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Monday, 23 March 1987
Page: 1308

Mr BRAITHWAITE(4.42) —The petroleum resource rent tax is a profit-based tax designed to replace the present crude oil excise and the royalty system in those fields to which they apply. Whilst one does not suggest that it is part of the present tax reform measures of the Treasurer (Mr Keating), it is part of the whole tax reform system introduced by the Government in the four years it has been in office. The 63 pages of this legislation will further increase and complicate Australian tax-based laws. The tax will apply only where there is an excess of project-related receipts for a financial year over both project-related expenditure for the year and undeducted expenditure of previous years brought forward at a compound rate. Theoretically, the RRT may look like an improvement on the present system, which is production-based, but there are enormous problems, both with the concept and with the Government's proposed implementation of the tax.

The Opposition has opposed and continues to oppose the RRT because it is an additional tax on the petroleum sector that cannot be justified if exploration is to be encouraged. Any member of the Australian Petroleum Exploration Association will confirm that fact. On top of this the RRT will be an administrative nightmare for both the Government and the oil industry. When one takes into account the associated administrative costs, the compliance costs, the penalties and the size of the legislation itself one can only imagine the pitfalls into which people paying this tax in the future and the Government will fall. The Liberal and National parties will, therefore, oppose this legislation. The next Liberal-National Party Government will review the operations of this legislation, if it is passed now, with a view to its repeal if it harms oil exploration throughout Australia-and the Opposition believes it will.

A resource rent tax in respect of certain mineral-based activities has been Australian Labor Party policy since 1977. Following the election of the Hawke Government, the former Minister for Resources and Energy, Senator Walsh, and the Treasurer set about to introduce the tax. Between December 1983 and April 1984 the Government released three discussion papers and consulted with industry. This led to an announcement in July 1984 that an RRT was to apply to greenfields off-shore petroleum products, that is, any off-shore oil producing fields that were discovered after July 1984.

The legislation was mooted for two years and eight months. We have had, I think, 32 amendments to it, which reflects the uncertainty which has been created in the industry and its development. The Government's thinking has been muddled in this regard. Legislation to give effect to the Government's decision was introduced into the House of Representatives in the Budget session some two years after it was mooted. There are four Bills in the package. The Petroleum Resource Rent Tax Assessment Bill 1986 provides the framework of the tax and defines where the tax will apply, how it will apply and how it will be paid. The Petroleum Resource Rent Tax Bill 1986 will formally impose and declare the rate of the tax at 40 per cent. The Petroleum Resource Rent Tax (Miscellaneous Provisions) Bill 1986 will amend other legislation. For example, it will amend the excise Act to remove areas to which the RRT applies. The Petroleum Resource Rent Tax (Interest on Underpayments) Bill 1986 will impose an interest charge in respect of underpayments on the petroleum rent resource tax. This provision could not be included in the PRRT Assessment Bill as, under section 55 of the Australian Constitution, laws imposing taxation may deal only with the imposition of taxation and may not contain extraneous matters.

I would like to give a history of secondary taxation on the oil industry. In addition to all the normal measures, that is, company tax, royalties, et cetera, the Australian oil industry has been subject to a levy on crude oil production. This secondary taxation of the oil industry stemmed from the view that part of the revenue flowing from the large price rises forced by the Organisation of Petroleum Exporting Countries in the early 1970s should accrue to the Government. The extra revenue gain was referred to as a windfall and governments around the world thought they had a right to it. In fact, they built it into their budgets. Expenditures were made in conformity to the windfall, until even with the levies that were gathered from the oil the greed of the Government was such that expenditures led from what were formerly balanced Budgets to the massive deficits of the last four years-$8.5 billion, $7.9 billion, $5.1 billion and $4 billion. In all, about a $25 billion debt has been incurred through the excessive deficits of the last four years, the years of the Hawke Labor Government.

