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Tuesday, 14 May 1985
Page: 1932

Senator COOK(9.45) —I support the Government's legislation, the Petroleum (Submerged Lands) (Cash Bidding) Amendment Bill 1985. In doing so I commend to the Senate the second reading speech of the Minister for Resources and Energy (Senator Gareth Evans) which, as we know, was delivered on 28 March. The important point to remember about this legislation is that it is the Crown which owns all the off-shore oil and minerals in Australia. Therefore, this Government, as the representative of the Crown, is concerned about making sure that the allocation of prospecting licences in those areas is farmed out efficiently and effectively for proper and comprehensive prospecting and development should discoveries be detected and that the public interest is served in guaranteeing that we move to an improved system of oil self-sufficiency.

The cash bidding proposal of this Government-a system that has worked effectively for many years in the United States of America-is the preferred way of moving. This legislation seeks to replace the current-what I would describe as old and defective-system of work program bidding which has operated until now. I believe that there is a ready and wide understanding in the industry of the deficiencies of the present program and that much of the debate about what should be done, given the Government's initiative in bring forward this legislation, has, in fact, highlighted those deficiencies. One reasonable conclusion to draw from all of that debate is that really the current system is shot full of holes. Indeed, now the industry organisation is seeking to argue for alternatives which suggest that the current system is not strongly supported by it.

This legislation seeks to remove the work program bidding system, a system in which prospectors bid for a right to prospect a certain acreage by submitting a schedule showing what type of work they propose to carry out on that acreage, and replace it with a system which, in fact, auctions off the acreage for prospecting to the highest bidder, given some other qualifications as well. As I have said, this system has worked well in the United States. It is a flexible, easily managed system and an efficient way of cutting through the red tape associated with the work program bidding. Indeed, one would have thought that, given that it is a direct attempt to allow market forces to determine the value or the prospectivity of certain acreages, an industry that prides itself on arguing in favour of market forces would have supported it.

For this Government all legislation is, of course, important, but legislation in the resources and energy field is vitally important because it is here that we come under great scrutiny. We are concerned to promote exploration and development of our resources. We believe that in the world at present there is a reasonably strong supply of oil. One would not say that there is a glut but, nonetheless, there is a strong supply. Australia, as a producer of oil from Bass Strait, is tapering off in terms of what we would domestically produce. We are aware that the International Energy Agency, the sub-agency of the Organisation for Economic Co-operation and Development which is devoted to energy matters, warns of impending shortages of oil as world gross domestic product lifts, despite conservation methods implemented by that agency and by governments associated with it, and that by the years 1990 and 1995 rationing due to shortages will begin to apply. It is therefore important that we get things right and make sure that the positive exploration of Australia's potential reserves is carried out.

In balancing the issues as to what should educate the mind of a government in proposing how the incentive should be given to exploration, there are, of course, the interests of the industry. I do not think that anyone would argue that over a long period this Government has not conducted itself entirely properly in order to carry out consultations with the exploration industry in Australia. In February 1984 we released a discussion paper inviting comment on the movement to cash bonus bidding and in December 1984 we released a draft Bill on how we proposed to implement the movement to cash bonus bidding. We took into consideration the constructive comments of the industry and State governments; we conducted an extensive round of discussions with all the State governments and the Territories on this. Therefore it cannot be said that there has not been a proper course of consultation and discussion with the industry and the various States.

If I have a criticism about the way in which the debate has been developed, it is that we have tended to focus on the points of conflict-that is, where the industry disagrees with the concepts advanced by the Government but has not put a countervailing argument strongly enough or where community organisations have not put an argument on the national or public interest in this matter. Although the Government recognises and respects strongly the views put by the industry as to what would suit them best in this matter, the Government must balance the industry's views with the need to ensure that potential reserves are recovered and that this is done in the national interest. That is the countervailing argument. Unfortunately that argument does not get all the coverage it deserves as we descend into looking at the merits of the detail of this scheme or that scheme.

