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1989 energy conference



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SPEECH BY SENATOR PETER COOK, MINISTER FOR RESOURCES, TO THE 1989 ENERGY CONFERENCE AT THE SEBEL TOWNHOUSE, SYDNEY, ON TUESDAY, 8 AUGUST, 1989

(Delivered in Senator Cook's absence overseas by Mr Alan

Smart, Acting Executive Director, Minerals & Fisheries, Department of Primary Industries & Energy)

The topic of Senator Cook's address is the direction and achievements of energy policy since the "Energy 2000" report

was released in April last year.

It is no overstatement to say that the energy industry is a volatile and changeable one. The competitive nature of the international marketplace means that energy industries inevitably face continuous elements of uncertainty and risk. Correspondingly, energy policy must be able to adapt to those

changes.

"Energy 2000" — which was completed in April 1988 — represented the culmination of a detailed process of consultation with state and territory governments, industry, and community groups. It provided a comprehensive framework

for Australia's energy policy based on an explicit ‘

understanding of the economic environment in which the industry

operates.

However, from the outset, when "Energy 2000" was released we said that it was not to be regarded as a doctrinaire masterplan. It was intended to provide a framework, no more, no less, within which specific policies could be implemented.

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A flexible and pragmatic approach to policy development underpinned its objectives, and we have continued to adjust our

policy settings in line with changing circumstances when

necessary.

Energy policy in Australia grew out of our experience of the

two world oil price shocks of the 1970s. Political events such as the Arab oil embargo after the Yom Kippur War in 1974 and the Iranian Revolution of 1978/79, coupled with the economic reality of a world becoming hooked on oil were only a few of the forces that combined to produce these shocks. It is understandable that energy security became a major theme of

energy policies in most countries throughout the world.

"Energy 2000" had three key objectives: security of our overall energy supplies; development of exports in the energy sector; and greater efficiency in the domestic energy sector.

As we said from the outset when we released "Energy 2000“, energy security is not synonomous with self sufficiency.

Energy security is about achieving a diversified energy supply and ensuring as far as reasonable that those supplies are adequate and reliable. This must be done within an economic, regulatory and consumption framework that is acceptable to the industry and to the Australian community. Energy, of itself, has little intrinsic value. Its value remains as one input, essential to underwrite our economic well-being and future development. For this reason energy policy cannot be viewed

separately from the Government’s other economic initiatives and policies. Considerable care has been taken to ensure that

energy policy supports and reinforces the achievement of other fundamental economic, industry and social goals.

Shortly I will outline the Government’s macroeconomic and microeconomic reforms that are consistent with the key objectives of "Energy 2000" and which themselves in turn have

influenced the energy sector.

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But, before doing that, the obvious question to ask is: Are

these considerations still as relevant now as a basic

foundation for energy policy as they have been?

Energy policy in "Energy 2000" was about creating an appropriate framework to ensure that market signals are operating to produce the most efficient outcome possible for

Australia's economy and its energy commodities. This basic framework hasn't changed.Notwithstanding these principles which will continue to underpin the Government's energy policy efforts, a number of new issues have now emerged, which have as

great a potential to impact on our use of energy as did the oil shocks. I am referring, for example, to the greenhouse effect and the much broader issue of sustainable development, which are emerging in the public arena as issues for policy makers in

the 1990s.

Any energy policy response that shuts itself off from these new issues will be ineffectual. It is for this reason that the Government established the National Energy Consultative Council to enable it to deal with these changing circumstances and emerging energy policy issues with the involvement of a broad cross-section of energy and community interests on a regular

basis. Membership of the NECC includes the peak bodies from the energy industry such as the Australian Petroleum Exploration Association, Australian Coal Association, Australian Institute of Petroleum, Australian Gas Association and Australian

Institute of Energy. I intend to use it as a key consultative body in the formulation of energy policy.