The Australian Government imposed a production-based crude oil levy which went through a number of changes and permutations until today it is quite complicated to operate, although wonderfully simple in terms of raising revenue. The RRT is an extension of the current Federal Government's attitude that petroleum resources are community property and that the community as a whole has a right to share disproportionately in the returns from the exploitation of non-renewable resources. One might call them social oils. This attitude overlooks the fact that the community already benefits from a profit-based, relatively high company income tax rate of 49c in the dollar. It also disregards the fact that the community also benefits from such non-profit based taxes as sales tax, payroll tax, fringe benfits tax-not to mention the royalties and production excises also imposed on the oil industry. The Government has ignored history and its expenditure of windfall profits and now proceeds to squeeze the last taxation dollar from the oil litre.

The resource rent tax also has a history. The resource rent royalty operates in certain areas of Western Australia and rationalises Federal and State imposts. It was only made possible because of the Labor Government of Western Australia being compatible with the Federal Labor Government in Canberra. It applies to post-1984 developments that do not occur in Bass Strait or the North West Shelf. The Government has touted the RRT as a vast improvement on the old production-based system. The legislation being debated has effect from 1 July 1984. As I said, it has taken the Government two years and eight months to have this legislation drafted and introduced and it will be nearly three years by the time it is voted on.

There are very good reasons why the RRT should be abandoned right now. The Government has steadfastly chosen to ignore the fact that because of the oil price drop there are no longer any windfall gains to tax. In the period of nearly three years since the tax was announced the price of oil has fallen and no windfalls now exist to tax. There are two major reasons why RRT should be abandoned. Firstly, the changed pricing conditions which apply now vis-a-vis 1984 have reduced gains and therefore act as a disincentive to further exploration and production. Secondly, there is the imminent decline in Australia's level of self-sufficiency and the effect that this will have on our economy. Any taxation revenues coming from secondary tax at the moment are a penalty to profit and a disincentive to future investment. This Government, in this and other ways, has made profit within private industry a dirty word but taxation a byword. Oil companies are already committed to revenues by company tax and royalties, so if Australia is to stay competitive as a place to explore the RRT proposal needs to be defeated. Such taxation discriminates between the different exploration portfolio structures.

The Australian Petroleum Exploration Association Ltd on 24 November 1986 directed to the Minister for Resources and Energy (Senator Gareth Evans) a submission for a case for a change to the petroleum tax regime. With that letter the Association enclosed a submission to the Federal Government at the invitation of the Minister. Its contents are interesting, particularly when one realises that it is talking about the significance of petroleum to the economy, the risk in prospectivity, the high Australian costs, the source of Australian funds, general business tax regimes, petroleum taxes, resource rent tax and old oil tax. Page 19 of that report mentions the resource rent tax. The report states:

Throughout the debate on secondary taxes of the past four years the Government has proposed the `resource rent tax' as the solution for the industry's concerns. It has continually failed to understand, or chosen to ignore, the operations of the industry: exploration decisions are made on the basis that post-tax profits from successful exploration must be able ultimately to cover all costs, including the costs of unsuccessful exploration and a premium for the aggregate risk entailed. The proposed parameters for the RRT do not acknowledge this. The tax therefore constitutes an active disincentive for oil exploration. It is not, and should not be claimed to be, a tax on resource rents-it is a tax on risk-taking and will have a predictable impact on the Australian exploration industry's attitude to such risk-taking. RRT if generally applied onshore, would have a similar impact.

The most likely effect of the RRT will be to shift exploration decisions away from those projects which are more likely to make significant additions to the nation's reserves towards the lower risk/lower potential volume prospects.

In other words, RRT is bound to turn off that great productivity which Australia is now seeking.

It is also appropriate to note the oil price collapse over recent years, because this is part of the legislation we are discussing. The world oil price has fallen, and the domestic price of Bass Strait crude oil has fallen from $A43.71 a barrel in January 1986 to $A29.37 a barrel in March 1987. The average price fell from $A29.07 a barrel in the first half of 1986 to $A22.85 in the second half of the year. The domestic price has fallen from $A35.36 in July 1984 to $A29.07 in March 1987. The effect of this collapse has been to reduce commercially recoverable crude oil reserves and to reduce the number of anticipated worthwhile exploration prospects. Company cash flows have been more than halved and it is now nearly impossible to raise equity capital on the stock-market for high risk exploration. Profits are being skimped to very marginal gains on the invested capital, but government still pursues this policy of massive taxation of the resource. In turn, this has made acquisition of reserves through takeovers and mergers more attractive than exploration.

