Pumped dry!
A bad report card
I would like to thank the contributors, witnesses, and committee secretariat for their participation in and support for this inquiry.
The committee's report is a comprehensive examination into whether Australia has and is maximising the benefit that comes from its oil and gas resources. Sadly, it's a report card marked with a big 'F' for fail.
Overview
Nothing says it clearer than a comparison of the benefit that the public derives from the oil and gas endeavours of Qatar and Australia. Qatar and Australia are the world's primary suppliers of liquified natural gas (LNG), with both countries supplying very similar volumes of LNG, but with Qatar forecasting $26.6 billion in compensation and Australia forecasting $800 million.
The situation is as follows:
(a)
Australians have received little financial return from allowing companies to extract and export our oil and gas resources. At the same time, we have undermined our own fuel security.
(b)
Companies that extract and export our resources are not required to publicly disclose information such as the type and quantity of the reserve they are exploiting, nor the rate at which they are doing so.
(c)
Companies are not required to fully exploit a reserve; they can walk away when extraction starts to get more expensive.
(d)
There are ample loopholes for oil and gas companies to exploit in relation to dealing with aging assets.
(e)
'Canberra, we have a problem'. Actually, we have serious problems due to a series of interrelated failures.
National benefit test failure
The situation as described above has occurred because of poor stewardship. We have government entities responsible for identifying areas potentially containing resources (Geoscience Australia), handling the titles and associated data (National Offshore Petroleum Titles Administrator (NOPTA)), safety (National Offshore Petroleum Safety and Environmental Management Authority (NOPSEMA)), the environment (NOPSEMA), taxation (Australian Taxation Office) and policy (Department of Industry, Science, Energy and Resources (DISER)).
What we don't have is an entity that is responsible for the base resource, an entity whose role includes ensuring that Australia maximises the benefits that flow from any project that seeks to extract and sell our oil and gas resources.
Australian needs an oil and gas national benefit czar.
The Australian Government establish a natural resources steward, with explicit responsibility for the delivery of national benefit from Australia's natural resources; ensuring all necessary amendments are implemented to:
give the national resources steward decision making powers;
clarify its position with the petroleum Joint Authorities and regulators; and
enable project assessments and approvals on the basis of benefit criteria.
The Australian Government introduce legislative and regulatory reforms that maximise the national public benefit stemming from the exploitation of Australia's oil and gas reserves, including:
a national benefit statement for oil and gas; and
the requirement to assess and approve projects based on transparent benefit criteria.
Revenue failure
The Petroleum Resource Rent Tax (PRRT), as explained in Chapter 2 of the report, is the mechanism by which Australians are supposed to be 'compensated' by the oil and gas business for the resources they require for their businesses. Whilst the concept seems sound, when profits are low the PRRT is low and when the profits are high the PRRT is high, 'share the pain, share the gain'. The problem is there never seems to be a time when the profits are high, in fact it is entirely the opposite.
The industry cries poor, explaining the large investments required, the volatility of the market, and the difficulty in making money—none of which is disputed—however the decision to operate in the line of business in which they operate was theirs, not the people of Australia, who seem to be carrying a disproportionate level of the risk.
The concept of a royalty scheme is covered in Chapter 7 of the report. A clearly defined royalty regime will guarantee a return to Australia and allow the extractor to understand the level of direct liability relating to the extracted resources.
The current mechanism of the PRRT has too much variability in how it is assessed and implemented, and, as it currently stands, results in Australia effectively 'gifting' finite resources to the commercial entities. This is a broken model and cannot continue.
According to the Australian Petroleum Production and Exploration Association (APPEA) in 2018 there was an estimated $1.5 trillion of oil and gas reserves. It would be negligent for the Government to allow these resources to be extracted under the broken regime.
That the Australian Government supplement the PRRT by applying a fixed percentage royalty of the wellhead value on all projects subject to the PRRT; and that gas transfer pricing be calculated on a net-back or modified net-back basis; and that the depreciation of expenditure be limited and the ability to uplift unused expenditure removed.
The Government implement a single common point for calculating PRRT that is consistently applied across all projects.
Transparency failure
You can't review what you can't see.
It is entirely reasonable that the public see what's occurring in regard to their resources and that's what Australian oil and gas reserves are—resources that belong to Australians. However, all data regarding the reserves, including the type and quantity of the reserves, the number of wells, what's been extracted, from where, what's been pumped into the tenement and the quantity, is submitted to NOPTA and made permanently confidential, by a Government determination.
Unfortunately, my attempts to get this legislation changed, to ensure this data is made publicly available as happens in other jurisdictions, have been blocked by the major parties. I consider this totally unacceptable. Interestingly, a review conducted by ACIL Allen, commissioned by DISER and covered in Chapter 4 of this report, also found such confidentiality unwarranted.
The Government improve the transparency of the oil and gas industry and its operations through:
publication of mandatory periodic reports;
development of enhanced outcomes and supporting criteria to be applied during project approvals, evaluations, and reviews, including those relating to public economic return, environmentally sustainable development, field management, production and efficiency, industry collaboration and infrastructure sharing and safety; and
regulator analysis and publication of all identified performance data against outcomes and benchmarking to improve industry performance.
Liability failure
The possibility of Australians being left with the bill to carry out the decommissioning and remediation of the aging fields and associated assets, has caused anguish and concern to many. Australia rates highly in terms of the risk of having stranded fossil fuel assets. The Government's solution to impose a temporary levy to cover such costs going forward is an attempt to address the problem, but also confirms the lack of forward thinking and preparedness that had been assumed. To keep it simple, those that make the mess should clean it up, or at the very least fund it.
Government introduce a scheme to collect mandatory, up-front remediation or decommissioning payments to be held in a sovereign escrow account until the regulator is satisfied that decommissioning and post-decommissioning requirements have been met.
Subsidy and assistance failure
Governments at both federal and state levels, have a track record of providing assistance to the oil and gas industry through an assortment of subsidies and grants. Financial service entities are reconsidering their preparedness to provide funding to the fossil fuel industries, and in many cases are declining to do so.
In an environment where financial service entities are avoiding funding the industry, Governments would be well advised to consider their position and the return they obtain from the provision of such funds. It would be wiser to invest in the future than to prop up the past, and to look to transitioning the regions affected before the crisis occurs.
The Government phase out all assistance, subsidies and grants to oil and gas projects on a sliding scale by 2030, with assistance redirected to assisting the transition of companies and communities, and developing and producing alternative, green fuels, or renewable energy sources.
The Government establish a fund for workers and regions that are impacted by the energy transition, and that this fund be delivered by a new energy transition authority that includes representatives from government, industry, unions, and affected communities.
Groundhog failure
As the world becomes more focussed on critical and rare earth minerals, caution is required to ensure Australia does not duplicate a model that allows these finite resources to be 'gifted' to entities that send them overseas for processing and incorporation into finished goods.
Australia's critical and rare earth minerals should ideally be processed in Australia, but it is imperative that the benefit to Australia is maximised and they must absolutely not be squandered.
We must look at the past and ensure it is not repeated, as per the proverb 'fool me, once shame on you—fool me twice shame on me'.
The committee conduct an investigation into maximising the benefit from Australia's critical and rare minerals, including:
consideration of nationalisation mechanisms and benefits, such as equity and shares, as well as direct ownership;
review of the minerals taxation and royalties regime;
establishment of a sovereign wealth fund for the long-term benefit of Australians; and
assessing the suitability of the Future Fund for the role of fund administrator.
Senator Rex Patrick
Member
Independent Senator for South Australia