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Tuesday, 5 May 1987
Page: 2335


Senator SHORT(8.21) —I wish strongly to support the Liberal Party and the Opposition in their opposition to this package of Bills, as outlined by Senators Durack, Parer and others. We are debating a package of four Bills, the main impact of which is to impose a petroleum resource rent tax that will apply to profits from the recovery of petroleum in off-shore areas where the Commonwealth Petroleum (Submerged Lands) Act 1967 applies, other than in areas covered by production licences granted on or before 1 July 1984, and the permit areas from which those production licences were drawn.

The resource rent tax, which is effective as of July 1984, is to be implemented on off-shore petroleum projects licensed since then. The tax will be levied at a rate of 40 per cent on the net assessable receipts from individual projects-that is, it will be levied not on the company's total income, but separately on each project. That in itself raises several very considerable administrative, technical and conceptual difficulties.

Company income tax is not an allowable deduction for the purposes of resource rent tax, but resource rent tax payments are deductible for company tax purposes. This is designed to tax a project that earns more than the minimum competitive threshold return, or one that earns a so-called windfall profit. In the fields where it applies, the resource rent tax will replace the existing secondary taxes-crude oil excise and the royalty system. Petroleum is defined to include any naturally occurring hydrocarbon, whether in gaseous, liquid or solid states. Therefore, some products that were previously excluded from the crude oil levy, such as natural gas, will be subject to the new tax. It is to apply only where there is an excess of project-related receipts for a financial year over both project-related expenditure for that year and undeducted expenditure of previous years brought forward at a compound rate.

There are various reasons why the Opposition decided strongly to oppose the legislation. Firstly, it is an additional tax on the petroleum sector-and, therefore, on industry-that cannot be justified if the industry is to be encouraged to explore further. Taxation revenues arising from the resource rent tax, which is a secondary tax, are, in effect, a penalty on profit and a disincentive to future investment.

Secondly, there will be several unintended consequences of the legislation. It will have a negative impact on investment decisions in resource areas; it will end up being an additional burden for the petroleum industry; and it will have a detrimental impact-potentially very severe-on the balance of payments in the longer term. Because the petroleum industry is a key Australian industry, any efforts to stifle it are, in effect, efforts to stifle Australian industry as a whole. There are enormous, widespread uses of petroleum right through the whole range of industry in Australia and, indeed, in every aspect of community life. In the long term, therefore, the legislation is certainly against the public interest. Being a secondary tax on oil, it will also be a new tax on user or downstream industries, such as petrochemicals, plastics and the like. It will almost certainly have a severe unemployment effect within the industry.

The philosophy behind the Government's proposal appears essentially to be two fold. The primary rationale given by the Minister during his second reading speech was that:

Petroleum resources are, in their most basic sense, community property and the Government believes that the community as a whole should share in the potentially high returns from the exploitation of these scarce, non-renewable resources.

In other words, the Government is enacting a bit of old Australian Labor Party philosophy-that there is a fundamental schism between the interests of business and the interests of the community at large, and that it is only by the paternal actions of a socialist government that that imbalance can be corrected.


Senator Button —That is short-talk humbug. After seven years in government, you should not come out with that sort of rubbish.


Senator SHORT —The Minister knows as well as I do that the Bill is reiterating an old ALP, worn out socialist philosophy. One of the key assumptions of the Minister's statement is that the community is yet to reap the benefits of the activities of the resource industry. But what about the taxes that this industry already pays, and has paid for many years, such as company tax and royalties? In addition to those normal taxes on industry, it has paid a very high levy on crude oil production. It is estimated that in 1985-86, oil producers contributed some $1.06 billion in company tax and royalties to Federal revenue, and more than $200m in State royalties. If there had not been a crude oil excise of about $4 billion, company taxes and royalties would have been $2.6 billion higher.

However, it is not only by virtue of those taxes that the Australian community has benefited from the activities of its domestic oil industries. Each time that an exploration venture or an oil rig is set up, there is an associated infra- structure, including employment for those directly employed in the technical expertise involved in such ventures. That would not be provided by crude oil imports. In addition, domestic oil exploration, discovery and drillings have spin-offs for many other sectors of the Australian economy. All those employed by the oil industry must, of course, be provided with the normal essentials of living. As I said before, the downstream users of the oil industry are enormous.

