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Investor
Confidence Vital To Oil And Gas Future: APPEA
Governments
need to stimulate investor confidence in the oil and gas industry to provide
a healthy climate for a sustainable future, according to Dr Malcolm Garratt,
Chairman of the Australian Petroleum Production and Exploration Association.
Garratt
called on governments to come up with "policy, not rhetoric"
to help the industry set goals and eliminate randomness and sovereign
risk. He called for the establishment of a single, robust, national set
of scenarios to serve as a basis for government policy and industry investment.
"This
nation needs a clear view as to where its energy demand and supply scenarios
are likely to take it", Garratt said. "We do not need multiple
agencies and consultancies providing widely differing forecasts for transport
fuels, natural gas and electricity."
He
queried whether governments were serious about wanting to maximise Australia's
self sufficiency in transport fuels or were they "happy" for
the country to increasingly rely on imported feedstock for refineries
and petroleum products, which is already running at about 65%.
"If
an increasing reliance on imported fuel is the choice made by governments
then they will have made an assessment of the political situation in countries
that can offer an alternative supply", he said. "They will also
have made assessments about the security of supply routes for the delivery
of oil to Australia and they will have decided that the risks of supply
disruption are so minimal as to be acceptable."
He
said governments would also have decided that the implications for defence
planning and the impacts on budgetary revenue and the balance of trade
were also acceptable. "Furthermore, governments will have made the
judgement that the lifestyle disruption implications of a supply shortage
are acceptable", he said.
He
said there would be "major negative investment and operational implications"
for the Australian oil and gas industry, and associated industries, if
governments did not act to help make Australia more self sufficient.
"Australia
must do its utmost to find more oil of its own and develop it", he
said. "Exploration and development must be made more attractive.
The global industry's perception that Australia has relatively low prospectivity
together with the highly competitive international market for exploration
investment capital, mean that our governments must set attractive exploration
and development investment parameters."
Garratt
called on governments to develop an integrated fiscal package and stop
looking at issues in isolation. "Companies will not explore if they
believe that there is no capacity to develop a discovery", he said.
He said the pre-competitive assessment of resource availability had to
be both adequately funded and the results made readily available to industry.
"Most
of the industry ministers understand that investment in pre-competitive
research creates the possibility of expanding or sustaining the $3.3 BB
of production taxes the industry pays annually. It is time revenue ministers
shared this understanding", Garratt said.
He
called for the acreage access regime to be more streamlined and cheaper.
"The financial burden of overlapping governmental processes, cost
recovery by the Commonwealth, States and local government agencies, expensive
environmental assessments, performance bonds, and the legal and other
costs of meeting native title requirements are strangling the small and
medium end of the exploration industry", he said. "They simply
cannot afford it."
"On
one hand, via the Parer Review, governments are calling for more competitive
access to exploration acreage. On the other hand, a multitude of incremental
cost imposts are strangling the companies that will provide that competition",
he said. "This issue has become so serious that APPEA has commissioned
a study aimed at identifying the magnitude of these imposts on a jurisdiction
by jurisdiction basis. We hope to give governments the results of this
study later this year."
Garratt
also said the taxation regime must be made more attractive for exploration.
"APPEA has made proposals for changes to company tax in relation
to flow through shares and the treatment of pre competitive resource assessment.
The association is also seeking different resource taxation treatment
for new developments in Australia's deep water offshore areas."
Garratt
said APPEA realised the Commonwealth budgetary situation was tight this
year, but he called on government action to implement these measures now.
Garratt said APPEA was only targeting new exploration and development
activity, not existing tax revenue streams. And even if the measures were
introduced this year, it would take two or three years before any claims
were made on the Federal Treasury. But in the meantime, vital investor
confidence would have hopefully returned to the industry. "In any
case, exploration success as a result of these measures will mean a bigger
future tax cake", he said.
Garratt
said the industry generated more than $9.7 BB in export income for Australia
in 2001/02 and provided about 35% of Australia's refinery feedstock supplies.
It also contributed $3.3 BB in production taxes and $2.5 BB in company
tax to government coffers during 2000/01, and this figure could increase
this year due to higher oil prices.
"In
addition, we need to remember that there are tax imposts totalling $12
BB on the consumption of petroleum products", Garratt said. He said
these contributions were a significant contribution to government coffers.
"The production and company taxes alone are sufficient to wholly
finance, for example, the Commonwealth's expenditure on schools",
he said.
The
industry generates almost 18,000 jobs, directly and indirectly, and is
a major customer of about 900 companies in Australia. "LNG production
alone feeds about $1 BB a year into the broader economy via the purchase
of services", he said. "That's why Australian Competitive Energy,
ACE, is such a key part of APPEA activities."
While
APPEA wants to help create a climate that is conducive to more oil and
gas discoveries, finding markets to underpin new gas developments is also
a high priority issue. "While producer to customer marketing is fundamental,
there are some cases where industry needs all the help it can get from
government to ensure barriers to market access are removed and political
access is facilitated", Garratt said. "The role of governments
in the China gas sale last year is a great demonstration of what can be
achieved when government and industry work in harmony."
Garratt
said further incentives are needed to make Australia an attractive investment
destination. "The petroleum resource rent tax regime must be made
more attractive for new greenfield gas developments", he said. "Industry
must be able to recover the real value of the huge start up costs of gas
projects before production tax imposts come into play."