Turning now to the Government's program of macro and micro economic reform, it is clear that this program is fundamental

to the success of all sectors of our economy. The key

macroeconomic policy settings have included the Accord which

has continued to deliver consistent wage restraint while

facilitating award restructuring. It has seen profit levels

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rise to their highest point in fifteen years and employment grow between 1983 and 1989 at over twice the rate of other OECD countries. \

Tight fiscal policy has reduced Government sector outlays and resulted in the first budget surplus in more than thirty years in 1988-89. The Government's tightening of monetary policy has had a major role in maintaining appropriate conditions to enable it to pursue other policies which can improve our balance of payments position. Similarly, the Government’s microeconomic reform agenda has been directed at achieving a more competitive industrial structure through increased

productivity and lower unit costs. This has involved market deregulation, award restructuring, waterfront and shipping reforms, comprehensive tariff reform and changes to business taxation arrangements and foreign investment guidelines.

The reforms to coastal shipping and the waterfront will continue over the next three to five years. The Government has made it clear that it will take further steps if the gains from improved efficiency are not passed on to users.

Finally, I might add to this the establishment of the Resource Assessment Commission and the Government’s renewed commitment to the implementation of the National Conservation Strategy for Australia, which will benefit the industry by clarifying the decision making process in complex land use issues.

These are all areas where the Government has acted in a

consistent and balanced way to reform Australia's economic system. These reforms have obvious benefits for our energy industries. Moreover, when looking at the energy sector in

particular, it is clear that the Government has reinforced

these general macro and micro measures with specific sectoral policy initiatives.

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For example, the single most effective measure for the petroleum industry has been the Government's decision to deregulate the crude oil market from 1 January 1988. This action has seen the abolition of Government control of

petroleum prices and the crude oil allocation scheme. Deregulation has contributed to improvements across the board for the industry: refiners have had greater flexibility in

choosing their feedstocks which, in turn," has lowered costs, improved refinery efficiency and improved their competitiveness; explorers and producers have had greater freedom to exercise their own commercial judgement in planning

their operations.

As might be expected in a deregulated environment, refiners are starting to invest in upgraded plant and equipment. For example, BP Kwinana has commissioned a residue cracking unit to process heavier imported crude; Ampol is constructing a continuous reformer at its Brisbane refinery to produce high octane blendstock for unleaded petrol at a cost of more than

$100 million; and Shell plans to extend and upgrade its Geelong and Clyde refineries at a total cost of $600 million. Caltex has recently announced that as part of its rationalisation of the Kurnell refinery it will spend about $57 million over the

next three years on upgrading process control instrumentation.

In addition, conversion units will be modified to enable refining of heavier imported crudes with improved product yield.

All this investment is aimed at achieving better performance in a more competitive market. Clearly deregulation has been the

right decision and will continue to present opportunities to optimise Australia's pattern of crude oil imports and exports

as well as maintain our competitiveness in refined product exports. -

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In a similar vein, the Government announced last October new pricing arrangements for liquefied petroleum gas to apply from 4 February this year. The changes are an important move towards

a freer LPG market which, on the basis of experience of the crude oil deregulation, will enable greater flexibility in LPG supply investment decisions. The Government has also removed the 50 percent Australian ownership and control restriction on

foreign investment in petroleum development projects of over $10 million, subject to national interest considerations.

The community's interest in petroleum development continues to be protected: the Government remains committed to fostering an economic environment in which it is profitable for companies to operate, and which takes into account the considerable risks

associated with resource exploration and exploitation. At the same time, the community must be provided with an appropriate return for the development of non-renewable public resources.

Consistent with these aims, the Government has made a number of moves on the tax front during the "Energy 2000" development process and since its implementation. These include the excise concessions announced in July 1987, the resource rent tax

legislation, and the business tax changes, including the lowering of the corporate tax rate to 39 percent, announced in

the 1988 May Statement. At the same time, we have retained the immediate 100 percent deductibility of exploration costs

against any taxable income.

A more pressing and current issue for many in the industry is the ongoing review of crude oil excise and royalties. The review is expected to be completed by May 1990 with any

resultant changes in place by the following July. It is to focus on excise on crude oil and LPG in Bass Strait, the North West Shelf and onshore production areas as well as offshore

royalty arrangements.

