AUSTRALIA AND THE REGION - OPPORTUNITIES FOR THE PETROLEUM INDUSTRY

Address by The Hon Alexander Downer, MP, Minister for Foreign Affairs, to the Australian Institute of Petroleum, Adelaide, 16/7/97.

Jim Starkey, CEO, Australian Institute of Petroleum, Michael Cochrane, AIP's South Australian Chairperson, ladies and gentlemen.

I am pleased to be able to address you today because the oil and gas industry is such a critical one for Australia. I therefore welcome the Australian Institute of Petroleum's pivotal role in providing a forum for the discussion and exchange of ideas about this all important industry.

The rapid development of the industry in the second half of this century has been one of this country's more important achievements. Being able to supply from domestic sources a significant portion of our economy's oil needs has been a great boon to our economic development in recent times. We tend to think of this contribution as having been substantially by way of a reduced import bill. Increasingly, however, the petroleum industry has also become an important exporter as well.

The petroleum industry will face important challenges over the next few years. Like all Australian industries it faces the prospect of greater competition in a more globalised and liberal trading environment.

In addition there are the particularly difficult uncertainties for this industry posed by the impending decisions on approaches to climate change - expected to be taken in Kyoto in just a few months time. It is all the more important, therefore, that the petroleum industry be able to look for opportunities to trade wherever they lie. Fortunately many of those opportunities lie close at hand in our region.

Today I would therefore like to talk to you about the following issues of importance for our foreign policy as well as for the petroleum industry:

I would like to state unequivocally here once again that Australia's future lies in the Asia Pacific. The Government is committed to that future. We have made clear from the outset that Australia's top foreign and trade policy priority is closer engagement with the region.

It is in Australia's own interests that it look to make even stronger the bonds which tie us to the dynamic economies of the Asia Pacific.

Despite a few emerging constraints to the exuberant growth of the past two decades, average growth in the region will still easily outstrip average growth in the rest of the world for the foreseeable future. World Bank projections indicate that by 2020, four of world's ten largest economies - Japan, China, Korea and India - will be in Asia. Australia, Indonesia and Thailand will be amongst the next ten largest economies.

For its part, Australia is already fully enmeshed in the region's transformation. Over half Australia's total foreign direct investment goes to APEC countries. Three out of four of our export dollars are earned in APEC markets.

Closer engagement with the region is therefore of vital importance to Australia, but it is particularly important for the oil and gas industry. This is where its best prospects for export growth lie - but I will come back to that later.

A Record of Achievement

Since our election last year the Government has sought to put into action our commitment to closer engagement with the region. We have done this primarily through a series of pragmatic steps aimed at improving bilateral relations with our regional neighbours. Let me review briefly for you some of the highlights of what has been a record of achievement from day one.

The landmark Australia-Indonesia Development Area - or AIDA - was inaugurated successfully in May this year. AIDA represents a significant milestone in our bilateral relationship with Indonesia.

It is the first such sub-regional agreement Indonesia has entered into with any country outside of ASEAN. Importantly, AIDA is all about reducing barriers to business investment in Eastern Indonesia so as to bring development for Indonesia and create jobs for Australians.

Earlier this year, the Indonesian Foreign Minister, Ali Alatas, and I signed the historic Maritime Boundaries Agreement which concluded more than 25 years of negotiations between Australia and Indonesia. Again, beyond its importance to national security, the Agreement was also aimed at creating jobs and wealth for Australians by unlocking the potential resources of the seabed between Australia and Indonesia. This is, of course, particularly important for the petroleum industry.

We have also built on the important initial meeting with Dr Mahathir last year by delivering a new, revitalised Trade Agreement with Malaysia. This Agreement will over time bring greater access for Australian producers and benefits to Australian consumers.

Agreement was reached earlier this year that the Australian and Japanese Prime Ministers will hold an annual summit on bilateral and regional issues. This gives us an unprecedented opportunity to work with our largest trading partner at Prime Ministerial level so as to achieve positive economic outcomes for Australian firms and workers.

