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Legislative Council - Fifty-First Parliament, Second Session (51-2)
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SANTOS LIMITED (DEED OF UNDERTAKING) BILL

Second Reading

Adjourned debate on second reading.

(Continued from 15 November 2007. Page 1342.)

The Hon. D.W. RIDGWAY (Leader of the Opposition) (16:43): I rise on behalf of the opposition as the first speaker on this very important and history-making legislation for South Australia. I indicate that the opposition intends to support the bill, and I know that at least one other member of my team will speak.

The lifting of the cap provides an opportunity for Santos, a well-known and well-respected South Australian company, to relieve itself of the burden of a cap of 15 per cent on the ownership of its shares. However, this exposes Santos to a number of risks, and I look forward to discussing those later in my contribution.

This is a very important piece of legislation for the economic future of South Australia. As we know, we are experiencing a minerals exploration boom. Of course, for the last 40 years, we have had a wonderful time with the resource-rich area of the Cooper Basin, and Santos has played a significant role in the development of that asset for South Australia and Australia.

The most significant facet of the bill is the repeal of the Santos Limited (Regulation of Shareholdings) Act 1989, removing the current 15 per cent of total voting shares which any one person can lawfully have in the company.

I think that I should discuss a little bit of the history of that, although I am sure that my colleague the Hon. Rob Lucas—who, of course, all members will know is a former treasurer—will discuss in a little more detail some of the more interesting financial details of the impact this may have on the state. The regulations to the shareholdings bill were introduced in 1989 by minister Hudson of the Corcoran Labor government, and it ensured that gas sources and electricity could be provided at prices that were comparable to those of other Australian industrial markets.

I will mention further on in my contribution the potential takeover by the Bond Corporation and the impact that that had on Santos shareholdings. However, it is interesting that back then this was introduced by minister Hudson of the Corcoran Labor government. In his second reading explanation he discussed the possibilities of increased prices and of exposing South Australian consumers to increased gas and electricity prices. That is one concern that a number of members of the Liberal Party and I have. Notwithstanding the fact that we will see the benefits to the state, we are concerned that this may be an opportunity or a mechanism by which gas prices will increase in South Australia and, therefore, for consumers, and particularly families in South Australia who may be exposed to increased gas prices at their house. Of course, as we know, a significant amount of electricity is generated in this state from gas, so that could also have an impact on electricity prices.

Back in those days, the Cooper Basin supplied a large proportion of South Australia's primary requirements. And it still does today; although, with the new SEAGas pipeline coming from Victoria, we are less isolated. It is interesting to note that, while Santos is still the major player, there are a number of smaller players now in the Cooper Basin producing both crude oil and gas from areas where Santos had not taken up the opportunity to bring them into production. It was during the time of the former Liberal government when the Hon. Wayne Matthew was minister that they were freed up for other companies to explore and then bring into production.

Santos, the operating company in the Cooper Basin, was responsible for almost half the sales of the energy supplies in the Cooper Basin at the time of the bill. Maintenance of its financial strength and stability was fundamental to the development of operations within the Cooper Basin. As you will recall, Mr Acting President, that was a couple of decades ago. Certainly, it was important to secure Santos's future. The bill was treated with such urgency at the time that the then premier brought forth the opening of parliament by a week, and for the first time in the history of the parliament the House of Assembly was made to sit on a Friday. Certainly, the bill was not afforded the scrutiny it deserved, being forced through the House of Assembly in a single day.

It is interesting that it was seen at the time to be a particularly important piece of legislation, and I guess all members present then were happy to support it. I have looked at the deed of undertaking that is associated with this bill today, and I will explore it a little later in my contribution. We know that the bill prevented a hostile takeover of the company by the Bond Corporation, which, in September 1978, acquired a large interest in Santos. The deal involving the Bond Corporation was structured in such a way through its holdings in certain companies that Mr Alan Bond had personal control of 37.5 per cent shareholding in Santos.

The Bond Corporation was having significant financial difficulties at the time and, with the intention of obtaining 51 per cent, Mr Bond hoped to consolidate Santos's accounts into those of his failing corporation. It was expected that, if Mr Bond gained control of Santos, he would use that control to rectify problems that had arisen from substantial borrowings he had made to buy the initial 37.5 per cent shareholding. Due to the magnitude of the bill, it was met with a level of uncertainty.

At the time, the Hon. Dean Brown asked valid questions about the bill. For example, he questioned why the government had given approval for a wholly owned overseas company to purchase 37.5 per cent of Santos in the years prior to 1975 with no action ever taken to disinvest that company. The bill was not passed without valid arguments being made; however, the bill was successful in reaching its intent in securing the stable future development of South Australia's energy resources and to prevent gas prices from rising in such a manner that both existing and future industrial development would have been put at risk.

Again, that brings me back to the point that nearly 30 years ago that was a potential risk for South Australia. I would like to ask the minister and his advisers—and I assume that he will have some advisers here in the committee stage of this bill, and I will put on notice that I have a strong view that the price of gas will be volatile, and more so with the removal of this cap—to provide some comment and give some guarantee that gas prices, industrial activity and the future development of South Australia and the mums and dads in this state will not be put at risk as far as excessive increases are concerned.

Santos is now Australia's largest gas producer, supplying gas to all mainland Australian states and territories. As I mentioned earlier, the SEAGas pipeline that was completed during the first term of the Rann government, of course, was one of the very important initiatives undertaken by the Olsen government. And, of course, we saw, as always, the current Premier and ministers taking credit for this visionary decision, which, of course, we all know was not their decision at all. I guess that is just the luck of the draw when governments change. Those in the driver's seat at the time tend to take credit for a whole range of things that they did not initiate.

Santos has by far the largest Australian exploration portfolio by area of any company and it is pursuing new venture opportunities with a focus on Asia and other parts of the world. It plans to boost production in the Cooper Basin oil and gas fields through a project that will see it drill at least 1,000 wells over the next five years. It is the financial feasibility of projects like this which evidence the success of the original act. The act has served its purpose in ensuring the financial stability of Santos but now the company needs to be free (and I think the community sees that it needs to be free) of that restriction to achieve its full potential—and that is certainly not possible under the constraints of a 15 per cent shareholding cap.

In about 1989 Santos was one of the top 10 companies on the ASX but it now only makes the top 50. Santos has indicated that it sees the 15 per cent cap as having had an impact on its ability to maintain its place in the top performing companies in Australia. Santos see this as an opportunity to free itself of that because it believes that its growth has been relatively stunted in a growing and buoyant marketplace. No other company has the same shareholder restriction and, as Liberals, it is certainly our opinion that this constraint should not be placed on Santos.

Similarly, as with the previous act, the introduction of this bill is not without a certain level of risk. In lifting the cap and making Santos free to grow, acquire and revalue, this government also exposes the company to all the risks associated with free enterprise. There is the possibility of Santos being savaged and all operations not linked with the Cooper Basin repositioned in another corporate headquarters by an acquiring company. This could amount to a significant loss to our state. I know that the deed of arrangement (which has been fully explored in the other chamber) does indicate a number of penalties, including a penalty of at least $100 million if Santos is to leave South Australia. It states:

The Company undertakes that, unless otherwise approved by the Premier, the Company's South Australian Cooper Basin (SACB) assets, head office and operational headquarters will remain in South Australia for the term, including without limitation direct management and key supporting functions for the SACB assets identified in clause 4.1(b) for so long as those functions are carried out.

It continues:

As at the date of this Deed of Undertaking, the direct management and key supporting functions for the SACB assets include:

(1) executive general management;

(2) geosciences expertise and development;

(3) engineering;

(4) oil and gas exploitation;

(5) maintenance;

(6) operations planning; and

(7) Moomba carbon storage,

and all other key supporting functions with respect of the SACB assets including finance, accounting, legal, procurement, IT, human resources and gas marketing.

