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Australasian Oil and Gas Conference, Thursday 22 April 1999, Perth: address to the opening.



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LEADER OF THE OPPOSITION

 

CHECK AGAINST DELIVERY

EMBARGOED UNTIL DELIVERY

 

ADDRESS TO THE OPENING OF THE

AUSTRALASIAN OIL AND GAS CONFERENCE

THURSDAY 22 APRIL 1999

PERTH

 

Let me start out today by thanking the organisers for two things - firstly, holding the Australasian Oil and Gas Conference here in my home State, and secondly for inviting me along to open it.

 

It’s a particularly important place for a West Australian politician to be.

 

We all talk about the onward march of economic change, but all too often we dwell on the negatives. It’s nice to be able to celebrate the positives every now and then.

 

The Oil and Gas sector has been at the heart of the Western Australian economy’s transformation. With annual production valued at around $5 billion, it is greater than all agricultural production combined. It is 13 times the size of our fishing industry, and 12 times the total value of the forest sector.

 

Since the inception of the North-West Shelf project, domestic oil and gas production has come to provide over 90% of the State’s domestic energy needs.

 

Over the same period, WA has come to produce half of Australia’s total crude oil and condensate production, 60% of its natural gas, and the entire nation’s liquefied natural gas. Present production is around 180,000 barrels of oil and 65 million cubic metres of natural gas every day.

 

Many of the firms represented here today benefit from the flow-on effects of the oil and gas sector for the wider economy.

 

APPEA studies show that there are around 900 WA-based companies providing services to petroleum explorers and producers. These companies range in size from sole trader consultancies, to companies employing over 2000 people.

 

The services they provide include transport, logistics, hospitality, and scientific services, with construction and engineering being the most prominent.

 

These businesses employ an estimated 17,000 people. Put another way, for every employee in petroleum exploration or production, there are 9 others employed as service providers.

 

With annual revenues of around $1.4 billion, the companies represented here today are critical to the continued well-being of both the state and national economies.

 

In particular, I am aware that the local downstream processing of alumina, nickel, heavy mineral sands and - most recently — direct reduced iron, depends to a great extent on gas.

 

The corollary of this has been significant regional development. Mineral processing plants in Geraldton, Leinster, Capel, Pinjarra, Kalgoorlie, Kambalda, Wagerup, Muchea, Collie, and most recently at Port Hedland, are all gas-driven. Diversification and growth at Karratha have followed directly from its role in petroleum operations.

 

Clearly, ensuring the growth and future prosperity of the petroleum industry is essential if these same outcomes are to be assured for the wider economy.

 

The challenges of achieving these goals demand all the insight and analytical skills that the private and government sectors can muster.

 

A number of issues must be addressed and understood if the government and private sectors are to ensure that each contributes positively to future success.

 

At the risk of stating the obvious, oil and gas prices are at the heart of the matter. Equally obvious is the fact that our proportional share of the global market (just under 1% of world crude oil production) means neither production variations nor policy decisions will have much effect.

 

Oil prices averaged around US$19 a barrel between 1994 and 1997, but fell to US$10 a barrel in June last year before making something of a recovery. ABARE predicts that the average price through to 2004 will be around US$14 a barrel.

 

Oil prices continue to have a direct bearing on gas prices.

 

Of particular significance to Australia is the long-standing connection between oil prices and the level of exploration, together with the change in the timelines for the production from proven reserves. Declining outlays in both areas have had - and will continue to have - a negative effect on growth in the wider economy.

 

APPEA projections indicate a fall from $3.3 billion of exploration and development expenditure nationally in 1998 to $2.4 billion in 1999.

 

Given the mobility of capital and the competition for this scarce commodity, we are already seeing companies such as BHP re-evaluating their portfolios, and either quitting or shelving projects.

 

There can be little doubt that expanding world demand — and technological innovation - will assist the Australian petroleum industry in the long term. With this in mind, the present decline in greenfields exploration is a regrettable impediment to the industry’s long term optimal performance.

 

The world market for LNG is in its infancy. There are only eleven significant LNG importers, and of these Japan accounts for 54%.

