Banning new fossil fuel extraction: what will it cost us?

Every year the federal government releases new offshore exploration acreage, and month after month the National Offshore Petroleum Safety and Environmental Management Authority (NOPSEMA) approves new offshore seismic testing and drilling applications.

Extracting yet more oil and gas clearly is a bad thing from a climate perspective, but just how much economic benefit would Australia miss out on if we ban all new fossil fuel extraction projects?

The story is similar for both onshore and offshore fossil fuel extraction, but with two key differences. State and Territory governments have the primary power to approve or ban new onshore coal, oil, and gas extraction projects in their own jurisdiction (includes coastal waters within three nautical miles off the coast), whereas approvals for new offshore oil and gas projects in Commonwealth waters are under federal jurisdiction. Accordingly, the No More Bad Investments (NMBI) campaign has state-specific campaigns calling for state governments to ban new fossil fuel extraction projects (and other new climate-damaging projects) and a separate petition to the Senate calling for an offshore oil and gas ban.

The Petroleum Resource Rent Tax (PRRT) applies to all new oil and gas extraction projects, but the second key difference is that onshore (and some older offshore) projects also pay state royalties, whereas new offshore projects pay no royalties. That doesn’t make a huge difference since state royalties do not bring in as much money as you might expect, but it does mean that we are giving away new offshore oil and gas completely free of charge to the many oil and gas companies who currently pay no PRRT.

State royalties from ALL existing coal, oil, and gas extraction projects Australia-wide, after subtracting government subsidies given to them, benefit us to the tune of around $3.8 billion per year (enough for maybe two new hospitals), of which around $2 billion is from oil and gas. That suggests that the royalties we would ‘lose’ if we ban all NEW fossil fuel extraction projects would be counted in mere millions, not billions.

According to corporate transparency data published by the ATO, there were at least 39 fossil fuel companies that paid no income tax in 2015/16 despite a combined income of almost $72 billion. The majority of those companies also paid no tax in the 2013/14 and 2014/15 years.

New fossil fuel extraction projects would generate some economic benefit from jobs, payroll tax, and local procurement of goods and services, but the same applies to new climate-safe projects. Creating new jobs is a poor reason for allowing new climate-damaging projects.

Nor do we need new fossil fuel extraction projects to keep the wheels of industry turning or the lights on at home. We already export around 75% of the coal and gas we extract. (Oil is a bit more complicated. We export crude oil and import refined petroleum products because we lack sufficient refining capability.)

Is it possible that the politicians who prioritise short-term economic gains over proactive environmental policy have simply not looked at the financial figures?

Offshore oil and gas flies under the radar

Almost nobody seems to notice most new offshore projects, possibly because they are out of sight and out of mind – not in anyone’s immediate backyard. There are campaigns to stop drilling for oil in the Bight and seismic testing off the coast of NSW, but new projects being planned or currently underway off the shores of WA, NT, and Victoria seem to get little government or public scrutiny.

It appears that NOPSEMA ignores negative climate impacts when approving new offshore projects, and that the federal government fails to question whether or not they are of any public benefit. Do we need new offshore oil and gas extraction projects? Will they benefit our economy?

The gas shortage myth

We don’t need any new gas extraction to guarantee domestic supply. We already extract well over twice as much gas as we use here. Domestic gas usage is falling and existing sources are nowhere near depleted. The ‘east coast gas shortage’ is a myth (see analysis by Tim Forcey & Dylan McConnell and Bruce Robertson). All gas from new projects (or an equivalent extra amount from existing projects) will be exported.

Figure 1. Total annual gas consumption by sector, 2016 to 2036 (Neutral economic scenario). Source: AEMO 2016 National Gas Forecasting Report.

We also get next to no financial benefit. Many recent and pending offshore gas projects are by foreign-owned companies, like ExxonMobil, Shell, Inpex, ConocoPhillips, and Chevron, who currently pay no income tax and no Petroleum Resource Rent Tax (PRRT). It’s their shareholders who get all the profit from selling the gas.

As a Senate enquiry late last year concluded, we are practically giving away offshore oil and gas because the PRRT is set up as a ‘super profits’ tax. No PRRT is payable until all exploration, extraction, and production costs are recouped. In the meantime PRRT ‘credits’ compound over time and offset any income tax that would otherwise be payable. Since offshore projects pay no state royalties, Australia literally gives away offshore oil and gas for the first decade or more until PRRT starts to be paid (if it ever is). And it is given to companies that don’t even pay income tax!

Onshore gas projects do pay state royalties, but current PRRT settings and PRRT credits work in the same way as for offshore projects, meaning that most companies involved in onshore gas extraction also pay no PRRT and no income tax.

Since gas extracted from new projects will be exported, the resultant climate damage is not reflected in terms of meeting carbon reduction targets. Under international carbon accounting conventions, carbon emissions from exported fossil fuels are not counted as part of Australia’s carbon footprint. Even so, we disregard those emissions at our own peril.

The good news is that it makes really bad news!

Imagine the public outrage if mainstream media started reporting that we don’t need any new gas extraction for domestic use, that all of the new gas will be exported, and that Australia receives little or no revenue from allowing (mostly) foreign-owned companies to sell ‘our’ gas.

Part of the social licence for new projects stems from knowing that, despite the climate impacts, we currently still need to use some fossil fuels while we transition to a renewable energy future. Seismic testing off the NSW coast and new drilling plans off the Victorian coast, for example, are being touted as a way of easing the supposed east coast gas shortage. Even if some gas from those proposed new projects is used within Australia, that will simply free up other gas for export. If the public knew that the entire amount of extra gas production from all new projects will be exported, the social licence for any new gas extraction proposal would vanish.

One particularly stark example is the enormous new Inpex (Japanese) Ichthys project. They have already forward-sold all the gas for the first 15 years to Asian LNG customers, and will only supply gas to NT in an emergency. Did NOPSEMA or the Treasury ask Inpex what they planned to do with the gas before that project was approved?

The public might assume that any oil resulting from drilling in the Bight would reduce the amount of oil products we import, but the Statoil website gives no indication of its plans. Regardless of whether or not the oil proves to be suitable for refining in Australian refineries (it might not be), chances are Statoil will sell the oil to the highest bidder. Has anyone asked Statoil where they plan to sell the oil?

The other major part of the social licence comes from the myth that fossil fuel exports make us rich. People react very strongly when they hear we are ‘giving away’ offshore oil and gas. The most common response is to demand a change in the rules so that we earn more revenue, rather than calling for a ban for climate reasons. But regardless of what form the public outrage takes, exposing the economic benefit myth would break the social licence for new oil and gas.

Australia’s least-cost climate action

If we were to ban all new oil and gas, onshore and offshore, we’d miss out on a little in state royalty revenue, but compared with the other climate measures we must take to restore a safe climate, the cost would be insignificant. This must be one of the easiest and most cost-effective strategies Australia could implement to reduce future carbon emissions.

Banning new offshore oil and gas would be even easier. It would cost us nothing in lost short-term revenue – we don’t get any revenue from new offshore oil and gas.

PRRT credits compound over time and offset income tax liability. An oil or gas company could avoid ever having to pay PRRT and income tax simply by continuing to spend money on new exploration and new extraction projects. This might explain why Santos and Beach Energy both paid income tax in 2013-15, but neither have paid any tax since. The more climate damage they cause the less they pay in tax.

Oddly enough, banning all new oil and gas extraction would increase our tax revenue from the oil and gas companies that might otherwise continue to expand their activities in Australia.