a company did not hedge against a project but hedged at a corporate level. He said he had very clearly in mind the practice of some companies to hedge independently of the specific price risk of particular parts of their production. 196 The question of the distinction between hedging transactions related to sales and transactions not so related was revisited in re-examination. Professor Garnaut said the exception he had in mind was the Highlander transaction. Asked whether he was conscious, in making his comments, about the distinction between strategic hedging and cargo specific hedging arrangements he said he was aware those terms were sometimes used but would not say that they were germane to the issues upon which he was commenting. The question whether the hedging was part of the sales process or not was a question of characterisation. By that he meant characterisation from an economic point of view. 197 As to the comparison between hedging losses and deductions of interest related to investment in the project, Professor Garnaut said that the losses or gains from hedging against the risk that prices at the time of sale will fall below the prices available in current forward markets is one of the things determining net revenue from sales. He said: There is no conceptual similarity between the interest on debt and losses from a hedging contract. 198 In the final portion of his statement, Professor Garnaut contended that if assessment for RRT failed to add to or deduct from sales revenue the gains or losses from hedging contracts that were integral to sale of product, the tax would not have as its base economic rent or pure profit. He spoke of resulting distortions to investment and production in the resource industries which would be antithetical to the objectives of the RRT. 199 Professor Garnaut agreed with the proposition that he regarded hedge expenses as deductible in calculation of a RRT because without deducting them from receipts a true profit could not be calculated. He added: … the link that I had in mind there was that if you choose to sell a commodity, say gold, and at the same time enter into a hedge contract to remove the commodity price risk, then that is exactly - conceptually exactly the same as selling the gold forward. And selling the gold forward is conceptually simply related to the resource rent tax. And I am saying the use of derivative instruments to create that same result is relatively straight forward. 200 He accepted that the economic concept of "true profit" is not constrained by legal definition nor by conventions attached to the ordinary concept of profit. His published works had drawn a distinction between profit as defined for the purposes of corporate income tax and the economic concept of economic rent. He regarded true profit as the surplus of revenue after the deduction of the true costs of all inputs into production. 201 I accept Professor Garnaut's evidence as an account of his model of a tax on economic rent in a particular application to profits from resource projects. I accept that consistently with that model hedging transactions would be regarded as indistinguishable in economic terms from forward sales. I accept that a tax on project profits giving effect to that model and consistently with its underlying theory, would include profit net of hedging expenses which could properly be said to be related to sales giving rise to that profit. 202 It does not follow, however, that a taxing statute imposing tax by reference to profits from resource projects and bearing the label "resource rent tax" is to be seen as an application of the model propounded by Professor Garnaut. The assumption upon which his evidence was based was that the PRRT is intended to be a tax on "economic rent". That is a very broadly stated assumption which is capable of encompassing a range of statutes which might differ in detail. In the context of this case, the assumption appears to be that the PRRT was intended to be a tax on economic rent applying the model proposed by Professor Garnaut in his writings on the topic dating back to 1975. 203 An assumption that legislation which uses economic terms or concepts related to a particular economic theory or model, thereby applies the theory or model, whether it be for the purpose of regulation or tax collection, is an assumption which requires close scrutiny. Particular statutes may be based upon or inspired by economic theories or models. Their precise terms, however, may reflect policy choices or political compromises inconsistent with a complete acceptance or application of the theory or model concerned. Counsel for Woodside Energy properly accepted in closing argument that the exposition given by Professor Garnaut of a tax on economic rent could encompass a wide variety of statutory models and that the political process did not always produce models of intellectual coherence. 