 

Greenfields projects such as the Gorgon field will only be viable if the market expands. This means that the health and well-being of the Korean economy must concern us all.

 

Even more critical is the situation in China.

 

China’s commitment to take 3 million tonnes of LNG from 2004-5 must remain for the good of our industry in general, and for Gorgon in particular.

 

Current projections have oil and condensate production peaking within 12 months, and declining thereafter. Australia has 10 to 12 years of reserves at current rates of production. Greenfields exploration is the only way this profile can improve.

 

Exploration activity and effort is the key to a vibrant future for the petroleum industry. With this in mind, I am interested in discussing the future role of the Australian Geological Survey Office with your industry. It is our view that AGSO plays a vital role in collecting and disseminating geo-scientific information.

 

We see a continuing role for AGSO in providing this information and reducing commercial risk to explorers by helping them to better define their exploration targets.

 

It is one area where we believe government can make a positive contribution to underpinning the health of industries vital to our national economic future. It is one area - among many - where a rigid belief in small government sells Australia’s economic future short.

 

Capital for exploration is highly mobile. Australian companies spent over $300 million last year in exploration ventures outside Australia. Labor sees the continued availability of comprehensive AGSO databases in the public domain as being critically important to attracting overseas exploration capital, and keeping our own capital working here — and generating Australian jobs — in the face of strong global competition.

 

Labor is committed to dialogue with the industry to ensure that our policies optimise exploration and production.

 

We also appreciate that industry decision-makers look to government above all to provide a stable and predictable economic environment which reduces the risks inherent in making commercial decisions for the future.

 

This is why I stress to you today Labor’s commitment to good economic management: to prudent fiscal policy which keeps government debt and interest rates low; to Reserve Bank independence in the fight against inflation; and to policies to deliver high and sustainable economic and employment growth.

 

While I am on the subject of good economic management, let me inject a note of bipartisanship by endorsing the comments of Deputy Premier Barnett at the opening of the recent APPEA conference.

 

His words again highlight the fact that in the challenges facing the oil and gas industry, governments can be a part of the solution, or a part of the problem.

 

Mr Barnett is of the view that implementation of the Ralph Committee’s recommendation to scrap accelerated depreciation allowances would strangle expansion of this State’s oil and gas industry. He characterised the proposal as “very, very dangerous”, and said that any consequent slowdown of growth would be “a tragedy”.

 

These comments bear out something we on the Labor side have been saying all along when it comes to the Federal government’s Review of Business Taxation.

 

Our problem has never been with tax reform. Our problem has always been with a Federal government whose overwhelming priority is to punish dissent from its own particular views on the subject. We learnt long ago to judge them not on their words, but on their record, and we’re not so sure Australians — businesses or individuals should sign on the dotted line without first reading the fine print.

 

We would prefer the government focussed less on headline-chasing with 30% rates on this and that, and more on the real long-term challenges of building competitive Australian industries.

 

We are quite prepared to join the business tax debate with this gov ernment — as we have already signalled - but we want a proper, sober consideration of the issues. Another edict from the Prime Minister or the Treasurer and another hail of propaganda such as we saw over the GST simply gets us nowhere.

 

The government would do well to consider the views of all players in the debate over trading off accelerated depreciation for a lower corporate tax rate - and that includes the views of groups like the Australian Industry Group in favour of a swap, and those like the Minerals Council opposed.

 

Those involved in exploration and resource development activities, exposed as they are to high upfront capital risks, deserve a fair hearing. And that is particularly important in Western Australia.

 

I believe it is also very important for the oil and gas industries to involve themselves in this debate. When you think about the magnificent returns to both the State and the national economy from the North-West Shelf project, it should give anyone pause for thought on the issue of abolishing accelerated depreciation allowances.

 

North-West Shelf involved a truly massive upfront capital investment. We need to ask ourselves if it would have gone ahead without accelerated depreciation.

 

There are threshold questions to be answered here about the extent to which our tax system encourages different kinds of commercial activity. Lower corporate taxes across the board make no distinction between investment which genuinely expands our national productive capacity, and more speculative activities.

 

Another area Labor is particularly concerned about in this debate is the critical one of Research and Development.

