Embargoed until 11.30 a. m.
18.4.77 AUTHALIA
FOR PRESS 18 APRIL 1977
ADDRJ7SS AT THE OPENING OF THE ANNUAL CONFERENCE OF THE
AUSTRZALIAN PETROLEUM4 EXPLORATION ASSOCIATION, SYDNEY OPERA HOUSE
It is a great pleasure to address this confer~ ence of thEi Australian
Petroleum Exploration Association. When I first saw the! title of
this conference " Risk and Reward" it struck me how much
politicians and petroleum. explorers have in common. In both cases
it often seems the risks are legion, and the rewards all too
infrequent. But-so far-no one has found an adequate substitute
for either of us. The main advantage of our product over yours
is that our-ideas are capable-of being constantly recycled.
The question of " risk and reward" 1ns great relevance to the problems
that have beset the Australian economy in recent years, and to the
policy strategy the Government has been pursuing to overcome those
problems. The Australian economy's ability to function effectively
depends on investors' willingness to take business risks, and on
the existence of an economic environment that provides rewards to
the successful risk takers. Between 1972 and 1975, the economy
suffered from a combination of high inflation, frequent shifts of
Government policy, and psychological discouragement of the private
sector by Government. The result was that profi * tability declined,
while uncertainty and instability reigned. Economic activity and
busirness investment was drastically affected..
This Government's policies are designed to reduce inflation, and by
reducing inflation ensure a return to profitability and sustained
economic growth, and aninprovement in the employment situation. To
do this, we have brought Government spending under control. We have
pursued-a responsible monetary-policy. We now have an appropriate,
external policy, and we have consistently argued for wage restraint
before the Arbitration Commission. There can be no doubt that we
have had considerable success in pursuing our goals. The most
reliable indicators show that there has been a steady reduction
in the rate of inflation. Taking the deflator for major components
of G. N. E. over the year to the December quarter, the rise was
10.7%, much more modest than the rise of 15.6% recorded in 1975
and 20.7% in 1974.
This has been a more accurate reflection of gerneral price increases
in re: cent times than the Consumer Price Index which has been
distorted by changes in health insurance, and which only applies
to prices for a limited basket of goods. The national accounts
published a month ago show that in 1976 there was a return to
econcmic. growth. There were significant increases in: gross non-farm
/ product,
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product, personal consumption, dwelling investment, business investment
in plant and equipment, and exports. While unemployment is still too
high, the broadest measure of employment we have, the Labour Force Survey
conducted by the Commonwealth Statistician, shows that the number of
employed persons has increased by 62,600 in the twelve months to February
1977.
To sustain the economic recovery and build on this progress, we must
further reduce inflation,. and all the arms of economic policy. under the
Government' s control are being brought to bear on this task. This
Government is acting to establish an economic environment in which the
rewards offered to business are fully commensurate with the risks they take.,
Lask week, a major contribution was made to the fight against inflation and
unemployment. At the Premiers Conference, the heads of the Commonwealth
and State Governments unanimously called fo ' r a three month halt in price
and income increases. This is one of those rare times in our history
when all seven governments representing all major political parties, have
reached a consensus that a major initiative is required. This is a
genuinely workable plan to achieve the vital goals of reducing inflation
and providing employment for all those who want to work. I welcome the
many public statements by retailers and major companies that they will
hold their prices for the three month period.
There is a-commitment amongst Australians to defeating the twin problems
of inflation and unemployment. The agreement of Government leaders at
the Premiers Conference that there should be a three m. onth halt in price
and income increase was a concrete expression of that commitment. if
the commitment is carried through and all Government leaders are
resolved to use all their moral force and authority to support it we
have a unique opportunity to break the back of inflation. All the other
arms of economic policy are in position to sustain the beneficial effects
of a prices-incomes halt, and economic circumstances are such that excess
demand is not a problem. Tax indexation and the wage increase which wage
earners have just received from the Arbitmation Commission make it
reasonable to ask for an incomes halt, and if we are to ask for an
incomes pause, it is essential that we ask for a prices halt. I
All Australians have much to gain from breaking expectations of continuing
inflation. The more rapidly inflation is reduced, the faster will be the
recovery in consumer demand, the greater will be the prospects of
productivity increases, the sooner profit ratios will be restored to
normal levels, unemployment will be reduced more rapidly. Everyone
will be better off if we can halt the incessant spiral of wage and price
rises. The mining industry has an important part to play in economic recovery,
and this seems an opportune moment for me to make one point quite clear.