We have also redressed the longstanding neglect of South Asia through the highly successful `New Horizons' promotion with India last year and the `Year of South Asia' initiative for 1997, each of which is ultimately about promoting Australia's profile and products.

A Tolerant and Diverse Australia

Based on our experience in Government, and the closer relations we have been able to develop, I am glad to say that Asia is increasingly a place of common concerns and, importantly, joint aspirations. But when we look at our respect for the peoples of our region it is also important to look at ourselves.

Australia is passing through an historic transition from being a European outpost to becoming one of the most vital and exciting contributors to the Asia Pacific's growth. That is not easy for everyone in Australia to understand as is most notably evident in the views of the Pauline Hanson led One Nation Party.

The Hanson views, in the unlikely event that they were ever to become policy, would not only isolate Australia, they would cost Australia hundreds of thousands of jobs which flow directly from our economic links with Asia. Any such policies would create a level of unemployment unrivalled in the post-war era.

Do not think for one moment that we could ever practise the ethically wrongheaded anti-Asian policies advocated by Ms Hanson without provoking an economic backlash from the region.

It is the truth of this conclusion, and the increasing evidence of links with extremist groups, which has led to a continued decline in One Nation's support to less than 6 per cent - or to put it another way - to the rejection of Hanson by 94 per cent of the Australian population.

That basic tolerance is, I believe, the hallmark of Australia's extraordinary success as a multicultural country.

I do not want to say Australia is perfect in every way. But we have done as well as any in the world in building a strong, diverse and extremely tolerant nation. And I think we should be faster in recognising this success which is, I believe, the true majesty of Australia.

The simple fact is that closer engagement with the region is and must be Australia's first foreign policy priority, now and for the future.

PART TWO: Opportunities for the Petroleum Industry in the Region

The performance of Australia's energy exports to the Asia-Pacific region over the last decade exemplifies Australia's increasing commitment to this part of the world. Exports to Asia have more than doubled from AUD 4.0 billion in 1987 to over AUD 8.1 billion in 1996. Moreover, exports of oil and refined petroleum products to the region have grown at an average of 16 per cent per annum over this period.

The Asia-Pacific region is where there will continue to be major opportunities for export growth for Australia's oil and gas industries. According to International Energy Agency projections, primary energy demand in the Asia-Pacific region is expected to grow at a significantly faster rate than world demand. Over the period 1993-2010 the region's energy demand is forecast to grow by a total of 40 per cent compared with 34 per cent growth in total world energy demand.

Japan, South Korea and Taiwan have been the major destinations to date in the region but China and the ASEAN countries can also be expected to become major export destinations as their rapidly accelerating energy requirements continue to close the gap with the region's more developed nations.

Coal has been a major export to the region. Although the demand for coal looks set to decline this may well be good news for the petroleum industry as countries look to comparatively cleaner fuels. Certainly the rapidly growing numbers of cars in these regions will also mean a greatly increasing demand for oil. To give a mind-boggling example, some experts estimate that China may go from having only 350,000 cars on the road in 1994 to as many as 200 million by about 2020!

The Asia-Pacific is not simply about opportunities, however. There are challenges as well. ASEAN countries are increasingly involved in downstream processing enabling them not only to meet some of their own requirements but also to export. Their phenomenal projected growth rates should ensure, though, that demand for these products remains ahead of their production capacity for some time.

Prospects for growth in exports of LNG to the region are particularly good. Major users of LNG are looking to diversify their sources and Australia has a proven track record as a supplier. Moreover, LNG produces the least CO2 emissions of any fossil fuel and this will be an increasingly important issue with the Kyoto discussions looming at the end of this year.

The Government is therefore keen to facilitate the development of LNG projects based on our abundant natural gas reserves. It is up to the private sector, however, to determine the timing, markets, funding and scope of such developments.

PART THREE: Our Approach to Kyoto

All here will be aware of the extensive publicity that Australia's approach to the climate change negotiations has been getting. It is a very high profile global and environmental issue for the Government. It is a challenge for Australian diplomacy as we approach the Kyoto meeting in Japan in December and a matter of paramount economic concern to us all.

