The North West Shelf joint venture (JV), Australia's biggest oil and gas operation, cut royalties it owed by claiming more than AU$5 billion (US$3.7 billion) in deductions, some of which weren't valid, over the 18 months to December 2015, according to the Australian National Audit Office (ANAO) on Nov. 28.

The ANAO said government departments need to take steps to tighten their collection of royalties from the North West Shelf, which accounts for about one-third of the country's oil and gas output.

The finding comes at a time when oil and gas producers have been hammered by a slump in prices.

"The Royalty Schedule does not permit all the deductions currently being claimed," the audit office said in a report released on Nov. 28.

The North West Shelf JV said it cooperated in the audit and was fully transparent.

"Woodside, as operator of the NWS Project, has robust compliance processes with regard to royalty obligations," a North West Shelf (NWS) spokesperson said in an emailed statement.

The audit office said the JV reduced the royalty payable by taking more than AU$5 billion in deductions, including operating costs, depreciation, cost of capital, crude oil and condensate excise, processing tariffs and JV participant costs.

Revenue reported from NWS petroleum sales between July 2014 and December 2015 was AU$19.7 billion, on which AU$1.9 billion in royalties were due. Of that, about one-third went to the federal government and the rest to the state of Western Australia.

The audit office questioned the eligibility of deductions claimed for the cost of debt and equity funded capital and the excise paid on crude and condensate.

Royalty underpayments amounted to about AU$11.6 million at most, the ANAO said, based on the incorrect deductions the audit office had identified, however it added that there may be more.

"Some errors in the claiming of deductions have been identified, but the available evidence indicates that the problems are much greater than has yet been quantified," the report said.

Australia's Department of Industry agreed with the audit office's recommendations for improving royalty collection.

Western Australia's department of mines and petroleum, however, considered its processes robust and said "the commonwealth and state governments can be confident that royalties are being accurately assessed and collected."

The NWS JV is operated by Woodside Petroleum. Its partners are BHP Billiton, BP Plc (NYSE: BP), Chevron Corp. (NYSE: CVX), Japan's Mitsubishi Corp. and Mitsui & Co., and Royal Dutch Shell Plc (NYSE: RDS.A).

(US$1 = 1.3385 Australian dollars)