It is axiomatic that exploration activity is sensitive to crude oil price. Under an RRT regime exploration decisions are sensitive to both the RRT tax threshold rate and the crude oil price. The proposed RRT rate of 40 per cent, with the proposed threshold rate, will render all but a few high risk exploration prospects unattractive at current oil prices. The sensitivity of production to the level of producer returns was shown in 1986 when oil prices dropped dramatically and Esso-BHP shut down production in Bass Strait because it had become uneconomic. Marginal producers' realisation dropped to its lowest level in 10 years, at about $A3 per barrel, and export ceased. In order to lift producer returns to levels that made production viable, the Government made temporary concessions to the industry. The on-shore excise was suspended and the top rate of the old old levy was reduced from 87 to 80 per cent. These measures are currently being reviewed.

The production outlook and self-sufficiency are areas that we should examine. The medium term outlook for Australia's potential crude oil production has changed dramatically since RRT was introduced in July 1984. In March 1984 the Bureau of Mineral Resources estimated that there was a 50 per cent probability that at least 2,600 million barrels of crude oil remained to be discovered in Australia. One might now say with hindsight that that was a massive exaggeration, and perhaps proposed a type of boom revival in order to justify the RRT. It was estimated that about 1,800 million barrels of this oil could be discovered and brought into production by the year 2000.

It was also estimated that more than 50 per cent of the 1,800 million barrels of undiscovered oil would be found by 1989. On this basis the Bureau considered that there was a good chance that Australian oil production would rise by about 30 per cent by 1989 and then plateau at this level before beginning to decline in 1996. These assessments were based on the assumption that 1,000 million barrels would be discovered off the north-west by 1989. This assessment vastly overestimated the contribution that would be made by the Jabiru field. Estimates ranged from 150 million to 200 million barrels, but Jabiru has reserves of 20 million barrels and nearby Challis has some 40 million barrels. The wild-cat Eclipse well caused massive speculation about the amount of oil with estimates ranging as high as 1,100 million barrels, but Eclipse 1 was a dry hole.

Since 1984 there has been a fundamental reversal of opinion regarding the nature of future discoveries. In the north-west it appears that fields are likely to be small and will require extensive exploration to bring them into production. The Australian Petroleum Exploration Association estimates that a total of only 100 million barrels has been added to crude oil reserves from new discoveries in the three years from 1984 to 1986, with some 20 million barrels being located in 1986.

The historic average for discoveries over the past 15 years is about 70 million barrels annually. In February 1987 the Federal Government released a revised outlook which forecast that production would be about 20 per cent lower in 1989-90 than in 1983-84. The outlook estimated that Bass Strait production in 1992-93 will be slightly more than half the 1985-86 production of 470,000 barrels a day. That is a massive decline from what is being produced today. This rate assumes that the development of several discovered but as yet undeveloped fields will proceed together with projects to enhance the production rates within existing fields. Bass Strait producers, however, have indicated that it may not be commercially viable to proceed with these developments, in which case Gippsland Basin production is forecast to fall to 170,000 barrels per day by 1990.

I recently had the opportunity of going out to inspect both on-shore and off-shore developments in Bass Strait. I was very impressed with the work that was going on, with the capital invested and with the dedication of those people to their work, but might I say, massively discouraged by the taxation regime of this Government. The changed production outlook and the question mark hanging over the commercial viability of further developments in the Gippsland basin, and indeed elsewhere, under an RRT are major ramifications for future Australian import requirements. The Government's 1984 estimate suggested that Australia could be 95 per cent self-sufficient in crude oil in 1990. Recent estimates point to Australia being only 65 per cent self-sufficient in that year; a 30 per cent decrease in estimate over the period of 2 1/2 years. If Bass Strait developments do not proceed, that figure could be as low as 50 per cent.