If the negotiations go against us it would potentially be very harmful for our domestic economy and our international trade. Specifically - this would affect our capacity to refine petroleum products and LNG and to export them to the region.

Were the EU's proposed flat rate cut - 15 per cent on 1990 emission levels by 2010 - imposed on us - ABARE has estimated that the cumulative loss to the Australian economy would reach AUD 150 billion by the year 2020. Resultant job losses would run into the tens of thousands.

While some may argue about the seriousness of this we believe it is significant and disproportionate relative to others. Looked at another way, we would end up losing more than we gained in the hard-fought Uruguay Round outcome. That is a price in lost income and lost jobs that Australia simply cannot afford to pay, nor should we have to.

We can, therefore, only agree to a target at Kyoto if it were to allow reasonable growth in our greenhouse gas emissions. But the challenge is twofold: to contribute constructively to dealing with the problem of global warming; while protecting Australia's interests.

The Government has made every effort at home and abroad to promote greater understanding and acceptance of Australia's position. Our case is based on the fact that ours is an especially energy-intensive economy. We have a rapid population growth relative to other OECD countries. Our trade linkages with developing economies, particularly in East Asia, are strong and involve substantial quantities of energy-related exports

Australia has therefore proposed a "differentiated targets" approach. This is, in fact, nothing new - we simply want to see extended to all participating developed economies the system the EU has proposed for itself and the "Economies in Transition". We want to see "equality of effort" - targets should not inflict disproportionately great economic pain on some economies.

Moreover, the EU's proposed "flat rate" target is unrealistic, if not disingenuous. The EU's performance to date would indicate it could not even achieve that target itself.

Without wanting to raise any premature hopes, we are encouraged by some signs that our efforts are starting to have some impact. The Denver Summit of the world's major economies, as well as the so-called "Earth Summit II" in New York did not result in endorsement for the EU's proposal, or even a flat-rate target of any kind.

The New York call for "realistic and equitable" greenhouse gas emission targets was very heartening. This is exactly what Australia is seeking.

There is, of course, still a long way to go and the negotiations will be very difficult. Moreover, we need to recognise that, whatever the nature of the agreement reached at Kyoto, action over the long term to address greenhouse gas emissions from the energy sector will have an impact on many established markets for Australia's energy and energy-intensive exports.

It is important to state, however, that Australia does not want a "free ride". We recognise the potential severity of the problem. What we are looking for is a workable system which will allow us to contribute according to our means - without taking upon ourselves the sort of crippling economic costs which the EU's proposed approach would inflict on us.

We already have runs on the board in addressing the problem in Australia. A number of reforms and measures to reduce the growth in our emissions have already been taken.

One of the Government's current major initiatives, known as the Greenhouse Challenge, involves more than thirty of our largest enterprises covering mining, manufacturing and services, a number of whom are, of course, here today. Together they account for more than 45 per cent of Australia's industrial greenhouse gas emissions for their sectors. By the year 2000 they aim to reduce their projected aggregated emissions by 14 per cent below the level they would otherwise have been.

I announced last week an initiative aimed at carrying the community along with us in our approach to these negotiations. We will conduct an analysis of the range of implications of possible Kyoto outcomes and the impact these would have on the Australian economy. The results are to be compiled in an issues paper, to be released in September, that will be the basis for further community consultations.

We will be informing State and Territory Governments, industry representatives, non-government organisations and community groups of our negotiating position compared to others who will be at Kyoto.

I urge you therefore to make the most of the process.

Conclusion

To conclude, I would simply like to reiterate that Australia's closer engagement with the region is our highest foreign and trade policy priority. This helps Australian business take advantage of the opportunities in the fastest growing region in the world.

Moreover, it will assist the oil and gas industry in seizing its chances in the changing market conditions post-Kyoto. The Government is making every effort in the region and in the climate change discussions to give Australian business a solid platform for success.

I applaud the efforts of the Australian Institute of Petroleum in fostering discussion of these important issues. I encourage you to continue to play this vital role in encouraging the exchange of ideas and in sharpening the focus of industry thought on its future directions.

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