THE ENVIRONMENT FOR RAISING FUNDS FOR PETROLEUM EXPLORATION IN THE 1990s

Abstract

Private shareholders' equity has traditionally funded greenfield exploration programs in Australia in the 1980s. In the next decade junior exploration companies will again need to rely on funding from both current and potential shareholders. However, the major difference between the 1980s and the 1990s will be the level of difficulty for companies seeking to raise funds. Recent events have sapped potential investor confidence, particularly private investors, and notably, in oil and gas exploration companies.

The recent events in the Middle East and the need for some degree of energy self-sufficiency make investment in oil exploration essential for Australia right now. Exploration requires substantial amounts of risk capital which, at this time, is not flowing from traditional sources. Rather, we are seeing a concentration of ownership in the hands of financial institutions and a handful of producing companies and foreign multinationals. It is essential for the Federal Government to recognise the need to offer further incentives to encourage the private sector to invest in exploration companies. In this paper we suggest that the most effective mechanism for such incentives is through some minor modifications to the Australian taxation system.

The oil exploration industry must pursue Government in a co-ordinated manner for assistance in raising funds particularly as the requirement for action is urgent. Industry bodies, such as the Australian Petroleum Exploration Association Ltd (APEA) have recently petitioned the Federal Government with recommendations but the Government has failed to accept these proposals on the grounds that they are inconsistent with present tax policy. If this is the case it is time present policy was changed.

Clearly, all exploration companies will take whatever action is possible to raise funds for exploration and not simply look in vain for government salvation by handout. However, in the interests of Australian national security, the government has a responsibility to encourage and foster oil and gas exploration.

Since planning for this paper commenced in July 1990, oil prices have leapt from US$18 to approximately US$40 per barrel. Should prices such as these (not experienced since the early 1980s) continue, it will make investment in exploration companies more attractive to all investors while at the same time it will test severely the endurance of the equity market generally.