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Interview

with Drew Clarke, Secretary of the Commonwealth Department of Resources, Energy and Tourism, The Department of Resources, Energy and Tourism

02.06.2010 / Energyboardroom

What do you consider the most important policies that support Australia’s continuous ambitions to be a competitive and leading energy supplier in the Asia-Pacific region?

The starting point is our endowment of natural resources. We are unusual as one of only three OECD countries that is a net energy exporter, the other two being Norway and Canada. We have an extraordinary endowment of fossil fuels, uranium, and renewable energy resources. This is the opportunity that we possess and it has a huge role in shaping the Australian economy.

The exploitation of those resources to the benefit of the Australian economy is heavily driven by foreign investment. Capital markets in Australia are never going to be deep enough to fully utilize those natural resources. Broadly speaking, investment attractiveness is largely a function of our colleagues in Treasury who run the tax regime. But obviously as the sectoral department we have a big role in working with them in maintaining that attractiveness. That leads to the importance of precompetitive geoscientific information, infrastructure, workforce skills, supply chain efficiencies, and the efficiency of the regulatory regime in this multijurisdictional federation. All of these are important policies but the starting point of course is the endowment of resources.

Given its size Australia is still a relatively underexplored country. How are the department and the ministry working to encourage foreign companies to tap into Australia’s exploration potential?

The attractiveness of Australia as an investment location is clearly a major priority which is supported by the provision of pre-competitive data. Through Geoscience Australia, a major function of this department is to provide exploration data to encourage the further and more focused exploration in Australia.

The Department recognises that exploration will also be driven by an efficient and competitive legal and regulatory regime, a well understood and low sovereign risk business environment, and the ability of Australia to access the strongly growing markets of Asia. The Department is working across all of these areas to ensure that we continue to be an attractive place for exploration and development expenditure.

Can you explain the broad strokes of the Henry tax review and its implications for the oil and gas sector?

The impact of the new Resources Super-Profits Tax (RSPT) on the mining sector is generating the most attention. But what is important to understand is that the offshore oil and gas sector has already been operating under, and most investment decisions have been made, on the basis of a resource rent tax: the Petroleum Resource Rent Tax (PRRT). For the offshore sector – offshore being within the Australian commonwealth government’s jurisdiction – those arrangements will stand unless companies choose to opt into the new taxation arrangement. There is no immediate impact of the new super profits tax that flows through to most existing offshore projects.

Onshore projects are not part of the PRRT regime and will be affected by the super-profits tax. They will need to make their assessments about the new policy and work through their issues. A lot of the implementation issues are subject to intensive industry consultation which is beginning now. We expect that during the consultation period companies will come forward and explain the impact of this new policy on their businesses, for the government to understand and take it into account in the final design.

Decisions to invest are influenced by the tax regime in the location of investment. We understand that people have to rerun the numbers against this new policy. It is still policy, not yet legislation. The consultation process and exposure draft are still to happen. In any country from time-to-time major reform programs come in and are applied. This just happens to be here and now in this sector in Australia.

Advancement on legislation for the Carbon Pollution Reduction Scheme (CPRS) was recently delayed until after the next election. Various stakeholders across the resources industry and government have opined about the cause and effect of this decision. From a departmental point of view, how should this delay be interpreted?

An important part of the debate is that the national emissions reduction target has not changed as a result of this decision. The government’s position on Australia’s emissions trajectory – our goal – remains firm.

Still to be resolved are the mechanisms and measures that will be used to reach that goal. Indeed the emissions reduction goal is common between the government and opposition. Industry knows what the emissions reduction target is. What they do not know yet are the principal mechanisms, beyond the Renewable Energy Target, to achieve it.

What are the necessary infrastructure upgrades to keep pace with the demand of gas projects that are coming on stream?

This is a big issue for Australia. With the continuing expansion of oil, gas, and other natural resources, the provision of infrastructure and labor are critical issues that government is very focused on. Again it goes to the question of what is the role of government in facilitating a more efficient infrastructure provision arrangement and to what extent should common user infrastructure be developed. A particular focus is in Western Australia and Queensland where much of these industries are based. The Henry tax announcement included consultation with the states about the design and execution of a new infrastructure program, funded from the RSPT, to make those supply chains more efficient.

How is the department coordinating its efforts with other government entities for what many are projecting to be a skilled labor shortage in the resources sector?

The overwhelming focus of this issue happens to be in northern Australia, which largely means that the demands for labor are well away from most major cities. If you are familiar with the economic geography of Australia, most Australians live in a small number of cities close to the coast and most of these projects are a long way from these cities. So there is a mismatch in where the labor is to the project and the quantity and skills profile to achieve it. Right now there is a Taskforce working on this very question about meeting the needs for labor in northern Australia. The Government has set up the National Resources Sector Employment Taskforce to report to the Government by June 2010. The Department along with other relevant Commonwealth Departments, State Agencies, industry associations and unions are involved in the Taskforce. Government has made it a priority to look at the policies and measures needed to address skilled labor needs. Clearly, new policy and flexibility around immigration is central to the discussion.