204 Debates about the application and purpose of s 46 of the Trade Practices Act 1974 (Cth) concerning abuse of market power, illustrate the point. On one view the proper purpose of s 46 as enacted was to protect competition rather than competitors: Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (2001) 205 CLR 1 at 13; Boral Besser Masonry Ltd v Australian Competition and Consumer Commission (2003) 215 CLR 374. Nevertheless the section has been subject to amendment designed to protect the interests of small business rather than the competitive process. The High Court has observed that statutes sometimes embody responses to "shifting and contradictory positions" taken by a range of interest holders in legislative outcomes and expressing "an inarticulate (or at least not publicly disclosed) compromise": Stevens v Kabushiki Kaisha Sony Computer Entertainment (2005) 224 CLR 193 at [32]. There is nothing to suggest that taxing Acts have higher standards of logical and normative consistency than any other class of statute. 205 As appears from the legislative pre-history referred to later in these reasons, the debate about the introduction of an RRT regime was publicly acknowledged by a government minister as having been initiated by Professor Garnaut's writing. That fact is not, however, a reliable guide to its construction. The construction of the Act must, as always, begin with the ordinary meaning of the words taken in their context and having regard to the apparent statutory objectives. The relevant context in this case includes particular provisions of the Act relating to assessable receipts and deductible expenditure. 206 In my opinion, and with no disrespect to an economist of high reputation, the evidence of Professor Garnaut, which was admitted subject to relevance, has limited utility in these proceedings. It establishes that expenses associated with hedging transactions related to sales may, consistently with the concept of a tax on profit able to be regarded as a species of economic rent, be taken into account in the calculation of that profit. His evidence would therefore support a proposition that hedging expenses may be expenses payable in relation to the sale of petroleum if the proper construction of s 24 of the PRRTAA is capable of accommodating such expenses. The prior question however is, what is the proper construction of the section. To answer it is a task which, in my opinion, cannot be assisted by reference to Professor Garnaut's evidence. 207 There is insufficient evidence in the extrinsic materials to suggest that the terms of the PRRTAA were drafted to give effect to Professor Garnaut's model. Had there been an explicit statement in the Second Reading Speech that the legislation was designed to give effect to that model and its underlying theory, then what Professor Garnaut had said about the model and the theory might have had a bearing upon the construction of the statute. On the evidence, however, the connection between the economic rent model which he proposed in 1975 and the language of the statute is insufficient to allow his evidence to be a reliable guide to, or influence upon, its construction. Expert evidence of Professor Graham Walker 208 Professor Walker is a Professor of Accounting at the University of Sydney. His evidence, like that of Professor Garnaut, was admitted, pursuant to the ruling made on 4 October 2006, subject to relevance. The solicitors for Woodside Energy posed three questions for his opinion in a letter dated 7 October 2005. It is convenient to set those questions out in full: 1. From an accounting perspective, if one was to calculate the "profit" of a particular resource project such as the Laminaria project, how would that profit be calculated and in particular, would an accountant make allowance for amounts received and expenses incurred on the hedging activities undertaken by Woodside in relation to the Laminaria project (as described in the Woodside affidavits) in measuring the "profit" generated by the Laminaria project?; 2. Would an accountant regard the hedge expenses incurred by Woodside in relation to the Laminaria project (as described in the Woodside affidavits) as expenses payable in relation to the sale of petroleum from the Laminaria project, or are the expenses amounts which ought for accounting purposes to be dealt with upon some other basis (and if so, on what basis)?; and 3. Are there any circumstances in which an accountant would not regard amounts received and expenses incurred in relation to commodity hedges entered into by a commodity producer as expenses incurred in relation to the sale of the commodity being produced? If so, from an accounting perspective, what are the significant features of the hedging activities undertaken by Woodside (as described in the Woodside affidavits) which cause them, in your opinion, to be regarded as expenses payable in relation to the sale of petroleum from the Laminaria project or as expenses which are not payable in relation to the sale of petroleum from the Laminaria project, as the case may be? Professor Walker was provided with three affidavits filed in these proceedings by Woodside Energy, the letter from the Australian Taxation Office to Woodside Energy of 15 October 2004 and its Reasons for Decision, Woodside Energy's Statement of Grounds for Appeal dated 11 April 2005, the Commissioner's Reply to that statement and the Commissioner's Statement of Facts, Issues and Contentions. He set out a list of