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Tuesday, 5 May 1987
Page: 2316


Senator DURACK(4.42) —We have before us a package of legislation which seeks to implement the Government's proposed petroleum resource rent tax. This proposal was spelt out in some detail by the Government in a statement that was made by the then Minister for Resources and Energy, Senator Walsh, in July 1984. Yet it has taken this Government at least 2 1/2 years-since July 1984 until a few weeks ago when this package was introduced in the House of Representatives-to introduce the legislation. That is an inordinate amount of time and it is my first major criticism of the Government's proposal. The industry, already groaning under the burden of this taxation, has not been able to make important investment decisions because it has not seen the full details of the legislation.

The Petroleum Resource Rent Tax Assessment Bill 1987, the Petroleum Resource Rent Tax Bill 1987, the Petroleum Resource Rent Tax (Interest on Underpayments) Bill 1987 and the Petroleum Resource Rent Tax (Miscellaneous Provisions) Bill 1987 will add yet another taxation burden to those already borne by the Australian community. In particular, they will add to what is already one of the most discriminatory tax regimes any industry has to work under in Australia, even compared to regimes that the petroleum industry works under in other countries. This legislation will result in disincentives for the industry at the very time when the Government should be providing a fair and equitable taxation regime that would encourage oil and gas exploration in Australia.

In considering the taxation of the petroleum industry in general, what strikes the observer is the great range of taxation measures, many of them discriminatory. Not only is the industry subject to company tax, royalties, fringe benefits tax, capital gains tax, but also it has to pay excise on production and a resource rent royalty in certain cases. Now the Government proposes a new tax, a resource rent tax, to take the place of excise and royalty in some off-shore areas. These taxes were levied on the industry at a time when the world price of crude oil was forced to stratospheric heights by the actions of the oil cartel of the Organisation of Petroleum Exporting Countries.

In this environment governments of oil producing countries around the world did not believe that they, or the communities they represented, were getting a high enough return from indigenous petroleum resources. Governments were receiving increased revenues from royalties and company tax but decided that, as the price of oil had been forced up by OPEC rather than through the action of market forces, a proportion of the extra income generated, and a large proportion at that, should accrue directly to the Government and through it to the community. That may have been all right in an environment where a barrel of oil was worth in excess of $US30, but now the spot price of Saudi light oil has fallen to around $US17.30 a very different situation applies.

In real terms the price of oil approximates the price it held during 1973. A rise to $US22 per barrel is needed before it would equate to the price received between 1975 and 1979. The Government, therefore, should realise that the major fall that has occurred in the value of petroleum has reduced the value of that resource base and has thereby reduced the capacity of producers to pay high and discriminatory levels of taxation. Other governments around the world have recognised this and have modified their taxation regimes accordingly. Canada, the United States of America and the United Kingdom have all made concessions to the industry that reflect the decreased capacity of the industry to be a major source of government revenue. The Australian Government badly needs to recognise this also.

Today we have seen headlines about the success of the Australian company Hartogen in oil exploration work it has done in the Philippines. It has been successful, but why has it been in the Philippines? Why is it not exploring in Australia? It is because of the more favourable tax regime in the Philippines. It has been getting an equitable return from its oil exploration under that regime, and because of that it has been successful, as we know.

Senator Evans has at least recognised, in a recent speech to the Australian Petroleum Exploration Association conference, that the total Government take from existing production in Bass Strait is relatively high in comparison with that of other countries. He also stated that for new on-shore and off-shore projects the total Australian tax take is in an intermediate position. However, we must contrast this relatively high or intermediate tax position with the levels of prospectivity that apply in Australia with the levels that apply to other countries. It has to be recognised that Australia's prospectivity is low. We have large geological basins and an unsophisticated and relatively undeveloped geological database. In terms of world oil resources and cumulative production, Australia compares badly. The only conclusion that can be drawn from the data is that large discoveries are unlikely and that oil companies, when deciding where to invest scarce exploration funds, will direct them to an area where the return is attractive. I asked Senator Evans a question yesterday arising from a speech made by Brian Griffith, the General Manager for petroleum exploration of Broken Hill Proprietary Co. Ltd. In a speech to the Australian Institute of Mining and Metallurgy last week Mr Griffith said:

In assessing Australia's prospectivity it is perhaps relevant that in the past thirty years or so, only some four billion barrels of oil have been discovered in the country, and the great bulk of this volume was discovered in a relatively short period of time in one very small area of the Gippsland Basin. In the face of statistics such as this it is perhaps not surprising that the undiscovered oil resource base of Australia has been assessed at a relatively low level.

