December 11, 2012

There was a full house at the University of Western Australia’s University Club auditorium on Tuesday 11 December.

Oil and gas professionals, academics, policymakers and journalists turned out in force for a half-day seminar – The Economics of Oil and Gas in Western Australia: Benefits to the State & Key Policy Challenges. There were numerous questions from the floor and plenty of animated discussion at the networking lunch that followed.

APPEA and the University of Western Australia staged the event to outline the industry’s contribution to the nation’s economic wellbeing and to promote discussion of the policy settings needed to foster continued investment in the industry.

Speakers included:

  • WA Minister for Mines and Petroleum, Norman Moore
  • WA Shadow Minister for Energy and State Development, Bill Johnston.
  • Professor Peter Hartley, an internationally renowned economist, who in May will take up the BHP Billiton Chair in the Business of Resources at UWA’s Business School
  • Woodside CEO, Peter Coleman
  • Deloitte Access Economics Partner, Professor Ian Harper
  • Australian Venture Consultants Partner Russell Barnett

The event was a great success, but in some ways it seems puzzling that it is necessary to highlight the industry’s achievements.

Australia is on track to become the world’s largest LNG exporter by 2020 with three operating LNG projects, seven more under construction, and several others under consideration. Coal seam gas has gone from being a curiosity to a major success story and shale gas could be the next major onshore energy source to be commercialised.

About $200 billion is being invested in Australian petroleum projects, including LNG, oil and domestic gas. As Norman Moore told the seminar, the capital cost of just one of these projects – Gorgon – is more than twice the state government’s annual budget.

This enormous construction effort will create more than 100,000 jobs over the next few years. It will be followed by a production phase that will create tens of thousands of jobs in upstream oil and gas and in support industries.

In 2011, the oil and gas industry paid $7.9 billion in taxes in Australia. New modelling released by Professor Harper at the seminar shows that by 2020 annual tax payments are expected to increase to between $13 billion and $18 billion in 2011-12 dollars, depending on the level of new investment in the sector.

But Professor Hartley told the seminar that resources and technology are not enough to maintain competitiveness and guarantee future investment. The global LNG business is changing rapidly and becoming more competitive. Cost blowouts on current Australian LNG projects are a major threat that must be addressed by industry and government.

Peter Coleman also discussed Australia’s declining competitiveness for oil and gas investment. He warned that investors have long memories and it takes a long time to regain investment attractiveness once it is lost.

Russell Barnett outlined the results of a study undertaken for APPEA by Australian Venture Consultants.

This report – The wider contribution to Australia of the oil and gas industry: a selection of case studies – showed that more than $29 billion has been spent with Australian-based businesses as part of the current wave of oil and gas investment. It describes how oil and gas companies are using and expanding Australia’s oil and gas services expertise and capability and are contributing to employment and training; research, development and technology; community infrastructure and social investment; and environmental research and conservation.

Speakers agreed that a do-nothing approach will result in lost investment. The threats to competitiveness are real and must be addressed by the industry and governments.

Professor Harper said poor policies can reduce competitiveness, destroy wealth and reduce living standards. The Australian economy is going through a period of major structural adjustment and economic policy must support, not obstruct, structural change. He also explained that domestic gas reservation policies and price interventions have not worked in countries and said wealth can only be maximised by allowing markets to work.

The issues, challenges and opportunities facing Australian upstream oil and gas have also been outlined in APPEA’s recently released State of the industry 2012. This report discusses how public policy is affecting our industry and clearly identifies where APPEA’s advocacy effort is best placed.

State of the industry 2012 finds that:

  • Taxation settings must provide long-term stability and address impediments to competitiveness and distortions to investment.
  • Energy market reform must allow the full operation of market forces, remove distortions and resist introducing counterproductive interventions such as domestic gas reservation policies.
  • Red and green tape must be reduced, approvals processes streamlined and duplicative and overlapping regulatory practices eliminated.
  • Labour productivity must be improved and labour flexibility and mobility increased.
  • Fiscal and licensing terms for high-cost, high-risk exploration must be improved to attract exploration to the 70 per cent of Australia’s prospective basins that remain unexplored.

These issues are important not only for our industry but also for the nation as a whole. Yet they are poorly understood in the wider community – and even in sections of the media and among some policymakers.

Australia has been presented with some enormous opportunities in oil and gas. But we need some clever policymaking to ensure we take full advantage of the potential benefits.

David Byers is APPEA’s Chief Executive