In a recent article in its Flowline publication APPEA chief Barry Jones said developing Australia’s petroleum resources was clearly a national priority with bipartisan support, citing the Council of Australian Governments, the Ministerial Council on Energy and the Ministerial Council on Mineral and Petroleum Resources having all supported proposed initiatives in recent years. He said the Commonwealth’s Energy White Paper, “Securing Australia’s Energy Future”, endorses this objective.
All these policy pronouncements recognise petroleum is an essential element in Australia’s energy supply (being responsible for 73% of final energy consumption) and an essential component of national and regional wealth creation.
Jones said all these pronouncements also see petroleum development as a key contributing factor to delivering competitive domestic energy markets, enhanced supply security and national environmental aspirations.
These desirable public benefits are not part of the normal commercial decision-making process. The said there is a high probability that failure to take account of these benefits in investment decision making will see underinvestment. Australia suffers as a consequence. Policy action is needed to address the market failure.
The key question therefore is whether appropriate policy action is in place to deliver these objectives and address the market failure. Are political commitments being transformed into working policies and measures that facilitate the appropriate level of petroleum resource development?
Well, in relation to exporting gas in the short and medium term, the Commonwealth and Western Australian Governments have recognised the need for action and delivered on-the-ground action. Access to overseas markets has been heavily facilitated and this effort continues. Appropriate greenhouse policy settings have been put in place. Policy by-laws applying to project developments have been enhanced. Taxation depreciation arrangements have been improved. Hard yards have been won in international treaty negotiations. Steps have been set in train to address skilled labour shortages.
However, in relation to facilitating the greater use of gas in domestic markets and ensuring that sufficient petroleum is found to meet gas and transport fuel supply requirements, much needs to be done.
Key lead indicators of industry activity, such as the amount of seismic being run and the average size of new discoveries, are all showing negative trends. The large and medium explorers are not responding to higher oil prices by investing more in Australia. The prospects elsewhere look too attractive. The smaller companies are seeking to explore elsewhere – almost 60% of Australian listed companies in APPEA are exploring overseas.
Action on the fiscal system has to be the top priority. After all, on new projects, the government’s tax take can range up to 58%. Across the industry it averages 43%. Given Australia’s need to further develop its petroleum resources on one hand, and Australia’s prospectivity and cost structures on the other, such a tax take is clearly inappropriate.
Equally it doesn’t fit well with investors’ and financial markets’ expectations of reasonable level of returns on shareholder funds.
It’s not valid to argue “making the tax regime more competitive undermines government’s budgetary strategies”. In spite of arguments to the contrary, the choice the Treasury faces is simple – get additional budget revenue to offset declines due to declining production or get nothing. It’s totally fallacious to argue that changing tax parameters now means Australia will earn less if a discovery is made. “If the fiscal regime is not made more competitive, discoveries won’t be made,” he said.
Equally it’s fallacious to argue that high oil prices will drive more exploration. The fact that Australia is a gas-prone country and that oil prices have little impact on export or domestic gas prices gives the lie to this argument. As noted above, Australian companies are voting with their feet. International exploration expenditure data suggests that overseas companies still see Russia, the Middle East and now deepwater fields off Africa and the Americas as preferred destinations for exploration spending.
The one parameter that can be changed and make a meaningful impact quickly is changing the uplift factor for the Petroleum Resource Rent Tax System. This parameter needs to be changed from its current setting at the long-term bond rate plus 5% to the long-term bond rate plus 10%.
In recent months the Treasurer has been stressing the vital role enhanced energy and resources commodity exports are making in driving the Australian economy. Sustaining this contribution means new projects have to be found and brought on stream.
Enhancing the international competitiveness of the resource tax system is the key to sustaining this national benefit.
APPEA 2005 Conference news is proudly brought to you by 