The Government utterly rejects the views expressed recently by certain
prominent members of the Opposition that the growth of the mining industry
should be deliberately retarded. The Deputy Leader of the Opposition for
instance argues that rapid development of mining is undesirable because
it is highly capital intensive and drains capital away from other sectors.
The reality is, as most members of this audience will be well aware, ' chat
large scale mining ventures in Australia bring much of their capital
from overseas. This is capital that would not otherwise be available
to-Australia. The Labor Government deliberately held back mineral
exploration
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exploration and development. By the time they went out of office,
investment in the industry had practically stopped. This Government
is deter-mined to revive it. We will not penalise the mineral industries
in which Australia has a comparative advantage.
Since coming to office, we have removed unnecessary barriers hindering
exploration companies, and where necessary, we have provided positive
incentives to encourage exploration and mining activity. We have
actively co-operated with the states to ensure that further exploration
permits are granted over vacant prospective areas. During 1976
applications were considered in respect of extensive areas iLn offshore
Western Australia. Six new permits have been granted and applications
in respect of three areas are currently under consideration. The
Government has alopted a new approach to export controls which respects
the role of private enterprise.
The investment allowance introduced in the last budget has significantly
encouraged new investment in the mining industry. Following the TAG
report on the petroleum and mining industries, the whole taxation
structure of the industry was reviewed. As a result, in recognition
of the special circumstances of the minerals industry provision has been
made to allow petroleum exploration expenditure to be immediately
deductible against income from any source; allowable capital. expenditure
on development is now deductible by a reference to a life of' a mine of
not more than five years, instead of twenty five years, and all such
expenditure on a petroleum field is deductible from any inccome.
Allowable capital expenditure on transpoittion facilities is deductible
over either twenty years or ten years at the taxpayers option. Allowable
capital expenditure now includes port development not previously deductible.
Crude oil from new discoveries has been freed from the $ 2 per barrel
production excise, thus removing a deterrent to petroleum exploration.
I understand that your industry wishes to make further submissions to
the Government in relation to some of these matters. The ccal export
duty is to be phased out within three years, and as a first step duty
on non-coking coal has been removed and rates on coking coal reduced.
The Government welcomes foreign investment because it contributes
significantly to Australia's development and prosperity, and we have
significantly revised the guidelines for foreign investment. Our
Foreign Investment Review Board examines each foreign investment
proposal to ensure that it is not contrary to the national interest.
The guidelines relating to exploration are designed to give explorers
maximum freedom without unnecessary Government restrictions. At the
exploration stage, foreign companies are not required to obtain Australian
Participation. We recognise that Australian risk capital is
limited, and that requiring foreign investors to obtain Australian
participation at the exploration stage could needlessly inhibit
exploration. At the development stage of new mineral projects ( except
uranium) involving investment of one million dollars or more our
objective! is 50% Australian equity, and 50% Australian voting strength
on the board. If 50% Australian equity cannot be obtained immediately,
the Government may seek to increase the Australian equity to 50% within
an agreed period of time. / The guidelines
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The guidelines are designed to encourage working partnerships
between Australian and overseas investors, with all the benefits this
brings from the pooling of knowledge, capital and technology. The
guidelines are being administered in a flexible manner to meet the
circumstances of individual cases. Proposals which do not meet our
objectives may still proceed if appropriate levels of Australian
equity are simply not available. No foreign investor should feel
inhib. 4.' ed from proceeding forthwith with the evaluation of investment
proj ec'ts.
I believe that the Foreign Investment Review Board has now set a
favourable climate for increased investment in Australia. I have
heard no complaints from investors about the Board's activities, and
given Sir Bede Callaghan's knowledge and expertise, this is not
surprising. This Government programme of reducing inflation, adopting a more
liberal approach to export controls, providing taxation incentives,
and welcoming foreign investment, is designed to encourage mineral
exploration and development in this country, and clearly petroleum
exploration needed encouragement and incentive. There are forty six
offshore and seventy one onshore permits presently in force, but
exploration activity remains far below that experienced prior to
1973. There are however signs of improvement, and clear indications
that the Government's policies are having an impact. I believe a new
spirit of confidence and renewed interest in the Australian mining
industry is developing. I understand your association has predicted
that exploration activity will increase sharply7 in the near future.
