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Juniors Divided On Benefits Of APPEA

Junior oil and gas exploration companies which PESA News interviewed are split about the benefits that APPEA provides for junior companies.

But one issue that they all agree would make APPEA more relevant to junior companies would be the successful lobbying of the federal government to introduce a flow through share proposal to improve the environment for raising investment funding for exploration.

Current APPEA Councillor and Strike Oil Executive Director, Jim Durrant, said the introduction of a flow through share scheme was vital for the financial survival of the junior exploration companies which are currently unable to gain any benefit from the tax deductions resulting from their exploration expenditure. "The junior exploration companies without production don't have income to offset against the deductions, yet still have to pay income and payroll tax on salaries", he said.

The flow through scheme could be used to flow those deductions back to investors, encouraging further investment. "The scheme would provide some balance for the smaller companies to bring their cost of exploration closer to the cost of exploration for the majors. So that is probably the biggest issue and is something that APPEA is actively pursuing."

West Oil Exploration Director, Bevan Warris, said the flow through of funds issue could be a boon for junior companies. "That is the thing that we really need to survive", he said. "If we had access to that then we would be able to raise more funds than we've got now. We scratch along to survive but the oil business is a statistics game You've got to drill wells to find oil, so you try and spread your risks and be involved in as many wells as you can."

"But if you don't have a lot of money you can only be involved in a small number of wells and, unless you are lucky, you are likely to have some dry holes, and then the brokers' view of the oil industry becomes a self fulfilling prophecy."

Eagle Bay Resources Chairman, Tony Rechner, had been trying to push APPEA to get behind the flow through deductibility scheme to encourage shareholders to invest in small and large companies. But he said APPEA had responded with what he called a proposal for a "leveraged tax scheme". "They wanted 170% deduction for monies spent in exploration, and how could we be sure that these small companies were bona fide", Rechner said.

"Who asked for that, certainly not us", he said. "We didn't want to be party to that and it just reflected how little they had listened to us and how little they understood what we were talking about. It's not something new, it's been tried and proven, it's reported on and discussed at every mining conference, and details are available on the Association of Mining and Exploration Companies (AMEC) website."

Durrant, who is one of 15 councillors who comprise the APPEA board, which meets about six times a year, said there was a perception that APPEA favoured the majors, who contributed more in membership fees which are based on production output. And while the APPEA board is dominated by the major companies – 10 majors and 5 juniors – Durrant said there were opportunities for the junior companies to take a more active role in the organisation. But time is a commodity in short supply for most juniors.

Durrant said the larger companies provided more money and resources to APPEA, particularly when addressing issues of direct concern to them. "When an issue becomes significant to that company they can provide more support, especially in terms of management time, to the particular committee dealing with that issue", he said. "Juniors can't do that, not unless it became an extreme issue that could materially damage the company, then you would probably be able to allocate more resources."

Voyager Energy Managing Director, John Begg, agreed that the lack of "executive time" was a major constraint but he rejected a suggestion that a solution to the perceived lack of junior interest by APPEA could be solved by setting up a break away forum. "I think people are kidding themselves if they think a junior company forum is going to have anywhere near the lobbying capability and horsepower that APPEA's got, or that it can remain viable for a long period of time, simply because of the survival rate or attrition rate of small companies", he said.

Begg said APPEA provided avenues for junior companies to participate in policy formulation through its committee structure. "There is an opportunity for greater small company representation in APPEA I think, but when you are in the survival game it's difficult to devote the time to it", he said. Begg suggested junior companies could still confer and provide their APPEA committee representatives with "ammunition regarding issues they want APPEA to lobby on their behalf."

Warris said the junior companies had their best chance to set up their own lobby group in the mid 1980s. "Setting up another organisation for juniors was talked about and that probably would have been the time to do it because there was a lot of companies, ranging from juniors up to middle size companies, that also thought they weren't getting a run", Warris said.

"I don't think it would be effective to have another organisation [now] because there simply aren't enough juniors, there are only about 20 of us. And the cost of actually running our separate lobbying group wouldn't be cost effective. It's also difficult for junior companies to get the ear of government anyway, we are not capitalised significantly."

Rechner also rejected suggestions that juniors should set up their own organisation, saying that would be a 'disastrous' move to make. He said it would be better for juniors to be represented by APPEA, but he said the organisation was not prepared to spend the "time or the intellectual capital" to actively pursue the issues that the juniors wanted pursued.

He said AMEC, which represented hard rock and soft rock companies, was providing better representation and were more pro-active in identifying and addressing problems common to junior companies in both sectors. "They understand what we are doing better, they represent us better and they charge less money", Rechner said. "So from the purely commercial point of view, why would a small oil company ever want to join APPEA? It doesn't make any sense, they don't offer [the juniors] any services."