The deed continues:

The Company also undertakes that, unless otherwise approved by the Premier, for the duration of the Term, the Santos roles based in the Adelaide office as at the date of this Deed of Undertaking associated with the functions set out below will remain located in and cannot be transferred out of South Australia nor replaced or replicated in another State:

(1) onshore South Australian and offshore Australian exploration;

(2) South West Queensland Cooper Basin operations;

(3) Australian gas marketing commercialisation;

(4) Australian IT services;

(5) Australian accounting services;

(6) Australian human resource services; and

(7) Australian procurement and logistics operations,

provided that nothing in this Deed requires Santos to increase the number of personnel in those roles referred to above or transfer roles that are currently outside of South Australia into South Australia or precludes Santos from developing new roles outside of South Australia to support projects or developments outside of the state.

One can see that there are two clauses in the deed which do state 'unless authorised by the Premier'—which in itself is interesting: that the Premier is the authorising person. I will ask the minister to provide some information to us about why it is not ministerial or cabinet approval and why it is the Premier. It seems a little strange, because in other legislation I have read, it requires the minister to be the one authorising. If there is to be any change to the deed it would be, presumably, a cabinet decision and the minister would be making that decision, not the Premier. I was interested to read the social responsibility and community benefits, as follows:

The Company will, as part of its Social Responsibility and Community Benefits Program, continue to meet its existing long-term pledges to sponsor or donate to the following South Australian organisations:

(1) the remainder of the Company's investment in South Australian education and research through its original $25 million 10 year commitment to the Australian School of Petroleum at the University of Adelaide; and

(2) the remainder of the Company's investment in South Australian youth health through the Company's 15  year (to 2014) commitment of $25,000 per year to the Santos Stadium at Thebarton.

They are ongoing commitments, and the community thanks Santos for those longstanding commitments. The deed then states:

Notwithstanding clause 4.3(c), the company covenants that, with a view to providing certainty that its significant support to the state will continue for at least the term, it will, as part of its Social Responsibility and Community Benefits Program:

(1) within 12 months of the commencement date pay $5 million to the Royal Institution of Australia based in Adelaide [and I will come back to that in a little more detail];

(2) during the period of 10 years following the commencement date, pay at least $10 million into a Santos Indigenous Fund to support indigenous employment, training and education initiatives...

(3) during the period of 10 years following the commencement date, pay a further aggregate amount of at least $10 million towards education initiatives ($2.5 million payable after the first, but on or before the second anniversary of the commencement date) in South Australia (in addition to the payments under clause 4.3(d)(1) which will include initiatives which support the development of Adelaide as a university city as may be further developed in discussion with the Premier; and

(4) during the period of 10 years following the commencement date, pay a further aggregate amount of at least $35 million to organisations or projects in South Australia which the company can reasonably demonstrate have mutual benefits for both Santos and the state. For the avoidance of doubt, it is acknowledged that money expended by the company in satisfaction of its pledges specified in clause 4.3(d) post the commencement date will be counted in determining whether the company has fulfilled its undertaking under this clause 4.3(e)(4).

It is interesting, because we all know that the Royal Institution of Australia was one of the Premier's recent announcements.

This deed also talks about developing Adelaide as a university city. It does seem to me and to other members of the opposition that this whole deed is full of holes. I am sure that the legal people at Santos are happy that they have been able to negotiate this document. However, it appears to be almost a bit of bribery. We have a Premier saying, 'Well, we are happy to agree to it. I am happy to agree to it. I am the Premier and I will make the decision as to whether you can break the deed of arrangement. Provided you support the majority of my pet projects within the state, you will have my support.' I do hope the minister takes the opportunity to respond to that. I am sure he will. It does seem to us a little unusual, if you like, that the Premier's pet projects are those that get mentioned in this deed of arrangement.

A recent takeover of Rio by BHP involved tens of billions of dollars. If a company decided that Santos was worth taking over at some time in the next three or four years, and if it was forced to, you would see the repayment of some of these commitments to be almost insignificant. It seems as though this deed of arrangement really does not provide a lot of security for South Australia. In fact, as I explained before, the biggest risk for South Australians is a potential increase in gas prices.

However, the alternative future of Santos is one of positive and profound economic implications which on balance, I guess, does make this bill worthwhile. However, I will explore for a moment several possible scenarios: Santos could be taken over by a larger player or merge with a similar size company; or it could use its increased capital-raising ability that the cap's removal would give in a take over to a smaller company. Analysts have stated that however the removal of the cap plays out, Santos's substantial contingent reserves (which are three times larger than its booked reserve base) would always remain an attractive takeover target.

Santos has stated that its objective is to become a leading international oil and gas company based in Adelaide, and that the removal of the cap will enable the company to use its shares to fund acquisition and development projects to a degree that has not been possible in the past. The former Liberal government did initiate a review of the cap but resolved not to introduce a formal proposal into the parliament. It believed at the time, I am told, that the Labor opposition would have put a lot of energy into broadcasting only the risks associated with the removal of the cap, which brings me to another point. The Premier made a ministerial statement on 16 October 2007 (the Hon. Paul Holloway read that same statement in this place, I assume, later that day), and I was a little annoyed with this sentence:

I call upon all members of parliament—the opposition and members of the upper house—to put aside any temptation they may have to play games with the repealing of the cap and to put South Australia first.

I do not think at any time that the then Rann opposition ever put South Australia first. In fact, with respect to all the key economic initiatives in this state—the Roxby Downs mine, the long-term leasing of ETSA, and the introduction of the GST (three of the most significant financial benefits this state has seen)—the then Rann opposition played games at every opportunity.

Given that this is a much more responsible opposition and one that will not play games with the economic future of South Australia, I think it is a bit of a cheap shot for the Premier (someone who has led a party that has played games at every opportunity) to stand up in parliament and make a statement asking others not to play games when he knows full well that we are very unlikely to play games. We will always put the future of South Australia first. Mr Conlon used this criticism of the then Liberal government at the time: he said that it was intimidated by the then opposition. Again, with respect to important economic factors, it would not have been about intimidation: the Labor Party would have played simple gutter politics and games that would not have given the government at the time confidence that South Australia's future would have been put first.

I am certain that there would have been other arguments leading to the decision that was made. Had the Liberal government felt it to be appropriate at the time I am sure the cap would have been lifted, although I am also told that it was in the lead-up to the election and that it would have been much better to have done it following the election. Suffice it to say that South Australia's economic environment and Santos' financial position have certainly changed significantly since that point, and the decisions made in this bill cannot really be compared with decisions that may have been made some five or six years ago.

In assessing the risks of this bill it is important to make something clear. The Labor government in 1979 made the right decision in introducing the bill, and the government of the day will unfortunately take credit for the benefits that this bill has amounted to. Likewise, this government will be sure to take the credit for any positive impacts of the bill we debate today. However, as I have pointed out before, this government must also bear the weight of any undesirable results from this bill, and I reiterate my concerns about the price of gas.

Amongst other things, the Deed of Arrangement guarantees that effectively 90 per cent of Santos' roles and some 90 per cent of its staff will stay here in South Australia. I guess It is somewhat of a concern with the Cooper Basin, which we know has reached a mature phase. I expect that, unless the carbon sequestration project that Santos is keen to see get off the ground takes place (and that will involve the significant investment of many hundreds of millions–if not billions–of dollars to make that workable); if that does not get off the ground and does not become a reality, and as the Cooper Basin assets go beyond their mature phase into a declining phase, we will then see a reduction in the number of employees in South Australia.

