Australia-China FTA Conference in Shenzhen
28-29 June 2006
Day 1 - Resources and Investment
Mr George Gilboy, China Country Manager, Woodside
Good afternoon, thank you for the opportunity to be here today.
I want to offer you some thoughts today as an individual; both as an economist who has studied China for nearly 15 years, and as a person who has been working in China's energy industries for nearly 10 years. I am not here today to represent any formal requests from Woodside Energy to either the Chinese or the Australian governments; rather, I am here to support the process of increasing our two countries' mutual prosperity and security by making suggestions about how China could benefit from freer trade and fair market access in its energy industries.
1) In energy sectors, China's formal tariffs on international trade are not a big problem.
2) However, energy is a sector where the Chinese people and Chinese companies can benefit from reducing non-tariff barriers to trade and investment. Greater market liberalization, freer international trade, and fairer market access in China's energy sector will benefit Chinese consumers, Chinese non-state firms, and Australian firms.
The principle behind all of the following comments is that I believe China can increase its own prosperity and security by engaging in freer energy trade with Australian firms, and by granting Australian firms fairer market access to China's energy markets. Both countries will benefit.
I also believe that in making decisions about free trade, and fair market access, the principle of greatest economic benefit to the greatest number of China's consumers and citizens can guide Chinese leaders' decisions. Developing resources in the most efficient, sustainable way possible will best enhance China's security, and this requires greater levels of domestic market competition, including greater levels of foreign participation in China's energy markets through trade and investment. With that principle in mind, I would point to the following issues the two governments could consider as part of a bilateral Free Trade Agreement that includes energy industries:
Non-tariff barriers to trade limit the ability of Australian firms to find partners oil and oil products import and wholesale business, or to invest in these businesses.
Examples: China restricts access to crude oil and oil product import quotas; there are only 4 state owned oil traders, and 2 dominate the industry. Import licenses are given to non-state companies, but any crude importer must show customs officials an agreement signed by a state company that the crude will be refined in state refineries, otherwise an import quota is not given; a similar restriction exists on imported oil products - importers must put the product into the wholesale system of one of two state companies; overall, policy preferences are given to a few SOEs.
Fair market access
Unfair access to markets and investment opportunities limits the ability of Australian firms to invest in China's upstream energy industries, and to find partners in these industries.
The main issue is fair access, and clarity and transparency of the process and decision. In exploration and production, Australian firms want access to licenses and business opportunities equal to Chinese firms, in a process that is regular, institutionalized, and transparent.
Ideally, the decision to grant a license for EP would be based on a competition to achieve the greatest economic benefit in a sustainable way. Consider the Australian gazettal process - one time per year, anyone can bid, decision is based on greatest economic benefit in sustainable fashion. But in China, access to land for exploration is restricted; according to Chinese industry sources, the onshore license blocks already granted to two state owned companies account for about 50% of China's total land area; in the offshore, other than in coastal waters 5 meters deep and less, one company holds a monopoly on exploration and production. In practice, foreign firms must ask Chinese firms for access to China's exploration and production.
It is China's right to make these restrictions. However, China - especially Chinese consumers and Chinese non-state firms -- will benefit from more competition, greater transparency, and fairer market access in the energy upstream. This would include allowing Australian firms to put in play their competitive advantages in China's usptream, both onshore and offshore.
Direct and indirect state intervention in markets limits the opportunities for Australian firms to trade energy products with China, and to limit the ability of Australian firms to find appropriate business partners in China.
Examples: Both examples from LNG. Government-controlled energy pricing, has had a negative effect on the ability of Chinese firms to compete for international LNG supply. Government partnership "matchmaking" places limits on partnership choices for foreign companies.
We understand China's concerns about high energy prices, and we understand China's desire to avoid fratricidal competition among Chinese firms. However, as market based firms with shareholders, Australian energy firms can only do business with China on a market price basis. In the case of "matchmaking" for partnerships, the risk is that some Australian firms will be directed towards partners who, perhaps due to market conditions in their region, cannot successfully complete a deal, while others, perhaps with better local market conditions, are prevented from talking with Australian partners. In the end, China could lose a chance to secure supply of key resources.
Regulatory transparency and consistency
Non-transparent and inconsistent regulation raises risk and uncertainty for both foreign and domestic firms, and by raising risk, discourages investment and trade. A secondary effect may be to limit the growth of clean energy industries, such as natural gas and LNG.
Examples: VAT on imported LNG: some regas projects have tax holiday, will others? Will VAT holidays be extended, or made permanent? Pricing of natural gas and other energy products varies considerably by both locality and project, and companies never know when a price rise will come... uncertainty about next step of electric power reform, especially with regard to gas-fired power, is a major source of risk. These uncertainties deter investment and restrict the development of industries that would have both efficiency and environmental benefits, as well as competitive pricing.
I believe that both China and Australia can benefit by further opening of energy sectors to international trade and investment. I believe competition will enhance efficiency, promote sustainable development, and increase both prosperity and long term stability on both sides.
Thank you.