The Trans-Pacific Partnership: what it means for Australia’s gas industry

Negotiations on the biggest global trade deal in 20 years, which first commenced formally more than five years ago, were successfully concluded in Atlanta, United States, in early October 2015.

The historic Trans-Pacific Partnership Agreement (TPP), the largest multi-continental trade agreement since APEC in 1989, is expected to deliver enormous benefits to Australia and unprecedented new opportunities in the rapidly growing Asia Pacific region.

But while the agreement has overwhelmingly been hailed a triumph for the agricultural, medical and e-commerce industries, is it a good deal for the Australian oil and gas industry?

Benefits to Australian oil and gas

By setting common international trade and investment standards between member countries, the TPP aims to make doing business across the region easier, reducing red tape and business costs.

There are several areas where the domestic oil and gas industry will benefit, including greater facilitation of oilfield services exportation, streamlined investment processes and easier entry arrangements for oil and gas professionals and employees. However, one of the greatest benefits to the industry is the reduction in trade barriers through the reduction or abolishment of tariffs.

Reduction in trade barriers

The TPP will slash barriers to Australian goods exports, services and investment and eliminate 98 per cent of all tariffs, including those applicable to resources and energy.

Australia’s exports of resources and energy products to TPP member countries were worth close to AU$47 billion in 2014, representing 30 per cent of Australia’s total exports of these products.

The TPP delivers certainty and significant gains to Australian producers and exporters of resources and energy products.

The agreement locks in the duty- and quota-free access Australia currently enjoys into a number of TPP markets for major exports such as coal, iron ore and liquefied natural gas.

Other key market access gains include:

  • Elimination of Vietnam’s tariffs on butanes, propane and liquefied natural gas within seven years of entry into force. Australian exports of these products to Vietnam were valued at AU$9 million in 2014
  • Elimination of Vietnam’s 20 per cent tariff on petroleum (Australian petroleum exports to Vietnam were AU$11 million in 2014)
  • Elimination of Peru’s tariffs on iron ore, copper and nickel upon entry into force of the TPP.

Oilfield services

Australia’s mining equipment, technology and services (METS) and oilfield services sectors in countries like Vietnam, Malaysia, Mexico, Chile and Peru will gain several benefits. There will be major new commercial opportunities for Australia’s METS service providers, including through:

  • Mexico’s liberalisation of its energy sector, which, for the first time will allow Australian companies to be able to bid to participate in the exploration, production, processing and distribution of oil, gas and geothermal resources.
  • Brunei Darussalam and Vietnam locking in future reforms to local content regimes, or otherwise committing to a level playing field between Australian and foreign suppliers providing goods and services in the mining, oil and gas sectors.
  • New rules on large state-owned enterprises like PETRONAS, PEMEX, VINACOMIN and PETROVIETNAM, which will help ensure that Australian goods and service providers can compete fairly for contracts.
  • Prohibitions on the introduction of new export taxes and commitments for the elimination of existing export taxes in Malaysia and Vietnam, providing greater certainty for Australian mining and energy companies operating in these countries.

The TPP’s new rules on state-owned enterprises (SOEs) will level the playing field between Australia’s privately owned mining, oil and gas companies and the large SOEs that dominate these sectors in some TPP countries. The TPP will help ensure that the member countries do not provide financial support to their SOEs that would give them an unfair advantage over their Australian competitors.

Streamlined investment processes and greater protections

Greater investment protections and streamlined processes will help propel investment by Australian mining, oil and gas companies, METS and oilfield goods and service providers in TPP countries.

TPP countries have committed to not introducing new foreign investment screening regimes or have extended higher preferential investment screening thresholds to Australian investors. Australian investments into Canada of below CN$1.5 billion (currently AU$369 million) will be exempt from investment screening processes.

The TPP will also promote further growth of foreign investment in resources and energy in Australia by increasing the screening threshold at which private foreign investments in the mining and energy sectors are considered by the Foreign Investment Review Board (FIRB). The threshold will be raised from AU$252 million to AU$1,094 million for all TPP countries, except in relation to uranium and plutonium extraction and nuclear facilities.

Temporary entry arrangements for professionals and employees

Australian companies will be able to transfer executives and managers more easily to work in TPP countries for extended periods, and face fewer hurdles in obtaining visas for Australian contractors working on a temporary basis.

Independent Australian professionals and technicians providing services to the mining, oil and gas sectors will enjoy certainty over visa arrangements and periods of stay in Brunei Darussalam, Canada, Chile, Malaysia, Mexico, Peru and Vietnam.

These countries have also guaranteed that Australian installers and servicers of niche mining- and oilfield-related manufactured goods and technologies will be able to temporarily enter these markets to undertake installation and maintenance activities.

But is it all good news for gas?

While the TPP can be seen as a good deal for the Australian oil and gas industry, it is not without its complications.

Geoffrey Cann, National Director for Oil and Gas at Deloitte, observes that any trade agreement is a two-way street: while the TPP heralds positive outcomes for Australian exporters, it will open up the Australian market to capable importers. And Australia, as a high-cost nation working in the commodity industry, will be looking for an advantage over competitors.

According to Cann, the key opportunity for the Australian industry is to focus on those areas where the high cost of a capability or a service is not material to the perceived value of those services by potential customers.

“The secret for Australia is to find those spots where it can develop capabilities to give it some form of edge or advantage, or some dimension of know-how which other countries will find hard to replicate,” says Mr Cann. One such opportunity for Australia is in CSG-to-LNG. “Australia, having built the world’s biggest LNG industry for the last six years, to the extent that there is an interest in that know-how among the 11 nations in the TPP. This is an inherent exportable know-how, and that’s very positive for Australia.”

Another dimension, Mr Cann says, is offshore oil and gas. “In offshore, Australia has developed and is continuing to develop know-how in offshore oil and gas production, because Western Australia and Bass Strait are almost offshore at the moment.

“In particular, servicing lots of offshore infrastructure, and doing that cost-effectively and in reasonably demanding environmental conditions, is a capability that will be in high demand. Australia, because it’s a highly regulated business jurisdiction…means that Australian firms have had to develop the capability to respond to those regulations, to the extent that those regulatory environments harmonise internationally. Thus, Australian companies will have an advantage in that they know how to build businesses that comply with demanding regulations.”

However, Mr Cann says that in the absence of harmonisation, conflicting regulations may erect a barrier to trade that survives the removal of tariffs. Mr Cann notes that while the elimination of import duties on particular natural gas technologies will help accelerate the adoption of these technologies in Australia, there are other obstacles to technology transference. If Australian standards relating to drill rigs, for example, are significantly different from the country of import, the cost of the necessary adaptation may be substantial. “So you might eliminate a 10 per cent import tariff, which is a good thing obviously, but if you still have to pay twice the costs to strip the drilling down to make it meet local standards, it’s still a barrier to imports.”

In some circumstances, the existence of tariffs are not themselves a deterrent. China is a notable absence from the TPP, despite extensive internal pressure to deregulate its domestic natural gas industry, which operates with fixed prices that resit the influence of the market.

However, Mr Cann advises that while a trade agreement with China would establish a market-corrected low oil price environment, a benefit for Australian importers, a number of companies are already importing from China, “without really raising tariffs and duties as being a big barrier.” With that said, the removal of trade barriers with China would facilitate the transfer of Australian expertise, with Australian knowledge of coal seam gas projects likely to be of high value in coal-rich China.

As at November 2015, the TPP needs to be formally ratified by the 11 member countries. While Australia is expected to ratify the partnership with limited opposition by the federal Labor party, the United States will be the biggest challenge to the partnership, with a hostile Congress in an election year.

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