Again, while the Deed of Arrangement talks about maintaining the Cooper Basin assets and employees, I am sure that, in spite of the commitment to maintaining 90 per cent of the employees (which is roughly 1,700), if they do not need 1,700 those numbers will decline. So, again, the Deed of Arrangement is somewhat of a hollow document in the public spin that the Premier has indulged himself in by talking about maintaining and keeping jobs in South Australia. There is a distinct possibility that, as the Cooper Basin supplies diminish, the number of people employed will inevitably go down.

The deed itself raises a number of uncertainties, but I am certain there is a tremendous amount of goodwill with Santos. It has operated in South Australia for a long time and has significant investments, both here and overseas. There is certainly nothing to suggest that Santos is more likely to be acquired than to use this bill to become a take-over opportunist. I trust that Santos will undertake to serve the best interests of its shareholders and hope that its undertakings include major operations and economic benefits to this state. With those words, I urge support for the bill.

The Hon. R.I. LUCAS (17:11): I rise to support the second reading of the legislation. I do not intend to repeat the very comprehensive summary that the Hon. Mr Ridgway has given in relation to the legislation. It was interesting in part to go back to some of the original debates on the legislation in 1979. I remember at the time being an employee of the Liberal Party, and it is my recollection that during the debate on the Santos legislation the former Liberal President of the Legislative Council, the Hon. Frank Potter, passed away.

It is interesting in light of the government's manoeuvrings on the replacement of the Hon. Mr Nick Xenophon in the Legislative Council to recollect that the Liberal Party had I think five days to find a replacement to put into the Legislative Council. Because of the critical nature of the impending vote the government had indicated that it could not or would not (or both) delay the legislation to allow the Liberal Party a more normal period of time to appoint a replacement.

Our processes are such that normally a vote of our state council, with over 200 people, takes four to six weeks–and that is a pretty quick one; sometimes it is six to eight weeks. So, to have a replacement done within a week was an extraordinary set of circumstances.

The Hon. J.S.L. Dawkins interjecting:

The Hon. R.I. LUCAS: No; that is when the Hon. Trevor Griffin came into the Legislative Council, and Trevor is recorded as having voted with the majority of Liberal members at that time.

During that debate three Liberal members of the Legislative Council felt so strongly about the issue that they exercised the prerogative they had as Liberal members of parliament to follow their own free vote on the issue and voted to support the initiative of the then Labor government to enable the passage of the legislation.

It is interesting to go back to those debates and look at the set of circumstances that the parliament and parties at that time went through to make sure nobody missed a vote on a critical piece of legislation. I think we can contrast that with what has occurred in recent weeks in relation to the replacement for the Hon. Mr Xenophon but also the highly charged and highly controversial nature of the original legislation. Certainly, it was extraordinarily controversial at the time.

Those members old enough to remember the period of Mr Bond, Santos and the related issues would know that it was highly charged and controversial and, certainly within the Liberal Party, respected members of the Liberal Party like the Hon. Don Laidlaw (the Hon. Diana Laidlaw's father) and other Liberal Legislative Councillors felt very passionately and strongly about the issue. When one reads the debate one sees that it was quite a vigorous one, with Liberal members having a go at each other in the chamber on the issue of the Santos legislation—quite unlike anything that goes on these days, with quite a united, happy and harmonious team.

The Hon. Mr Ridgway has traced the history of the legislation and looked at its main provisions. There are only a couple of issues I want to address in the second reading. One relates to a little bit of the writing of history from a particular perspective in the period of the former government. As a minister for those eight years, and for the last four years state treasurer, I can provide one perspective on the debates. I note that the Independent Weekly has quoted a former Liberal minister of minerals and energy as maintaining that the former government had decided not to go ahead because of the impending election.

I am not sure whether that is a fair or accurate quote of the former minister but, as someone who was actively engaged at that time, that is certainly not the position that I or other senior members of the former government adopted. Certainly, there was an awareness of the potential position that the then Labor opposition might adopt on the issue, but the major factor that influenced my decision was the fact that for some time I have been sympathetic to the view that the cap should be lifted, and I am pleased to support this legislation.

The major issue at the time, without going into all the gory detail (and there are leaked copies of former documents that substantiate a number of things I can indicate when the former government addressed this issue), was the power Santos as a company had over the future economic development of the state. It comes back to the point the Hon. Mr Ridgway made, namely, the need to have an alternative form of gas supply, then known as the SEAGas pipeline (although I do not know what it is strictly known as now) from Victoria to give an alternative source of gas supply to Adelaide and South Australia.

Santos had tremendous power over South Australia because it was the only source of gas and, if there were problems with Santos and if Santos was not developing gas at a fast enough speed or was having problems supplying the metropolitan area, the state's economic development was largely captive to the decisions and performance of Santos as a company. It was a critical decision of the former government whereby for the state's economic development we needed to have an alternative gas supply to introduce some degree of competition.

I can recall during one of the cabinet debates at the time saying that this decision the former Liberal government took was as important a decision to the state's future economic development as any decision it had taken or would likely take during its period in government. That is a big call, but it is a view I supported at the time and still do. Not many appreciate the significance of the decision taken and, to give credit where it is due, the incoming government saw the sense of what the former government had done and continued on with the proposition. In particular, the Hon. Mr Conlon sought to claim credit for the introduction of the policy.

The Hon. P. Holloway interjecting:

The Hon. R.I. LUCAS: That is right. Decisions were taken but, inevitably, if the Liberal government had been re-elected it, too, would have had to look at the two competing pipeline deals as was the case at the time. The Hon. Mr Conlon likes to delude himself that only he had the wherewithal to see that you could not have two pipelines and you needed to negotiate some sensible development which meant that we could have competition in terms of gas supply. There is no doubt that critical decisions were taken by the former government and, to the credit of the new government, it followed that through and some decisions evolved.

At around that time, in about 2000, the view I and some others took was that, until we had that position (because we had made the decision that we were going out to tender) and we were confident of competition in gas supply, it was not an appropriate time to take the decision that is now being contemplated. Now is an appropriate time because that decision is well and truly implemented. We have competition to the degree that Santos is not the monopoly supplier of gas to Adelaide, so the set of circumstances that exist now have materially moved on from the set of circumstances that existed when the former Liberal government was elected in 1993 and when it had the second or third look at it in around 2000.

The view seems to have been accepted generally that the former government looked at it only once, but certainly there were initial considerations on a number of occasions prior to that, and certainly in the early days conflicting messages were coming from Santos in terms of the view from management and the board. In the early days it was not always clear that management's view and the view of some board members were completely in sync, to understate the point I am making. I am talking about the early stages of the former Liberal government back in the 1990s, and as it got to the period of 2000-01 public statements were made by the Santos company in relation to its wishes and intentions.

The Hon. P. Holloway interjecting:

The Hon. R.I. LUCAS: There were issues. There was the Kowalick report. This government seems to use Mr Kowalick for almost everything, and the former government certainly used his skills in a number of issues as well. This was one of the things that he had to look at for the former government.

There were a range of issues: competition issues and the issues that I talked about in terms of economic development. As I said, whilst they would not have been part of the formal papers that were presented to the cabinet—and in recent times I have had an opportunity to again look at leaked copies of those particular documents to see indeed what propositions were put at that particular time—there were a range of issues that were considered by the government. If former minister Mathew is being fairly quoted in the Independent Weekly it may be his view that the major consideration was an impending election.

I can certainly say, as the treasurer at the time and as someone with at least a modest input in terms of the decisions that the former government was taking on this issue and related issues, that that was not the pre-eminent issue for me and, indeed, some other key people. I have spoken with some of those other key people in recent weeks and it was not the key issue for them. I did want to place that on the record because I would not want it to become accepted folklore that the only reason that key people in the former government decided not to proceed with something was on the basis of an impending state election. For the reasons I have outlined, I do not agree with that particular proposition at all.

