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Wednesday, 9 March 2005
Page: 97

Senator BRANDIS (4:09 PM) —On behalf of the Economics Legislation Committee, I present the report of the committee on the provisions of the Tax Laws Amendment (2004 Measures No. 7) Bill 2005, together with the Hansard record of proceedings and documents presented to the committee.

Ordered that the report be printed.

Senator BRANDIS —I seek leave to move a motion in relation to the report.

Leave granted.

Senator BRANDIS —I move:

That the Senate take note of the report.

In tabling this report, I want to make a few remarks about an issue arising in relation to schedule 3 of the bill. Schedule 3 of the bill, if passed, would amend the Petroleum Resource Rent Tax Assessment Act 1987. It would increase the amount that companies undertaking new exploration for oil and gas in designated frontier areas can claim for the purposes of determining their resource rent tax liability. Petroleum resource rent tax was introduced in 1987 with the intention of ensuring that the Australian community received an appropriate share of the large returns that can follow the development of rich oil and gas deposits, while ensuring that companies that explore for and develop these resources receive an adequate return on their investment. It applies to offshore areas under Commonwealth jurisdiction, with the exception of the North West Shelf, where a revenue-sharing agreement between the Commonwealth and the Western Australian government is in place.

Australia both imports and exports oil. Imports exceed exports by a substantial margin. In 2003-04, 23,649 million litres were imported and 17,660 million litres were exported. This margin is expected to widen such that the proportion of imported oil in primary consumption will rise from 37 per cent in 1998-99 to 52 per cent in 2019-20. This change results from a combination of increasing domestic demand and declining domestic reserves. Australia has substantial natural gas reserves but limited and declining oil reserves.

Australian gas reserves represent about 2.2 per cent of the world’s total but oil reserves account for only 0.4 per cent of global reserves. Nonetheless, Australia has thus far enjoyed a high level of self-sufficiency in oil and gas, at least for the last three decades. However, the rate of new discoveries of oil and gas has lagged behind rising domestic demand. We are increasingly dependent on imported oil. Reserves peaked in 1994, declined by 19 per cent by the year 2000 and are continuing to decline. Australia’s current reserves of crude oil totalled 819 million barrels with a further 671 million barrels of condensate as at 1 January 2003, equivalent to only about five years of consumption at current rates. Production declines as reserves diminish. Geoscience Australia expects production to decline by 40 per cent to 50 per cent in the medium term and then to decline steadily even further.

Exploring for oil and gas is expensive. This is particularly so in the offshore frontier areas of Australia’s coast because drilling activity is carried out in very deep water. Estimates of the costs vary. Geoscience Australia costs a single offshore exploration in the region of $8 million to $10 million, while the Australian Petroleum Production and Exploration Association, APPEA, advised the committee that the costs of a deepwater exploratory well may well exceed $50 million.

Australia is also considered a risky place to explore. Success rates are low compared with other countries. Australia ranks 46th in the world in exploration-drilling success, with a commercial success rate of a little over six per cent. This compares with other locations such as Malaysia, with a commercial success rate of over 50 per cent, and Angola, with over 40 per cent. Nonetheless, substantial sums of money continue to be spent on exploration for oil and gas in this country. In 2002-04, explorers spent a total of $995 million. The amount spent fluctuates from year to year. The total spent in 2002-03 represented a 14.7 per cent increase over that spent in 1998-99. However, the overall trend for the last two decades has been for the levels of exploration to decline, particularly when the number of wells drilled and the quantity of seismic surveys carried out are considered. That trend can be expected to continue.

While exploration has declined, there appears, nonetheless, to be further exploration potential for new petroleum resources. Australia has 40 offshore basins, of which half remain unexplored. The measure considered by the committee recognises the need to extend exploration into areas previously unexplored. The government has indicated that, when specifying designated frontier areas, the relevant minister is likely to favour those areas which are at least 100 kilometres from a commercialised oil discovery and not adjacent to an area designated in the previous year’s acreage release.

In these circumstances, there is international competition for the exploration dollar. This is where the rates of taxation applying to commodities are quite important, particularly when the rate of exploration in this country continues to decline. During the course of its inquiry, the committee’s attention was drawn to the differential rates of taxation that apply in relation to different parts of the resource sector. Offshore oil and gas may be subject to petroleum resource rent tax and, in this time of very high oil prices, taxation of windfall gains from established fields such as the Gippsland oilfield seems entirely reasonable. However, there is no equivalent tax on coal, despite the very heavy prices that industry is enjoying at the moment—and neither is there any tax on renewables such as water for hydro power.

APPEA were clearly not happy with the way the resource rent tax was applied in this country. They argued that there was a case for having a level playing field across all energy resources. To quote Mr Jones of APPEA:

If the decision is that there should be some sort of resource use tax—which is the case, both for mining and petroleum—and if this resource tax is based on the grounds that these are public resources, community resources, being used by industry for a commercial reason and a public benefit, then it should be a level playing field for everyone—and that does not exist, even within the fossil fuel sector—and it should cover everyone.

He went on to say that he thought that the petroleum resource rent tax, as currently applied, was not entirely consistent in how it treats risk in the petroleum sector. Levelling the playing field in relation to resource taxation would not be an easy task. There are a number of important externalities that would have to be taken into account—for example, Mr Jones referred to the public good of discovering new oil resources in this country. That is true in the sense that, unless more oil is found, the import bill will steadily rise in the years to come.

The committee is of the view that these issues need to be examined. It considers that there is a persuasive case for considering the differential taxation treatment within sectors of the resources industry as well as factors that affect its international competitiveness. The committee therefore, in recommending that the bill be passed in its entirety, is also making a further recommendation—that is, that the government institute a public inquiry into the impact of differential tax regimes in the resources sector, in particular with a view to identifying and removing any anomalies arising from differential tax treatments within the sector.

Question agreed to.