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Wednesday, 10 September 2003
Page: 19638


Mr STEPHEN SMITH (10:19 AM) —I support the Taxation Laws Amendment Bill (No. 8) 2002 . I also support the proposed amendment to be moved in the committee stage by the member for Kingston, the shadow Assistant Treasurer. The proposed amendment is in respect of schedule 5 of the bill and it is to that schedule that I propose to confine my remarks on the bill. Schedule 5 amends the Petroleum Resource Rent Tax Assessment Act 1987. The petroleum resource rent tax is an important structural reform effected by the Hawke Labor government which has provided Australia's petroleum resources industry with a sure and certain taxation basis from which to make their substantial capital investments. The key to the structure of the regime is that it is profit related and applied to a productive, or a producing, resource. One amendment contained in schedule 5, the infrastructure amendment, will recognise expenditures associated with closing down a facility that has ceased to be used for a petroleum project but continues to be used as infrastructure under an infrastructure licence. The second schedule 5 amendment, the partial use amendment, will produce a more uniform taxing arrangement where the same facility is used for petroleum sourced from two or more petroleum projects. In such a partial use case, the tax will include all petroleum activities related to that project in the tax calculations of the operator.

The proposed amendment to be moved by the member for Kingston during the committee stage deletes the infrastructure licence proposal. No infrastructure licences are currently in contemplation and this is an issue that can be revisited in due course, in particular when the government considers important possible changes to the petroleum resource rent tax arrangements, including deepwater exploration and production arrangements. The infrastructure licence proposal would allow expenditure associated with closing down a petroleum resource processing project, where the facility continues to be used for another processing project under an infrastructure licence, to be deductible against the first project's petroleum resource rent tax receipts. The costing provided for this deduction in the original explanatory memorandum states:

... the likely revenue impact ... is a reduction in revenue of between $0.28 million to $56 million per field ...

The revised explanatory memorandum is not much more helpful on the costings front. As there would be advantages in gaining a better understanding of the revenue cost that might be incurred, this proposal, which does not need a final or any decision now, can be deferred until later. My understanding is that this does not meet with disapproval from the relevant industry association, the Australian Petroleum Production and Exploration Association.

So far as the partial use amendment in schedule 5 is concerned, currently where there is partial use of the infrastructure, tolling receipts and expenditures may not be taken into account for petroleum resource rent tax purposes. This may discourage partial use arrangements and impact adversely on the productivity and international competitiveness of petroleum projects. Currently, where there is a partial use of the facilities, the capital cost of facilities used in carrying on a petroleum project is apportioned. That apportionment does not change if the relative use changes throughout the life of the project.

Schedule 5 broadens the scope of what constitutes a project to ensure that petroleum resource rent tax remains economically efficient and neutral in application by including all partial use related revenues and expenses in determining a project's petroleum resource rent tax liability. The partial use proposal aims to provide more uniform treatment of partial use situations, whether they be contemplated from start-up or instigated at a later date, and as a consequence that amendment is supported.

As I mentioned earlier, schedule 5 of the bill, dealing as it does with the petroleum resource rent tax, goes to the heart of Australia's petroleum resources industry. Accordingly, I take the opportunity in the context of schedule 5 to comment on Australia's petroleum resources industry and, in particular, Australia's liquefied natural gas export industry. Since Australia first entered the export natural gas market late in the 1980s, the way in which Australia and the world view the use of liquefied natural gas as a fuel and the way in which we have come to view natural gas as a driver of domestic economic growth have changed radically. First and foremost, it is always important to understand that Australia is but one of a number of countries with significant LNG export potential. Our major competitors include Malaysia, Indonesia, Qatar, Brunei, the United Arab Emirates, Oman and Russia. A market is there—Japan, Korea and Taiwan now, and China, the United States and possibly India in the future. But the international competition is cutthroat and this needs to be clearly understood.

