The Federal Government will review Australia's petroleum taxes amid a plunge in oil and gas revenue and a crackdown on multinational tax avoidance.

Earlier this week, the Commonwealth auditor-general revealed that the operators of Australia's biggest oil and gas project, the North West Shelf, had underpaid millions of dollars in royalties and said not all their tax deductions were legitimate.

Treasurer Scott Morrison said revenues from oil and gas taxes have plummeted in recent years, and the review would examine why the fall has been so great.

"What has occurred since 2012/13 is a halving in PRRT revenues down to $800 million," he told reporters.

"In addition to that, the crude oil excise collections have fallen by more than half."

Mr Morrison said the review of the Petroleum Resource Rent Tax (PRRT), crude oil excise and associated Commonwealth royalties would make sure that companies are paying the right amount of tax.

"This is about ensuring sustainability and effectiveness and efficiency of our tax system. It is actually not primarily about revenue," he said.

"We need to deals with these things sensitively. The last thing we want to do in moving in this area is do things that might put at risk investment."

Budget measures likely to arise from PRRT review

The review will be led by independent expert Michael Callaghan, working with the Treasury Department.

He will report back to the Government by April next year with recommendations for changes to the PRRT.

Mr Morrison said the timing of the inquiry ensures it can be considered in the 2017-18 budget process.

"We have some $200 billion put into the system in terms of what is deductible expenditure," he explained, which is the key issue many analysts have fingered for the lack of revenue.

"That comes with an uplift and there is an ordering of the deductions that can be made under the PRRT and there is the transferability of exploration expenditure against other projects.

"There have been no changes to the PRRT since 2012 and we think it is timely that these matters be addressed and be addressed in time for these matters to be considered in the preparation of next year's budget."

However, Mr Morrison said there is no guarantee that the review will result in measures that increase the Government's revenue.

"I wouldn't want to create the expectation that in the short-term, when it comes to the PRRT, that this would lead to any significant change in the revenues over the budget and forward estimates," he added.

On Monday, the Australian National Audit Office said more than $5 billion worth of tax deductions were claimed from mid-2014 to December last year by the North West Shelf operators, but not all of the deductions were valid.

It recommended that government departments improve their oversight of royalty calculation and collection.

The North West Shelf is off the coast of Western Australia and is operated by Woodside Petroleum.

Woodside said all the claimed deductions were allowable and it had worked co-operatively on previous audits and reviews.

It said the auditor-general's report suggested that the maximum underpayment of royalties was only $12 million.

Woodside's partners in the project are BHP Billiton, BP, Chevron, Japan Australia LNG and Shell.