Just to put the House completely in the picture I would like to quote from today's Australian Associated Press report of the minerals exploration and petroleum exploration groups, which I think is significant and brings this subject right into the nub of the problem. The report states:

Expenditure on mineral exploration during the December quarter increased 8.7 per cent on the previous quarter, but expenditure on offshore and onshore petroleum exploration declined significantly, according to official figures released today.

The Australian Bureau of Statistics said expenditure on mineral exploration during the December quarter totalled $96.3m, up 8.7 per cent on the previous quarter, a 14.5 per cent increase over the December quarter, 1985.

Expenditure on onshore petroleum exploration during the quarter totalled $42.9m-10.3 per cent more than the September quarter, but 59.4 per cent less than the December quarter, 1985.

Expenditure on offshore petroleum exploration during the December quarter was $33.2m, a 21.7 per cent drop on the September quarter, and down 58.2 per cent on the December quarter, 1985.

I think I should repeat the actual impact reflected in this day's announcement which is:

Expenditure on offshore petroleum exploration during the December quarter was $33.2m, a 21.7 per cent drop on the September quarter . . .

That speaks for itself. At the current world price of oil and the current Australian dollar value, crude oil imports in 1990 could cost some $A3,000m compared with a net crude import bill of $A44m in 1985-86. There is a massive movement of $2,956m in our essential imports within four years. I use that word `essential' because there is no way that we will get around it, particularly with the rate of research that is going on with alternatives under this Government. Given Australia's current balance of payments problem, an additional outflow of this magnitude would have serious repercussions, as I have mentioned, in an area where our current account deficit is running on average at over $1 billion a month and increasing our national debt as a result. That is the type of crisis that will be added to the crisis we have at the moment. I have outlined two basic reasons for the Opposition's rejection of this legislation. The changed pricing conditions that apply now vis-a-vis 1984 when the RRT was announced, giving rise to reduced incentive for exploration and production; and the effect of a decline in petroleum self-sufficiency on the Australian economy. In order to boost Australia's level of self-sufficiency, more exploration and development work needs to be done. The volume of this work that is needed will not proceed while the level of producer realisation is so low. Producer realisation is affected by the price level and the tax level. As we have little power to exert on the price level currently throughout the world, if we are to effect producer realisation it must be via the taxation levels. By getting rid of the RRT we are providing a significantly greater incentive to exploration companies to explore, while still ensuring that the community gains a return on the assets through the normal taxation and royalties system.

In claiming that producer realisation affects exploration, it is as well to review the recent performance of the exploration sector. Off-shore exploration expenditure fell by 25 per cent between 1985 and 1986.

Mr Tim Fischer —They are overtaxed.

Mr BRAITHWAITE —Overtaxed and underdeveloped, and we are not enticing people to carry out this exploration. Off-shore exploration is expected to fall by another 56 per cent in 1987. Total private exploration expenditure has declined by 35 per cent between 1985 and 1986, and in 1986 there was a 55 per cent fall in on-shore drilling. Price is a critical factor in exploration decision-making. Petroleum exploration expenditure in Australia has tracked the import parity price. There is ample data available to suggest on a world wide basis that exploration activities are directly related to earnings, which are a function of oil prices and tax regimes. Exploration should thus be responsive both in the short and longer terms to any reduction in taxes which results in increased, post-tax, cash flows or expected returns. That is a normal business procedure and expectation.