Australia has world-class natural gas reserves, in the order of 100 trillion cubic feet, more than 100 years supply at current rates of consumption. As well, there is believed to be anywhere from a further 50 to 170 trillion cubic feet of further provable reserves available for utilisation. These are massive reserves of gas. The Australian petroleum resources industry has a proven track record of expertise in discovering and utilising these reserves, even though they are invariably located offshore in inaccessible locations. Our exploration, exploitation, engineering and recovery efforts to date have been second to none, and the expertise of our geologists and engineers as well as the skills of our platform work force are world-class.

The initial investment in the North West Shelf project in the early to mid-1980s eventually amounted to some $12 billion. This is the largest resources project in Australia. It has established Australia as a safe and reliable exporter of LNG to the Japanese market day in and day out now for well over a decade, returning billions of dollars to the Commonwealth and Western Australia in taxation and royalties. But, more than that, it has formed the base for substantial domestic infrastructure. It has also resulted in the development of a Western Australian and Australian industry which can support and supply the North West Shelf project and which, over the life of that project to date, has already seen a turnover of over $10 billion in purchases derived from the LNG industry on the Burrup Peninsula. It is this base which has allowed the Australian LNG industry to move itself beyond the original North West Shelf project into the wider export market, as without it the capacity building would never have occurred and the level of expertise would never have been established.

Projects like the North West Shelf and now Gorgon, to which I will subsequently refer, generate significant opportunities for those domestic suppliers and impose on them the ultimate test of international competitiveness. This is an industry which by its very nature must operate in the international marketplace. Australian suppliers cannot operate behind the protection of a high tariff barrier or the shelter of artificial preference clauses in supply contracts. While there is sometimes a superficial nationalistic attractiveness in such arrangements, and governments here and overseas have flirted with them from time to time, they represent the same economic dead end that the high tariff walls of the past did and that European agricultural protection does now. The ultimate price is a lack of international competitiveness and a decline of expertise against international standards.

The reality is that more and more in the 21st century a country's economic performance will be measured by the skills of its people. To date, we have been able to win contracts and compete against others in the global LNG market, not just on price but on reliability of supply. Australian gas can be utilised in an internationally competitive way in large part due to the skills of our people. We have no need to sell ourselves short on price in the international marketplace.

More generally, the global demand for liquefied natural gas has risen by nearly seven per cent since 1990 and shippable volumes could double from current levels by 2010. Given compound growth rates in United States electricity demand, it is likely that the share of natural gas used for electricity generation in the United States will grow from 16 per cent to 36 per cent by 2020, resulting in a significant potential increase in the use of imported LNG from Australia, a likely major source given our reputation as a reliable supplier. Already, natural gas accounts for 24 per cent of all energy consumed in the United States, as well as being the dominant feedstock for a wide range of industries, including fertilisers, chemicals, fabrics, pharmaceuticals and plastics.

This could also see a change in the nature of the LNG export industry from one based on long-term supply contracts to much more of a spot contract market. BHP Billiton's recent announcement that it proposes to construct an LNG receiving facility off the west coast of the United States of America simply off the back of an assessment of the United States market into the future and without much or any thought to a long-term contract reflects this potential. All these factors combine to indicate a competitive but buoyant market in which Australia as a reliable and stable supplier will have a significant advantage over many of our competitors in a market where importers place a premium not just on security, stability and reliability of supply but also on a diversity of supply.

Australia's liquefied natural gas industry is vital to our long-term prospects as a nation and to my state of Western Australia for a number of important reasons. An Access Economics study undertaken for the LNG Action Agenda indicates, for example, that an $8 billion LNG project would bring economic benefits to Australia of some $4 billion annually, representing 0.8 per cent of GDP, generate some 20,000 Australian jobs and earn more than $1.5 billion every year in export income for Australia.