While the Government is concerned about the views of the industry and has sought, I believe, sympathetically and sensitively to try to meet those needs-embracing industry concerns-in the final analysis it has a duty to the public. If there are conflicts and those conflicts have had an opportunity to be aired and brought to resolution but there is still no agreement, of course, a government has to make a decision as to what is in the best interests of the community and move down the track which it as a government believes fundamentally is the proper course. That is what has happened in this circumstance. I do not believe anyone could argue that there has not been a proper opportunity for full debate. However, if in the end that debate is unresolved it will be necessary for the Government to act, and the Government is acting.

I am perturbed, if not annoyed, by the tenor of the debate on this matter in the Senate. Many of the speakers in the debate have not concentrated on the merit of the proposition and unfortunately for themselves, because I believe it reflects badly on them, tried to attack the personality of the Minister for Resources and Energy (Senator Gareth Evans) and diminish his standing in the community. I appreciate that that is a form of parliamentary tactic, although not the most edifying form of parliamentary tactic. I believe that when we are dealing with a matter of national concern such as this it is not a form of tactic that ought to be encouraged. I think it ought to be said that the Minister has conducted himself in the negotiations with industry-following on the work done by the former Minister, Senator Walsh-in a way that reflects credit to himself and to the Government. Attempts to try to portray him otherwise can be disproven by resort to the record. I think those honourable senators who launch such attacks are made smaller by their efforts to tear down the good work done by the Minister. I think that point needs to be squarely made.

In attempting to show that the Minister was not representative of the mainstream of thinking-at least among the governments-reference was made to criticism by the Premier of Western Australia, Mr Brian Burke, of the draft cash bonus bidding legislation brought forward for public discussion. To my knowledge, while it is unquestioned that Mr Burke made criticisms of the Federal Government at an earlier stage, those who wished to consult him now would find no comfort for their allegations. I believe that with the effluxion of time, the availability of new material and the opportunity to have further discussions-as was acknowledged by Senator Jack Evans of the Australian Democrats-with the world expert on cash bonus bidding, Professor Walter Mead, a visiting professor from the United States, that view of the Western Australian Government would be different. Those honourable senators opposite who have relied on Premier Burke, as all Opposition speakers have done, will find that they do not have a very substantial case because I understand that that is not now the view of the Western Australian Government.

Listening to many honourable senators speak in this debate, one would imagine that there are simply no problems with the current situation. The most recent problems concerning the current work program bidding situation in the Gippsland Basin were set out in the second reading speech. However, I think it is worth recording, in this the substantive debate, what those problems were. If the Opposition launches an attack on the legislation based on current practices that is the flimsiest and most insubstantial foundation upon which to rely. In 1980 applications were invited for three permits in highly prospective areas in the Gippsland Basin. Twenty-nine bidders submitted work programs as to how they would develop those permits. In other words, more than eight applications were submitted for each permit. Most of the propositions involved large work programs. I think this is a feature of the work program system which could cause it to be said that extravagant bids are put in for extravagant programs in order to win the contract. However, large work programs were submitted in the Gippsland Basin. A range of different explorational philosophies was paraded. There were great administrative difficulties in making subjective determination as to which of those large programs ought to succeed. In the end there is no evidence based on the record for one to be sure that one is right. I think the Minister made the point in his second reading speech.

What happened in Gippsland was instructive. One permit was surrendered after four of the 12 wells for the program submitted were drilled, leaving eight wells undrilled. That permit was surrendered at that point. With another permit, six wells out of the 19 originally proposed in the program were completed but the remaining 13 were not. There is now doubt about the future program with respect to that permit. A third permittee deferred some of the commitments and applied for a reduction in the program. This is an example of a highly prospective area and of the so-called efficiency and good working arrangements under the current system. I do not think that anyone looking at that record objectively could say that that was an efficient, flexible and fair way of managing our prospectiveness in a critical area of natural resources. When one considers that there were 29 bidders, of which three were successful, and that that was their record, a question of equity is raised. Is it fair to the other 26 bidders who missed out that those three should be able to alter or amend their programs or not complete their programs? As I have said, the tendency is to put in an extravagant work program bid in order to win the contract and then apply for an amendment to make the program workable. Of course, that throws the Government into a position of having to make a subjective judgment as to the best bid available.