How can Australia achieve the reputation of having one the safest offshore oil and gas industries with the best practices that other countries look to?

The Montara oil spill last September was indeed a very significant incident. Fortunately no lives were lost but we are learning the lessons of how it happened and how practices need to change, and whether any changes are needed to the regulatory regime. The government commissioned an inquiry into the Montara incident. It has just finished its public hearing stage and has yet to hand its final report to the government which I would expect to come in a matter of weeks. Minister Ferguson is waiting to hear the recommendations of that Montara inquiry before making any moves on further regulatory reform in the offshore oil and gas sector. Offshore and onshore projects are different jurisdictions and hence operate under different regulatory regimes. There are policy proposals for efficiency improvements in both regimes; particularly in a situation where the resources and the platform are offshore, the integrated processing facility is onshore, and the project has sections that operate under different regimes. Further reform in that area is going to be heavily influenced by the recommendations of the Montara Inquiry.

Australia is on track to become the world’s first operator of a floating liquefied natural gas (LNG) facility. What are the challenges that come with being a trailblazer without a precedent to follow?

The National Offshore Petroleum Safety Authority is looking very closely at the regulatory challenges associated with being the country with the world’s first floating LNG technology. Floating LNG is a very exciting prospect and has immense potential to exploit smaller fields without the massive overhead of a tie back to a single onshore facility. We are looking forward to seeing the first floating LNG project up and running.
Floating LNG has the potential to unlock smaller stranded gas deposits which were previously sub commercial thus further enhancing Australia’s LNG capability.

Do you see Australia as evolving into an energy superpower with increased roles and responsibilities on the global stage?

I have avoided using the term energy “superpower” and I do not think that it is a goal in its own right. Our role as a department is the efficiency, safety, and the long run development of the industry. It would be great if that puts us in the position of a “superpower.” But the issue at hand is economic growth and prosperity for Australia and the policy settings to achieve that. Australia has always been a resource and trade-oriented country that relies on foreign investment. Energy supply, resources trade, and foreign investment are not new to us. We have been on this pathway for many decades and a long involvement in resources trade with Asia has always been a critical part of our economy.
Yes, the growth of China and the increasing potential of LNG exports adds a new dimension to the Asia-Pacific region. But I do not see them as changing the fundamentals. They bring forward new challenges associated with the geography of these projects and the regulatory requirements around them. But they do not fundamentally change the pathway that Australia has been on.

The Australian Energy Resource Assessment that Geoscience recently published has two big stories. First is the assessment of the coal seam gas (CSG) resource in eastern Australia. Less than 10 years ago it was barely understood and not part of our demonstrated resources. Now it is such a huge resource that we have potentially five LNG projects in the pipeline to exploit CSG exports and make a significant contribution to domestic supply. Not too long ago companies were looking to pipe natural gas from Papua New Guinea to supply energy security for eastern Australia and now, a few years later, we are looking at exporting LNG from eastern Australia. It has been an extraordinary turnaround in our resource endowment. The other story in the Australian Energy Resource Assessment is the first attempt at quantifying the renewable resources in Australia – solar, wind, geothermal, and biomass.

But there are serious global competitors for all of this. We do not ‘own’ LNG exports to Asia. We do not treat this as if all of a sudden we have a new power. We have a new economic opportunity, that brings with it competition and we must work hard to ensure that we are competitive.

You were newly appointed as Secretary in April and the department itself, as it exists in it present structure, was only formed three years ago. How have both you and the department adapted to your new roles?

I was previously the Deputy Secretary for this department. During that time my understanding of the resources side of resources, energy, and tourism grew tremendously. But as secretary I have to get across all of it in much more depth. I worked in energy policy, energy security, and stationary energy policy for many years. There is a blurry distinction between energy and resources issues, but structurally within the department the resources side focuses on upstream oil and gas as well as coal, minerals, and uranium, while the energy side covers downstream gas and all of electricity. My policy background is more in downstream gas and electricity but I am very pleased to now be engaged across all sectors as Secretary.

Our structure as the Department of Resources, Energy, and Tourism has some subtleties to it with many people wondering why tourism is part of our portfolio. Our Minister, Martin Ferguson, wears two ministerial hats. He is the Minister for Resources and Energy and the Minister for Tourism. There are surprising synergies between resources, energy, and tourism which many do not expect. All three are very big export industries; each has a very big regional focus for generating employment and wealth in Australia; and all are reliant on foreign investment. The underlying policy themes between the three are reasonably common. The Minister spends a lot of time engaging with Asian, North American, and European countries that are all critical to us in those sectors.

Regarding the departmental change, the Australian system is very different to the American one. In the general sense, US executive departments are institutions with long lives. That is not the Australian tradition at all. While central departments have near institutional status, sectoral departments are often restructured. We are used to managing such changes with minimal disruption.

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