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The review is starting from 'basics' and includes a fundamental analysis of resource taxation, examining questions of economic efficiency, equity and administrative simplicity. It will take a fresh look at different secondary tax structures and levels

with a view to providing industry with a reasonable degree of

stability.

Some industry representatives continue to suggest that all secondary taxation on petroleum should be phased out. Such suggestions are simplistic and unacceptable.Secondary taxes are levied to provide a return from the developer to the community for the use of its non-renewable resources. The principle is widespread. It’s not new. Moreover, the Government considers

that all resource developers here today tacitly recognise its validity.

In addressing the crude oil excise review, the Government is encouraging the industry to put forth positive and realistic

suggestions which recognise the legitimate interests and concerns of the community.

Though the excise review will be our major focus in the coming months, it will not be to the exclusion of other issues. The essential point is that new ideas are always welcome and should be examined on their merits.

On RRT, for example, I am happy to receive industry's views on issues such as the tax rate and exploration cost

deductibility. Constructive proposals on these will always receive my close attention.

Finally, in relation to the petroleum sector, this Government has made a concerted effort to ensure continued availability of exploration acreage. Offshore exploration acreage has been

released regularly, usually with two releases each year since 1985.

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The coal sector.

Since the publication of "Energy 2000" the Australian coal industry' has entered a new phase of its development. We would , Z

like to claim all the credit for it, but the upturn in world coal trade must be given the recognition due to it. Just over a year ago, Mr Kerin, the Minister for Primary Industries and Energy, announced the Commonwealth Government's long term coal

strategy. Tomorrow he will report on its success and directions for the future.

Research and development.

In continuing to develop and widen the choices for our future energy mix, we have maintained a commitment to research and development into new, renewable and alternative forms of energy.

In December 1987, Mr Kerin announced that an additional $5 million would be made available for research and development into renewable energies, energy conservation and energy efficiency. On 9 June, I announced a total of 29 grants

totalling $3.1 million for research in this area.

A strong commitment to R&D into alternative transport fuels underpinned "Energy 2000". An additional $5 million was made available over 3 years for research and development' into

alternative transport fuels. The major focus of this work has been on research and development into the use of natural gas for transport purposes, and involvement in funding by industry has played a significant part in this program. More recently in May of this year, the Government concluded its review of

research and development arrangements in the primary industries and energy portfolio with the release of a joint Government

Statement by Mr Kerin and me about future directions in R&D.

The upshot of this review is the intended corporatisation of the R&D function within the Commonwealth's primary industries

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and energy portfolio. To this end, the National Energy

Research, Development and Demonstration Council (NERDDC) is to be replaced by the Coal Industry Research and Development Corporation and the National Energy Research and Development

Corporation. Legislation is being drafted with a view to passage of an omnibus bill in the Budget Session of

Parliament. In the meantime, NERDDC is continuing its valuable work and arrangements are being developed within the Department of Primary Industries and Energy to ensure a smooth transition to the new arrangements.

Corporatisation of the R&D function will build on the

outstanding human and infrastructure foundations that already exist in Australia. By better defining the goals and restructuring incentives in the system of research and development, the capacity to expand, manage and properly prioritise its efforts will be greater and the system will be given the freedom, flexibility and industry connection to

respond dynamically to these incentives.

I would like to move on to the question of where energy policy is heading. What will be the main forces driving energy policy in the years to come? Australia's energy policy has been — and will continue to be — about providing the most appropriate

framework to ensure Australia has access to a suitable mix of energy supplies to meet our varied and changing needs. Competition in the market place between energy sources and

between energy technologies will produce the greatest gains for

the smallest cost, and the market mechanism will continue to be the most significant policy tool in achieving this objective.

Maximising the export performance of the energy sector will

continue to be a vitally important challenge to Australia's

industry. To this end, the Government will continue to review Australia's regulatory and taxation frameworks and remove

impediments where necessary to ensure Australia's international

competitiveness is maintained.

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At the same time, we will continue to assist industry where possible to identify overseas market opportunities and developments through our networks of multilateral and bilateral

contacts-. , Z

Clearly an efficient domestic energy sector will continue to be

desirable both on economic and environmental grounds. I will

talk more of this subject later. However, first I want to identify a number of challenges which will confront the energy sector in coming decades, and it is to these that I would now like to turn.