Therefore, the Minister for Industry, Technology and Commerce (Senator Button) is incorrect when trying to sell the legislation on the ground that it will ensure that the wider community will benefit from Australia's resource wealth. On the contrary, recent developments overseas and the downturn in local conditions have put severe pressures upon the industry. Therefore, this proposal, as an instance of fiscal policy, will strangle the industry rather than maximise remaining production. In the long run, the wider Australian community will be the net loser.

That this Government can glibly assume that the so-called excess profits of Australian industry in general, and the oil industry in particular, are more equitably distributed in its hands is a travesty of the truth. That is only too obvious when its record of extravagance and wasteful expenditure of taxpayers' funds is laid bare for all to see. There have been numerous, never ending examples of that during recent times-indeed, during the whole four years of the Hawke Government. There may be a sound case for a mechanism to be put in place whereby the wider community does share in the returns from the exploration and recovery of non-renewable resources-in fact, both the Liberal Party and the industry happen to share that belief-but this proposal is certainly not the way to achieve that end.

The other rationale provided by the Minister in his second reading speech for a resource rent tax was that it is a more efficient and equitable secondary taxation regime than the excise and royalty system that it is to replace. There is no need to worry about the resource rent tax, so the argument goes, because it is a profit based tax, not a production based tax and so it offers considerable benefits to the petroleum industry. But there are several points to note in that argument. The first is that the tax is to replace an existing secondary system of taxation; that is, one that is in addition to the normal taxes that private enterprise pays in the normal course of its operations. It is an additional tax. The argument here is that because the oil industry enjoys windfall profits the Government is justified in taxing it to the hilt. The theory is that taxing returns in excess of the minimum required to make an investment attractive-in other words, the concept of economic rent-will not cause a desirable investment to become undesirable in the eyes of the investor because the investor, so the argument goes, would go on investing on the ground that the resource rent tax impost will not affect anticipated ordinary profit or return on the investment.

However, the legislation under debate tonight will not and cannot achieve this effect, even if it were a desirable effect, which in itself is a question for another time. It will not and cannot because it will have several inevitable consequences for oil exploration and production in Australia, consequences to which I have already alluded. It will have a negative impact on investment decisions in resource areas, it will end up being an additional burden on the industry and it will have a detrimental impact on Australia's balance of payments in the longer term.

The tax is essentially a tax on risk taking. At the very best it will act as a disincentive to Australia's petroleum industry. It could well cause its demise. As the legislation stands, the Government will share in all instances in which returns turn out to be more than acceptable but it will not share in them when they are not. The tax will have the greatest impact on the riskiest projects and project phases, the riskiest commodities, geographical areas, production techniques and marketing and sales methods. Marginal projects for which expected returns are barely enough to make it worth while to take the risk will almost certainly be scrapped.

In introducing this legislation the Government has failed to take full cognisance of the deterioration in several key areas of the oil industry which makes the future of that industry bleak indeed. In the nearly three years since the tax was first announced the price of oil has fallen dramatically. The world price has fallen and the domestic price of Bass Strait crude oil has fallen, following it down. The price of Bass Strait crude oil has fallen since January 1986 alone from about $44 a barrel to less than $30 a barrel at present. The average price of oil fell from $29 in the first half of 1986 to less than $23 in the second half of the year.


Senator Button —Are you attacking our muslim brothers, Senator?


Senator SHORT —No, not at all-not on this occasion. The effect of the slump in oil prices has been to reduce the gains to producers and, therefore, act as a disincentive to further exploration and production. The upshot of this is that currently exploration is dragging to a halt. The petroleum industry last year laid off some 6,400 people, who represented 42 per cent of the total number of people employed in the petroleum industry. They consisted largely of professionals-physicists and geologists. They are the sorts of people we can least afford to have out of work in their professional areas. The impact of the resource rent tax on employment and on the industry, admittedly, will not be felt until a little further down the road. But when it is felt, it will be extremely damaging for the industry and it will be reflected in a major decline in the exploration effort and the resource and development effort of this country.