In assessing an exploration proposal two factors are of the utmost importance-prospectivity and the level of producer realisation, that is, what the producer will get out of it after all expenses, including taxes, have been paid. Australia has a low level of prospectivity when compared to other countries. The Australian Government has not, unlike those other countries, acted responsibly to reduce the taxation burden in the light of falling oil prices. There are two factors that affect the level of producer realisation-the price the producer receives for the oil produced and the level of tax imposed by the Government. Australia is not in a position to exert any pressure on the price of oil. We produce a tiny amount of the world oil production, most of which is absorbed on the domestic market. When in government, the Liberal Party recognised that Australia had only small reserves and that the most economical way to allocate those reserves, and to encourage exploration and production, was to price Australian oil at world price levels. That major decision, taken by the Fraser Government in 1979, was known as the import parity price policy. The essence of the decision was to price Australian oil at world parity prices. This policy was very successful in terms of encouraging increased exploration. There were great increases in exploration during those years until this Government took office.

It must be realised that the tax rates that were applied during the high oil prices of the late 1970s may not be appropriate now under low oil prices in the late 1980s. They are not appropriate because they have forced the level of producer realisation so low that exploration has fallen dramatically and indeed production in many cases has proved not to be economical-even in Bass Strait. The Government has already partially recognised this in that it has given some relief on the crude oil excise. Undoubtedly that is a matter which must be kept under further review.

The level of self-sufficiency attained in oil production in Australia will have an important effect on our economy. We are not saying that self-sufficiency at any cost should be our objective. We should not provide subsidies for the exploration industry, and companies in industry should pay their way by making a proper taxation contribution. As I have said, it was the Fraser Government which, when the IPP scheme was brought in, also introduced the excise on production. So we are not saying that companies should not pay proper taxation contributions. In this debate we are arguing what constitutes a proper taxation contribution in the light of the effect which current taxation levels are having on the exploration industry and which they are likely to have in the future, as indeed they have already had because of the greatly increased taxation imposed by the Hawke Government. Liberal Party policy is certainly not to impose new sectoral taxes on future oil discoveries. That was known as the new oil policy, and also accompanied the IPP policy.

To put all this into perspective I will briefly outline the situation in regard to Australia's self-sufficiency. The Department of Resources and Energy, using Bureau of Mineral Resources figures, has in its discussion paper on the regulation of crude oil marketing indicated that by 1992-93 the gap between supply and demand to be met by imports could be as much as 320,000 barrels per day. In Australian dollars this would cost some $3 billion per year at 1987 dollar rates. The price of oil is expected to rise through the 1990s as non-OPEC production declines so that by the 1999-2000 period we could be importing some 390,000 barrels per day, which may well by then at current rates amount to some $A4.5 billion in added import costs.

The economic costs of these declining levels of self-sufficiency are quite high-indeed, astronomical. The Victorian Department of Industry, Technology and Resources has undertaken some study of the general economic costs of declining self-sufficiency with the assistance of the National Institute of Economic and Industry Research. That research shows that as the crude oil gap widens over the 1990s and the Federal Government is forced to use contractionary monetary and fiscal measures to cope with balance of payments problems the most likely effects could be a decline in the gross national product by the year 2000 of around $A7.7 billion in 1979-80 prices, a fall in employment of over 200,000, a fall in manufacturing output of up to $A3 billion, and a fall in wage rates of about $24 per week in inflation adjusted dollars.

However, a lot of other research has been done which confirms this sort of dramatic impact on our standard of living as a result of our loss of self-sufficiency or major decline in it. The Centre for South Australian Economic Studies, a joint centre of the University of Adelaide and Flinders University, has looked at the economic impact of oil exploration on expenditure in South Australia. The simple conclusion of the study is that for each $1m reduction in expenditure on exploration and development activity some 20 fewer jobs were supported in South Australia. In 1985 direct expenditure by Delhi was shown to support 3,000 jobs in South Australia in addition to those directly employed by Delhi. Of course this relates to exploration in the Cooper Basin area. The revised exploration and development budget of Delhi in 1986 supported nearly 1,500 fewer jobs as a result of the decline in exploration.

