VZCZCXRO3809
RR RUEHPT
DE RUEHBY #0758/01 2290243
ZNR UUUUU ZZH
R 170243Z AUG 09
FM AMEMBASSY CANBERRA
TO RUEHC/SECSTATE WASHDC 1926
INFO RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUEHKO/AMEMBASSY TOKYO 3653
RUEHWL/AMEMBASSY WELLINGTON 0080
RUEHBJ/AMEMBASSY BEIJING 9567
RUEHUL/AMEMBASSY SEOUL 9885
RUEHJA/AMEMBASSY JAKARTA 5506
RUEHDN/AMCONSUL SYDNEY 4862
RUEHBN/AMCONSUL MELBOURNE 6610
RUEHPT/AMCONSUL PERTH 4875

UNCLAS SECTION 01 OF 02 CANBERRA 000758 
 
STATE FOR EEB/ESC/IEC/ENR MONOSSON 
DOE FOR SKEER 
USDOC FOR 3132/USFCS/OIO/EAP/JRULAND 
USDOC FOR 4530/MAC/EAP/OPB/GPAINE 
 
SENSITIVE 
SIPDIS 
 
E.O.  12958: N/A 
TAGS: ENRG EINV AS
 
SUBJECT: PEAK BODY VIEWS ON OIL AND GAS INDUSTRY DOWN UNDER 
 
¶1.  (U) SUMMARY.  Australia has an expanding LNG sector (see Perth 
septel) and contracting oil sector.  The Australian Petroleum 
Production and Exploration Association (APPEA) represents both and 
has argued for increased government incentives and regulatory 
simplicity to encourage further oil exploration and also 
successfully lobbied for LNG to be included in the Carbon Pollution 
Reduction Scheme.  It holds that expansion of gas as an energy 
source could lower Australia's carbon emissions.  END SUMMARY. 
 
A RAPIDLY CHANGING INDUSTRY STRUCTURE 
------------------------------------- 
 
¶2.  (SBU) The Australian Petroleum Production and Exploration 
Association (APPEA) is the representative body for the oil and gas 
industry and its membership includes many large U.S. companies. 
Over the last five years, the gas and LNG sector has become the 
centerpiece of investment, while oil production has declined.  APPEA 
CEO Belinda Robinson (who sits on the government's national energy 
security committee and CSIRO's Energy Committee) is a key industry 
advocate for the industry and spoke extensively to econ Counselor 
and econoffs on July 22.  Australian LNG is primarily for export, to 
Japan and other economies in the region, while gas is used for 
domestic energy and could be used as an input to produce urea and 
fertilizers.  LNG is a major growth opportunity for Australia - with 
an estimated $220 billion in planned projects.  Australia will be a 
world-class LNG producer by the next decade and this has important 
implications for energy security in key regional players like Japan, 
Korea and the PRC, all of whom are increasing their consumption of 
Australian LNG. 
 
THE OIL AND GAS INDUSTRY 
-------------------------- 
¶3.  (SBU) Most oil and gas is sourced from Commonwealth waters 
adjacent to Western Australia (70% of oil and 50% of gas 
production), followed by Victoria (20% of oil and gas) and other 
states.  Tax revenue from the oil and gas sector (average A$6 
billion a year, last 5 years) is significant and should give the 
industry more lobbying influence than it has.  Most tax revenue from 
the offshore oil and gas sector goes to the federal government 
(company tax 47%, royalties and excise 28%, petroleum resources rent 
tax 25%) and state governments benefit mainly from investment 
expenditure and employment creation (the future development of the 
onshore coal seam gas sector in Queensland will more directly 
benefit state government revenue).  Given this strong revenue 
contribution, it is surprising that the industry is often not 
consulted over policy decisions of the Rudd government.  In 2008, 
the sudden elimination of a 30-year tax exemption from excise 
taxation for crude oil for the North-West Shelf provided "an easy 
A$2.5 billion" in extra revenue over four years -without much 
industry dissent (although Woodside's CEO Voelte protested 
vociferously).  Robinson told ECONOFF that U.S. oil and gas 
companies are reluctant to actively lobby for changes in Australian 
energy, climate change or taxation policy.  This is despite a 
worsening investment climate due to regulatory complexity and 
exceptional development costs for oil and gas projects in Australia 
Qexceptional development costs for oil and gas projects in Australia 
- one of the highest in the world.  Robinson noted that even BHP 
Petroleum, a major local oil producer, has not actively lobbied the 
government, or with much success on recent tax increases, the higher 
costs of the CPRS or the apparent threat of a tougher policy on 
retention leases. 
 