I have referred in some detail to the discussion that this Government entered into with the industry, the States and the Territories on the draft of the legislation now before the Senate. I must say that I found it very instructive to discuss this matter with Professor Walter Mead, who I believe was available to the Australian Democrats and, I assume, the Opposition. Certainly, he had a fairly public presence in Australia when he was here the other month. He is, it is recognised, the world expert on this topic. I think it would be useful if I put on the record of this debate some of the views he communicated to me and some of the references that perhaps others should look up in order to satisfy themselves about the so-called inequities with this program. Professor Mead is a professor of economics from the University of California at Santa Barbara. He is a distinguished United States economist. He has testified to a whole host of Senate and House of Representatives inquiries. He has been the President of the Western Economic Association in the United States. He serves with distinction on a number of editorial boards. Some references that he commends to the Australian debate on cash bidding are as follows: The Energy Journal of October 1983, an article entitled 'The Rate of Return Earned by Lessees under Cash Bonus Bidding for OCS Oil and Gas Leases'; the Free Market Energy booklet section entitled 'Federal Leasing Policy' published by Universe Books in 1984, written by S. F. Singer, who is the editor; 'Competitive Bidding under Asymmetrical Information: Behaviour and Performance in Gulf of Mexico Drainage Lease Sales, 1959-1969'; and the Review of Economics and Statistics of August 1984. There are several other references, which are substantial references in themselves, that I am only too prepared to make available.

Some of the points that come out of those articles do, I believe, answer some of the substantial points put by the Opposition. I start with its point that the Australian scene is not a fair comparison with the United States scene; that our industry is not a mature industry, a well developed industry, as is the case in the United States. There is some truth in that. We do not have a history of exploitation of petroleum resources as the United States has. However, to dismiss it in those terms is facile because there are legitimate comparisons to be made. In the not so recent past in the United States, between 1954 and 1969, 1,200 leases in the Gulf of Mexico were let. Those leases were classed as wild-cats. Figures issued by the United States Department of Interior show that 10 per cent of acreages leased were frontier areas outside the Gulf of Mexico and the Santa Barbara channel. The current United States program in Alaska is in an area that is previously unexplored. While it can be argued that aspects of the American industry are more mature and, therefore, qualitatively different from the Australian industry, the apples to apples comparison, I believe, is with the Australian industry and those examples in the United States that I have cited. In those cases, cash bonus bidding has proven itself as a flexible, efficient distributor of the rights of the market to decide how to allocate the prospective areas.

There have been a number of other criticisms from the industry. I wish to turn to some of those. Industry claims that companies have only a fixed amount of capital to spend in a particular area so they will be unwilling to bid for acreage. If that were true, it should not pose any difficulty for industry. If that were true no one would bid for the acreage so the Government would have to give it away. The truth is that companies are concerned about cash bidding because of the prospect of their having to make positive bids to secure leases. The Government owns the leases and the value of those leases is reflected in the amount of cash bids. If exploration is worth while, companies will find the funds to do it and they will never bid an amount which makes the exploration not worth while.

I refer to another criticism. Industry claims that cash bidding is inconsistent with the spirit of the resource rental tax concept. I argue that that is a false assertion. The RRT is a tax on rent, as is cash bidding. Cash bids reflect the residual rent value of a lease after the anticipated effects of the RRT are taken into account. An up-front cash payment which is fixed by the Government would not be inconsistent with the RRT concept since a fixed payment is not based on resource rent. However, under cash bidding, companies are left to determine the cash payment. Thirdly, industry claims that cash bidding will distort exploration decisions away from high cost, high risk areas. This claim could be valid if the Government applied uniform up-front fixed fees for all leases. But the fee, the cash payment, is determined by the companies themselves under the cash bidding system. If high cost, high risk exploration warrants a small cash bid, companies will submit only a small bid. They will not walk away from high risk exploration to low risk exploration as a result of cash bidding.

I turn to the fourth criticism. Industry asserts that cash bidding will complicate off-shore exploration. Cash bidding is much simpler than work program bidding-that is the point I have been making all through my remarks-since successful applicants are determined by bids offered, not by complex work programs which are difficult to compare and which require subjective judgments to decide. Industry has proposed that the Government refine the work program bidding system by ensuring that commitments are met. Companies would find it hard to live with that proposal. Suppose a company offered to drill 10 wells and the first six wells were absolutely dry, providing no encouragement for further drilling. How would the company regard a Government requirement that the remaining four wells be drilled? The company would be happy to relinquish the lease instead of completing its commitments, but the ability to relinquish at will would allow companies to make ambit claims about their work program commitments in the first place when completing the lease. Industry claims that cash bidding will discriminate against Australian companies and also multinational companies trying to secure 50 per cent Australian equity. This ignores the possibility of joint bidding. Small Australian companies can form a bidding consortium, either with each other or with multinational companies. In this way the amount they need to put towards a cash bid can be greatly reduced.