So the decline in self-sufficiency has major national economic effects. Senator Gareth Evans and the Hawke Government would seem to want to rely on the vast resources that we have still in the ground, that is, our general mineral resources. Unfortunately such an approach is wishful thinking. We simply cannot rely on those developments to replace the loss of our self-sufficiency in oil. We must confront that problem. Senator Evans is also ignoring the fact that export revenue from coal is declining. Where he will find this extra windfall is of course problematical. And what about uranium? The Hawke Government has successfully killed off most of the uranium exploration and indeed development by refusing to sanction any further uranium mining developments other than Ranger, Nabarlek, which is just about finished anyway, and Roxby Downs.

On the one hand, the Federal Government is saying: `We need not worry because we have all these minerals'; yet on the other hand it is putting every impediment in the way of the exploration and development of these minerals. We had another example of it last week in the Government's Kakadu legislative package. Clearly the Government does not wish to face up to the economic problems that are on the horizon as a result of our declining oil self-sufficiency. They cannot be swept under the carpet as part of its pre-election `she'll be right' attitude. The studies that I have mentioned show that there is a lot of economic pain being caused by loss in self-sufficiency.

Mr Keith Orchison, the Executive Director of the Australian Petroleum Exploration Association, in a recent speech to the Australian Institute of Mining and Metallurgy, announced the results of an activity review that had been recently completed by APEA. That review showed that only 52 on-shore exploration wells and five off-shore wells are likely to be completed in the first half of 1987 and only 7,000 kilometres of on-shore seismic work and 2,000 kilometres of off-shore seismic work are forecast to be recorded in the first half of the year. This compares with 72 on-shore and 19 off-shore wells completed in the same period last year, when seismic activity was 100 per cent greater on-shore and 600 per cent greater in off-shore areas.

APEA has prepared a fiscal year comparison between 1986-87 and 1985-86 which is also very telling and very depressing. In 1985-86 213 exploration wells were completed-173 on-shore and 42 off-shore. In 1986-87 activity was more than halved with only 82 on-shore wells and 15 off-shore. The picture for seismic work is even worse. At the end of March this year only nine on-shore drilling rigs out of a fleet of 43 were at work, and three of the five drilling vessels in Australian waters were stacked and half the seismic crews idle. This depressed picture is unlikely to lead to any substantial additions to the quantity of our oil reserves and the low level of seismic work suggests that the drilling effort will continue to be depressed over the next two years at least. APEA has also released the results of its latest survey of exploration activity. This indicated that about $A165m would be spent on off-shore exploration this year compared with $A278m in 1986. In 1987 expenditure is forecast to fall 24 per cent below 1986 and 54 per cent below 1985.

The resource rent tax is just the latest in a series of secondary taxes imposed on the industry. Despite replies from Senator Evans to me, the industry has opposed the tax from the beginning and informed the Government of the negative effects that the tax will have on the exploration efforts. It is clearly having an effect. It is not just the low price of oil; it is the fact that the RRT will greatly affect producer realisation.

This tax is not the profits based tax that was promised. The very way in which it is structured will lead to a significant disincentive. Government members are fond of using Jabiru as a peg on which to hang their RRT arguments. We had an example of this from Senator Gareth Evans the other day. They suggest that the Jabiru development would not have gone ahead without an RRT. This is simply not true. The industry wanted the RRT to apply in this area because of the Government's taxation on new oil discoveries. New discoveries would have had to pay royalty only, and it is more likely than not that Jabiru would have gone ahead. It proceeded not because of the RRT but because the RRT system replaced the discriminatory new oil tax.

The inescapable conclusion to be drawn from the way in which the RRT is currently structured is that it is not truly profits based. It has significant structural defects-the major one being the limitation imposed on the deductibility of exploration expenditure. The version of RRT that we have before us is structured to limit deductibility of exploration expenditure to within an exploration permit or where a retention lease is granted to within the retention lease. This will alter the incentives that apply to drilling wells and undertaking exploration expenditure. If exploration expenditure on unsuccessful exploration is deductible against only the results of successful exploration within the same permit area this will clearly discourage risk taking activity. Exploration projects that previously might have taken place-they may have been geographically dispersed-will not proceed because of this. If a company has a successful project further projects within that exploration permit area will be viewed more favourably as the expenditure will be deductible for RRT purposes. Therefore there will be a misallocation of resources and exploration may not take place.

