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Monday, 23 March 1987
Page: 1331

Mr ROCHER(8.37) —This is a very curious time for a government to be introducing legislation of the kind we are called upon to consider tonight. Indeed, the more we may think about our current economic predicament, the more amazed we must become at the naivety, ignorance or plain prejudice of this Government's decision to pursue a so-called resource rental tax in, of all industries, the petroleum producing industry. It is even more curious that we should be considering this package of four resource rental tax Bills for the petroleum industry only three months or so after the joint statement by the Treasurer (Mr Keating) and the Minister for Resources and Energy (Senator Gareth Evans) announcing their response to the recommendations of the Gutman Inquiry into Taxation of Gold Mining. It will be recalled that the Government's original tax White Paper said of a gold tax:

. . . there is little justification for the continuation of the exemption . . .

and that the Government commissioned Gutman report recommended the phasing out of the exemptions. Yet the Treasurer and his colleague the Minister for Resources and Energy decided against the course of action. In the context of the discussion this evening we might well ask why. Most likely, it is because the importance of encouraging active exploration and development and of maximising production and the consequent export income generated by the gold mining industry outweighed the argument in favour of removing the industry's long-standing tax exemption.

Proposals for a general resource rental tax-RRT-have been in circulation for over a decade, with the original academic proponents promising lucrative advantages for governments and assuring us that it would be economically efficient in that it would not distort resource allocation or interfere with the creation of wealth in the resources industries. As well, at that time it was maintained that an RRT would siphon off part of the resources wealth to the Government without inhibiting investment. Added to this supposedly rational economic view was the so-called moral argument that natural resources wealth is public rather than private and that an RRT would allow both private risk takers and the public to obtain if not a just then at least a fair reward from this national wealth. The general RRT proposal did the rounds of the then Labor opposition and eventually became a centrepiece of the Australian Labor Party's resources policy.

I must say that even in the most propitious of economic climates I would have considerable reservations about the whole thrust of the so-called resource rental tax proposals. While having a certain and admittedly superficial appeal especially to that section of the community that regards mining as an affront to the memory of Henry Lawson-something which is permissible only if every possible dollar is squashed out of the mining firm concerned-after examination of the economic arguments and the supporting literature it becomes clear that there are some very serious problems with resource rental tax proposals either of the general kind or specific sectors. I am convinced that not only have the proponents of resource rental taxes made important mistakes in their economic analyses, but their proposals would also inhibit and distort investment activity in the resources sector.

It is to go right to the heart of the broader RRT proposal to note that nowhere is the element of uncertainty in investment decisions more apparent than in the natural resources industry. There is an unfortunate tendency to judge the effect of resource rental tax proposals by calculating its effect on existing successful projects, and that after the fact. The key point is what effect RRT proposals will have on new investment decisions or, even more importantly, on decisions yet to be made somewhere even further down the track. The available evidence seems to indicate that, far from being a neutral tax on economic rents, resource rental tax proposals effectively discriminate against risky investments and are likely to distort the direction of investment in a certain manner which is quite predictable if one is at least acquainted with the evidence.

Leaving aside the wider economic distortions of RRT proposals for a moment, it might be thought by some that whatever the negative impact will be a resource rent tax on the petroleum industry will result in significant revenue gains and might thus be partially excused as an emergency measure in troublesome economic times. Yet when we turn to the financial impact statement at page 3 of the explanatory memoranda we discover:

It is unlikely that any petroleum resource rent tax revenue will be received before the 1989/90 financial year. The amount of revenue in any year is inestimable due to continuing fluctuations in world oil prices and the uncertainty inherent in offshore petroleum exploration.

