OIL, GAS AM~ NATIONAL DEVELOPMENT
This paper is an abridged version of the speech
by the Prime Minister, the Rt. Hon. Harold Holt,
to a conference of the Australian Petroleum
Exploration Association in Sydney on Monday,
13th March, 1967.
The speech sets the Government's record and policy
in the sea-rch', for oil and gas in the context of its
broad policies for the promotion of national
development, and deals with recent criticism of
certain aspects of its oil search policy.
The speech is supported by two documents to which
reference was matde by the Prime Minister:-
Appendix A
A statement by the Commonwealth Treasurer,
the Rt. Hon. W. McMahon, on the
Government " take" ( royalties plus income tax)
in off-shore oil and gas activities.
Appendix B
Surmmary of a speech at the same A. P. E. A.
Conference by Sir Ian McLennan, Ma~ naging
Director of B. H. P. Co. Ltd. a partner with
ESSO in the successful discovery of off-shore
gas in Bass Strait, Victoria.
OIL, GAS AND NATIONAL DEVELOPMENT
TO THE AUSTRALIAN PETROLEUM EXPLORATION ASSOCIATION CONFERENCE
13TH ACH, 196
Let me first say that I am fully conecious of the
tremendous importance to Australia of an efficient, well-conducted
and successful petroleum exploration and development industry.
The petroleum industry provides an increasingly significant part
of our total energy needs. It employs directly and indirectly an
important percentage of our-population. Without petroleum, life
as we know it today would be, if not impossible, then certainly
very different. Fortunately, there is not much risk of a world shortage
of petrol. Why then, it is often asked, should we spend so much
effort in Australia in looking for more?
First, demand is rising at the rate of about 10% o a year
in Australia and 9% a year world-wide. Unless new reserves are
being found, over-supply could turn to shortage. Second, there is
always a risk that our supplies could be interrupted by events over
which we have no control. It is prudent to have our own resources.
Third, local supplies would help our balance of payments very much.
Petroleum is our third largest import, following machinery and
chemicals. In 1$ 65-66 we imported 4,854 million gallons valued
f. o. b. at about $ 250 million. There are very great national rewards
if wie can replace much of these imports with local petroleum.
Although the quest for petroleum began in 1892 in the
Coorong area of South Australia, it only commenced seriously in
the years following World War II. Senior officers of the
Commonwealth Bureau of Mineral Resources were among the few who
maintained, despite general disbelief, that a major search was
warranted. The Bureau began basic geological and geophysical
mapping of the Australian sedimentary basin and we, as a
Government, felt that here was a national speculation that was
justified in the national interest.
When Rough Range failed to show significant resources
after the find in 1953, the search had reached a. low ebb by 1958.
The Government, concerned at this decline in interest, introduced
a Petroleum Search Subsidy Act to stimulate company enterprise and
to make generally available the knowledge so gained of the geology
of the basins. We also felt that the Act would demonstrate a
favourable political attitude to petroleum soarch-that would
encourage experienced overseas companies to join in. The Act
has been extended from time to time and is currently effective
until June this year.
In the ten years of its life the subsidy scheme has
stimulated exploration and led to the discovery of oil and gas
in a number of areas in and around Australia.
Active exploration geological, geophysical and drillinghas
been undertaken in the 25 major basins of likely petroleumbearing
sediments. These cover some 1.7 of tho 3.2 million square
miles of land surface of Australia and Papua New Guinea and, about
0.6 of the 1 million square miles of the continental shelf. Total
expenditure by companies and by the Commonwealth and State
Governments to the end of 1966 was about 420 million, but
established reserves total only about 200 million barrels of oil.
We consumed in one year, 1965-66, a total ol 139 million barrels.
Thus our known reserves arc still less than two year's importation.
So you see we still have a lonSg, long way to go on the road to
self-sufficiency, / 2o
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While the discoveries of natural gas will result in
cheaper domestic and industrial heating in some areas natural
gas is ready to pay handsome dividends in some localities in
Australia some of the markets are at a considerable distance
from the supply. It is therefore desirable that the search
should continue in an attempt to locate other fields in closer
proximity to the markets. Incidentally, the current cost of
finding oil in Au tralia of $ 2 a barrel compares very favourably,
I understand, with American and Canadian costs.
Apart from the Subsidy Act, the Commonwealth Government
has provided various inducements and basic technical services in
order to create a favourable climate in which private enterprise
* will provide the greater part of the expenditure required and be
responsible for detailed exploration, development and exploitation.
