Rudd Government Must Dig Deeper To Develop A Long-term Resource Strategy

The Age

Saturday June 14, 2008

Allan Fels & Fred Brenchley

Australia has huge mineral and energy resources, but current policies are keeping them in the ground.

AUSTRALIA, the Rudd Government likes to remind us, is an energy superpower with abundant supplies of coal, gas and uranium. But for how long?

While self-anointed energy superpower status might be little consolation to motorists socked by ever rising petrol prices, it would be even less so if our current resources bonanza stopped propping up the economy in the face of a global slowdown.

Australia, however, not only faces long-term energy and resources supply problems, but is also losing share in an increasingly competitive global market.

Australia's major base metals exports lost global market in the five years to 2007, according to a recent Access Economic report for the Minerals Council.

"That has already cost Australia's economy dearly," says Access. "Had we maintained our global market share between 2002 and 2007, then at today's prices Australia's miners would have earned another $17 billion, the equivalent of 1.6% of nominal national income in 2007."

The good news is that massive recent investment should restore some lost market share, while the Infrastructure Australia taskforce under Rod Eddington will prioritise work to erase the supply bottlenecks that have damaged our trading reputation.

Even so, the effort needed just to hold the line in Australia's share of fuelling Asia's industrial revolution is immense. Coal and iron ore volumes will need to lift by 211 million tonnes and 328 million tonnes respectively above their 2007 levels - treble the lift in the five years to 2007.

If we continue to lose market share, the economy could be $91 billion worse off by 2020, according to Access. But if we can increase market share we could be $120 billion better off.

With such high stakes it is small wonder that Resources and Energy Minister Martin Ferguson is considering a substantial financial fillip for both exploration and project development.

Labor came to office promising a "limited and capped" flow-through share scheme for petroleum, which transfers tax deductions of exploration companies to their investors, vastly stimulating exploration. Ferguson intimated at a recent Minerals Council conference that the scheme might be extended to mining companies.

Many problems remain. Flow-through schemes only work for small companies, but what is the cut-off point? And can tax rorting be stopped? One solution would be to limit the benefit to lower tax rates.

Even so, a flow-though share scheme will only provide a limited lift to small and medium explorers. Australia's oil reserves are declining, yet less than a quarter of our 50 hydrocarbon basins have been explored. That task became much greater in April when the UN gave Australia jurisdiction, including oil and gas rights, over an additional 2.5 million square kilometres of outer continental shelf.

Ferguson says he is now looking at a "broader range of incentives to promote exploration". The industry would like a 175% investment allowance deduction for frontier area exploration.

Separately, the Henry tax review has been tasked with examining the tax barriers to getting big new gas projects up and running. The industry wants accelerated company tax depreciation to compete with attractive overseas rates.

Between flow-through share schemes and investment allowances, the challenge for Ferguson is to lure the exploration industry into risking budgets in Australia rather than abroad. When it comes to new hydrocarbon areas, Australia has a reputation for gas but not oil, attracting only 1% of global exploration spending.

There's plenty of global investment available for Australia's capital-intensive resources sector, yet Canberra seems determined to keep its distance from cashed-up sovereign wealth funds (SWFs).

The OECD, however, sees SWF's as reliable, long-term, commercially driven investors and "to date" a source for global financial stability.

The Rudd Government needs to be watchful in interpreting its more wary five principles of dealing with SWFs, announced in February, that it maintains Australia's attraction for foreign investment. Here's one area where Australia should really be acting as a superpower, developing a resource security strategy rather than political stunts like FuelWatch and $35 million on hybrid car subsidies.

© 2008 The Age

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