In the first three months of this year only 28 wells were drilled, which is the worst exploration drilling performance since 1981. Seismic activity, the basis for future drilling programs, has all but ceased. In the first quarter of 1987 a very limited amount of seismic activity took place, only about one-ninth or one-tenth of the amount that took place in each of the two previous years, 1985 and 1986. As well, company cash flows have more than halved. So raising equity capital to finance high risk exploration has become extremely difficult. At current world oil prices the proposed 40 per cent resource rent tax rate and threshold rate will exacerbate the present poor outlook for exploration and will render all but a few high risk exploration prospects totally unattractive. The Esso-BHP shutdown in production in Bass Strait because it had become uneconomic last year highlights the dramatic decline in the industry as oil prices have collapsed. At the same time marginal production realisation dropped to its lowest level in 10 years, around $3 a barrel, and exports ceased.

In 1984, when the tax was first put forward, the hue and cry was that Australia's oil production would rise by about 30 per cent by 1996 and that 2,000 million barrels of crude remained to be discovered, of which 1,800 million barrels could be brought into production by the year 2000. But subsequent developments have forced the Bureau of Mineral Resources, which made these predictions, to be much more sober in its forecasts. This year the Government has radically revised the 1984 rosy forecasts for the industry. Production is now forecast to be 20 per cent lower in 1989-90 than it was in 1983-84 and producers have recently indicated that it may not be commercially feasible to proceed with Bass Strait developments. Rather than the optimistic 1984 forecast of 95 per cent self-sufficiency in crude oil by 1990, the Government is now estimating 65 per cent self-sufficiency in that year. If the Bass Strait developments do not proceed, this figure could fall as low as 50 per cent and quite possibly even lower.

This dismal outlook for Australia's oil industry has enormous ramifications for our future balance of payments situation. At the current world oil price and value of the Australian dollar, crude oil imports in 1990 could cost this country some $3,000m compared with a net crude oil import bill in 1985-86 of $44m. In 1985-86 imports of crude oil and other refinery feed stocks were about $1.2 billion but exports were of almost the same amount. So the net import bill was only $44m. The implications of going from that situation to a deficit on the oil side of our balance of payments of $3 billion within a period of two to three years are absolutely staggering, particularly when one considers the enormity of the balance of payments situation facing Australia at the moment.

Rather than encourage exploration, which is a vital ingredient for future levels of oil production, the proposed resource rent tax will discourage it. At a time when there has been a 35 per cent downturn in total private exploration expenditure, both on-shore and off-shore, in the past year, this tax is the last thing the industry needs or can afford. As the bulk of Australia's undiscovered reserve potential is estimated to be in `Greenfield' off-shore areas, this conclusion is underscored.

The resource rent tax is out of step with the rest of the world. The response of other governments to the oil price collapse has been to foster, not to deter, exploration. For instance, Canada, China, India, Malaysia, Norway and Nigeria are all relaxing their tax terms and conditions by variously abolishing or reducing petroleum taxes and royalties to facilitate industry activity. Given Australia's naturally adverse conditions for oil exploration, that relatively greater expenditures are needed to locate oil, it is sheer madness for the Government to impose a resource rent tax at a time when prices are at their present state and the outlook for the industry is so appalling.

In conclusion: The Opposition very strongly opposes this package of legislation. It believes that it is very damaging not only to the industry but also to the interests of our nation. In the long run it will severely constrict the activities of our domestic oil industry, causing a demand for more and more imported crude which, in turn, will adversely affect our balance of payments and drive the nation into ever increasing levels of debt. It is an irresponsible piece of legislation which fails to take into account the circumstances facing the industry and our nation. It is being imposed for old, worn out socialist philosophies and also as an attempt to raise more revenue at a time when the last thing that the Government ought to be doing is that, as distinct from cutting its own spending. The risks and costs involved in this exercise for the industry and the nation are immense. The legislation deserves to be defeated, and I hope that it will be.