We clearly recognise the need to maintain continuing incontives.
in this field, and I can safely assure you that the general
attitude of my own Government is to recognise the difficulties
the industry faces because of the long term character of its
investment and the freaks of development wnich are a feature
of the oil industry.
The principle measures taken by the Commonwealth
Government, with which you are all familiar, include taxation
concessions, subsidies to exploration companies, basic surveys and
investigations in the field and laboratory by the Bureau of
Mineral Resources, other forms of assistance such as relief
from duty for essential equipment, accelerated map production
by the Department of National Development and the assistance
of highly qualified consultants.
Despite all this there has recently been a definite
pause in the rate of exploration due to an absence of significant
discoveries of new areas on-shore and delays in obtaining rigs
to drill structural areas off-shore. This latter problem w. ill
be largely overcome late in 1967 when five and possibly six rigs
will be drilling on our continental shelf. As Sir Ian McLenian
has said, the production activity of these rigs, and other
by-products of the mineral oil exploration programme, affect
the economy over a wide range of activities.
I was appreciative of what Sir Ian McLerman had to say
about the co-operative and helpful attitude he had found in the
Governments concerned in his negotiations this, of course, is as
it should be. There have been extensive Comi_. onwealth/ State
discussions on the proposed off-shore legislation, and the
Governments concerned have given their careful consideration to
the views expressed by the companies engaged in off-shore operations.
The object of the Governments has been to reach agreement on a
legislative scheme that would give certainty of title to operators
in off-shore areas who undertake to bear very high expenditures,
and at the same time to avoid wasteful and costly litigation of
a kind which has beset the United States for many years and is
now starting to show up in Canada. We confidently expect that
our legislation will be brought before the Parliament during the
course of this year.
Much interest in the continental shelf has been generated
by the discovery of large supplies of natural gas. Although
natural gas provides only one-hundredth part of one per cent of
Australia's primary energy market, this share could increase to
as much as 10% within a few years. The change from one energy
source to another is an expensive step, but where it can be shown
that it is in the interest of the Australian people to make a
change, my Government will view constructively and in a helpful
spirit any scheme suggested. I am happy to say that through the
Australian Loan Council we have been able to arrange for the
necessary funds to cover the $ 40 million cost of piping gas to
Adelaide. / 3.
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As a background to the changes which your own industry
is bringing to Australia's groviin6 economy, let me mention that
there are now 60,000 factories in Australia double the number
at he beginning of World War II. Employment in these factories
represents an increase of 125% since 1939. Manufacturing now
absorbs 28% of our viaork force and contributes 13%; of the value
of our total exports and that peroentage is tending to increase.
We are now exporting to countries some products which we formerly
imported, including steel to the United States and the United
Kingdom. Our manufacturing nowadays includes some highly
sophisticated products like radio-tele phone eqjuipment,
transistorised airways beacons, the pilotless jet aircraft
Jindivik, the anti-submarine ge-uided missile Ikara and the
anti-tank guided weapon Malkara. These have all found markets
abroad. Another aspect of the changing economic patternreflecting
largely the impact of petroleum and mineral
developments is -the emergence of new towns. Though small
in size, the contribution to national development, and in
particular to development of the north of such towns as Weipa,
Dampier, Mount Tom Price, Gove and Barrow Island, will become
increasingly important as time goes by. This is decentralisation
in a practical way stemming from private industry developments.
We recognise that there is a role for Governments in all this,
but Australia has benefited, and will benefit increasingly in
the years ahead, from the practical decentralisation of activity
and industry occurring through these private industrial
developments, and others like them.
Vast quantities of capital are required for these
projects and in the main this is being found by the firms
themselves. Nevertheless, Government action has contributed
much to the mineral development of the north. Direct financial
contributions totalling 44 million have been made by the
Government towards the Townsville-Mount Isa Railway, the
Gladstone coal loader, the Weipa wharf and township, the Darwin
wharf and railway facilities in the Northern Territory. The
Commonwealth Government has also arranged that, in addition to
the mining activity in the Gove bauxite deposits, processing
to alumina will take place in the Northern Territory. The
Burezu. of Mineral Resources has, in fact, spent 80% of its
annual budget of nearly $ 5.4 million on securing basic data
on mineral resources in Northern Australia.
In all these ways, the Government is helping to shape
the new pattern of economic activity. Vie can also help by
providing a favourable climate for decentralisation, and this
applies in particular to your own industry through the economic
and general policies we pursue. An illustration that comes
quickly to mind oli practical help to areas remote from the cities
is the legislation that brought the price of petrol for people
outside the city areas to a level close to city prices. Other
measures include the amounts to be expended on rural roads under
the Commonwealth Aid Road legislation, the activities ol' my
colleague, the Postmaster-General in ensuring that television
services stretch out as widely as possible, the decentralisation
of air services and the provision of other amenities.