assumptions which he had made for the purposes of preparing his report and which it is not necessary to reproduce here. 209 In answering the first question, Professor Walker distinguished between the profit of an entity and the contribution to an entity's profit derived from a particular project or undertaking. He noted that profit calculations may differ between those adopted for Woodside Energy as an individual entity and those adopted for the Woodside Petroleum Group as a consolidated entity. He referred to a relevant accounting standard, AASB 1006, entitled "Interests in Joint Venture". At [14] and [15] of his report he said: In summary, an accountant would treat amounts received and expenses incurred on the hedging activities undertaken by Woodside in relation to the Laminaria project as amounts to be 'matched' against revenues from the sale of petroleum products in the accounting period in which those sales occurred, so that gains or losses would be included in the calculation of the profit contribution of that project. An alternative description is that accountants would look at the overall commercial effect of a series of linked or associated transactions. Hence the practices known as 'hedge accounting' involve having regard to the overall 'substance' of several transactions (rather than the 'form' of individual transactions - here, a hedging deal and contracts for the sale of petroleum products). 210 In discussing the second question he assumed the reference to 'hedge expenses' was limited to expenses incurred by Woodside Energy arising from transactions that were intended to operate as hedges. He noted that Australian accounting standards did not address the accounting treatment of hedging transactions until the issue of AASB 1012 "Foreign Currency Translation" (2000). He discussed AASB 1012 which, as its title suggested, focused upon foreign currency transactions although it also referred to transactions involving financial instruments which incorporate foreign currencies. He referred to the extension of the approach to hedge accounting outlined in AASB 1012 to other types of transactions in two statements issued by the accounting professions Urgent Issues Group (UIG), namely UIG Abstract 32 and UIG Abstract 33 "Hedges of Anticipated Purchases and Sales" (May 2000). He pointed out that UIG 33 sets out the conditions under which transactions entered into to hedge anticipated purchases or sales are to be recorded using 'hedge accounting'. In particular one paragraph of the Abstract stated: The gains and losses that arise on an instrument accounted for as a hedge must be deferred and then included in the measurement of the hedged anticipated purchases or sales when they occur. [his emphasis] He returned to the question posed and stated that both gains and losses on hedges for anticipated sales of petroleum products would be regarded as revenues or expenses attributable to those sales. For accounting purposes the gains or losses on hedges would be added to, or deducted from, those sales revenues for reporting purposes. He said: In accounting terminology, expenses payable are expenses that have been incurred and are owing but not yet paid at a specific date …. He said: In summary, from an accounting perspective, hedge expenses would be 'related to the sale' of petroleum products for the purpose of calculating and reporting sales revenues. They would certainly be regarded as attributable to the sale of petroleum products in the period sales are made. Hedge expenses would not be reported as 'expenses' but netted off against sales revenue for reporting purposes. 211 Professor Walker was cross-examined about UIG33. He agreed that it specified criteria to be satisfied before transactions entered into to hedge anticipated purchases or sales could be accounted for as hedges of those purchases or sales. He rejected the proposition that to be accounted for in relation to a sale the hedging instrument must be specifically identified along with the anticipated sale or purchase to which it relates. He regarded UIG33 as referring globally to anticipated purchases or sales, rather than to specific transactions. 212 The relevant extract from [8B] of the UIG33 stated: The characteristics of the hedged purchases or sales must be designated with sufficient specificity so when a purchase or sale occurs it is clear whether that transaction is or is not a hedged purchase or sale. Professor Walker did not construe that as requiring particular dates or exact volumes to be sold to be specified at the time the hedging contract was placed. He accepted, however, that there must be sufficient specificity so that the relevant sales could be identified. 