A number of commentators and industry groups, including APEA, have emphasized the declining level of indigenous oil production, particularly from Bass Strait, as an issue of major concern. Their prescriptions for policy change have generally been that the Government should further encourage petroleum exploration activity through changes to the petroleum

(secondary) and company taxation regimes. There has been a long running debate between the industry and the Government

about the implications of lower indigenous production and about the correct policy response. Let me look at a few of the assumptions and reiterate the Government's position.

The Government does not see declining crude oil production levels as an issue to be addressed solely within the context of petroleum or energy policies. Rather, the Government's overall

macroeconomic strategy of encouraging increased industry efficiency, and its program of microeconomic reform are the right policies effectively to complement the market-driven adjustments that will be associated with increased crude oil

imports. The Australian Bureau of Agricultural and Resource Economics (ABARE) has been studying the potential macroeconomic

impacts of declining crude oil production. They presented a

paper to the National Minerals and Energy Outlook Conference earlier this year and more recently to the Conference of

Economists of

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the Economic Society of Australia. The papers concluded that the expected fall in domestic crude oil production over the next decade would lead to a slight decline in real gross domestic product and the real exchange rate. The estimated

economic adjustments are not large compared with the recent and expected further adjustments required to achieve a current

account deficit closer to average historical experience.

It is also important to note that an expected decline in crude oil production is not the whole story for the Australian energy sector over the coming decade. In particular, production and exports of coal, uranium and liquefied natural gas are forecast to rise significantly during the 1990s. This trend in the growth of these and other export industries have the potential to offset the macroeconomic effects of the decline in crude oil production.

In looking at declining oil production, the Government is not only looking at the question of the Australian exploration and

development effort. We are also looking at the question of Australia's oil prospectivity, the cost and reliability of imported crude oil, the time path and cost of producing alternative transport fuels such as natural gas to gasoline,

and the resiliency and growth prospects of the Australian economy.

The answers to these questions are clearly pointing us towards

the conclusion that declining oil production is not a special, catastrophic event, but one of obvious change - which will require other changes, including structural change to parts of

the Australian energy industry. Such changes, however, may not necessarily require any particular action by the Government,

apart from maintaining our commitment to macroeconomic and

microeconomic reform and allowing the market through competition to provide Australia with a diversified energy mix.

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As I said at the outset, an emerging issue with the potential to have as great an impact on energy usage as the oil shocks is

the greenhouse effect. The greenhouse issue and the debate which it is provoking will surely continue. Talk to people and you will find that this is now a growing concern — and, more importantly, a largely informed concern — of a wide cross

section of ordinary Australians. It is also an international

concern. All over the world attention is being focussed on these issues, and Governments are being asked to take action now.What are the facts about greenhouse and what are the uncertainties? What is this Government doingabout this issue?

It is clear that the composition of the earth's atmosphere is changing. However, it is by no means certain that the changes

will ultimately lead to a sustained global warming. It is also clear that some 40 per cent of greenhouse gas emissions can be attributed to fossil fuels. However, further scientific work is required to define the relative significance of these greenhouse gases in terms of their contribution to global warming and the full range of potential activities that produce

them.

Nothwithstending these technical uncertainties, the Government is closely examining the energy policy aspects of this issue as well as all other aspects.

As announced in the Prime Minister's environment statement, we are committed to an overall approach that combines

international activity; a research program into causes, impacts and limitation/adaptation responses; public education; and a

national strategy which will involve the Commonwealth, State, Territory and Local Governments, as well as industry and community groups.

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In an energy policy context we are concerned with the need to tread cautiously. To this end we are examining the relative

significance of greenhouse gases, together with the range of activitires that produce them, against projections for fossil Z fuel energy demand and greenhouse gas emissions up to 2000.

The Commonwealth is also working with the State and Territory

Governments on these issues through the Australian Minerals and Energy Council (AMEC) Working Party on Greenhouse. With this information we can then begin the task of evaluating a range of

policy options in terms of their costs and their effectiveness

in reducing greenhouse gas emissions.