The Hon. Mr Ridgway has outlined a number of questions which he intends to pursue in the committee stage, and I will not repeat those. I think they are important questions and I hope the government will respond to the questions from the Hon. Mr Ridgway during the committee stage of the debate.

The final point I would make is that there has been—certainly in some parliamentary discussion and, I think, in some of the media discussion—a general acceptance from many that, as soon as this legislation goes through and there is this 12-month transition period, Santos will be automatically taken over. I would have to say that there is obviously some prospect that that may well be the case. I think those of us who introduced the legislation and those who support it will have to bear that in mind.

I think there is at least some prospect of an alternative future—I guess Santos, as a company, and the government would prefer this—that Santos is actually going to have a 12-month period where its backside is protected in terms of not being able to be taken over and it has a 12-month running start, if I can put it that way, in terms of trying to build by acquisition and growth. Certainly, if one follows the financial pages—they are not always 100 per cent accurate but where there is smoke there is fire—it would indicate that there are a number of companies, not just in Australia but internationally, that are being speculated as potential takeover targets for Santos: for Santos to grow.

Certainly, looking at the business pages, one of the most commonly speculated takeover companies that might be interested in taking over Santos is a large Australian energy-based company, without mentioning a name but, with the recent changes in its financial performance which led to significant changes in terms of its manager, the change of a chief executive officer and a number of other changes like that, there was a very significant downward spiral in its share price, so that its prospects of being able in the short term to take over Santos are significantly reduced. So, there will be a lot of speculation about the future of Santos.

As I said, if we support this legislation we have to accept that there is a reasonable prospect that Santos might be taken over, and with all the deeds and undertakings that have been signed, up to a limit of $100 million in certain circumstances—and looking at the estimates done in the Financial Review—the market capitalisation of any potential bid for Santos is in a number of billions of dollars. So, then the potential cost of a few tens of millions of dollars, up to a maximum of $100 million, is unlikely to be a significant deterrent in terms of a company wanting to take it over, wanting to take significant employment out of the state and wanting to take its head office interstate or internationally.

I think we ought not be deluded by what the government has sought to do. We ought to recognise it for what it is. It is the best endeavours of the government to (a) get something; and (b) to be able to say, 'We have tried to get something out of this to ensure that'—in the Premier's words—'there was a win-win for the state of South Australia.' I am sure that people like my colleague the Hon. Mr Lawson, who are paid a lot of money for a day's work, could drive the proverbial truck through the undertakings that have been given. I do not think it would require too much time from eminent lawyers, working for companies that want to take over Santos, to work their way around or through or over or under the various undertakings that have been given. With that, I indicate my support for the second reading.

The Hon. R.D. LAWSON (17:29): If the restrictions on the shareholding of Santos related to an ordinary public listed company, in my view there would be no justification at all for the establishment of such restrictions or for their continuance. However, to my mind, the justification for this legislation is valid in that it imposes a cap on the shareholdings in Santos because the company is, in fact, a South Australian utility, and not only a utility but also an enterprise upon which much of the economic prosperity of South Australia depended at an earlier stage.

Santos became the gas supplier to South Australia and the source of power for the Torrens Island Power Station. The South Australian government had a very significant economic interest, through the Pipelines Authority of South Australia (PASA), in the establishment of an asset—being the pipeline from Adelaide to Moomba. Santos wanted to develop a liquids project after it developed the gas project, and this involved a substantial capital investment at Moomba as well as a pipeline to Port Bonython, the establishment of that port itself, and the benefits the state derives from the exports from that port.

So Santos, originally the South Australian and Northern Territory Oil Search, became a major cog in South Australia's economic development. That justified the establishment of the cap, which was designed to ensure that the enterprise could continue and would not become part of a wider corporate play. I supported the imposition of the cap, and I supported its maintenance for a certain period of time; however, the time for the removal of the cap has now well passed. The company wants it, and there is no public interest in maintaining it.

One point I would like to make is that the Premier, in his public statements on this bill, has grossly exaggerated the effect of the undertaking he has extracted from Santos—in particular, the impression he has sought to create in the public mind that employment in Santos is guaranteed and that the maintenance of the head office of the company in South Australia is guaranteed, even were the ownership of the company to change in the future.

Saying that the head office stays here creates in the public mind the idea that this is where the corporate head office is; that is, the place where the major strategic policies of the company are set down and from where all the executives operate. However, in the fine print this undertaking does not say the head office, meaning the corporate head office; it says the South Australian Cooper Basin Assets head office. This is a significant qualification on what the head office encompasses.

It relates to the South Australian part of the Cooper Basin, and it is a matter of public record that the South Australian part of the Cooper Basin has been very thoroughly worked and developed by Santos over the years and most of the productive parts of the basin are now located outside of South Australia and in Queensland. No doubt the production plant is in Moomba—that is a central facility which is in South Australia—but the South Australian Cooper Basin Assets head office is by no means the place where decisions in relation to the company's future developments take place.

The Premier has also sought to suggest that employment in Santos and its head office will remain at something like the levels that currently exist—for example, the deed refers to the fact that there are 1,700 jobs in South Australia, a figure that has been mentioned by the Premier in his public utterances. However, those jobs are not guaranteed; the deed of undertaking merely mentions that number as descriptive of the current situation without giving any assurance that those levels will be maintained. The functions of the South Australian Cooper Basin Assets head office may well continue in the future, but there is no guarantee that the workforce performing those functions will not be reduced. Indeed, the undertaking itself only continues (to quote the deed) 'as long as those functions are carried out.'

No-one should forget, for example, that News Corporation, a company which once had its domicile and head office in South Australia, moved its domicile to Delaware. We are grateful that Mr Rupert Murdoch comes to South Australia annually for a meeting, but there is no doubt that the real domicile and head office of News Corporation is now offshore—and the same thing could well happen to Santos. Even under current ownership and management it need not necessarily stay here, and, clearly, if there is a change in the majority ownership of Santos it is likely that there will be such changes for taxation or other commercial reasons. I do not in any way deny the right of Santos to do that, whoever are the owners, but I do not believe it is appropriate for the Premier to try to schmooze the South Australian population (as he has done) by suggesting that this undertaking contains measures that it does not, in fact, contain.

I also query the fact that, under the deed, the Premier himself is given sole power to relieve the company of certain obligations. Santos has, for example, been a generous charitable contributor to the South Australian community and it will continue to be so—indeed, it agrees to so continue in the deed. However, there is always the possibility that a company will tailor its charitable donations to causes favoured by the Premier, who has the power to relieve the company of its obligations in certain circumstances. This suspicion arises from the fact that we see the initial donations of Santos, under the deed of undertaking, to charities that the Premier has, by his actions, indicated are favourite causes of his—for example, the notion of Adelaide being a university city. He is not the only one who supports that cause—I do and so do many of us. However, it is intriguing that it is one of the donations Santos has made.

Of course, the other donation is to the Royal Institution, which is a project in which the Premier has taken great personal interest. It is intriguing that Santos should suddenly become a major benefactor of the Royal Institution to be established here. With those comments, I indicate support for the second reading and hope that the bill has a rapid passage.

The Hon. P. HOLLOWAY (Minister for Police, Minister for Mineral Resources Development, Minister for Urban Development and Planning) (17:38): I thank honourable members for their contribution to the debate and their indication of support. I will make a couple of comments in relation to those contributions.

First, I think that it is worth pointing out for the benefit of the Hon. David Ridgway that, as has happened with electricity pricing, there have been significant changes in gas pricing over the last decade and a half, and it has come about through national competition policy reform. Indeed, those of us who debated the electricity bill last week would be well aware that there will be reforms to the gas act into the future that reflect that position.

