Is Australia the next Qatar?

BRISBANE, Australia — While most developed Western countries agonize about the long-term effects of debt in the wake of the global financial crisis, Australians are furiously debating how to divide up the vast mounds of wealth the country will extract from its massive resources boom. That’s even before most of the drilling has started.

The onshore mining success story in the state of Western Australia that began in 2003 is already worth $500 billion. It amped up Australia’s terms of trade to highs not seen since the 1950s, when the country traded wool. Now, sensitive new technologies are helping to find gas. New reserves of offshore natural gas in the north-eastern state of Queensland have led to a wave of fresh mining deals, which will keep the boom rolling.

Gas is a transition fuel, bridging the gap between the petroleum age and lower carbon fuels. This is set to make Australia one of Asia’s leading suppliers for the next 10 to 20 years.

The question is being asked: Is Australia about to become the next Qatar? Qatar’s resource-rich economy has depended heavily on oil and natural gas. Another middle-eastern resource-rich nation, Dubai, relied heavily on exporting oil in the 1970s but huge increases in oil prices after the Gulf War meant the country turned to tourism and free trade.

These were not enough to save Dubai from becoming one of the worst-hit economies in the recent global downturn.

In Australia, the future still looks much brighter, not least because its geopolitical stability has helped clinch recent deals by BHP Billiton, Rio Tinto, Woodside and the U.S. multinational Chevron generating money. Lots of it.

Squabbles over the spoils have become an ongoing subject of public and political debate in the country. The recently ousted Labor prime minister Kevin Rudd wanted to heavily tax mining companies to “give back to the Australian people what is rightfully theirs.”

Rudd had planned to impose a 40 percent tax on mining profits. Reacting to the plan, mining companies threatened to pull out of deals, and one — Xstrata — shelved its Ernest Henry underground mine and exploration activities, in north-west Queensland, worth more than $600 million. The issue even had an impact on global stockmarkets. Reports in June of a quick deal between the government and miners over the controversial tax lifted mining stocks in London. Shares in BHP Billiton, the world's biggest miner, Rio Tinto and Xstrata surged as much as 4.3 percent on Jun 11.The tax issue mobilized those in the industry who fear it could affect their livelihoods. More than two thousand mine workers this month marched in Perth against the “super-profit tax.”

The mining tax issue was cited as a factor in Rudd's demise — he was unseated in a Labor Party leadership challenge on June 24. The Federal government, under Gillard, on July 2 announced big changes to the planned "super-profits" tax. The tax would be levied at 30 percent, instead of 40 percent, and the definition of a super profit lifted from 5 percent to 12 percent. The tax would only apply to iron ore, coal, oil and gas, and only 320 companies would be affected. Companies earning less than $50 million Australian dollars ($42.2 million), would be exempt. Xstrata said the proposal to retain the existing taxation and royalties for copper had given it confidence to restart its operations.

The recent resources boom started when the Western Australian mining industry was ignited by the onshore drilling for iron ore based on expanding existing reserves, known since the 1970s. Iron ore is the raw material used to make pig iron, which is a raw material used to make steel. This is fueling China’s production and development.The vast, 7,686,850 square meter Australian continent houses a population of just 21 million. However, the nation has control over a maritime space that is double the size of its land mass. A wave of recent discoveries has led to new mining deals.

Last month, there was the announcement of a coal seam gas deal in Queensland that is tipped to add 14 billion Australian dollars to the economy. The gas company, QCC, will pipe gas from the Surat Basin in the Queensland’s south to Gladstone in the central region, and then ship it to China from 2014. It is the biggest liquefied natural gas (LNG) contract in Australian history, with 72 million tons of gas to be exported to Asia over the next 20 years.In a startling statistic, Geosciences Australia — an organization heavily government funded to explore frontier areas — estimates that Queensland has enough coal seam gas to power the entire state, population 4.4million, for more than 1,000 years.

Energy analyst and researcher, Liam Wagner, from the University of Queensland's School of Economics, is looking into the future of the natural gas market in Queensland.

“Australia is one of the top four natural gas producers in the world and is on the edge of becoming the biggest supplier of natural gas in the world,” Wagner said.  “We will be supplying east and south-east Asia with natural gas, removing the strain from supplies in the middle-east and Russia.”

Qatar, Russia, the U.S. and Australia were currently the four top suppliers, Wagner said.
“That’s based on resources. When we start producing, Australia will be at the top of that list,” he said. “Australia is geopolitically stable, which a huge advantage. Queensland's gas market is attracting many other countries because of its geopolitical stability. ”

In other deals, the U.S. multinational Chevron is developing the Gorgon field, a petroleum project in Western Australia, while Woodside develops the Browse field, a cluster of three gas fields in the Browse Basin off the Kimberley coast, also in Western Australia.

The small southern island state of Tasmania is thought to be sitting on massive energy reserves. In 2008, the American exploration company Empire Energy Corporation launched a $31 million exploration program.

There are economic dangers in a resource boom, such as inflation and high exchange rates, which Australia saw during the 1970s and 1980s mineral booms. The killing off of other exports also increases the danger of Australia developing a one-sector economy.

One solution could be for a federal government to tie the money up for future years.

Australian National University Professor, Warwick McKibbin, also a Reserve Bank director, said Australia had learned from difficult lessons in the 1980s that led to banking regulation, thus saving it in large part from the global recession. Lessons from the past would be applied to the resources boom, and other world economies could learn from Australia’s current economic stability, he said.

McKibbin suggests that one way to ensure the resources boom was well managed into the future would be to create a an offshore sovereign wealth fund similar to those created by Norway and Chile. This would essentially mean that some of the vast profits from mining were sent offshore and invested for future generations. Such funds act to protects the money from rapid exchange-rate hikes and keep it out of the hands of governments looking to reduce debt in the short term for political reasons.

McKibbin went further to say that shares could be redistributed via superannuation (pension) funds. This would allow the windfalls to be managed by people rather than governments. In this way, the surging income would not drive up inflation, interest rates and send exchange rates through the roof.