So what are we left with? It seems to me that it is a rather odd announcement supported only by the generalities in the second reading speech of the Minister Assisting the Treasurer (Mr Hurford). It will be recalled by honourable members that the Minister Assisting the Treasurer said that petroleum resources are community property and that the Government believes that the community as a whole should share in the potentially high returns from the exploitation of these scarce resources. In justifying these RRT proposals the Minister said:

It strikes a reasonable balance between the objectives of satisfying the right of a community as a whole to share in the benefits of profitable offshore petroleum projects and of providing the participants with adequate returns for the risks they accept in undertaking offshore exploration and development activities.

While terms such as `reasonable balance' and `adequate returns' may seem the very embodiment of sweet reason, in practical terms they will put vitally needed investment in doubt.

As I said at the outset, this would be an odd proposal even in the most propitious of economic circumstances and there can be no one on either side of politics who seriously thinks that conducive economic conditions exist today. As well as the dubious accolade of being the biggest taxing and spending government in Australia's peacetime history, this socialist Government has achieved the lowest value for the Australian dollar and that occurred only last year.

Other economic factors bearing down on decision makers in the private sector include interest rates on home loans of about 15.5 per cent; interest rates on Bankcard of 22.5 per cent; a prime rate of 21 per cent; and a small overdraft rate around 20.5 per cent. On top of that we have exceeded a $100 billion public debt. We suffer under the highest ever current account deficit, running at the moment at 5.9 per cent of gross domestic product and with more to come. This is the first Australian Government ever to lose our triple A credit rating overseas. We are suffering under inflation at around almost double the inflation rate at the last election. Inflation is still rising in Australia, while throughout the Organisation for Economic Co-operation and Development it has been falling. Australia's inflation rate of 9.8 per cent compares with an inflation rate of 1.3 per cent in the United States of America, zero inflation in Japan and an OECD average of 2.2 per cent, or of 1.7 per cent if we compare ourselves with our major trading partners.

This economic summary presents the worst relative performance since the OECD was formed 26 years ago. With negative economic growth over the past year in Australia when gross domestic product fell by 0.5 per cent over the year to September 1986 and with a Budget forecast of 2.25 per cent in 1986-87 already scaled back and subject to further revision I lay further emphasis on our economic plight. On top of that we have the collapse of the Australian dollar to its lowest level under this Government, as I have already mentioned. On 5 March 1983 when this Government was elected we had a trade weighted index of 81.7 and on 23 February 1987 the trade weighted index was 53.6, a minus 34 per cent change. Our dollar remains chronically weak irrespective of the stabilisation activities of the Reserve Bank of Australia and the record high domestic interest rates which are crucifying many Australians in business.

This is only a partial catalogue of the economic chaos this country has suffered due to the ineptitude of this socialist Government. When we come to examine the particular situation of the petroleum industry, we discover that it too is suffering specific major problems and that now is a particularly inappropriate time to complicate the burden it carries. Since plans to introduce the resource rent tax were announced in July 1984, the world oil price has fallen and the domestic price of Bass Strait crude oil has fallen from $43.71 a barrel in January 1986 to $29.37 a barrel in March 1987. The average price fell from $29.07 a barrel in the first half of 1986 to $22.85 in the second half of the year. Australia's production outlook has also deteriorated. The outlook for self-sufficiency has deteriorated with offshore exploration expenditure having fallen by 25 per cent between 1985 and 1986, and it is expected to fall by another massive 56 per cent in 1987.

Australia has become progressively less attractive to exploration companies relative to many other countries, and the overall deterioration in our economic situation has had important flow-on effects for petroleum exploration within Australia and off-shore. The oil price collapse and the continuing volatility of world oil markets have had the effect of reducing the number of exploration prospects which have expected monetary benefit. That circumstance has more than halved company cash flows and makes it extremely difficult to raise equity capital on the stock market for higher risk exploration. All too often, acquisitions of reserves through takeovers and mergers have become more attractive than exploration.

