FOREIGN FUNDING OF THE AUSTRALIAN PETROLEUM INDUSTRY — IMPORTANT ASPECTS OF THE DIRECT INVESTMENT DECISION PROCESS

Abstract

The paper provides an outline of the financial aspects of the foreign direct investment decision process and an understanding of how this can help attract funds for Australian petroleum exploration and development.

Proposals to foreign investors are seen to require specific personal presentations. The investors' view of risk is discussed under the headings of political, economic, and environmental, and the major risk factors that require understanding are shown to be country risk; exchange rate risk—rate forecasting and exposure management; and international taxation.

The techniques in assessing country risk are reviewed, and the methodology of international banks assessed. The Go/No-Go, Premium for Risk, Range of Estimates, and Risk Analysis techniques are described.

In considering the forecasting of exchange rate movements it is recognized that, while there is no adequate forecasting measure, the major variables of comparative prices, interest rates, and comparative money supply require attention. The mechanistic tools of purchasing parity theory and the Fisher effect formula on interest are therefore outlined.

The management strategy in the management of exchange rate movement exposure is seen to require a determination of economic exposure, the observance of basic rules in currency grouping, and market operation guidelines. A management guide is set down for reference.

A reference to international taxation indicates the need of the tax planner to consider comparative taxation domicile of investment, and corporate structure.

The basic taxation principles that apply are seen as the necessity to plan in after-tax terms; the importance of determining the nature and sources of taxes; and the requirement of a full knowledge of relevant double taxation agreements and local tax administration regulations.

The role of the Australian petroleum industry in attracting foreign investment is seen as promoting the provision of data, increased opportunities to invest, risk reduction through tax effective opportunities, and assisting in proposal presentations.

The need for earlier release of exploration data is expressed, as is the development of comprehensive updated data packages—which would include basin reviews—for use by industry. A zoning approach to areal permit size that provides for a reduction in permit size with exploration maturity is seen as an approach to increasing investment opportunities. Finally, APEA is encouraged to take a leading role in encouraging foreign investment through direct participation in presentations.