Naturally we are cautious. We need to balance the potential cost of policy measures implemented now against the risks of a sustained global warming in the future. We realise fully that our policy developments must be based on continuously upgraded

scientific and technical information.

The fact is that the greenhouse effect will throw up a number of challenges and opportunities for the energy industry. We must recognise this now. What challenges? Challenges to the Government to ensure that the international debate on

greenhouse responses does not become one of knee jerk

reactions. Australia has a lot to lose by that. Challenges to both industry and government to speed up adoption of technologies which are energy efficient and conserve energy. Challenges to industry to seek out and grasp new market

opportunities which may develop as a result of greenhouse concerns.

Energy efficiency and conservation gains offer immediate potential to reduce the rate of greenhouse gas emissions from

fossil fuels. They also offer immediate opportunities for our overall economic efficiency, particularly our cost

competitiveness in energy-intensive export industries,

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irrespective of the realisation of the greenhouse threat.

On a global scale, one strategy may be to locate energy

intensive industries in countries that are highly energy efficient: Australia clearly would benefit. Moreover, if new

technology developments are involved, such technologies may become exports themselves. For these reasons the Government remains committed to its energy management program. Following the Prime Minister's environment statement, funding has been

increased by $1.4 million over the next two years. Existing programs are being expanded to increase activity in new

industry sectors as well as transport and residential sectors. These areas are important in the greenhouse emissions context. Australia is also joining the Centre for the Assessment and Dissemination of Energy Technologies (CADDET) which is allowing

access to the best available energy technologies in a wide range of applications.

Notwithstanding actions by Governments, it is vital that industry as a whole — at all stages along the energy production and utilisation pathway — invests and becomes involved in the research, development and implementation of

more energy-efficient and environmentally benign technologies. In many cases, appropriate technologies already exist, and it is commercialisation and market penetration that are the key issues. The industry should support the implementation of new technology. In the long term, it is in its interests to ensure

that this occurs. The Government recognises that the greenhouse effect is much more than only a problem concerning the world's use of energy. Agriculture and deforestation, for example,

also play a significant part. The problem strikes at the heart of our land-use practices generally. And therefore the

solutions to the problem must be holistic in nature.

As well as the issue of greenhouse, the concept of sustainable

development will also impact on the development of Australian energy resources.

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The notion of developing our resources in a manner that is consistent with future as well as immediate needs is clearly

unquestionable. More importantly, the notion explicitly provides" for the development of our resources and protection of , Z

the environment in parallel - not as one or the other, but in balance. The long term objective must be to develop sustainable

patterns of development and land-use and I applaud the support that the industry has given to this concept.

Finally, I would like to end my discussion by talking about one

of the key elements that always has been and always will be driving the energy industry and therefore energy policy - world

trade. Once again the issue is one of challenges and opportunities.

It has been estimated that energy demand in the Asia-Pacific region could grow by as much as 30 percent on current levels by the year 2000, with much of this growth occurring in the transport and electricity sectors. By the same token, we face stiff competition in the region’s energy markets with a number of other significant producers such as China and Indonesia

attempting to move into markets dominated by Australia. On the other hand, we are beginning to move into new markets ourselves, such as the market for liquefied natural gas.

Clearly changing patterns of trade and investment will be

significant, irrespective of the greenhouse effect.

The challenges for the Government are many, foremost among them the need to build on current levels of international and regional cooperation. This is the cornerstone of our approach.

The Government will continue to speak out against growing

bilateral pressures on the world trading system and maintain an

appropriate economic environment which seeks not tq disadvantage our energy export industries.

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The challenge for the industry is to maintain its competititiveness by continually upgrading its marketing and management skills and investing in technology and research that

will give it the edge over its international competitors.

We are entering a new period of world trade which requires us

to be more flexible and innovative than we have ever been. We have learned our lessons the hard way and learned them well.

The issues facing us in the future have no simple answers. Nor

did the ones we have faced in the past. The Government does not pretend to have cornered the market on good ideas on this score, and we will continue to liaise closely with representatives from the industry and with the states and territory governments and community groups, as Australia's energy policy continues its evolution.

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