The real dangers of a tax on discovery and innovation

According to the Treasury, one of the drivers of the Resource Super Profits Tax is a need to increase the tax burden on “immobile” tax bases like resources and land and reduce it on mobile capital.

 This fundamentally assumes that resources are immobile.

 Existing resource projects are certainly immobile and increasing their tax burden has led to much justifiable criticism about changing the rules after the investments have been made.

 However, exploration, the long-term driver of resource wealth, is far from immobile. The RSPT has the potential to shift the focus of explorers to other countries, destroying the potential to expand Australia’s resource wealth for the benefit of future generations.

 Resource wealth does not simply appear. To paraphrase the pioneering US oilman, Wallace Pratt, resources are found in the minds of the men and women who explore and persist with new and bold ideas, sometimes over decades.

 The RSPT works against discovery and development of quality resources because it increases the tax take when resource companies work smarter and harder. It is a super tax on effort, innovation and risk taking.

 If it were introduced in its current form, the global exploration talent pool working on Australian prospects is likely to shift its focus to more promising opportunities elsewhere.

 Australia’s history has many examples of talented explorers successfully betting against the conventional wisdom to the benefit of all Australians.

 The discovery of the giant Bass Strait oil fields in the 1960s ensured that the Australian economy was able to successfully weather the oil shocks of the 1970s. This discovery came about when the outstanding American geologist, Lewis Weeks, recommended to BHP that they search for oil in Bass Strait rather than at Port Kembla. BHP farmed out 50% of their interest to what is now ExxonMobil, which bought the necessary expertise and capital to the joint venture.

 Imagine what the result would have been if the Commonwealth Government had demanded a compulsory 40% farm-in under which, rather than meeting their ongoing costs, their obligations accumulated at the bond rate.

 The discovery of the supergiant Olympic Dam copper-uranium-gold deposit is another example of resource wealth being created in the minds of men and women.

 Olympic Dam was discovered in 1976 by a small team of Western Mining’s geoscientists after almost two decades of failure in copper exploration. The search began in 1957, and the company had spent almost $45 million in today’s terms looking at conventional copper targets and well-tried areas.

 The disappointing results led the company to develop its own world-first science and to test its ideas on outback South Australian geology, even though there were no outcrops of the targeted rock formations, no previous drilling and at least 100 kilometres between Olympic Dam and the nearest copper mineralisation.

 History shows Western Mining discovered one of the richest copper and gold ore bodies in the world, with the unexpected bonus of the largest uranium resource in the world by an order of magnitude.

 The in-ground value of the Olympic Dam today approaches $US1 trillion, but this wealth might still be undiscovered but for the skill of the geologists and the company’s willingness to back them over many years. Under a tax system like the RSPT that penalises companies for such effort and creativity, the likelihood of a discovery such as Olympic Dam would be even more remote.

 The dirt lying below the surface of the Australian continent has no intrinsic value. It only becomes wealth if the geoscientists imagine they can create value. These are rare talents. Roy Woodall, the Chief Geologist at Western Mining, was inducted into the Mining Hall of Fame (and received an Order of Australia), partly for discovering Olympic Dam.

 Compared with this, making a marginal discovery and relying on the government to pick up 40 percent of the losses under the RSPT is unlikely to impress the geology profession (or deserve an Order of Australia).

 There are many other examples. The coal seam gas industry is a recent example of creativity, innovation and persistence turning a hazardous by-product into a valuable resource.

 The theory behind the RSPT is to shift Treasury’s tax base from mobile to immobile activities. Like a local council taxing ratepayers on the value of their land, Treasury wants to apply a tax on ”super profits” earned from resources below the ground.

 But the tax economists in Canberra are forgetting that super profits are ultimately created by people, talented men and women who spend their careers scouring the globe for exciting prospects and if they cannot find bankable prospects in Australia they will turn their talents elsewhere.

 Graeme Bethune is CEO of EnergyQuest, an economic consultancy specialising in oil and gas. This piece was originally published on, Resources Daily.