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Tuesday, 14 May 1985
Page: 1923

Senator DURACK(8.46) —The Petroleum (Submerged Lands) (Cash Bidding) Amendment Bill 1985 introduces, for the first time under petroleum off-shore legislation, the notion of cash bidding for oil exploration permits. The Opposition rejects the principle of cash bonus bidding as a basis for granting off-shore petroleum permits in Australia. The proposal by the Minister for Resources and Energy (Senator Gareth Evans), who introduced this Bill, amounts to an up-front tax impost dressed up as an auction system for the right to undertake the risk of exploration. Cash bonus bidding will represent a radical departure from the previous system of allocating permits and will set a precedent in granting rights to explore not only for petroleum off-shore but also for minerals generally in Australia. It is an extremely bad example to be set by a Federal government. It is typical of Senator Evans to rush in and announce policies before proper consideration of the full effects of such new measures.

I refer to comments from a recent speech by the Premier of Western Australia, Mr Burke, which upset Senator Evans, Senator Walsh and others to a great extent. Mr Burke addressed the twenty-fifth annual conference of the Australian Petroleum Exploration Association Ltd in Perth. The Premier described the proposal as inappropriate and undesirable. He said:

We object to the concept simply because it would increase the cost of exploration and because it will drive small Australian companies out of the most prospective areas.

The Government must realise that Australian exploration has not been sufficiently successful to allow its cost to be increased by diverting funds away from exploration and into Government revenue.

In those words Premier Burke summed up the major objections to Senator Evans's and the Federal Government's proposals. They were not greeted very kindly by Senator Evans's colleague Senator Walsh, who said:

Mr Burke displayed a degree of conceptual ignorance of the subject which was matched only by his political impertinence.

However, Senator Walsh did not seem to realise or understand that Senator Evans had consulted the States about the proposal. Western Australia is a member of a joint authority and had a close interest in it. Such comments highlight the arrogance with which this Government has dealt with this proposal. At least the Premier of Western Australia had listened to the views of industry; the same cannot be said of Senator Evans and the Federal Government.

Senator Evans has now decided to apply the new scheme to areas under Commonwealth control for two years and then review its operations with the States. That is facing reality because the States, as well as the industry, are strongly opposed to it. Apparently Senator Evans had assumed that these token concessions would appease the States, the industry and this Parliament. Indeed it is just a further example of the contempt and arrogance with which this Government has treated both Parliament and the industry.

The Liberal Party of Australia and the National Party of Australia are vitally concerned about the future of the oil industry and exploration in Australia. Cash bonus bidding proposals and the proposed resource rent tax will be a clear disincentive to resources development in Australia. This proposal for cash bonus bidding seems to be based more on theories of economic rent and bureaucratic convenience than on the interests of this country.

In his second reading speech and in other speeches that he has made in trying to defend his position-I might say, an embattled position, in view of the total opposition that this proposal has met throughout industry, from the States and from all those who have commented on it-Senator Evans offered a number of arguments which I propose to deal with. He said that the proposal followed extensive consultation but, of course, he did not mention the opposition by industry and by the States. I have quoted the comments of Premier Burke of Western Australia, which I understand reflect the position of the States which Senator Evans met with at a recent Australian Minerals and Energy Council meeting in New Zealand.

Senator Evans said that cash bonus bidding had been used in the United States in wildcat areas, contrary to claims that cash bonus bidding only applies overseas in areas that have extensive exploratory activity. However, the number and size of cash bids overseas have not been indicated. More importantly, the number of potential explorers dissuaded from participating is not known or has not been stated. It is therefore impossible to judge the impact that cash bonus bidding has had in the United States. The most important aspect is that Australian oil fields are more complex and are less known and less prospective than overseas oil fields, particularly those in the United States. Therefore such overseas comparisons as that argument makes are not appropriate to Australian conditions.

Senator Evans contended that the existing work program system is difficult and costly to administer, is inequitable in selecting the successful bid and proves difficult to enforce work program commitments. This argument, however, ignores the fact that the work program system has been successfully operated in Australia for many years. Although it may not be perfect, it has a proven track record and it can be enforced and it has been enforced. Moreover, cash bonus bidding will apply, according to the Government's own statements, only to selected areas. The work program system will continue to apply to the bulk of applications for oil exploration permits.

Cash bonus bidding is inequitable and discriminates against smaller Australian companies without access to adequate low cost finance, whereas the work programs system assists small Australian exploration companies. The accumulated skill and experience of these small companies, which do not seem to be understood by the Government, are vital, in association with larger companies, to the total exploration effort.

Senator Evans made a number of points in response to arguments against cash bonus bidding. He said that the amount of funds available for exploration was not limited and claimed that cash bonus bidding was similar to farm-in arrangements, and that recent evidence indicated that it would be an incentive to foreign investors, which would increase the total amount of investment funds which would be available. This argument is a surprising one, to say the least. Clearly the source and cost of funds for exploration are finite. Domestic companies have limited ability to tap local and overseas capital markets for large up-front risk capital. The cost of such capital raisings may limit the ability of Australian companies to compete for these cash bonus permits.

Small Australian companies with limited cash flow have less ability to fund these payments from their own internally generated funds. Commitments to shareholders, of course, will limit ability to obtain funds from equity sources. Certainly large domestic and foreign companies with access to regular cash flows or international finance may be able to finance their offers or their payments under cash bonus bidding at lower cost, but this suggests that smaller Australian companies will be at a competitive disadvantage under this system. Although foreign investment may increase, there is no guarantee that total investment will increase and that Australian participation will be maintained. Successful tenderers may attempt to increase subsequent farm-in payments to recoup their payments. This may limit Australian participation and the further development of oil fields.