From what I have already said, you will appreciate that
mining and oil development are but a part of the overall story.
May I mention particularly the recent publication brought out
under the aegis of my colleague, the Minister for National
Development. It costs only $ 2 and shows the major development
work under construction in Australia at the end of June last
year to have a value on completion~ of $ 2,327 million. By any
standard this is a huge investment programme with a nation of
less than 12. million people and the to-tal does not include *. 04
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such things as expenditure on housing, hospitals and education
facilities or the Commonwealth's $ 600 million expenditure on
the Snowy Scheme. The publication shows that we now have in
hand investment and developments amounting to some $ 20G0 a head
of our population. New arrangements and facilities for the provision of
capital will need to be devised to help finance this and new
developments, and we have been working actively and earnestly
on the problem for some time. We are confident that we will
find a practical means to achieve this objective.
Nobody living in this country so subject to the haeards
of the seasons and risk of drought, flood or fire, can expect
that the course ahead is ever likely to be easy. But we believe
our plans are soundly laid and that the political and economic
stability we are maintaining is one of the strongest incentive-a
for investment in Australia and provides a favourable environment
for development and growth.
Before I conclude, perhaps I should deal a little more
specifically wftth some of the matters that weore raised by your
Chairman, Mr. Earl Abbott in his thoughtful and extremely
interesting speech. The most serious point I want to take up
with you is the question of the availability of Governments for
consultation. I have no hesitation in stating that there is no
agreement whatsoever among the Governments conccrned that they
will not consult w--ith the industry. Indeed, there have been
several consultations, and I have taken part in two of them
myself. To mention only the more recent occasions, there were
three meetings with the industry last year in Febru~ ary, June
and August, as well as a number of written exchanges.
At the meeting in Febru~ ary there were lengthy discussions
between senior Commonwealth and State officers and representatives
of eleven off-shore companies, many of whom are prominent members
of APEA. At a meeting of Commonwealth Ministers in June, the
. APEA request for permission to send a deputation was granted and
in August five senior Commonwyealth Ministers received a further
deputation which presented a written case and took several hours
in explaining its point of view and discussing it. I therefore
think it is fair to say that the Government has given the APEA
wide opportunity to present its views: it has certainly taken
these into account in determining its policies, and will continue
to do so. Far from our adopting policies which would discourage
the industry or kill the goose that we hope will lay us many
golden eggs, it is our object to assist it in its tasks and to
encourage it to go ahead with its investment, exploration and
development. I did have it in mind to go in some detail into the
percentage of " take" by Governments in Australio. and how this
compares with the percentages in other countries. For lack of
time, I now just want to make it clear th-it we do not accept
and this has been the matter of a quite thorough study the
table of percentages which have been publicly presented as a
basis of comparison for the Australian " 1take" l and that of
countries overseas. Rather than weary you with going over the
ground again, may I direct your attention to the press statement
of 27th January which went out from my colleague, thIe Treasurer.
It is admittedly difficult to find a realistic basis for comparison
between the tax st-ructures of the different countries, but we
have to recognise that the responsible Commionwealth and State
Governments have an entitlement to a proportion oZ the return
from the exploitation of our natural resources, just as have
those who hazard their capital and skill in the effort. These
things are all in our consciousness and I would hope that the
experience of the industry generally can be that we will always
be seeking good co-operation between Government and industry in
the exciting task of the development of our couintry and its resources.
APPENDIIX A
OFF-SHOIL OIL AIT GAS:
ROYALTIES AND TAX
by
The Rt. Hon. William McMahon, Mi. P.
Treasurer of the Cormmonwealth
of Australia
The petroleum industry has claimed th. t the Government
" take" ( royalty plus income tax) in Australia in the proposed
joint off-shore petroleum legislation by the Cormmonwealth and
the States will be higher than in five of the six other countries
with recent off-shore legislation. The comparative figures that
have been quoted are:-Govt. " take" as percentage
Country of " divisTble profit ( a)
United Kingdom 50.4 per cent
Denmar 45.8
Germany 50.6
Norway 55.2
France 47.72
United States 46.8
Australia 52.8
on a " present-day value" basis.
These figures do not give a true picture the .' orth of
the figures depends heavily on:-
a) the basis on which the calculations of " present-day
values" of " divisible profits" have been made.
( These calculations involve the estimating of gross
sales proceeds and capital and operating production
costs over a given future long-term period, and the
reduction of the resulting figures to a present-day
alue basis by the application of a miscount interest
rate); and
b) the assumptions used in the measurement of the incidence
of income taxation in the respective countries.
