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Interview

with Norman Moore, Minister for Mines and Petroleum; Fisheries; Electoral Affairs, Government of Western Australia

10.08.2010 / Energyboardroom

The Government of Western Australia (WA) is aiding the country’s ambitions to become a leading regional and global supplier of liquefied natural gas (LNG) through the development of the James Price Point Precinct in the Kimberly region to service LNG projects in the Browse Basin. Has the state government historically taken a hands-on approach to aiding the oil and gas industry, or is the James Price Point Precinct a new recognition of the tremendous opportunities offered by LNG?

Governments in WA have always taken the view that the resources industry is fundamental to our economy. WA is very much a resource-based economy and given our small population we have very few other industries. We seek every opportunity to promote the state and encourage investment in WA. Whenever a company expresses interest in exploring in WA we go out of our way to make sure they feel comfortable and help them at every possible chance once they make the decision to go into production. That may mean working with them through a State Agreement Act, as we have with the Gorgon Gas Project, which sets out the conditions by which they can operate in WA. State Agreement Acts being acts of Parliament, give companies security in knowing that operations have the ratification and support of government. We work hard with and for resource companies because we know they are going to provide a great benefit to the economy of WA.

There is a lot of infrastructure that needs to be put in place. We are investing heavily in Karratha where the Burrup Peninsula is located near the North West Shelf Venture (NWSV). We will put in the necessary infrastructure at James Price Point in the Kimberley to develop Browse Basin projects and a similar LNG plant in Onslow.

What do you consider the competitive advantages of WA over neighboring gas producing countries such as Indonesia and Malaysia who are also vying to be a regional export hub?

Australia has the great advantage of being a country with minimal sovereign risk for investment. Companies realize that if you do business in Australia there are certainties in what you can and cannot do. We try to help companies understand that once you have a deal in place in Australia it will remain for the duration of the project.

There is not a lot that governments can do other than tweak the taxation system to make it cost efficient for companies to operate here. The State Government of WA does not obtain revenues from offshore petroleum other than for the NWSV. The revenues for all other projects go to the Commonwealth Government. I would expect that the Commonwealth Government would give consideration to tax concessions if they felt there was a need to enhance Australia’s competitiveness.

Will the upcoming Gorgon Gas Project, because of its scope and significance, be shared between State and Commonwealth or fall under a unique tax regime much like the NWSV?

Tax revenues from the Gorgon Gas Project will go to the Commonwealth. Gorgon will be part of the Petroleum Resource Rent Tax (PRRT) regime which was established in the 1980s after the NWSV was put in place. Because its gas is in Commonwealth waters, revenues go to the Federal Government. It is a sticking point for the State Government since we are actively involved in providing support to Gorgon. But at the end of the day we will not get any return from it in terms of taxation. The benefits for the state will derive from job creation and payroll taxes from people working in WA on Gorgon related ventures. In general it is important to have these projects in WA because it is part of our economy despite not necessarily getting a direct return from them.

Many of the LNG projects in WA are following similar timetables for final investment decision, construction, and production coming onstream. With so much gas hitting the market at the same time are there concerns that too much supply will be chasing too stable demand?

I think there are some concerns around that at the present time. But I see demand, particularly Chinese demand, growing. Certainly one would expect Indian demand to surge in due time and if the Japanese economy can get back into a growth mode there will be resumed high demand from them; the same for South Korea. The United States was considered a potential market for our LNG not too long ago. Indeed there was a lot of work done for an unloading facility in California. But with tight gas and shale gas becoming readily available, that market seems to have dried up for the time being. The advice that I have is that most of the projects going through the present pipeline do have markets down the track. Wheatstone is locked into contracts with Japanese buyers and Gorgon has confirmed its buyers as well. Ultimately the companies will make the decisions as they are the ones spending money on the basis of economic return while governments can but hope they will spend their money here. We are subject to the vagaries of world markets.

Where do you foresee the supply of labour coming from and how is the State Government assisting in the process to fill project labour needs?

There are two aspects with regards to labour. First is the construction process when there are significant numbers of workers. The second is the production phase when the number of workers is relatively low. There will be some issues in Australia particularly in WA and Queensland in the mining and petroleum industries over the coming years assuming that the super tax on mining does not drive investment away. We are working very hard in WA to provide opportunities for people to get apprenticeships and traineeships to learn the skills to work in these industries. We have a new Department for Training and Workforce Development which has been separated out from the education department. Its core focus now is to determine industry training needs and direct people into those courses. We are working with industry to speed up this process so workers will be available when required, bearing in mind that a lot of the jobs require very specific skill sets.

We will need to look at further overseas immigration and that will be an issue for the Federal Government. There is probably a need for unemployed workers from eastern states whose economies aren’t growing as fast as WA to come here. An interesting development now is Qantas Airways running regular flights from Karratha to Brisbane, Melbourne, and Sydney. It presents opportunities for oil and gas industry workers to work two weeks on, one week off, and fly home in the interim. That happens quite frequently between Karratha and southwest Australia. It would be very beneficial for the country if more of that occurs from other states where unemployment is higher.