What I think is most important in relation to gas prices is that the Santos shareholding legislation has very limited impact, if any, on gas pricing. Indeed, one of the submissions from Origin Energy to the inquiry conducted by the government in relation to this legislation (and I think that the opposition has a copy of this) was from Tony Wood, the Executive General Manager Corporate Communications and Government Relations. The conclusion was:

Origin considers that there are sufficient actual and potential competition at play to ensure that lifting the cap would be highly unlikely to lead to excessive concentration and consequent high gas prices in the South Australian gas market. Retaining a cap in this environment is likely to impede normal commercial activity and prevent the market from reaching an efficient outcome.

I guess what we can say in relation to gas prices, as with all hydrocarbon prices, is that obviously there are upward pressures simply because the amount of hydrocarbon in the world is in decline. If one were to make a prediction about where future gas prices will be, one would be pretty safe in predicting that they would be likely to go up rather than down. What we would argue is that they really have very little to do with the ownership of Santos.

In any case, the resources we have within the Cooper Basin are, of course, declining, which brings me to the second point about why it is appropriate that we deal with this legislation now and why it may not have been appropriate some years ago. I will comment on the contribution made by the Hon. Rob Lucas with respect to the position in 2001.

I remember that, just after the election in 2001, as the minister responsible for the shareholding act I was presented with a sealed document marked 'confidential': it was the Kowalick report. At that stage, the SEAGas pipeline was a concept, and I think that the Hon. Rob Lucas outlined the history fairly accurately. There were a couple of pipelines, and this government, through minister Conlon, was able to get the two proponents together, and we had a larger pipeline.

Of course, that pipeline was first used on New Year's Day (and I am not sure whether it was in 2003, 2004 or 2005) when the Moomba plant went down. We were very fortunate that the SEAGas pipeline was ready for operation and ready to go on the very day that the plant went down. We had enough difficulties as it was, but they would have been much more severe had the gas pipeline from the Otway Basin not been available.

That was really the turning point in relation to this debate. As I said, the Hon. Rob Lucas put the opposition's position as to why it did not act in 2001 on the Kowalick report. I understand that, because it was certainly my view when we first came into government. However, there is no doubt that the presence of the SEAGas pipeline changed competition, and it certainly changed the situation.

Nevertheless, we should accept that the Cooper Basin gas is a declining resource. As each year goes by, the relevance of the Cooper Basin in South Australia will decline, even though some very useful oil exploration is going on there at the moment. The old Santos holding, PELs 4 and 5, or 5 and 6, whatever they were, have been broken up, and a number of smaller explorers are successfully looking for oil and gas within the basin.

Given that the gas was first exploited more than 40 years ago, we must recognise that it is a declining resource, even though Santos may well be looking to use the Cooper Basin to store CO2 for geosequestration. I know that is one of the important roles Santos sees it can play in the future in South Australia; hopefully, under these changes, it may well come about.

I think it is important to put on the record the importance of the Cooper Basin now to Santos. The basin now accounts for only 23 per cent of all Santos production and only 17 per cent of its reserves. Put another way, it means that 70 per cent of Santos production, and 83 per cent of its reserves, lie outside the Cooper Basin. If one considers the contributions we have just heard, particularly that of the Hon. Robert Lawson, one needs to recognise that Santos always had the potential to restructure its assets so that the current legislation could have been avoided.

Of course, the cost to them would have been not only the goodwill and their customers but also significant legal costs in restructuring and rewriting all of their contracts. But, given the 17 per cent of the reserves and 23 per cent of production of the Cooper Basin, that, after all, is the only thing under the current legislation that really ties Santos to South Australia. There is nothing in the current act that provides head office jobs or keeps the head office here. All that the current legislation does—and I think this tended to be overlooked in the whole debate—is provide that ownership cannot exceed 15 per cent, and it only applies in relation to Santos or one of its subsidiaries operating within the Cooper Basin.

As the Cooper Basin continues to decline in any case, the hold that we would have had over Santos would have also declined. That is why I think it is important that we recognise the job that the Premier, the officers in the Department of Trade and Economic Development within PIRSA, and others in government have done to negotiate an agreement where we can, through the memorandum we have before us, provide significant ongoing benefits to the state. As I said, the significance of the Cooper Basin to Santos and the state is in decline, and that will continue to remove our hold over Santos.

That brings me to some comments made by the Hon. Rob Lawson about qualifications to the deed and the like. In addition to the head offices of the Cooper Basin entity and the operational headquarters, under 4.2 the deed of undertaking also ties in other Santos roles, including the onshore South Australian and offshore Australian exploration, South West Queensland Cooper Basin Operations, Australian Gas Marketing and Commercialisation, Australian IT Services, Australian Accounting Services, Australian Human Resource Services, and Australian Procurement and Logistics Operations. Again, I remind people that if we just leave the act in place it really does not tie Santos to do anything in the state. It simply states that not more than 15 per cent of its share holding can be held by more than one owner.

The fact that we now have a deed that brings in these conditions to the head office is an achievement that I think ought to be recognised. It also needs to be understood that, in relation to the value that we will get out of this deed of undertaking from Santos, there were alternatives. The Hon. Robert Lawson referred to the case of News Limited. The fact that we have been able to negotiate this agreement, I think, reflects significant credit on the Premier in being able to achieve such an undertaking.

The Hon. Robert Lawson seemed to suggest that the speed of undertaking that we have achieved is not very much, because we saw how News Limited could move offshore. In relation to Santos, the point is that that could happen under the current legislation quite easily if it had restructured its assets so that 73 per cent of production and 80 per cent of reserves that lay outside the Cooper Basin were in some other vehicle. I think those points need to be put on the record in relation to this debate.

I trust that that answers all the points. Again I thank all members for their contributions. The time has come in relation to this legislation. Things have changed over the past 30 years. We do have alternative gas supplies. The Cooper Basin is a declining resource, and we now have a deed of undertaking which ensures that, should a takeover of Santos occur, there are significant protections for the state that do not lie under the current legislation. I think that you must put all of those things together. It is now time for this legislation to be passed. It is time for the old shareholding restriction to be removed, notwithstanding the fact that I think it has served the state very well, particularly back in the late 1970s when there was a real threat to the state of Alan Bond taking over and plundering the resources of the state.

Bill read a second time.

Committee Stage

In committee.

Clause 1.

The Hon. D.W. RIDGWAY: I did ask a couple of questions, in particular, about the impact that this change will have on gas prices. While the minister may well have made some attempt to refer to that, I would like him to repeat it if I was out of the chamber. I would like some information from either the minister or the adviser on the likely impact on gas prices as a result of this.

The Hon. P. HOLLOWAY: I indicated previously that hydrocarbons in the world are drying up, and prices will increase on all hydrocarbons whether they are gas or oil. Obviously, you are not saying anything particularly challenging when you say that. My point earlier was that, really, the shareholding of Santos is likely to have very limited effect, if any, on gas prices. I indicated earlier that there have been changes to the gas pricing regime (as there have been for electricity) during the 1990s and beyond.

We discussed the electricity bill last week relating to distribution and setting up prices and charges, and obviously gas will follow. There have been various competition agreements. We still do have control of gas prices for small customers, as I understand it, under the Gas Act. There is nothing in the Santos shareholding bill which in any way impacts directly on gas. I did read out earlier a paragraph from the correspondence the government received from Origin Energy in relation to the review of the Santos legislation. That paragraph states:

[Origin Energy] considers there is sufficient action or potential competition at play to ensure that lifting the cap would be highly unlikely to lead to excessive concentration and consequent high gas prices in the South Australian gas market. Retaining a cap in this environment is likely to impede normal commercial activity and prevent the market from reaching a sufficient outcome.