The information that has been provided on how the
figures are compiled is very meagre. The starting point is an
a-sumption that, on a present-day value basis, gross sales
procee-s will be double capital and operating production costs
in the case of all the countries mentioned.
This is obviously a very generalised assumption; it
certainly cannot be accepted without question so far as Australia
is concerned. The period and discount interest rate used in
the calculation of the present-'. ay value figures have not been
indicated and the use of different periods and different interest
rates can produce vastly diiferent results in terms of comparative
present-day values.
It is not suificient only to look at tax rates; the
comparisons must have regrd to the taxation laws as a whole of
/ 2.
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those countries. These laws differ considerably in relation to
deductions allowable and the time when those deductions may be
claimed. The tax figures include'. in th.. calc.. lasion of the
quoted percelnt. es for the other countries y be significantly
understated in some cases while the tax fiui. es included in thcalculation
of the ciuote, Australian percentage, o_ the other
hand, seem to be substantially overstated. This is because the
figures take no account of the special deductions allowable under
our income tax lawswhich are designed to free the proceeds from
the sale of petroleum and its products f. om income tax until all
allowable capital expenditure has been f'-lly recouped.
If in tihe present-day value calculations allowance
were made for thic feature of Australian incoime tax law, the
tax figures included in the Australian calculation would be
considerably reduced perhaps even to the point where the figure
for the Australian government " take" would fall below the
percentage figures quoted for other countries.
The only comparison that can be made of any ral
meaning is between rates of royalty and these represent only
o.. e area of government involvement. For instance, the Commonwealth
Government has given special stimulus and assistance to oil
search, at times when the risks are highest by the petroleum
search subsidy scheme, under which the Commonwealth has already
paid out or committed a total of $ 59.6 million; by making
capital subscribed to an oil exploration company by Australian
resident shareholders fully tax deductible, and by fixing a
special incentive price for five years from 1965 for crude oil
produced in Australia.
The standard royalty rate of IO' 1 in th.. proposed joint
off-shore legislation is relatively on international standards.
It compares with rates of 16-2/ 3o and 12-1% generally applicable in
off-shore a;. eas in the Unitea States and the United Kingdom
respectively. IFurt. iermore the industry has been treated more generously
in this country with the proposed legislation on the sizes of
exploration and production areas. Canberra
27th January, 1967
APPEMIX B
AN USTALIN LOKSAT PETROLEUM EXLORATION
by
Sir Ian McLennan
Managing Director of B. H. P. Co. Ltd.
Petroleum exploration activities in Australia represent
a unique combination of local and foreign private enterprise,
activities combined with effective and practical Government
support in tangible form.
Expenditure on petroleum exploration in Australia had
reached a total of some $ 370 million by December 1965 o * f which
$ 234 million had been spent in thce last 10 years. The current
rate of expenditure is of the order of $ 60 $ 70 million per
annum. These figures are substantial, even alongside the
Snowy Mountains scheme where approximately $ 600 million has
been spent at the rato of $ 40 $ 50 million a year, and the
steel industry where 4794 million has been spent in the last
years. The $ 370 million spent to December, 1965 -was made
up this way:-
Funds provided by Private Enterprise $ 294 million
Dircct Government Subsidies 42
Other direct Commonwealth and
State Expenditure S 34
This is enlightening and shows that while Governments
do play a significant role iLi the matter of subsidies, direct
expenditure and by other incentives, it is still for private
enterprise, to the greatest extent, to provide the necessary
stimulus, funds anC. 1 know how.
The. re is, of course, a further groat stimulus provided
by the Commonwealth Government in the form of relief from taxation,
but I know of no way of putting a precise figure to this.
A ba: cakdown of the $ 70.8 million spent on petroleum
exploration activities during 1965 shows that the major investment
was by overseas organisations which accounted for $ 34.3 million,
followed by Australian private enterprise inves-umont and re-investment
amounting to $ 21.6 million, Goverimrent subsidy of $ 10.4 million
and Direct Government expenditure of approximately $ 4.5 million.
One oi. the intangibles which has not been listed in
the expenditures, but which is very real, is the value which should
be placed on the experience represented by the pkersonnel engaged
in such activities, anc.-the influence that they can exert to see
that Ghe money is spent wisely.
In the field of off-shore legislation in particular
therc. have been many international and constitutional problems
to overcome and many points of view to consider.