How will that impact urban development in the northwest? As industry draws capital and labour will new cities emerge in that corner or will the commuter culture continue?

We are investing a lot of money in Karratha on what we call the “Royalty for Regions Program” to improve the level of amenities so that it becomes more attractive for people to live there. We provide high quality housing, air conditioning, and facilities such as theatres and restaurants to suit a general lifestyle. Similarly, we are investing a lot in the Pilbara to improve those towns. However, the bottom line is that with number of employees you need, particularly in construction, there will always be the fly-in and fly-out system because you do not need too many workers after the construction phase.

With respect to the Browse and James Price Point projects, those are located approximately 50 kilometers from Broome which is a very attractive and touristic place. It is a different climate from the Pilbara and more appealing for people to live. So while there will be a lot of fly-in and fly-out for James Price Point, assuming it goes ahead, I believe that during the production phase quite a large number of staff will live in Broome and commute on a daily basis. Bringing another industry (LNG) to Broome and several hundred more families would be great for its local economy.

We are talking a lot about offshore exploration. Is WA making the most of its potential for onshore hydrocarbons?

There has been a fair amount of exploration taking place over time, particularly in the Canning Basin – a land extension of the Northwest Shelf in the Browse area. I don’t think there has been enough or as much exploration as we would like to see. Some companies are drilling there but no one has found anything significant.

Down in the Perth Basin, companies have found conventional gas and are continuing exploration for tight gas. Latent Energy recently imported a very large drilling rig from the US to explore north of Perth for tight gas.

Similarly down in the south, there is believed to be the potential for tight gas of approximately 12 tcf. If that could be made to work it would be extremely beneficial for the Western Australian economy. Most of WA’s population lives in the southwest near Perth but majority of the gas comes from the Northwest Shelf and is piped down. That makes gas a very strategic asset but also has a certain amount of vulnerability for our energy security. If we had gas in the southwest where most of our people and businesses are located it would be very advantageous for energy security.

The deeper interior region of WA is in fact mostly sand. The problem there is that the geology of the land is not obvious on the surface. We are spending a fair bit of money on aeromagnetic technology to survey the central part of WA. That will give us indications of what exists below the sand so we can convey those prospects to the companies and encourage the taking up of mining tenements.

We also have a co-funded drilling program where we offer up to $200,000 per project to companies wanting to drill in frontier areas which has been quite successful. Because there are significant gas finds in the northwestern part of the state I believe there is less of a pressure for companies to go onto land to explore. There are additional regulations that they have to face when drilling on land such as national parks, aboriginal heritage, and native titles that they don’t have to contend with when drilling offshore.

The Federal Government recently proposed the creation of a single National Offshore Petroleum Authority. The State of Western Australia has publicly stated its opposition to this recommendation so as to not concede its shared oversight of Commonwealth waters and sovereign oversight of State waters. Can such a proposal push through against the opposition of the country’s largest state and most influential voice in the petroleum industry?

To understand our position it helps to take a brief look at the history of offshore jurisdiction in Australia. In the 1970s a country’s offshore jurisdiction was determined to extend 200 miles out to sea. Australia decided at the same time, through the Commonwealth Constitutional Settlement, that state governments would have their own jurisdiction of their waters three nautical miles out to sea. Because the Commonwealth had no expertise managing offshore ventures prior to this agreement, it put in place a system called a Joint Authority Arrangement so that the state and federal ministers made joint decisions on how to manage and allocate tenements. The state became the designated authority and did the actual work on the ground. Our department is responsible for the administration of all these tenements.

That system has worked quite well, in my view, over many years. The current Commonwealth Government has decided that they want to have a single national offshore petroleum regulator to completely manage all offshore activities in Australia, including state waters. That would mean that the State of WA would no longer have any involvement in the host of offshore acreage within its jurisdiction. Because it is a significant part of our economy, we have expressed our disagreement to the Commonwealth Government. We think the current system works and we want to be involved in it. If you have a gas field offshore near WA, nine times out of ten you need an LNG plant onshore. There needs to be a good understanding between the offshore and onshore components of a project. If we are not involved in the offshore part of it, we are at a serious disadvantage with respect to what goes on onshore.

Conversely, if we pull out of joint regulation of Commonwealth waters and just stick to regulating State water, what you will finish with is one statutory authority managing Commonwealth waters and one authority managing State waters; with two regulatory systems it would be worse than the current system. We want to leave the current system as it is. Ultimately there is no way that the State of WA is going to opt out of the management of its offshore petroleum industry. It is ludicrous to think that people living in the far eastern and southern parts of Australia, who probably do not know the geographic specifics of WA, could manage our offshore petroleum.