The other point I made is that the Cooper Basin resources are in decline. Probably the Cooper Basin will still be significant to this state for at least another decade. Hopefully we will get some new discoveries from some of the smaller oil producers, such as Stuart and Beech. Indeed, I think that Innamincka Energy made that very useful oil discovery the other day. Some of the smaller explorers in the Cooper Basin are discovering some very worthwhile additions to oil and gas. However, in terms of the major gas fields that have supplied this state for 30 or 40 years, the Cooper Basin is unlikely to continue on in any case. Already significant portions of our gas are coming from Victoria, so that will determine the price. Eventually, we might get a national gas grid. Our gas in the next decade or so might come from the north-west shelf, the Timor Sea, Papua New Guinea or coal seam methane resources in Queensland.

Hopefully, we might discover some in the Officer Basin or the Arkaringa Basin where exploration is happening. Wherever it comes from—and certainly if it is outside this state—it is likely to be at a higher price than current gas. Even if we had a situation like we had 15 years ago, where that gas from the Cooper Basin was controlled much more rigorously pre-competition policy than it is now (and because it is supplying so much less of our gas needs), the impact on price would be less significant. As I say, the pressure on gas all around the country and all around the world is likely to be upwards rather than downwards. All the evidence is that changing the Santos shareholding cap will have little impact on price. Other factors will determine price.

The Hon. D.W. RIDGWAY: I am not sure whether the minister or his adviser can answer this question, but given that a significant amount of the state's electricity is produced from gas, are they supply contracts with Santos or is Santos, if you like, a first stage supplier of gas and then it is on sold to other companies, and what impact is that likely to have on electricity?

The Hon. P. HOLLOWAY: One reason to build the SEA Gas pipeline was to supply Pelican Point. Certainly that has contracts with the suppliers of SEA Gas. Already there is a competitive electricity market. Of course, when Moomba went down on that New Year's Day several years ago, SEA Gas supplied the entire demand of the state. We were very fortunate that we were able to negotiate some agreements with Victoria, and a whole lot of gas sharing had to go on. We survived that month or two until the Moomba plant was back in operation.

Not only do we have some competition to keep prices down but also we have some security of supply that we did not have with the original Moomba price. Even from the Cooper Basin, I think a significant proportion of our gas comes across the border now from the Queensland part of the basin. Increasingly we are becoming a national gas market. At the end of the day the Cooper Basin assets are all that this act links to and are increasingly unimportant in relation to both security and price.

The Hon. D.W. RIDGWAY: Earlier today I asked a question in relation to something in the Auditor-General's Report about Santos overpaying royalties. I noticed in its deed of arrangement that Santos has a self-regulatory approach to its commitment to complying with that deed of arrangement. What checks and balances are in place that will guarantee that the community is not short-changed as a result of this deed of arrangement?

The Hon. P. HOLLOWAY: The deed of arrangement at 4.4 is reporting on the deed of undertaking as a whole. In relation to the Auditor-General's petroleum revenue about which the honourable member asked earlier, I can provide some of the answer now. In response to overpayment of the total royalties on petroleum by Santos in 2005, PIRSA employed an outside independent auditor (Deloitte) to provide advice on its processes for royalty collections in 2005. Deloitte made a number of recommendations for process improvements in relation to the collection of Petroleum Act revenues.

It was the Auditor-General's view that some of these recommendations had yet to be fully implemented. Audit recommended that, in addition, the department review, agree and document that all producers' assumptions are in accordance with the Petroleum Act 2000 and that they validate all royalty returns against documented assumptions. PIRSA has accepted these recommendations.

PIRSA contends that data routinely available to the Petroleum and Geothermal Group (that is part of PIRSA Minerals) and the group's existing capabilities to probe and validate compliance by exception enable the state to reduce the risk that royalty payments may be incorrect to as low as is reasonably practicable. That routine review of all royalty payments provides a basis to assess the need for further data on a case by case basis. Nonetheless, PIRSA has offered to bolster management processes to make the review of royalties payable pursuant to the Petroleum Act more open to scrutiny and transparent to stakeholders.

In addition to probing for compliance by exception, the Petroleum and Geothermal Group has now also implemented a schedule of routine site audits of all royalty payers, and all royalty payers will be asked to have their independent auditors provide additional assurance in relation to key assumptions and their application to royalty calculations. This approach bolsters existing processes that already minimise the risk that royalty payments may be incorrect to as low as is reasonably practicable without excessive cost.

The Petroleum and Geothermal Group has also established an internal multi-disciplinary standing committee, to be known as the Revenue Review and Audit Committee. This committee will have the explicit ongoing responsibility to plan, implement and document the actions necessary to administer, compliance probe and field audit revenues paid pursuant to the Petroleum Act. This committee will manage, monitor and document the progress of all follow-up actions in relation to the Deloitte 2005, Deloitte 2007 and Auditor-General's 2006-07 reviews.

Deloitte was subsequently requested to provide follow-up advice in respect of the Petroleum and Geothermal Group's progress towards compliance with the initial Deloitte report. By the attached 'Royalty Follow-up; Status Report October 2007', Deloitte concluded that two of the outstanding issues had now been completed and that the remaining two issues were on track to be completed within the time frames agreed with the Auditor-General.

The honourable member also asked questions about minerals today, and I will provide a written report in relation to minerals. It is not relevant to this debate, but suffice is it to say that the principal payer of royalties under the Mining Act is, of course, the Olympic Dam operations and, obviously, with the indenture now under review, greater transparency and some of the issues the Auditor-General raised in relation to royalties will be addressed as part of those indenture negotiations, but that is outside the scope of this.

The Hon. D.W. RIDGWAY: I thank the minister for the answer to a question that was somewhat irrelevant. I am interested to look at the audit process. As we know, with the commitment from Santos with regard to 90 per cent of its operations, we are talking about 1,700 employees. Will the minister explain how we can be certain that it is complying with this deed of arrangement, and what process is put in place to ensure that it receives adequate audit checking?

The Hon. P. HOLLOWAY: Again, I make the point that under the current act all that happens is that shareholdings are limited to no more than 15 per cent. The head office is not mentioned and there is virtually no constraint at all. As I indicated in my second reading response, if Santos wished to restructure its holdings so that the 77 per cent of production and 83 per cent of reserves that lie outside the Cooper Basin were in that restructured group, we would have no hold on it at all.

However, the key parts of the deed of undertaking are the compliance section; 4.4 is reporting; and 4.4(b) on page 7 provides that in the event of a threatened or traditional break of this deed of undertaking the state is entitled without limiting its other rights to seek an injunction or audit the specific performance to restrain or compel the relevant act or omission. Paragraph (e) provides that, in the event of a breach or threatened breach of an undertaking provided by the company in clause 4.1 or 4.2, the Premier may, by notice in writing delivered to the registered office of the company within 20 days of becoming aware of the breach, require to company to (1) rectify that breach or withdraw the threatened breach; or (2) provide a cure plan as set out in a deed poll of the state in a form to the reasonable satisfaction of the state to mitigate the effects of that breach or threatened breach within 60 days of the company receiving the notice. They are the relevant parts of that.

The Hon. D.W. RIDGWAY: In the deed it talks about the Premier being the person or the individual without whose approval Santos–or the company that may at some point in the future own Santos–cannot vary the deed. I asked in my second reading contribution why it is the Premier, not the cabinet, not the parliament and not the minister. I would have thought that, given that this is a significant economic decision for the parliament to make, it should have been involved in that decision or that, at the very least, a report be tabled in the parliament as to why the decision was made to change the deed of arrangement. I would like some clarity on why it is the Premier, not the minister, not the cabinet and not the parliament.

The Hon. P. HOLLOWAY: The first point to make is that the deed of undertaking is given force by weight of the fact that it is attached to this legislation. That was one of the recommendations in the review of this legislation: that, as well as negotiating significant benefits to the state with the removal of the share cap, there should be some legally binding agreement. As to why it is the Premier, obviously, the Premier is the signatory to the agreement, and I would be very surprised if the Premier did not discuss with the cabinet any changes in relation to the deed.