This is not just a simple government/ industry relations
problem. Both govern,.ñ ent and ind ustry are working together in
an uncharted field and the degree ol' progress and mutual understanding
is heartening. o
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There is intense world wide competition for capital
for petroleum exploration and the development of petroleum
production capacity. Other countries may offer certcin incentives
in the competition for such capital but in the overall analysis
Australia has a great deal to offer.
The development of the large super tanker and of
pipeline transportation have done much to ease our joint problems
of isolation and small local markets.
In the local scene, Australia is rapidly becoming
industrialised, and its population mobile, with a high standard
of living and increasing demands for energy. Our energy resourees
in black and brown coal are quite significant, but the growth
factor is in the field of readily transportable energy. The
sources of primary energy, for the statistical year 1965-66,
expressed in tons of black coal equivalent, arc:-
Coal 48.7%
Petroleum 44.2%
Firewood 1. 4%
Hydro electric power 5.7%
This clearly shows the importance of potroloum'in the energy
market. Therj are areas whore competition exists between these
sources of primary energy, particularly in power generation and
perhaps in some types of industrial market, and the natural forces
of competition will give each source its place in the market.
However, ther are major sections of the energy market
where the alternative types oi fuel are not interchangeable and
one result is the rapidly increasing demand for energy in the
form of petroleum. The petroleum industry is well aware of the continual
expansion of the demands for its products. In the United States,
for example, the 61% share of the total energy requirements of
the United States helu by oil and natural gas in 1950 rose to
76% by 1965. In Western Europe, the share rose from 15% in
1950 to 52% in 1965 with an expected increase to 72% in 1975.
Is there any doubt that Australia's energy requirements
will follow similar trends?
In Australia we offer stability of Government and have
Governiments fully alive to the advantages which can accrue from
the development of a local petroleum industry. I woul. emphasise
the intangible incentives that stable Government offers, notwithstanding
the va, r ious shades of Government opinion.
The lack of restrictions placed on foreign investment
in Australia, compared with restrictions, both written and
unwritten, which the petroleum exploration and production
industry has encountered elsewhere, reflects an enlightened
Australian attituLe offering considerable encouragement.
In matters such as taxation, remittance abroad of
earnings and repatriation of capital, the attitude of the Commonwealth
Government and the various authorities concerned can only be
cla. sified as highly co-operative.
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From time to time there may be some criticism levelled
at remittance abroad of earnings and repatriation of capital in
the case of foreign controlled organisations, but usually such
criticism is saved up for those organisations which are succes-ful.
However, there isno doubt, on the ether side of such criticism,
a whole-hearted respect for such organisations and a realisation
of their value to a country like ours.
One very important aspect of Government policies, is no
discrimination between national and foreign ownership in the
application of laws and regulations. Another incentive to the
petroleum exploration industry for continual and expanded
exploration in Australia is tE potential that exists.
Our own experience in petroleum exploration has shown
that a painstaking and detailed step by step programme under
expert and experienced guidance with adequate resources in
capital and know-ho a, can result in discoveries and also maintain
a high proportion of local equity.
I would not venture to predict the anticipated ratio. of
success in both continental and off. shore exploration in Australia,
but I imagine you will all agree that the potential for further
discoveries in the Australian area is good.
I am not sure if we ar doing all we can in Australia
to take full advantage of this petroleum age and our educational
activities will need to be developed further so that our y-ung
people can play their full part in just the same way as they
have in the development of our other industries. We need
geologists, chemicel engineers, construction engineers, physicists,
chemists, and so on, all oriented in their training toward. s the
petroleum industry.
The coming of the petroleum exploration industry and
its prospect of success has brought other developments to Australia
which would not have been contemplated even a few years ago.
Who would have thought that the State Dockyard at
Newcastle would have played a major part in reconstructing an
off-shore drilling rig and who would have thought that at Whyalla
we would be constructing a semi-submersible rig of the most
highly sophisticated nature using very largely Australian raw
materials and Australian people?
The imported content of this rig will be confined to
specialised machinery not made in this country. Further, it is
hoped that soon we will be building platforms for erection in
Bass Strait ; and already there has gone into operation at Port
Kembla a new tube mill capable of producing the very high grade
pipes necessary for gas and oil distribution. These are just some
of the things that have happened and others of course may well
occur and are in fact already under way.
So far very little incone h-. s bjcn derived inAustralia
from petroleum activities. It is all with an eye to the future
and it is most heartening indeed that there arc so many people
prepared to " chance their arm" in an ondeavour to bring the great
benefits of oil and natural gas production to this country.
Surely they deserve their just rewards if success comes
their way. It is essential that these rewards be there to provide
incentive for further exploration because up to the present we
have only scratched the surface. 13th March, 1967.