In taking a decision to explore, the companies are hoping to find a large field. That is what impels them. Companies do not explore if all they expect to find is a small field. The costs of exploring off-shore are too great to be justified by finding a small field. The decision to explore is made after evaluating whether the company can expect a find that will produce revenue well in excess of the cost of drilling the well. There are many unsuccessful wells in Australia, off-shore in particular. Whilst probabilities will be applied according to the production history of the area, three different outcomes are the basis of all decisions. They involve looking at the probability of there being no find. The chance of this is usually large off-shore from Australia. There are usually small prospects of a small find. The prospects of a large find in Australia are usually very small indeed.

The possibility of a large revenue stream, even taken with the small probability of a large find, often is enough to make the decision to explore positive. However, with the RRT having its largest effect-approaching 40 per cent-on large finds, it can be expected that many previous decisions to explore made viable by the possibility of a large find will no longer be viable. Therefore self-sufficiency will decline. The declining pattern of exploration will only accelerate as a result of the imposition of an RRT. Thus, despite assertions to the contrary by some economists during the initial examination of the RRT concept, the RRT will depress the incentive to invest. Allowing wider deductibility of exploration expenditure effectively lowers the cost of drilling and makes it more likely to achieve a positive expected value of return. But that is not what the concept of this legislation permits.

Exploration in Australia is more expensive than in any other comparable country, as the Chairman of Minora Oil NL, Mr Max Roberts, reminded us all at the recent Australian Petroleum Exploration Association conference. Those costs have to be incurred against the background of price uncertainty and in the context of a very high taxation regime and an even higher one as a result of this RRT proposal. In many marginal discoveries there is a significant down side risk in development and producers need to be assured of a reasonable risk loaded rate of return before committing to development. The RRT thus does not provide an adequate level of return to offset this risk. As I have said, it is clear that Australia is facing a self-sufficiency decline of crisis proportions. That decline will have broad scale economic effects that will act to reduce our living standards. To combat the fall in self-sufficiency we will have to rely on more exploration.

In concluding, I wish to refer briefly to the nature of the industry. Public perceptions are very often incorrect, particularly when it comes to the oil industry. It is not a hugely profitable industry dominated by multinationals-certainly not on the exploration side. Whilst the most recent industry statistics are somewhat out of date, it is hard to imagine that following the collapse of the oil price conditions have improved. The Chairman of APEA in his 1984 address referred to the Coopers and Lybrand survey of the industry. He stated that the industry earned a net profit on average shareholder funds of almost 19 per cent. However, the net profit on average funds employed was only 10 per cent. The industry as a whole was left with a net profit of around $A621m from which to pay dividends and put funds aside for exploration. In the light of inflation and the returns available on no risk investment such as treasury bonds, a 10 per cent return is quite inadequate.

Almost 300 companies are involved in the exploration business in Australia. Only about 90 of those spend more than $A2m a year. Therefore, there are a large number of small investors in the oil exploration business. They have taken a huge hammering over the past 12 months because of the fall in oil prices and the effects on exploration I have already indicated. The heart of the industry consists of some 50 to 60 companies which account for some 80 per cent of the investment. A large number of these companies are Australian; they are not multinationals, as Labor supporters seem to imagine. There are some 300,000 shareholders in listed oil exploration companies and the Australian Mutual Provident Society and National Mutual both have substantial direct or indirect investments in the industry on behalf of all their investors.

Many Australians thus have a direct stake in a healthy oil industry, not a subsidised one or one that cannot pay its proper and equitable contribution in taxation but rather one that is itself healthy, self-sufficient and treated equitably by government. This Government has not treated the industry in this way. As I said, it has imposed upon it a whole range of new taxes-the fringe benefits tax, the capital gains tax, a new oil tax and a cash bonus bidding system in off-shore areas. Those taxes have made a lot of exploration uneconomic. The threat of RRT, without details, hanging over the head of the companies over the last two and a half years has been a major disincentive. I hope I have shown that the proposed RRT does not act equitably, because, in particular, of the restricted deductibility it provides and the way in which that will militate against exploration. For the reasons I have indicated, the Opposition will oppose the legislation. We hope that a majority of senators will support us in throwing it out.

Debate interrupted.