It should be understood that farm-in arrangements are not identical to cash bonus payments. In all cases, farm-in deals off-shore are made on the basis of prior exploration. In some cases, farm-in deals are made to recoup funds already invested. Under farm-in arrangements, payments remain within the industry, whereas under cash bonus bidding payments go to the Government. Although farm-in payments may not always be used directly for oil exploration, the availability of these funds may indirectly assist further exploration by reducing competing demands for funds within the industry.

Senator Evans quoted a number of farm-in arrangements which he said suggests that ample funds were available for exploration. However, some of the companies cited by Senator Evans have claimed to have been misrepresented. They note that they either sought funds to invest in further exploration and development or formed consortia only to evaluate the viability of participating in cash bonus bidding permits.

The Government claims that cash bonus bidding is complementary to its proposed resources rent tax and that the two will provide certainty in investment decisions and deter overbidding. This argument is based on airy-fairy theories of economic rent which Senator Walsh has promoted from time to time in the Senate.

Senator Gareth Evans —You mean you can't understand it?

Senator DURACK —I do not think Senator Gareth Evans understands it. I am just about to point this out. We have heard Senator Walsh on these theories from time to time. If on occasions a substantial rent is earned on a mineral resource, it certainly cannot occur twice. It is typical of governments to try to double their take, and Senator Evans is proving no exception to this unfortunate rule.

While the resource rent tax attempts to obtain the economic rent from the production phase of minerals development based on a known value such as profit, cash bonus bidding attempts to extract the economic rent from the exploration phase of minerals development where the end value is unknown and any decisions may be based on irrational expectations and incomplete knowledge about the true value of mineral leases. There is no certainty that any benefit will accrue to companies prior to exploration. Where up-front payments for perceived or notional economic rent are made without any discoveries, companies will suffer losses unless payments are recouped, at least partially, by tax deductions or by the government refunding the cash bonus payment. It cannot be assured that any returns from any future production will fully compensate companies for inflated cash bonus payments. For instance, the Government may effectively talk up bids by declaring areas to be highly prospective. The Government implies that the risk will affect only the size of bids and not the number of bids. However, increased risk may reduce both the prospective number and the size of bids.

Proposed new section 22B, deals with the calling for and handling of applications and provides discretionary power to the Joint Authority to award or refuse permits. It does not stipulate any conditions. It permits criteria to apply to permits to be announced by the Government at the time applications are called for. The Bill also provides the Joint Authority with power to require further information. Senator Evans has indicated that the Joint Authority-in the immediate case it will be only the Commonwealth Minister-will reject bids if it considers that there is evidence of collusive bidding, if there are insufficient technical or financial resources or if conditions known prior to biding are not met.

I believe that these aspects of the Bill make it clear that the cash bonus bidding proposal will not be the administratively simple system that the Government and Senator Evans maintain it will be. Furthermore, unlike under existing off-shore permit arrangements, only limited renewal options will be available under the cash bonus bidding system. Indeed, only one permit renewal is provided for in clause 7 of the Bill. Clause 8 stipulates that only 50 per cent of the permit area is to be eligible for renewal and removes the option to renew a permit over a minimum of 16 blocks. However, limited renewal clauses may be inappropriate given the more complex geology and greater risk associated with off-shore exploration in Australia.

The arguments that have been advanced by Senator Evans on behalf of the Government in his efforts to persuade the industry, commentators and members of this Parliament of the merit of these proposals have, I think, been summarised in what I have said. He introduces in this legislation a proposal which has been around in Australia for some time. As I said, it has been used to some extent in the United States under completely different conditions. He is seeking to replace the system of granting exploration permits on the work program basis, which has been a time honoured system in this country and which has worked effectively and honestly and is acceptable to the industry. I think that any Minister and any government would take on a very hard job indeed in trying to persuade us that a change is desirable. Senator Evans has produced the arguments that I have just analysed in order to do that but, as I hope I have established, those arguments are fallacious and indicate in many cases that he simply does not understand the conditions under which the Australian oil exploration industry has to operate and pursue this very difficult and vitally important task for Australia. I believe that anything which will be a disincentive to the industry or which will divert money from exploring simply to government is totally unjustified.

The arguments in support of cash bonus bidding are, as I have shown, superficial or inconsistent with the successful commercial arrangements which are in existence and which people in the industry have become used to. The work program system, under the Government's proposals, will continue to operate not only on-shore but also in most of the off-shore areas. The Government, in a last desperate effort to persuade this Parliament and the State governments of the desirability of change, has offered to apply the system in Commonwealth areas for only two years, after which it proposes to discuss the matter again with the States. But, overwhelmingly, the time honoured work program system will continue in Australia. That is the extent to which this Government's proposals have been reduced.

I suggest that it is quite clear that the primary consideration behind the Government's proposal is the raising of revenue. The limited size of the permit areas, the limited renewal options and the lack of tax concessions or the writing off of these payments against a proposed resources tax clearly suggest the paramount objective of raising revenue. I know that the Government has been at great pains to deny this. However, even the Governor-General's Speech delivered at the opening of this Parliament, in which it was announced that this legislation would be introduced, referred to its revenue raising importance. When one comes to analysing the reasons for it, when one has considered all the other arguments, one finds that the only possible reason is that this Government wants to use this system to gain further revenue and to do so at the expense of vitally necessary oil exploration, particularly off-shore.

The Opposition, in view of the number of times that Senator Evans has tried to persuade industry on this subject, has given careful consideration to the arguments that he has brought forward. An analysis of the arguments, as I have shown, indicates that they cannot be sustained. For all those reasons, and in the interest of continued orderly and successful exploration for oil in the off-shore areas of Australia, the Opposition will vote against this proposal.