213 Professor Walker made the point that the identification of a hedged anticipated purchase or sale might refer to transactions over a particular period such as a quarter or a period of four months. He accepted that it was not sufficient to identify hedges as a percentage of projected sales over a forthcoming period. Paragraph 20 of UIG33 stated: Hedging anticipated purchases or sales merely as a percentage of that which is anticipated for a specified period would not satisfy the requirements. As an accountant he would interpret that as simply saying it was not enough to specify a percentage of sales to be hedged. He said: … you need to actually get down to a bit more detail and present your estimates of the projected transactions, the dollar value of them or volume of production as it may be. It would be sufficient to nominate 100,000 barrels of production in a three month period. Provided the volumes and period of production were indicated in the documentation of the hedge approval that would be sufficient. Merely recording that 75% of anticipated sales in the next six month period would be hedged would not be adequate. That would not quantify the value of the expected sales. He rejected the proposition that it was necessary to match up particular sales with particular hedges. 214 Asked about the status of the UIG document, Professor Walker said it was not of itself an accounting standard. Indeed UIG33 had probably been overtaken by the release of AAS139 which was not in force at the relevant time. There was evidently no relevant standard in existence between 1986 and 2000. He said there were some accounting standards issued by the Financial Accounting Standards Board on hedge accounting which he had not looked at in relation to commodities. 215 In answer to the second question, Professor Walker said that if Woodside Energy were a reporting entity obliged to prepare 'segment reports' in terms of AASB 1005, then the Laminaria hedge expenses would properly be regarded as expenses incurred in relation to the sale of petroleum products from its petroleum business, or expenses incurred in relation to the sale of petroleum products in a geographic area. As Woodside Petroleum Group is a reporting entity, the hedge expenses would properly be regarded as expenses incurred in its petroleum business. If they arose from speculative dealings they would not be attributed to the petroleum business. 216 In discussing the third question, Professor Walker identified three main circumstances in which an accountant would not regard hedging expenses as incurred in relation to the sale of the commodity being produced: (i) if the relevant transactions were entered into as trading activities or speculative dealings; (ii) if hedge transactions were subsequently deemed to be no longer effective; (iii) if the hedge transactions were undertaken in relation to anticipated sales but later events suggested that those forecasts would not occur as previously designated. He went on at some length to explain these propositions. 217 In answer to the third question, Professor Walker dealt with a distinction which the Commissioner had sought to draw between expenses incurred to minimise risk and expenses incurred in relation to the sale of products. He maintained that the distinction was artificial from an economic or commercial perspective. He explained that proposition. He concluded by acknowledging that the interpretation of whether hedging expenses were incurred or payable in connection with the sale of petroleum products, is a matter for the Court to determine. Nevertheless he expressed his opinion that in a commercial context both cargo insurance expenses and hedging expenses are expenses incurred to mitigate risks from the sale of petroleum products. It would be anomalous if expenditure on cargo insurance were recognised as an expense incurred in relation to the sale of such products, while hedge expenses were not. 218 I accept Professor Walker's evidence so far as it describes accounting practice and the way in which an accountant might treat hedging expenses. Like the evidence of Professor Garnaut however, his evidence does not affect the proper construction of the PRRTAA. Rather, in the event that, on its proper construction the Act is capable of accommodating hedging expenses in the calculation of profit then his testimony may be relevant to determining whether, in the circumstances of this case, such expenses should be taken into account in that calculation. Expert evidence of Alan Miller 219 Alan Miller is a director of Basis Risk. Mr Miller has a BsC in Metallurgy from Strathclyde University, Glasgow and an MBA from London Business School. He is a Certified Member of the Finance and Treasurers Association and a Fellow of the Australian Institute of Energy. He has 20 years experience in the international oil and gas industry in which he has mainly been concerned with supply trading and financial risk management. He spent 12 years in a variety of roles at British Petroleum, including 9 years in commodity trading and operational risk management. In 1997 he joined PricewaterhouseCoopers where he was concerned primarily with the area of corporate treasury. He is based in Perth and provides financial risk management advice to commodity traders and corporate treasurers. 220 He has had previously dealings with Woodside Energy. In 2001 he was part of a PricewaterhouseCoopers' team engaged by Woodside Energy to advise in relation to its hedging activities. He has been a director of Basis Risk from 1998 until the present day. 221 Mr Miller was asked by the solicitors for Woodside Energy to provide his expert opinion in relation to three questions. The following outline of his evidence is taken from an executive summary contained in his report to those solicitors. 