To be political, the Federal Government is a policy entity more than anything else. It does not do anything on the ground. It does not have workers managing offshore petroleum projects, conducting geological surveys, or running schools or hospitals. Over the last couple of years they have tried very hard to build schools and provide insulation for houses, which have been absolute disasters. To give them control of the offshore oil and gas industry would be very problematic.

How is the State of WA fighting back to defend its core industries against the new taxes proposed by the Commonwealth Government?

There are two issues. One is the PRRT currently in place which applies to the Gorgon Gas Project and delivers tax revenues to the Commonwealth. That is an issue which has been around for a long time and needs to be sorted out. In my view, the State of WA should share the PRRT because there are no royalties paid to the states from any of those gas deposits.

With respect to the mining industry, presently companies pay a royalty to the State Government. The royalty is not a tax. It is in fact the price a company pays to access the minerals owned by the State of WA.

I compare the process to a person who owns a restaurant. When you start a restaurant you have to buy all the ingredients to make the food that you sell. You have to pay for the ingredients before your business gets started, not when you start making a profit. With respect to minerals, if you want to mine in WA you pay the State Government a royalty which factors into your cost of doing business. Once you make a profit you pay a standard company tax to the Commonwealth Government. The mining industry pays twice: first, the access fees to the State which ranges from 2.5%-10% depending on the stage of development the minerals are in; second, a tax on profits.

What the current Labor Federal Government is trying to do is stop the states from raising royalties and charge its own resource rent tax payable to the Commonwealth. What they did not do was ask the states if they were prepared to give away their royalties. We were not prepared and why should we be? The minerals belong to the state of WA. We are a sovereign entity and a sovereign government that is not about to keep giving away our revenue sources to the Commonwealth and become completely dependent on the Commonwealth for whatever we do with the revenues we receive.

The State Governments said we will not give away our royalties which led the Commonwealth Government to propose its ridiculous 40% super tax on what they describe as being excess profits. Excess profits are defined as anything greater than the current 6% government bond rate. Essentially they are saying that resource companies will pay a 40% tax on anything above 6% profit. As the Premier quite rightly said, if the return on your investment is 6% and you are going to pay excess tax on anything above that, why don’t you just buy government bonds and sit home and watch television? Why take the huge risks associated with the mining business? It costs a lot of money to drill exploratory holes for oil and gas. More often than not you do not find anything.

I have been involved in the mining industry all of my life. My father worked in the nickel and gold industry, I have represented the mining areas in Parliament for over 30 years, and this is my second tenure as State Minister for Mining and Petroleum. One thing I know about mining is that it attracts particular sorts of investors who are willing to take risks. They are prepared to accept the fact that by taking a risk they might lose all their money or make a lot of money. It is a risky business and people expect a better than 6% return to be compensated for the risk.

We are delighted that the federal opposition has denounced the super profits tax in the Parliament and has promised to rescind it in government if it passes. The Commonwealth Government keeps telling everyone that regardless of all the taxes, the country will still grow 5% and that the resources industry will fund the improved economy enabling them to eliminate the budget deficit in three years. It is all based on spin and lies. Minister Ferguson and I have a good relationship and we discuss things regularly. But the Federal Ministry for Resources, Energy and Tourism did not consult me or the other state energy ministers before proposing this tax. The Commonwealth has the tendency to think that everything is in the national interest, when in fact they fail to recognize that each state is its own sovereign entity.

A popular slogan amongst Texans in the United States is “Don’t mess with Texas.” If Perth is “the new Houston” as some oil executives have referred to it, the same fighting spirit certainly exists here as well.

We have a very strong and parochial view in WA that we know what we are doing when it comes to resources. This is no criticism, but federal bureaucrats are not exposed to the resources industry. The economy of eastern Australia revolves around manufacturing, financial services, and high-tech industries. Mining is a small player in those parts of Australia. In WA, we have a particular expertise in managing mining, oil, and gas. When eastern Australia starts telling us how we should manage things and additionally that they will take our money and dictate how much we can have back, then Western Australians get very angry. Indeed in 1934 we had a vote to secede from the Commonwealth with 68% of the population voting in favor of secession. Clearly it did not come to pass, but the secession sentiment has been alive and well in WA since we joined the Commonwealth in 1901.

Are there any final messages you would like to convey?

The most important thing is that we will bend over backwards to encourage investment in WA. Our predecessors in State Government during the last resources boom took the view that we had too much business producing too much pressure on the state and so did not go out to encourage business. Inpex chose to go to Darwin for its LNG facility because the previous government could not find a site for them on the Kimberly coast. The first thing we did when we came into government was find a place in the Kimberly for LNG activity which ultimately led us to James Price Point. Admittedly it has caused some controversy. But if you make decisions like that people will recognize that you are serious and they can invest here with confidence. That is what we are all about. Our biggest impediment is that the Commonwealth Government doesn’t seem to understand that whether it is oil and gas or mining it is a highly competitive and very risky business.

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