 

The government has not yet made its intentions absolutely clear on the quarantining of R&D tax concessions from the proposed business tax trade-off. Considering its terrible form on R&D, this must be a matter for concern. This is why we again call on the Howard government to rule out immediately and publicly any cuts to R&D tax concessions.

 

Previous government cuts - reducing the concession from 150% to 125% in the 1996/97 Budget — caused the first ever reduction in the R&D growth rate in more than two decades of record keeping.

 

And the cuts might not have stopped yet. It has gone largely unrecognised in this debate that if the Review does result in a lower corporate tax rate, this will of course further weaken already inadequate R&D incentives. A lower corporate tax rate automatically reduces the relative attractiveness of any existing tax concession, and that includes R&D.

 

So we may be lucky enough to avoid further direct cuts to R&D incentives (or worse still, outright abolition) as part of the Ralph Review, but we could quite likely end up with an effective cut by the back door.

 

This would happen in an environment where Australian R&D funding still remains substantially below that of our major competitors. The US, Japan, Germany, France, Canada, and the UK all spend a higher proportion of their GDP on R&D than we do. And while their R&D effort is greater than ours and growing, ours is falling and may have further to go.

 

If there ever was a business tax issue that was about increasing the nation’s wealth rather than just reducing tax on business, it is R&D.

 

A case in point is the proposed Shell/Dow Chemicals petrochemical project in the Pilbara. The success of such a venture would represent a win for everyone. Its demand for gas would obviously hinge on the markets that can be found and developed for the ethylene, ethylene dichloride, monoethylene glycol and chlor-alkali derived products that it could produce. Just as obvious is the fact that the disappearance of R&D tax concessions could be a killer in the current market environment.

 

Governments have a responsibility to design a system which increases R&D spending by Australian industry. We want a system that encourages firms to invest more in the nation’s scientists and engineers; in the development of new products and technologies; and in the investments that ultimately increase the productivity of Australian companies.

 

This is why Labor took to the last election a policy to lift tax concessions for R&D back up to 150%, and to do so while setting an interim target for business expenditure on R&D of 1% of GDP. We had been well on track to achieve this target before the Ho ward government came to office, but it has slipped beyond our grasp now.

 

And just to give you a measure of the challenge — even 1% of GDP is below the OECD average. We need to do much better.

 

It looks like we can’t make the current government see that. They are simply not interested. So Labor will engage industries and individual companies in the development of policies which will lift the nation’s R&D performance, so that at the next election we have a plan to repair the damage and get back in the game.

 

Other tax issues are important too.

 

For example, yours is an industry that relies heavily on outsourcing. One particular facet of outsourcing that has grown rapidly in the minerals and petroleum sector is that of human resources and deployment.

 

Particularly in the provision of engineers, geologists, computer people and other highly skilled personnel, the selection and placement is most likely to be done by a specialist agency. These specialist agencies were at pains to point out to Senate committees recently that a GST will result in significant new cost burdens.

 

These new burdens will be delivered at the wrong place and at the wrong time. You are price takers, not price makers. You can’t pass the cost on. Your options will be reducing profits, reducing the numbers you employ, or both.

 

All the more reason why the government must be more thoughtful and more consultative in designing its business tax reforms than it was with its GST.

 

On a more positive note, I would like to emphasise the fact that I see a limitless future for your industry and for those industries that have grown along with you.

 

The export potential does not stop with oil and gas products. It includes the growing prospects for selling the expertise and services nurtured here.

Software writers, environmental managers, and all manner of technical innovators have developed expertise here that is marketable anywhere.

 

The long-term future for North-West Shelf gas is great. Our regional neighbours will ultimately return to their former grow paths, and they will need energy.

 

At the more speculative end of things we could ponder this: as Eastern seaboard reserves diminish, producers here could have the option of joining that market in competition with the proposed PNG gas pipeline.

 

We’re all allowed our dreams in politics, and I have to confess that as a West Australian, a truly national pipeline grid is one of mine.

 

Thanks once again for the invitation to open your Conference. I wish you every success, both for your deliberations here, and for the future.

 

Thank you.

 

 

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