222 The first question asked about the ways in which a commodity producer, including a producer of crude oil such as Woodside Energy, could protect or insure against future adverse movements in commodity prices. In answering that question Mr Miller identified four principal mechanisms: . Forward contracts with individually negotiated prices . Hedging with exchange traded derivatives (ETD's) eg futures contracts . Hedging with over-the-counter (OTC) derivatives eg swaps . Incorporating price risk management in strategic decisions 223 In Mr Miller's opinion, individually negotiated forward contracts are not a viable option for oil producers to protect against future adverse movements in commodity prices because there is little appetite for such contracts among oil refiners and consumers. On the other hand ETDs and OTCs are popular and practical techniques for oil producers to protect against adverse price movements. The choice between ETD and OTC hedge contracts involves a balance between lower credit risk and the higher liquidity of ETDs on the one hand and the greater flexibility, convenience and custom fit of OTCs on the other. Mr Miller said that the incorporation of price risk management in strategic decisions is an important tool at the initial investment stage. It is not a practical tool for managing commodity price risk on an ongoing basis mainly because these are one off decisions that cannot easily be reversed. 224 The second question he was asked was about the practical options available between 1996 and 2002 to protect or insure against adverse movements in the price of crude oil of the type produced by the Laminaria Project. Mr Miller reiterated his answer to the first question, namely that the most practical options for oil producers were to hedge with either ETD or OTC contracts. Between 1996 and 2002 producers who wished to hedge up to two or three years into the future were limited to ETD or OTC contracts based on the WTI benchmark. The most common WTI hedge contracts were OTC contracts known as WTI swaps and WTI collars or ETD contracts known as WTI futures. Option strategies known as "collars" were also a popular form of OTC contract used by producers at that time. Collars would allow the producer to maintain some upside against a rise in the price of oil, while setting a minimum level for the price of crude and minimising the working capital requirements. Mr Miller said that the Tapis swap market was a viable alternative to WTI for hedging exposures of less than 12 months into the future. Producers seeking to hedge very large volumes might have found, however, that there was insufficient depth and liquidity to effectively hedge even up to 12 months forward. The decision for the producer in that case would be a trade-off between the greater depth and liquidity of WTI futures and swaps market against the lower basis risk of the local Tapis swaps market. Finally, producers could use Asian product swaps contracts to hedge netback contracts. Again, this was a trade-off between the low basis risk of the Asian swaps against the high liquidity of WTI. 225 The third question asked Mr Miller about the differences, from a practical risk management perspective, of the various methods of risk management referred to in his response to the first question. His opinion was that hedging with ETDs and OTCs were the most practical methods of protecting or ensuring against commodity price risk. The key differences between those and the other methods he had discussed were: . Portfolio risk management By pricing all grades of crude oil against the same benchmark, and then hedging their exposure to that benchmark crude, producers are able to manage their total oil price risk on a portfolio basis. . Market Depth and liquidity … WTI contracts (both ETD and OTC contracts) offer significantly better market depth and liquidity when compared to alternative methods of risk management. … . Separation of duties The use of ETD hedge contracts allow the oil producer's Marketing Department to focus on the sale of crude oil whilst the Finance Department focuses on protecting revenues. The separation of these activities facilitates clear accountability and transparent reporting. . Mixture of hedge instruments Producers are able to build hedge strategies with a mixture of options and futures. 226 In cross-examination Mr Miller accepted that diversification of a business was a clear way of dealing with risk management. Vertical integration was one form of diversification but there were others. 227 Mr Miller also agreed in cross-examination that he had prepared a report entitled "Review of Financial Risk Management Philosophy" which formed part of a set of papers submitted by Mr Carroll to the Finance Committee on 9 October 2001. Statutory framework - The PRRTA and the PRRTAA 228 The PRRTA and the PRRTAA came into operation on 15 January 1988. The PRRTA imposes tax "… in respect of the taxable profit of a person of a year of tax in relation to a petroleum project". The rate of tax imposed is 40% (s 5). 