I do not think it would have been impossible to have had it. If you are starting to specify conditions that parliament would need to address, then the chances of getting any negotiated agreement with Santos would have been very slim indeed. That would be my estimation of it.

The Hon. D.W. RIDGWAY: Is the minister indicating that it is possible under the deed of arrangement for the Premier in isolation, even though he says the risk is somewhat small, to change the arrangements without having to refer it to cabinet or to report to the parliament?

The Hon. P. HOLLOWAY: The whole point about allowing any variation is if there is some significant upside to the change. You would expect to vary this deed only if there was some very unusual situation or, in the event of a takeover, some additional benefits were to be provided to the state, which conceivably could happen. In any case it applies for 10 years.

The Hon. D.W. Ridgway interjecting:

The Hon. P. HOLLOWAY: That is unlikely, but it is a possibility.

The Hon. D.W. RIDGWAY: To clarify, it is possible that the premier of the day, whoever that may be, could alter the deed of arrangement. It is an agreement between the Premier and Santos and not between South Australians and Santos.

The Hon. P. HOLLOWAY: The Premier is the head of the government of the state of South Australia, which is why it is in his name. I am sure there are plenty of other examples where the Premier signs on behalf of the state and it is reported back to the government for discussion. The Premier, and the Prime Minister in a national capacity, signs on behalf of the state. I do not think there is anything unusual about the Premier signing an undertaking on behalf of the state.

The Hon. R.D. LAWSON: The Premier issued a public statement on 24 October, as follows:

These commitments will be supported by a $100 million legally enforceable compensation mechanism, should there be a significant reduction in corporate presence.

That is not a correct statement, is it?

The Hon. P. HOLLOWAY: To correct what I said previously, the Premier is not really a signatory: Santos has signed this as a deed of undertaking to the Premier. It was incorrect to say that the Premier was a signatory. The Premier is the head of government and there are a number of similar sorts of operations one could find that would operate in a similar way. I can only repeat the point I made in my second reading response that, at present under the act, the only limitation imposed on Santos is that one corporation cannot hold more than 15 per cent of the shares.

There is nothing in the current act that talks about head offices, benefits to the state or anything like that. Negotiated here is what Santos has agreed in return for lifting the cap, even though in theory it could have found ways around it, even though it would have been costly in terms of legal fees and so on. It could have restructured its assets outside the Cooper Basin in some other entity. But Santos is a good corporate citizen and has behaved honourably.

The Hon. R.I. Lucas: That's not the question.

The Hon. P. HOLLOWAY: I am not sure what is the question.

The Hon. R.D. LAWSON: Will $100 million be paid if there is a significant reduction in corporate presence, as stated by the Premier in his press statement?

The Hon. P. HOLLOWAY: The undertaking is that if Santos breaches the agreement, as we have indicated in answer to the previous question, a penalty is applied and it is set out—

The Hon. R.D. Lawson: I draw the minister's attention to clause 5(g).

The Hon. P. HOLLOWAY: If the company breaks the agreement in its first year it must pay the state a full $100 million under the deed. Regardless of taping down the break fee to $50 million at year 5, the deed does not terminate until Santos pays at least $100 million to the state. In the event of a break, the state will always receive at least $100 million. That is the design of this memorandum.

The Hon. R.D. LAWSON: Unless it is varied or unless the event occurs later in the period. It is not $100 million in all circumstances, as the Premier suggested.

The Hon. P. HOLLOWAY: My advice is that the deed does not get extinguished unless $100 million is paid. In terms of variation, the only reason you have a variation clause to something is if there is a significant upside for the state and if that becomes an option.

The Hon. R.D. LAWSON: Santos representatives themselves acknowledged the error in the Premier's statement, and it is a pity the government is not prepared to be as honest as the company.

The Hon. P. Holloway: What are the errors you are suggesting?

The Hon. R.D. LAWSON: That you get $100 million in the event of any significant reduction in the corporate presence in all circumstances.

The Hon. P. HOLLOWAY: Under clause 3 of the deed of undertaking, 3.2(a)(3) refers to termination as follows:

an aggregate amount of at least $100 million is paid as deed expenditure.

So, the deed of undertaking will terminate automatically when any of the following circumstances apply: (1) a period of 10 years has elapsed; (2) the parliament imposes or authorises the imposition of a new share cap, etc.; or (3) an aggregate amount of at least $100 million is paid as deed expenditure.

If you are talking about the jobs in relation to what is here in the Cooper Basin, I can only repeat the points I made earlier. The Cooper Basin is in decline. It is now just 23 per cent of Santos's operations and 17 per cent of its reserves, but that will almost certainly decline, as far as Santos are concerned, over the next decade. That is the background against which this whole decision has been taken.

The Hon. R.D. LAWSON: Is it not the case that deed of expenditure includes payments made pursuant to the charitable agreements, some of which the company was going to pay in any event, as it acknowledged? So, the deed of expenditure does not include payment to the government of South Australia of $100 million.

The Hon. P. HOLLOWAY: It would do in the first year. I will repeat what I said: if the company breaks the agreement within the first year they must pay to the state a full $100 million under the deed, and then there is a tapering down. Regardless of the tapering down of the break fee to $50 million at year 5, the deed does not terminate: Santos pays at least $100 million to the state. That would, of course, include payments it had made under that scheme.

I know the Hon. Robert Lawson is trying to negate the achievement of the Premier in relation to what has been negotiated here, but I think we should recognise that under this deed of undertaking Santos has to contribute significantly more than has been the case in the past. We should recognise that Santos has been not just a responsible corporate citizen but has played a significant role in its support of some key institutions, such as the symphony orchestra, the petroleum school at the university and a number of other community activities. That is something for which Santos should be commended.

Under the deed of undertaking Santos have agreed to extend those significant community contributions that the company has made. They are already significant but they will be even more significant as a result of this deed of undertaking, and that is surely a good thing.

The Hon. R.D. LAWSON: My point is that the Premier has overstated the effect of the deed in many respects, including the suggestion that there are guarantees of employment and that there are guarantees in relation to a head office, which most people would understand as being a corporate head office. There is also an error in the statement made publicly by the Premier that these commitments will be supported by a $100 million legally enforceable compensation mechanism should there be a significant reduction in corporate presence; whereas, the fact is that certainly later in the term of this deed there is no $100 million legally enforceable compensation mechanism in respect of a significant reduction in corporate presence.

The Hon. P. HOLLOWAY: The honourable member can make what points he likes, but I think that what has been achieved here, and I think most South Australians will—

An honourable member interjecting:

The Hon. P. HOLLOWAY: I put the question back to the QC then: what protection exists under the current act as far as the head office or any community contributions (if I can call them that) exist? The answer is that there are none whatsoever. I am sure the honourable member would agree with me. Secondly, does he accept that (like the example he gave earlier of News Limited) there are ways that Santos could, if it wished, have got around the current act?

The Hon. R.D. LAWSON: Clearly, that is not the question I am posing—that is not the point I am making. Rather than simply saying that we are in a better position now than we were before, my point is about honesty and integrity in describing correctly the effect of legal documents.

The Hon. P. HOLLOWAY: I do not think I can add anything more productive to what I have already said.

The Hon. R.I. LUCAS: I support the comments that my colleague the Hon. Mr Lawson has made, with a much more substantive legal basis than I or the Hon. Mr Holloway has. In relation to this deed that we are being asked to approve as a parliament, 4.2(a) refers to the protections in relation to 90 per cent of this company's South Australian-based workforce, which currently equates to approximately 1,700 jobs. I ask the minister how the government itself has established the total number of jobs, or is that an estimate that has been provided by Santos? Secondly, in relation to that, 'public sector' obviously refers to full-time equivalent positions. Are we talking about full-time equivalent positions here or is the minister unaware of the basis upon which the 1,700 has been calculated?