He
called for the removal of regulatory barriers to the development of domestic
markets.
"A
gas market cannot exist without three parties - customers, infrastructure
providers and producers", he said. "Governments also need to
have a better understanding of how gas markets operate."
Garratt
said the industry has impeccable environmental management and exceptional
safety records. "When we depart the land and water of this country,
we will leave it in as good a state as when it was put into our care,
or perhaps even better", he said. "In fact, given the contribution
we are making to enhance the state of knowledge about Australia's oceans
and terrestrial environment, we will certainly have made a great positive
contribution."
He
said the industry had the capacity to provide "enhanced environmental
management" by its commitment to "triple bottom line operations"
and its leadership in developing new, less prescriptive approaches, particularly
to marine environmental management.
"The
industry is leading the development of alternative approaches to marine
management based on sound science, risk assessment and continuous improvement",
Garratt said. "The potential gain is not only enhanced and more effective
conservation of the marine environment but also a more constructive and
harmonious relationship with the communities in which we operate."
The
industry is just about to publish a new volume to supplement its original
study of its impact on the marine environment. "The Big Banks and
Shoals of the Timor Sea publication from my own company is another example",
said Garratt, who is also BHP Billiton's Melbourne-based Vice President
for Global External Affairs - Petroleum.
Garratt
said safety will remain the industry's top priority. "The industry
will oppose attempts to make safety management a user pays service, as
this would undermine its independence and integrity", he said. "Protection
of the public interest cannot be compromised by user pay arrangements
implemented because of constraints on funding from the public purse."
On
the broader matter of the "triple bottom line approach", the
APPEA Council recently agreed a set of Principles of Conduct which encapsulate
the industry's demonstrated track record in the area of economically,
socially and environmentally acceptable behaviour.
Garratt
said the industry needed support to be able to discover and produce more
oil and condensate to provide a greater level of self sufficiency, which
would also lead to an increased tax revenue base and balance of trade
benefits. It would also enhance the reliability of supply directly, as
a refinery feedstock, and indirectly, as a source of export income, to
pay for imports.
"In
the near future, new liquids production can be expected from various areas,
from Gippsland, the Bass and Otway basins, the Perth Basin, the Cooper
Basin, from fields in the North West like Vincent Enfield and from the
Timor Sea", he said.
Garratt
said there needed to be a revived push for more "meaningful exploration"
over much of the Australian continent, particularly in deep water areas.
"There are opportunities, but there are also associated investment
risks", he said. "That level of risk requires a policy response
from government if we are to deliver the potential gains."
Garratt
said there was also potential to develop alternative transport fuels through
the development of more LPG and shale deposits, but he said governments
need to decide if they want Australia to be a leader or a follower in
these areas.
"If
they want to be leaders, then the policy settings for gas development
have to be changed", he said. "The policy settings on investment
in motor vehicle production and the refining industry will need to be
modified. Investment to upgrade and diversify the retail distribution
system will also be essential."
He
said natural gas also has a role to play in other aspects of supply reliability
in the domestic market. "The diversification of supply that will
take place over coming years should enhance customer confidence in southern
and eastern Australia", he said. "Current supplies will be enhanced
by new supplies provided by BHP Billiton, Woodside, OMV and Origin Energy
and their joint venture partners.
He
said these supplies would be augmented by supplies from coal seam methane
in New South Wales and Queensland and new production in the Cooper Basin,
and he said options of supplies from the far north and the west could
not be discounted, depending on how market demand develops
"Natural
gas has a capacity to expand its currently substantial export earnings",
he said. "The contracts which the industry has signed with China,
Japan and Korea over the past year are an indication of what is possible.
But there are more opportunities, both in the East Asian markets and in
North America, and potentially in the Indian Ocean rim. We need markets
to justify more LNG trains in Darwin, on the Burrup Peninsula and in the
Barrow Island region."
He
said the provision of natural gas could lead to the establishment of new
industries like methanol and fertiliser plants on the Burrup Peninsula.
"These gas based industries create export opportunities and tax revenue",
he said. "But oil and natural gas development is not just a matter
of benefits to the treasuries."
"The
whole supply chain would benefit if exploration, production and processing
were to grow", he said. There are profits for service companies and
jobs for service industry personnel. The real benefit for Australia is
not just growth in supply, it is the expansion of the whole economy."
He
said natural gas could also be a major contributor to the internationally
competitive Australian economy by helping to reduce greenhouse gas emissions,
particularly by increasing gas's role in electricity generation. "Gas
can also reduce greenhouse emission intensity by playing a greater role
in resource processing in northern and western Australia, and as a source
of process heat for manufacturing and service industries across the country",
Garratt said.
Another
area that could lead to reduced greenhouse gas emissions could stem from
research into the geological disposal of naturally occurring and flue
gas CO2. "Internationally, expanded LNG exports will lower the greenhouse
emissions intensity of the global economy and also make a contribution
to improving air quality and avoiding acid rain", Garratt said.
He
said a dark cloud emerging on the greenhouse horizon was a propensity
for some states to embark on "inefficient and costly" policies.
"Proposals for plant specific targets, state based emissions trading,
and mandatory capital turnover requirements, which ignore an industry's
exposure as a price taker, are flawed and not in the nation's or states'
interest", he said.
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