229 The PRRTAA is described in its long title as: An Act relating to the assessment and collection of the tax imposed by the Petroleum Resource Rent Tax Act 1987, and for related purposes It is divided into ten parts. Part V deals with "Liability to Taxation". It is divided into six divisions, structured as follows: Division 1 - Liability to tax on taxable profit (ss 21-22) Division 2 - Assessable receipts (ss 23-31A) Division 3 - Deductible expenditure (ss 32-45) Division 3A - Transfer of exploration expenditure incurred on or after 1 July 1990 (ss 45A - 45D) Division 4 - Tax credits (ss 46-47) Division 5 - Effect of certain transactions (ss 48-49) Division 6 - Anti-avoidance (ss 50-58) 230 The liability to pay tax is imposed upon persons by s 21 which 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. "Taxable profit" is defined in s 22 thus: 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. 231 "Assessable receipts" is defined in s 23. It refers to total receipts of specified kinds whether of a capital or revenue nature. The kinds of receipts which make up assessable receipts are: (a) assessable petroleum receipts; (b) assessable exploration recovery receipts; (c) assessable property receipts; (d) assessable miscellaneous compensation receipts; (e) assessable employee amenities receipts. Each of those components is separately explained in the succeeding provisions. 232 The term relevant for present purposes is "assessable petroleum receipts". It is defined in s 24 thus: 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; Paragraph (c) is not material for present purposes. It relates to marketable petroleum commodities which become excluded commodities otherwise than by virtue of being sold, treated, processed or moved. 233 Division 3 of Pt V deals with"Deductible expenditure". Section 32 defines deductible expenditure thus: 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 234 The terms used in the definition of "deductible expenditure" are themselves separately defined in succeeding provisions of Div 3. The only provision to which reference need be made at this point is that relating to 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. Statutory framework - Section 15AB Acts Interpretation Act 1901 235 Section 15AB deals with the use of extrinsic material in the interpretation of an Act. It provides, inter alia: (1) Subject to subsection (3), in the interpretation of a provision of an Act, if any material not forming part of the Act is capable of assisting in the ascertainment of the meaning of the provision, consideration may be given to that material: (a) to confirm that the meaning of the provision is the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act; or (b) to determine the meaning of the provision when: (i) the provision is ambiguous or obscure; or (ii) the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act leads to a result that is manifestly absurd or is unreasonable. (2) Without limiting the generality of subsection (1), the material that may be considered in accordance with that subsection in the interpretation of a provision of an Act includes: (a) all matters not forming part of the Act that are set out in the document containing the text of the Act as printed by the Government Printer; (b) any relevant report of a Royal Commission, Law Reform Commission, committee of inquiry or other similar body that was laid before either House of the Parliament before the time when the provision was enacted; (c) any relevant report of a committee of the Parliament or of either House of the Parliament that was made to the Parliament or that House of the Parliament before the time when the provision was enacted; (d) any treaty or other international agreement that is referred to in the Act; (e) any explanatory memorandum relating to the Bill containing the provision, or any other relevant document, that was laid before, or furnished to the members of, either House of the Parliament by a Minister before the time when the provision was enacted; (f) the speech made to a House of the Parliament by a Minister on the occasion of the moving by that Minister of a motion that the Bill containing the provision be read a second time in that House; (g) any document (whether or not a document to which a preceding paragraph applies) that is declared by the Act to be a relevant document for the purposes of this section; and (h) any relevant material in the Journals of the Senate, in the Votes and Proceedings of the House of Representatives or in any official record of debates in the Parliament or either House of the Parliament. (3) In determining whether consideration should be given to any material in accordance with subsection (1), or in considering the weight to be given to any such material, regard shall be had, in addition to any other relevant matters, to: (a) the desirability of persons being able to rely on the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act; and (b) the need to avoid prolonging legal or other proceedings without compensating advantage. Legislative history and extrinsic materials 236 Following the release of three discussion papers on RRT late in 1983 and early in 1984, the Commonwealth Government undertook consultation