As is well known, sensitivity of exploration to the crude oil price is exquisite. In an RRT regime the exploration decision is extremely sensitive to both the RRT tax rate/threshold rate and the price of crude oil. A proposed resource rental tax rate of 40 per cent, as outlined in the Petroleum Resource Rent Tax Bill, will render all but a few very high risk exploration prospects unattractive at current prices. As the Australian Petroleum Exploration Association pointed out in its submission to the Federal Government in March of this year:

The outlook for Australia's potential medium term crude oil production has changed dramatically since the RRT was introduced in July 1984.

As APEA said, in March 1984 the Bureau of Mineral Resources had estimated there was a 50 per cent probability that at least 2.6 billion barrels of crude oil remained to be discovered in Australia, and about 1.8 billion barrels of this oil could be discovered and brought into production by the year 2000. The BMR also estimated that more than 50 per cent of the 1.8 billion barrels of undiscovered oil would be found by 1989. It was on this basis that the BMR considered there was a good chance that Australian oil production would rise by about 30 per cent by 1989 and then plateau at about this level before beginning to decline in 1996. APEA further noted:

These assessments were based on an assumption that one billion barrels would be discovered off the North West Coast by 1989.

Such assessments were apparently based on an overestimate of the reserves in the Jabiru field. Various other developments, including over generous market estimates of the potential of various speculative undiscovered fields, meant that the Government's original RRT decision was made in an atmosphere of what APEA aptly describes as `unwarranted optimism'. Government estimates in 1984 suggested that Australia would be as much as 95 per cent self-sufficient in crude oil in 1990. Recent revisions reveal that there is no reasonable expectation that we can reach anything like that and that Australia will be only about 65 per cent self-sufficient in 1990. If a number of developments in Bass Strait do not proceed, as has been anticipated for the time being, this figure could be as low as around 50 per cent. Using the current world price of oil and value of the Australian dollar, it appears that by 1990 crude oil imports could cost about $3 billion compared with a net crude oil import bill of $44m in 1985-86. This is at a time when our balance of payments deficit has ballooned from something like 3.8 per cent of gross domestic product or about $6.6 billion in 1983, to 5.9 per cent of GDP or around $13.8 billion in 1986, and when the J-curve is still a long way off. This is shown by a recent study by the National Institute of Economic and Industrial Research, commissioned incidentally by the Australian Council of Trade Unions. These are some of the problems which we on this side are hoping to stress.

Bearing in mind that our 1986 current account deficit was the second worst of those of all the Organisation for Economic Co-operation and Development countries and that the OECD forecasts that Australia will still have a $1 billion monthly deficit for at least the next 18 months, and that we should still have the second worst deficit in the OECD in 1987, we simply cannot afford to contemplate an additional $3 billion net crude oil import bill; and we should be seeking to do everything we can to encourage exploration and the development of new oil fields and not, as this legislation clearly sets out to do, providing disincentives to risk-taking ventures. APEA also pointed out in its submission to the Federal Government:

The radical change in production and self-sufficiency outlook, as well as the change in exploration economics and in perceptions regarding the ease of discovering oil in Australia . . . suggest that more attention needs to be given to encouraging exploration by removing impediments.

Those comments are strongly reinforced when we recall that there has been a 35 per cent downturn in total private exploration expenditure, both on-shore and off-shore, in the past year. Granted, RRT applies only off-shore and the bulk of Australian undiscovered reserve potential is supposedly in off-shore areas. Nonetheless, we cannot ignore a severe slump in on-shore exploration activity, where there was a 55 per cent fall in drilling in 1986. We also need to remember that the relative attractiveness of Australia-that is, the combined productivity, tax and cost mix compared to that in a number of other countries-has declined for oil exploration. That fact clearly confirmed by the large number of Australian-based companies which have expanded their petroleum exploration interests overseas. There are other areas of concern. One I want to mention in these final moments of my speech is that the RRT proposal is structured to tax projects and not individual companies.

Mr DEPUTY SPEAKER (Mr Leo McLeay) —Order! The honourable member's time has expired.