Regulation Cuts Oz Upstream Value: EY

Inefficient and excessive regulation is limiting the investments flowing into Australian upsream oil and gas developments, according to a report published by consultancy EY November 23.

Producers are operating in a globally competitive market that has been badly hit by Covid-19, and regulations should make Australia attractive to them, not deter them with red tape, it said. There are other regions for them to invest in instead.

Citing the example of Santos' Narrabri project, it said there was a "high level of public scrutiny, particularly around environmental and planning laws... While regulations serve a vital role in improving social, environmental and economic standards, ongoing and continuous refinement to deliver better regulatory outcomes and manage costs for businesses is crucial."

Suboptimal regulatory costs have a higher potential to impede investment and act as a handbrake on economic growth, it said. In this way, regulation has similar cost features as taxes, which generate (big or small) disincentives on labour supply, investment, savings and other economic decisions. 

EY assessed the tax ‘equivalence’ of regulation on the industry growth paths and found it very costly in economic terms. Unlike taxes, regulation does not generate revenue for the government, which funds programmes and circulates throughout the economy. "In fact, every billion dollars of industry activity lost through regulation could generate an overall economic efficiency loss of up to $1.79bn. These costs should be recognised alongside the potential social and environmental risks of projects which many regulations seek to manage or avoid. Policy-makers would be rightly concerned about taxes which impose such heavy and narrow costs on an industry," it said. "Accordingly, the dividends from better and less costly regulations for all Australians could be large," it said.

This is all the more  important as Australia recovers from the pandemic recession with the support of the oil and gas sector. "A renewed phase of at scale industry investment is vital to fully realise the economic dividend from Australia’s oil and gas resources. But current market conditions facing the industry are challenging and investment uncertainty remains high.... What is imperative is our ability to develop a competitive and agile business environment so we can fully capitalise on new project opportunities and meet growing competition from other gas producing countries," it said. 

Upstream lobby group Australian Petroleum Production and Exploration Association said: "Relatively simple changes to the timing of some investment allowances and improved regulatory arrangements – along with maintaining stability in the tax regimes – would make Australia much more competitive for global investment.

“A growing oil and gas industry means more economic benefits for everyone, supporting job creation and profits in industries across the economy, including construction, trade, business services and finance, and manufacturing."