It is rare that a government can add to its nation's economy at the stroke of a pen. It is much easier, as the Howard Government demonstrated with the Woodside decision, to destroy national value. Aside from reducing the value of Woodside shares by 12 per cent, the immediate response to the decision to block Shell was to bring about a two percent devaluation of the Australian dollar.
Essentially this means that all Australian dollar incomes and all Australian dollar denominated assets were reduced in value by two percent. Nice one Peter!
Treasurer Costello's decision to block the proposed takeover of Woodside Petroleum by Shell went beyond undermining the rights of shareholders to buy and sell their property.
Although the effect on the North West Shelf (NWS) Project will be minimal, at least in the short-to-medium term, and Shell will not, after 100 years, pull out of Australia, the effect on the dollar and wealth creation in the long term will be significant.
The fact is Australia can not afford to shut out foreign investment, particularly in capital intensive and technologically-advanced industries such as petroleum. Our domestic saving is far too low -- we have one of the lowest rates of saving in the world and so one of the highest current account deficits in the developed world. Local firms do not possess the size, the market reach and, most importantly, the technology to develop out vast petroleum potential.
This was recognised from the inception of the NWS Project. Foreign companies have put up most of the money -- about 67 per cent -- used their contacts in Japan to develop the market and most important they -- and overwhelmingly Shell -- provided the essential advanced technology.
In short, without Shell and its other foreign joint-venture partners, there would be no NWS project and Australia would be without its largest export industries.
The decision was never going to be easy. Xenophobia has infected a large proportion of the Liberal Party, particularly in Western Australia, as well as the electorate. And the cry for the government to draw a line in the sand on the beaches of Karratha was loud and threatening.
Nonetheless, the proposal required addressing on its technical merits rather than on the numbers in the party room. Unfortunately, the Howard Government has failed to do so. The Labor Party on the other hand -- at Federal level and in Western Australia -- have acted like a responsible Opposition. They have avoided political point-scoring, recognised the importance of foreign investment and argued that the proposal be addressed on it merits.
None of the technical questions the Shell takeover proposal raised warranted blocking the bid.
First, there was the issue of foreign control. The project is already under foreign control and would always be so.
Second, there is the concern with the takeover Shell would be willing and able to "mothball" the NWS project in favour of one of its many other LNG investment around the world. While it is true the takeover would have given Shell 57 per cent of Woodside, this does not translate into control over the project. The NWS project is a joint venture between Shell, Woodside and four other partners. Each partner has equal voting rights. Thus, Shell would have been in the minority of two out of six. Moreover, most crucial decisions in the project require unanimous agreement of all partners. It is inconceivable that BP, BHP, Chevron or Mitsubishi/ Mitsui -- the other joint venture partners in the project -- would allow Shell to drag the chain their assets in favour of another Shell asset. Even if it could, Shell would not stymie the development of a project in which it had invested $10 billion and which represents 70 per cent of it gas reserves in the region.
Third, there was the concern that Woodside's head office and corporate culture would gradually migrant from Perth to The Hague. Now one can understand the concern of Western Australians. Woodside is the largest WA-based corporation and is a particularly good employer and corporate citizen. The fact is, however, Shell's culture is already indelibly part of Woodside's. Shell is the major shareholders of Woodside and has, from the start, provided a large proportion of its senior management and technical staff. Moreover, the takeover bid made clear that if successful, Woodside would remain a WA-based firm, that it would retain control over its expanded asset base and that it would have independent directors. The bid even promised that Shell would greatly expand its research facilities in WA.
Fourth, there was a concern that the takeover would give Shell, which has investments in other petroleum fields in the North West, a dominant position in this highly prospective area. This concern however, fails again to recognise the ownership structure. All Shell's interests in the north west are joint ventures, in which it is dominant in terms of neither ownership nor control.
Finally, there is the concern voiced most vociferously by Colin Barnett the WA Liberal leader, that the takeover would, in effect, usurp the rights and power of the State. That is, that a foreign dominated Woodside would be less open to the suasion of State politicians when it came to investments. Some may see this as a benefit of the bid but the truth is that the old days when local pollies could convince firms to undertake dud investments are long gone no matter who owns the firm.
In summary, the none of the many concerns raised against the proposed takeover hold up to scrutiny. Australia is dependent on foreign investment, perhaps excessively so since our taxation system impacts adversely on domestic savings. But we seem not to have the fortitude to prevent the double taxation of income that is saved and we must therefore either accept reduced investment levels or attract foreign investment. The Treasurer's decision on Shell has just made the latter course more expensive.
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