Durrant said APPEA's umbrella covered a broad range of companies and there were times when they all had common interests, and at other times there were conflicting issues. The common issues Durrant identified were tax, particularly the Petroleum Resource Rent Tax (PRRT), the environment, and negotiations with governments to rationalise regulation. "APPEA represents the industry in terms of working with the government on these sorts of things and it is important that the organisation is well funded to do that." He said.

As well as issues common between the juniors and majors, there are also times when their interests diverge. "If there is a conflict of interest, we try and find a way around it and adopt a more neutral position because the important thing for APPEA is to be able to go to governments and be able to claim to be representing the industry as a whole", he said.

Durrant said it was vital for the oil and gas industry to have a powerful voice in the political arena. "The industry would be literally stuffed within a couple of years if it did not have a well funded lobby group to provide some balance to everything else that is out there [in the political arena]", he said. This is particularly relevant for the smaller companies which are progressively being swamped by more regulation (often duplicated at State and Commonwealth level) and do not have the resources to respond. "Actual exploration often becomes a side issue" he said.

"And governments rely on getting information from APPEA in order to provide balance; if they want information about the industry they normally rely on getting that from APPEA", he said. "Now they realise it is potentially coloured, but they recognise it is the key organisation representing our industry and treats it appropriately."

Rechner, whose company also has interests in graphite, copper and gold production, has recently resigned from APPEA, after becoming frustrated with what he alleged was its lack if interest in juniors and calling it a club for the major companies.

Rechner said he had come to believe that APPEA was more interested in protecting the interests of the major companies and regarded junior companies as little more than a nuisance. He said small companies had a fiduciary responsibility to their shareholders to justify the expense of belonging to industry bodies and to measure the benefits of their association. "I've resigned [from APPEA] and I've said I don't want to go to petroleum managers' lunches and I'm not going to the conferences any more", he said.

"Somebody has to make a stand, you can't just keep going to the APPEA conference because everyone else does." He said APPEA was doing a wonderful job for the big companies and suggested it should concentrate on representing their interests, which he said were not always the same as the junior companies.

"They are a very good lobby group for major oil companies who are happy to fund them", Rechner said. "They should stay that way and leave us alone. You can't even go and talk to them without them giving you drinks and lunches, and we don't need that."

Although APPEA does purport to represent the whole oil and gas industry, Durrant said it "hadn't done much specifically for the smaller companies" and was an area that it realised it needed to improve. "In the last few years APPEA has recognised that it needs more representation for small companies and has made an effort to get small companies in, and representatives on committees, to address some of these issues", he said.

"They need to be more inclusive if they want to represent the industry as a whole and to make more of an attempt to represent some of the junior company issues", he said. "And that's a two-way street, if the junior companies say APPEA is a waste of time, I don't want to pay my money, I don't want to be on the committee then they can't expect their issues to be represented."

"The facts are that all petroleum exploration companies benefit to some extent from the work done by APPEA because our industry would be extremely vulnerable without high level representation. Strike's reason for being a member is because it strengthens APPEA's position if they can claim to truly represent all sectors of our industry, and at the same time we are able to influence policy. At the end of the day we see these benefits as providing good value for a relatively modest cost."

Warris said he did not believe APPEA represented juniors and lack of time was the biggest limiting factor in juniors taking a more active role. He suspected the individual major companies would "rather see the back end of us [junior companies]."

"But I think APPEA, as a collective group, does see the need for an independent sort of exploration industry in Australia", he added. "They have started making some noises about lobbying the government regarding this business of flow through of funds and that's going to be a slow task, but at least they have started on that one."

Warris believes that most of the junior oil and gas industry companies are not members, and it was up to APPEA to convince them why they should sign up. "They have been trying to encourage more juniors to join, but the juniors say you don't represent us so why should we pay $4000… so I think that's another factor in why they are trying to now look at the juniors and what our problems are", he said.

Durrant said Strike Oil decided to join APPEA because it needed to be more involved in political processes. "We needed to be involved in knowing what is going on and having some input into the state and federal governments, especially regarding particular environmental issues which had the potential to wipe some of our projects off the face of this earth", he said.

This is an issue that has the potential to affect all junior companies involved in exploration and production, with the increasing cost and complexity of environmental legislation and regulation, according to Durrant.

Durrant said another major issue facing the industry today was the formulation of a national energy policy. "Does the nation have a plan to go forward with the petroleum industry?" he asked. "Self sufficiency is a big issue because that is being threatened again."

Durrant believes the health of the entire Australian oil and gas industry is directly related to the strength and vitality of the junior exploration sector of the industry. It is important to provide a good investment environment for the junior companies to help make them as self sufficient as possible, for the interests of future exploration in Australia.

"Historically, it has usually been the small explorers that have done the ground work for the important discoveries, and subsequently the money for development has come in with the big companies. It is more of an issue for the country because a strong domestic industry is important", he said.