with industry and decided to pursue an RRT in relation to "greenfields" offshore petroleum projects. On 27 June 1984 the then treasurer, the Hon PJ Keating and the Minister for Resources and Energy, Senator Walsh, published a joint press release entitled "Resource Rent Tax on "Greenfields" Offshore Petroleum Projects". They stated in the introduction to the statement that the intention to enact an RRT in respect of mineral based activities had been part of the policy platform of the Australian Labor Party since 1977. It stated the Government's belief that an RRT regime related to achieved profits would be the most efficient mechanism for deriving for the community an appropriate share of the large returns that can be associated with the development of particularly rich mineral deposits. Secondary taxing regimes such as excises and royalties were often based on production and could discourage the commencement of marginal projects and bring about the early termination of others. 237 The statement set out the salient features of the proposed RRT. It was intended, at that time, that the regime would apply with effect from 1 July 1984 in offshore areas where the Commonwealth's Petroleum (Submerged Lands) Act 1967 applied other than in specified areas which would continue to be subject to excise and royalty arrangements. The RRT would apply in respect of income from the recovery of all petroleum, including crude oil, condensate, natural gas, LPG and ethane. The tax base of the proposed tax was described as "profits which exceed the specified threshold level". Profitability would be determined by reference to "actual expenditures". 238 The RRT would be assessed on a project basis. The basic principles for determination of a project for the RRT would be that the project would represent an integrated investment and could include a number of proximate fields. The boundaries of an integrated investment would comprise a production licence area and treatment and other facilities and operations outside that area integral to the production of a "marketable" petroleum product. 239 The scope of project expenditure and income to be taken into account would encompass certain infrastructure where this was integral to the production of a "marketable product" including social infrastructure provided principally for employees of the project and their dependents and office buildings situated at or proximate to the site of the operations. Expenses not directly related to the project would be excluded. Where an entity had diverse interests only one of which was a project assessable for RRT, only those costs incurred at its head office solely attributable to the RRT project would be deductible for RRT purposes. 240 An attachment to the press statement gave additional detail in relation to the treatment for RRT purposes of certain receipts and expenditure items. Capital and current expenditures directly related to a project assessable for RRT purposes would be deductible in the year of payment. 241 Apart from exploration expenditure other deductible project expenditures would generally comprise: … those in respect of a production licence area and expenditures outside that area necessary to obtain a marketable petroleum product. A number of indicative examples of the kinds of expenditure were given. These related to physical infrastructure including production platforms, drilling plant and equipment, pipelines and other facilities, plant for use in treatment processes, land and buildings dedicated to the project and expenditure on providing water, light, power, access and communication facilities. They also covered insurance premiums on building and plant, licence fees and like costs related to obtaining a production licence and the cost of feasibility studies and environmental impact studies related to the project. 242 Among the non-deductible expenditures identified were interest payments and repayments of principal, dividend payments, bonus share issues and equity capital repayments and expenses only indirectly associated with the project. Depreciation charges and income tax would also be non-deductible. 243 The major features of the proposed Act were also set out in an address by Senator Walsh to the Economics Society of Australia on 15 August 1984. In that address, Senator Walsh acknowledged that academic debate in Australia on the concept and feasibility of rent taxation was initiated by the 1975 article in The Economic Journal by Garnaut and Clunies Ross. He said: THE PROPOSAL WAS RECEIVED FAVOURABLY AND ADOPTED IN THE 1977 LABOR PARTY PLATFORM AS AN APPROPRIATE FORM OF TAXATION FOR RESOURCES INDUSTRIES - ESPECIALLY FOR THOSE IN WHICH ECONOMIC RENT IS A SUBSTANTIAL PROPORTION OF MARKET PRICE. 244 A Petroleum Resource Rent Tax Assessment Bill 1986 was introduced into the Parliament towards the end of that year. In the Second Reading Speech in the House of Representatives on 28 November 1986: Parl Deb H of R 28/11/1986 3942-3944, the Minister described the Bill as the first in a package of four to give effect to the Government's decision to introduce a petroleum resource rent tax on profits from certain offshore petroleum projects. He said (at 3942): The proposed tax regime was announced in detail in June 1984, after extensive consultation with the industry and the States. He said (at 3942): The Government believes that a resource rent tax related to achieved profits is a more efficient and equitable secondary taxation regime than the excise and royalty system that it is to replace. 