Such a project would also create opportunities for the local support and supply industry and new job opportunities for young Australians looking for a start in the petroleum resources industry. In addition, it would give our research and development base a massive boost, with significant new investments in the technologies of exploration in some of the most difficult terrain and in the related technologies of gas recovery, processing and—most importantly, from a greenhouse gas perspective—gas sequestration.

If an Access Economics study shows that all of these benefits apply in theory, in reality they will apply even more to the $12 billion Gorgon project approved in principle this week by the Western Australian state government. I welcome that decision very much. It is another example of Labor, at both state and federal levels, consistently and correctly supporting liquefied natural gas export development from Australia's more than abundant, proven natural gas reserves. Make no mistake of underappreciation here: this is a project on the scale and importance of the North West Shelf itself.

Historically, from a Western Australian point of view, the North West Shelf has underpinned the development of domestic gas infrastructure for industrial and residential consumption. Without North West Shelf LNG there would be no Dampier to Bunbury gas pipeline, let alone the spur line to Kalgoorlie, providing energy for any number of mineral and petroleum resource developments. A successful development of the Gorgon gas field, based on the export of LNG, is unquestionably in the state and national interest. The state interest includes the jobs and regional development that will flow from the investment; the national interest includes the external current account revenue that will flow from the export activity and the petroleum resource rent tax revenue that will flow from the production.

However, the real long-term national interest in a successful Gorgon LNG development in Australia is in Australian LNG breaking into the United States domestic energy market. It is clear at the moment that China, the United States and possibly India are where the great energy markets of the future will be. From Australia's export perspective, China and the US are the great market opportunities we have to break into now, relying effectively on our North West Shelf LNG credentials as a stable and reliable supplier of clean essential energy. The characteristic which has made Australian LNG internationally attractive to date—with exports from the North West Shelf to Japan, Korea and, soon, China—has been our impeccable reputation for reliable supply off the back of long-term energy contracts. Nations which are energy importers these days depend upon reliability, security and diversity of supply.

To date, the cost caused by distance has kept us out of the US energy market but, with the US facing severe energy shortages into the future, a safe, secure and reliable supply of LNG from Australia now holds great attractions for the west coast of the United States. To utilise our current internationally competitive strength, we must act now to break into that market. As I said earlier, this can be done without selling ourselves short on price. Our competitive advantage will not of itself last forever—something we are in danger of being very complacent about. The competition from Malaysia and Indonesia in particular, let alone Brunei or Qatar, is and will be intense.

It is also the case that the development of Gorgon for the LNG export market will provide the necessary critical mass for investment in yet another source of competitive gas in the Western Australian domestic gas market. The Western Australian Labor government has properly demanded of the Gorgon developers that gas be available for domestic Western Australian consumption. This will add to the state's domestic gas infrastructure, bringing with it more value added downstream processing opportunities as a result of a more competitive energy infrastructure and supply.

The microenvironmental issues here are very significant and have been most seriously addressed through the state government's special assessment process, which, when established, reflected the state's very clear understanding of the importance of the Gorgon project's potential to the state and the nation. These days, no government can be responsible to its community without being a friend of the environment. Equally, no resources company can be a friend to its shareholders without being a friend of the environment, local and global. As a consequence, it cannot be beyond the wit of the state and the developers to configure an outcome where the nation takes the benefit of the development and Barrow Island continues to flourish environmentally with a development that is in sympathy with the ongoing protection and quarantine of the local environment. This has occurred since the first barrel of Australian oil was produced from Barrow Island in 1967 and there is no reason why it cannot or will not continue.

In the macro sense, natural gas provides one of the best transition fuels for greenhouse gas purposes, particularly here, as the CO2 in the Gorgon gas will be reinjected and sequestered in situ at Barrow Island. One should not underestimate the importance of Australia gaining this technological expertise and advantage now. The world cannot afford to have Australia leave its gas in the ground; nor can Australia afford to leave it there. This is true on both environmental grounds and the obvious economic ones which I hope every Australian understands and appreciates. I commend the bill and the proposed amendments to the House.