From public statements made by companies, firm intentions to invest
nearly $ 2,000 million in the mining and oil field have resulted from
the decisions of the past fifteen months or so. The Government is
keen to see other projects such w the north-west shelf proceed, and
these could well lead to the sum being more than trebled.
No one knows better than yourselves the risks of petroleum exploration.
No significant oil discoveries have been made since 1970, during which
time 335 exploration wells have been drilled. No commercial oil
discoveries have been made in the last 450 wells drilled; and the
costs of drilling, seismic studies and related activity are very
great indeed.
Explorers also have to cope with the problems of very long lead times
between exploration and receipt of income; risks in estimating reserves
at the time when large capital commitments must be made; and exploration
areas which are often in isolated locations, distant from both
support services and potential markets. Investors and mining companies
naturally look for higher than normal returns on their capital and
an early return of funds invested to offset the great risks which
they undertake. Those people who think that this is unreasonable
should look at the facts and the figures on the risks involved in
exploration.
The Government recognises, and I believe the community in general
realises, that when petroleum exploration is successful, the rewards
must be higher than normal. The incentives the Government has provided
to your industry in part reflect this recognition. They also reflect
the high priority we attach to finding further significant reserves
of oil and gas. / Australia has
Australia has greatly benefitted from a 70% self sufficiency in
petroleu~ m products. But our position will soon deteriorate unless
further discoveries are quickly made. I am advised that in the
absence of further discoveries, the ratio of indigenous to imported
crude oil supplies will be completely reversed. Some estimates
indicate that the radio will be 30: 70 by around 1985.
There is a clear need considerably to increase our petroleum resources
to protect our balance of payments, and I would add, on strategic
grounds. Unless further significant discoveries are made, our import
bill for petroleum products could, at last year's prices, be in excess
of two billion dollars by 1985.
The rewards for successful exploration are greatly influenced by
Government taxation policy and the other measures to which I have
referred. But of course, the prime factor is the price received
for the product. Even without any price increases for indigenous
crude oil production, as we increasingly come to depend on imported
supplies, the price paid by Australian refinery companies for crude
oil will ineitably approach world parity over the next decade. This
fact has been very much in our minds in considering the TAC report on
crude oil pricing, presented on 30 September 1976. That report
examined the current situation under which the prices of crude oil
produced from fields discovered before 14 September 1975 are
substantially below import parity prices. These prices were
determined by past Governments on economic and technical considerations
applying to each field. An excise levy of $ 2.00 per barrel
currently applies to all crude oil produced from these fiel~ ds.
Crude oil produced from fields discovered after 17 September 1975
( which was not under reference to the IAC) attracts import parity prices.
Crude oil produced from fields discovered after August 1976 is not
subject to the excise levy. The IAG report recommended that the price
for existing oil from Gippsland fields currently producing or being
developed, be progressively increased towards import parity by 1980.
And it :--ecomended that oil from the Barrow Island and Mooriie Fields,
expansions and extensions and most known fields not yet in productionbe
at import parity less the $ 2.00 per barrel levy.
The IAG recommendations were generally in accord with industry
submissions. The major Gippsland producers had requested that their
prices be phased upward in a manner similar to that recommetnded by
the Commission, and the Barrow Island and Moonie producers had
requested an immediate and substantial price increase.
The Government has considered the TAC report with the benefit of
consultation with the Australian oil producers. As yet, no final
decision has been made.
The Government must have full regard for all the ramifications of
its decisions on crude oil pricing. This has necessarily involved
a more wide ranging analysis than was requested of the TAC, and the
conside: c-ation of issues outside the TAC's charter.
Broadly, we see the principal objectives of new pricing arrangements
as: ensuring the economic exploitation of known reserves; encouraging
new exp~ loration; minimising inflationary consequences; providing
/ reasonable
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reasonable certainty to the industry; and minimising Government
interventions in the petroleum industry. This is a substantial
undertaking. Underlying it is the need to promote a vigorous exploration effort
in the hope of achieving new discoveries.
There will be no decision on crude oil pricing before the effects of
the three month halt on wage and price increases announced on 13 April
have been reviewed. When the decision is made, it will be with full
regard for the impact on the consumer and on the economy generally.
The risks and rewards of Australian petroleumni exploration are great.
They involve not just your industry, they concern the whole country.
Petroleum exploration companies have every reason to face the future
confident in the knowledge that, if discoveries are made, proper rewards
will not be denied to them.