245 Describing the general application of the proposed tax he said (at 3942-3943): As the petroleum resource rent tax is profit-based, rather than production-based, it will apply only where there is an excess of project-related receipts for a financial year over both project-related expenditure for the year and undeducted expenditure of previous years brought forward at a compound rate. This compounding of expenditure that remains undeducted at the end of a financial year will be determined according to when it was expended. 246 Under the heading "Deductible Expenditure" the Minister said (at 3943): Expenditure of either a capital or a revenue nature which is directly related to a petroleum project - again reflecting the cash-flow basis of the tax - will be deductible in the year of payment against any assessable receipts for the year. Any excess of deductible expenditure, other than closing-down expenditure, over assessable receipts at the end of a year will be compounded forward for deduction against receipts in future years. He then went on to describe what would constitute deductible expenditure. He listed exploration expenditure, general project expenditure and closing-down expenditure, subject to the exclusion of specific items. He discussed the elements of exploration expenditure. In relation to general project expenditure, the Minister said (at 3943): General project expenditure comprises expenditure in a production licence area, or combined production licence areas, on the establishment of a project and on recovering and producing a marketable petroleum commodity. It includes relevant expenditure on storage and processing facilities and employee amenities. Expenditure to be specifically excluded included interest payments and payments made under a cash bidding system. 247 Debate on the Bill resumed on 23 March 1987. The Bill was passed by the House of Representatives and was before the Senate when Parliament was dissolved for the 1987 Federal election. 248 Significantly the Bill was amended on the motion of the Treasurer on 25 March 1987. Prior to the amendment paragraphs (a) and (b) of the proposed s 24, defining "assessable petroleum receipts", ended with the words "the consideration received by the person for the sale". After the amendment each paragraph ended with the words "the consideration received, less any expenses payable, by the person in relation to the sale". 249 The only deductions in the Bill as first presented to the Parliament were those set out in Div 3. Government received submissions on that matter from the petroleum industry. Letters were tendered from BHP Petroleum and the Australian Petroleum Exploration Association Ltd (APEA) to the Federal Government in February 1987 which asked that the Bill be amended to allow deductions for costs incurred in selling marketable petroleum products post production. The relevant part of the BHP Petroleum submission, which was contained in a letter dated 3 February 1987, was as follows: Freight, Insurance, Demurrage and such Expenditures As outlined above, costs incurred after a product has attained a marketable state will not be deductible. However, prior to the assessable receipts being received from the sale of the product, other costs, such as those mentioned above, depending on the term of sale, may be incurred. Under the general application of petroleum resource rent tax in the Explanatory Memorandum, it is stated the tax is to apply to profits from the recovery of petroleum. As the tax is a profit based tax, certain expenditures incurred after the production of a marketable commodity which relate directly to the receipt from the sale of the product should be deductible. 250 APEA's submission stated, inter alia (at [5]): Assessable Petroleum Receipts - Clause 24 Clause 24 states that assessable petroleum receipts are the consideration received by the person for the sale of the commodity. APEA recommends that the legislation specify that in a situation where part or all of the production from a project is disposed of on behalf of the project by a marketing company the amounts of assessable receipt received by the person will be net of marketing company fees and costs such as freight, demurrage etc. 251 An internal government reaction appeared from a minute dated 4 March 1987 from the Senior Assistant Commissioner, Policy and Legislation Group to the Treasurer. It recommended acceptance of the submissions and amendment of the Draft Bill. It stated: Assessable Petroleum Receipts (clause 24)

Associate: Dated: 10 December 2007 Counsel for the Applicant: Mr JW de Wijn QC and Mr AT Broadfoot

Solicitor for the Applicant: Allens Arthur Robinson

Counsel for the Respondent: Ms M Gordon SC, Mr SHP Steward and Mr A Pound

Solicitor for the Respondent: Australian Government Solicitor

Date of Hearing: 11, 12, 13, 14 and 15 December 2006