Industry has suggested that in view of the poor seismic information in the Timor Sea area the area is unsuited to cash bidding. Industry has stated repeatedly that it uses risk weighted analysis-that is, expected monetary value analysis-in assessing the viability of exploration programs. This takes account of possible returns and the risk faced in obtaining them. If information is poor the risk is greater and the expected monetary value is lower; that is, cash bids will be lower if the risk is high. Again, the companies have nothing to worry about since the poor quality of information reduces the size of the bids. But in any case, as Professor Mead pointed out when he was here, there is ample opportunity for the seismic information to be obtained in advance of the bids being called for. Indeed, the regular practice in the United States is for one of the companies-it may not even be a bidder-to conduct the seismic evaluations and then, at a small fee, enable the would-be bidders, or the prospective bidders, to have access to that seismic information so that their bids, when they are sealed and submitted, are bids based on the best available knowledge at the time.

If one looks at the Timor Sea area, the area to which this legislation would apply, one will see that,firstly, there is a very good opportunity for all of the relevant information to be available and, secondly, it is well known as a highly prospective area-precise information is available to which access is available-and since the information is there no one can be disadvantaged in any way. In economic terms, cash bidding systems are the most efficient means of allocating exploration rights, particularly where competition is high. As I have said, it has significant economic efficiency, equity and administrative advantages over the work program bidding system. I have emphasised a number of those.

In the five minutes or so remaining to me I will pick up a few more of the criticisms that have been made. One of them is that cash bidding will increase the financial risk of off-shore exploration. Companies will take into account the expected risks when they submit their bids, and the costs involved in exploring a permit when they are considering framing their bids. The cash bid in no way changes those risks and costs. Rather, the risks and costs influence the size of the bid. Compared with the work program system the cash bidding system will reduce the risks faced by companies. Under the cash bidding system companies will be free to undertake the most commercially viable exploration program consistent with changing economic conditions and prospectivity assessments. Under the work program system companies are committed to an exploration program designed up to six years in advance and must face the considerable risk that changing circumstances will make that exploration program uneconomic.

A final criticism is that cash bidding is inconsistent with the resources rent tax. Cash bidding and the resources rent tax are necessary to ensure that the community receives its appropriate share of economic rent. Under the work program system companies are encouraged to over-explore an area which, because the cost of exploration is deductible from RRT, would result in the collection of RRT below that which would otherwise be expected. The Government believes that it should collect, on the community's behalf, a share of the economic rent for use on general welfare objectives rather than leave it all with the companies. Cash bidding and resource rental tax together ensure an appropriate sharing of economic rent. Both are charges on economic rent.

I have dealt with most of the other arguments concerning discrimination against Australian companies and the reduction in the amount of funds that it is argued may be available for exploration generally. Let me conclude with these remarks. I am disturbed that the Australian Democrats have taken the view that they have and have sought to impede the passage of this legislation through the Senate by suggesting alternatives which, I think, reflect only the industry view. As I have repeated, while this Government respects the views of industry, there is-I hope that the Democrats are alive to this-the wider community and public interest to take into account. It seems to me that the Government is trying to achieve a free market to enable the market to determine the value of a particular acreage for prospecting reasons. I find it more than passing strange that both the Opposition and the Democrats, both of whom pay frequent and usually loud lip service to the idea of a free market, are opposed to this most obviously workable concept, a concept that has proven itself in the United States of America, and, I believe, would prove itself of great value and merit in Australia in providing for a better and more equitable allocation of areas for prospecting, certainly when one considers the example I cited earlier in my remarks of the surrendering of leases in the Gippsland basin which has shown, more graphically than any other example, that the present system is not working to achieve the equity, the flexibility and the efficiency which the Government wants and which this legislation would ensure was achieved for Australia. I commend the legislation.