APEA, in its submission to the Government on tax reform, draws attention to a number of cases where relatively modest changes in taxation have had a marked effect on exploration spending. In the United Kingdom's North Sea area in 1984 and 1985, following changes to the fiscal regime, exploration drilling increased from 128 wells in 1983 to 182 wells in 1984, and to 157 in 1985. The United Kingdom is a country which encourages exploration and development compared to Australia. R. E. Megill studied the relationship between the United States of America exploration expenditure to industry well head revenue over the period 1978 to 1981. He showed that expenditure was consistently close to 25 per cent of industry revenue. In Australia historically there has been a direct correlation between exploration activity and pricing policies. The exploration industry reacted positively to encouraging pricing changes in 1965, 1975 and 1978. The new oil policy resulted in a sustained period of high exploration activity reflecting price growth, higher potential producer realisations and policy stability. Abandoning the RRT would at least raise producer realisations from future discoveries and act as an incentive to explorers to make those discoveries. Once discoveries were made on revenue flowing from production, it is reasonable to expect that a significant portion of the extra revenue generation would flow back into exploration as additional investment.

Under the current excessive and punitive taxation regime of the Australian Labor Party's Government, to which the RRT will only add, indigenous Australian crude oil production will decline dramatically over the next few years, leaving a shortfall which will have to be met by either new discoveries or imports. Recent statistics released by the Australian Petroleum Exporters Association show a disturbing fall in exploration and development drilling and seismic work. This year's petroleum exploration activity in Australia is expected to fall by more than 50 per cent to its lowest level since 1980, in comparison to the figures I gave the House for the United Kingdom.

Mr Tim Fischer —It is a disgraceful situation.

Mr BRAITHWAITE —It is an absolutely disgraceful situation. Probably only 136 petroleum exploration wells will be drilled this year, in comparison with a record of 265 in 1985. Australia's crude oil demand is expected to grow at a modest rate of one per cent a year. However, at the same time indigenous crude oil production from current discoveries will decline quite rapidly. The combination of decreasing domestic production and moderately increasing demand will, as I have said, leave a widening shortfall which will have to be met by either new discoveries or imports, and the consequences for Australia's balance of trade of increased oil imports would be most unwelcome, particularly in the current circumstances. But with low prices and the severe downturn in projected exploration activity, the outlook for future discoveries is severely impaired. With only a few discoveries, Australia's self-sufficiency level will drop to only 35 per cent in the 1995 to 2000 period. This compares with the recent 100 per cent self-sufficiency in Australia.

Clearly this outlook demands that urgent steps be taken to encourage exploration and development. Only then will Australia have a domestic industry on which it can rely for supplies. There is no doubt that to allow the optimum level of exploration, development and production, the Government must lower levels of taxation on the oil industry. The fact that the Government takes almost $7 billion in tax from the oil industry underlines the need for complementary restraint in government expenditure. We are continually telling the Government about this in this House. The Government needs to allow the oil industry to retain the financial resources that are necessary for optimum exploration and development. The Government must allow oil producers to have free access to markets and let the market-place establish prices. The Government needs to review critically all existing regulations and remove them wherever the benefit cannot be shown to exceed the cost. Most topically, the Government should withdraw this resource rental taxation legislation now before the House.

In all of this I have outlined the problems that are besetting the oil developers, the explorers and the people doing the work out of the well-head. But what is in it for the consumer? All these costs and all these taxes that I have mentioned have the habit of finding their way into the pockets of the consumers. I am reminded that every litre of fuel that one buys from a bowser anywhere in Australia, almost two-thirds of the cost goes in government taxation, either in excise or levies-and in the future could be in royalties under this legislation. So it is the consumer in the end who is paying the price for the mischief this government is creating in the oil development areas.

It is interesting also, in the light of Mr Hawke's promise, when he was trying to assume government, that he would reduce the price of fuel around Australia by 3c a litre. How many of my colleagues faced the election with the Australian Labor Party candidates saying that they were determined to pull the price down by 3c a litre from what it was then. The people believed them and put this Government into office. But what is the reality and the substance of that promise? The fact is that today the price is 13c more a litre than it was in 1983-84-that is, 13c a litre more compared with the promised decline of 3c. Unfortunately, that is the sad history of the manner in which this Government has been demanding more and more from an industry that will now be less able to give what is asked. For the obvious reasons that I have stated in the course of my speech, the Opposition firmly opposes the four Bills included in this cognate debate.