AN INCREASING OIL AND GAS TRADE DEFICIT? 
---------------------------------------- 
 
¶4.  (SBU) Australia and its large offshore subsea territories are 
regarded as a mature oil prospect, but with amazingly rich gas 
reserves.  APPEA has called for more exploration incentives (such as 
flow-through shares) due to the low incidence of petroleum 
discoveries around Australia, dwindling supply of reserves and the 
energy trade deficit.  APPEA has emphasized Australia's deficit 
position in trade in oil and gas since 2003-04, which has been 
worsening as domestic production falls (see table). 
 
Table 1: Australian Oil and Gas Trade Deficit, 2008 (A$ million) 
 
 
Category            Exports        Imports        Deficit 
 
CANBERRA 00000758  002 OF 002 
 
 
 
 
Crude oil           11,382         18,122         6,740 
LNG                  8,708         -              - 
LPG                  1,228            483           +745 
Products               928         16,829        -15,901 
Bunkers              1,691         -              +1,691 
Total               23,937         35,434        -11,497 
 
 
Note: Bunker oil is heavy residual oil used as ship fuel oil. 
Source: APPEA. 
 
APPEA has sought to reduce regulatory barriers and to increase tax 
incentives for exploration.  It is a strong supporter of 
flow-through shares, would allow investors to claim up-front tax 
concessions when investing in smaller exploration companies (which 
by themselves cannot use tax concessions until they earn income) 
Resources Minister Ferguson has promised to implement a flow through 
scheme but there is no clear timetable.  The Henry Review on 
Taxation is now considering the scheme - but APPEA's Robinson is not 
optimistic it will endorse this approach. 
 
CLIMATE CHANGE POLICY AND OIL AND GAS 
------------------------------------- 
 
¶5.  (SBU) Oil and gas account for over 50% of primary energy 
consumed in Australia (oil 35%, gas 19% in 2007-08) and gas's share 
is expected to reach 24% by 2030 despite the federal government's 
reluctance to endorse LNG as a cleaner fossil fuel (40% lower than 
coal).  APPEA has emphasized the lower carbon emission of LNG but is 
very critical of the Mandatory Renewable Energy Target legislation 
because it will force the use of higher cost wind and solar 
renewable energy.  This, APPEA fears, will squeeze out the use of 
low-emissions LNG because power generators and others turn to coal 
instead as the lowest cost but most carbon-intensive fuel to meet 
the remaining 80 percent of Australia's power needs.  APPEA has 
claimed LNG is underestimated as a clean fuel and should receive 
more recognition under the government's Carbon Pollution Reduction 
Scheme (CPRS)  - and not have to suffer from cost imposts as a 
result of the scheme.  Robinson said carbon taxes would exacerbate 
already high costs in the oil and gas industry.  Woodside's CEO 
Volte has claimed his company will reconsider future investments and 
possibly withdraw from Australia entirely if ETS based costs are 
imposed.  Robinson told econoff she is cautious about the 
credibility of such threats as many companies have nevertheless 
endorsed future projects despite the CPRS and extra tax imposts - 
with the government probably willing to lose a few projects if most 
go ahead.  In her view, companies are typically relieved that the 
CPRS costs are not even higher and the decision of Chevron to 
approve the massive Gorgon project is just a formality (likely to be 
announced end-August) and a positive signal for arguments that 
emissions trading liability costs will be modest. 
 
¶9.  (U) COMMENT.  The Australian oil and gas industry is undergoing 
landmark changes as it changes structure and expands as a major 
world LNG producer.  The extent of this transformation depends on 
the flexibility of government policy in areas such as tax policy and 
the CPRS.  While the positive outlook for world oil and gas prices 
and regional energy demand continues to underwrite the sector's 
Qand regional energy demand continues to underwrite the sector's 
future prospects, there are emerging concerns that the investment 
climate in this sector may be weakened by rising costs and 
regulatory risk.  END COMMENT. 
 
CLUNE