The Hon. P. HOLLOWAY: Santos obviously provided the information in relation to the number of jobs, but it probably publishes these things in annual reports and all sorts of things anyway. I do not think there is any particular company secret about it. In relation to full-time equivalents, I think these are FTEs—we would perhaps have to check, but that was my recollection. The other point I make relates to the reporting (4.4(1), page 5 of the Deed of Undertaking):

The company undertakes that at least once every 12 months during the term it will provide a report to the Premier confirming and certifying Santos's compliance with all the terms of this deed, including, without limitation, providing workforce numbers, rolls and employment status at the time of the report and full audited details of payments made under clause 4.3.

The Hon. R.I. LUCAS: I think, and I believe the minister would acknowledge, that in this whole debate we need to understand the basis upon which the calculation has been done and the guarantee or undertaking that has been given. If the minister's understanding is correct that it is full-time equivalent jobs, then that is the agreed basis for understanding. I believe the minister's adviser is involved with the Department of Trade and Economic Development, and all the activities of that department are based on discussions of full-time equivalent jobs; otherwise (and as we have with the shared services initiative in the public sector) we can have 4,000 positions but only 2,500 full-time equivalents, or something. There are significant differences in some companies and sectors between total positions and full-time equivalent positions. I accept that the minister believes it is full-time equivalents, but I seek an undertaking from him to confirm that that is the case.

The second aspect relates to the undertaking the company has given in terms of approximately 90 per cent of the company's South Australian-based workforce, which currently equates to about 1,700 jobs. What is the government's understanding of the company's position, in terms of its description of jobs in relation to the employment of outsourced contractors? As Minister for Mineral Resources Development, the honourable member would be aware that the mining and resource companies are very much into the employment of outsourced contractors in a whole variety of areas these days—and increasingly so. Do the 1,700 jobs described here include estimates of contracted employees working for Santos in some way?

The Hon. P. HOLLOWAY: I am advised that it does include some contractors. However, in relation to the Cooper Basin and the fact that it happens to be in South Australia (which, after all, is the only hold we have over Santos), and given the investment there, obviously there will have to be employment there for as long as the Cooper Basin continues to produce gas. There will have to be employment by Santos within that area anyway so, in relation to those sorts of contractors (the drillers and all the others out in the field), what we most need to happen is to ensure that Santos (or whoever else operates in the Cooper Basin) continues to explore, and that we continue to make it attractive. At the end of the day, that is what we need to do to ensure that those people are working out there; however, as long as the Cooper Basin continues to produce gas it will have those sorts of people working there.

The Hon. R.I. LUCAS: The minister is obviously aware that some of those 1,700 jobs are outsourced contractors. Has the company provided him with information as to how many of these jobs are estimated to be outsourced contractors?

The Hon. R.I. LUCAS: I am advised that most are full-time equivalent jobs, but obviously there are some in specialist areas. Certainly, and from my visits to the Cooper Basin, it is obvious that there are a number of specialists working either on an ongoing or periodical contract basis with Santos; these are experts in particular fields. However, I am advised that most of the jobs are Santos's own full-time equivalents who would, I guess, be working at the processing plant itself at Moomba.

The Hon. R.I. LUCAS: Has the Premier entered into an agreement with Santos that sets a time each year for when this report must be provided? The deed does not seem to indicate that (although I may not have read it correctly), but there may be other supporting documents. Is there a set date upon which the company is required to report on its employment numbers and other requirements?

The Hon. P. HOLLOWAY: The company has undertaken to report at least once every 12 months during the term, so one would expect that. Of course, the deed will take place when the act is assented to, but there is a 12-month period where the cap remains in place. That is really the beginning; when the bill passes this council today and it is assented to, that is when—

The Hon. R.I. Lucas: But there is no set period every year? The company could report in October one year—

The Hon. P. HOLLOWAY: It is within 12 months, so the period will begin when the act is assented to and then within 12 months of that date it will have to report. One would expect that it would be towards the end of the term.

The Hon. R.I. LUCAS: But there is no requirement. Without wanting to delay it unnecessarily, all I want to confirm is that there is no set date in each 12 month period on which it has to be reported; that it is an issue of choice for the company.

The Hon. P. HOLLOWAY: Mr Chairman, I draw your attention to the state of the committee.

A quorum having been formed:


The Hon. P. HOLLOWAY: I move:

That the sitting of the council be extended beyond 6.30pm.

Motion carried.


The Hon. R.I. LUCAS: The question I asked sought to confirm that Santos can report at any time within the 12 months; that is, there is no requirement in this document, or anywhere else, that states that Santos must report as of such-and-such a date in the 12-month period.

The Hon. P. HOLLOWAY: The important thing is that Santos will have to report during the first 12-month period. So, before the cap is lifted, it will have to report during that time and at least every 12 months thereafter. The honourable member is correct that it does not say that it must report every 12 months on a specific day; it states once every 12 months. Again, I point out that the commencement of the deed relies on when the bill is assented to. However, there is no specific date.

The Hon. R.D. LAWSON: My question is: has the government obtained any advice on the effect of clause 4.4(2)(f) of the deed, which provide:

If the company fails to comply with a notice issued in relation to a material breach, resulting in a loss to South Australia of not less than $5 million...

In particular, how is 'loss' to the state of South Australia defined? The point I make is that there can be a breach of this deed without the state of South Australia (that is, the party to this arrangement) not suffering itself any loss at all.

The Hon. P. HOLLOWAY: This clause is designed in case Santos does not meet those undertakings in relation to the payments to the various community contributions, if I can call them that, and that is where this clause would come into effect. In relation to the point made by the Hon. Rob Lucas, I refer to clause 4.4(b), which provides:

In the event of a threat or actual breach of this deed of undertaking, the state is entitled, without limiting its other rights, to seek an injunction or order for specific performance to restrain or compel the relevant act or admission.

I suggest that, in relation to the employment or the reporting, it gives the state some back-up powers in relation to ensuring that it gets this information. I would not want to suggest that Santos would not comply with it, but obviously this deed of undertaking must apply with respect to any future takeover or other event. These clauses give us extra powers in relation to ensuring that we get the sort of information we need to assess whether or not there is a breach.

The Hon. R.D. LAWSON: The minister glibly brushed aside my question by making an entirely false statement. I referred to clause 4.4(2)(f), which provides that certain amounts are payable if the state of South Australia suffers loss. The particular events of the state of South Australia suffering loss are not the nonpayment or underpayment of any of the social responsibility or community benefits under clause 4.3, as the minister suggested. It specifically mentions clause 4(1), which relates to the maintenance in South Australia of the Cooper Basin head office, and 4(2), which is the maintenance in South Australia of certain functions undertaken by the company. The clause provides that if notice is given that there is a breach and the breach relates to the fact that the company has not maintained its South Australian Cooper Basin assets head office, or has not maintained certain functions at that office, what loss will the state government of South Australia suffer in consequence of those breeches? Unless the state of South Australia can show that it suffers a loss it can recover no compensation.

The Hon. P. HOLLOWAY: In relation to clauses 4(1) and 4(2), which relate to employment, obviously the state has a number of ways of measuring Santos's contribution. One of the most obvious is payroll tax. Through that we have pretty good access to Santos's contribution in relation to employment.

The Hon. R.D. LAWSON: But there is no undertaking that 1,700, or any other number of employees, will be maintained in South Australia. The undertaking is not about the number of people employed; it is about the functions which are to be performed.

The Hon. P. HOLLOWAY: That is in clauses 4(1) and 4(2), isn't it?

The Hon. R.D. LAWSON: Yes.

The Hon. P. HOLLOWAY: Those functions do relate to jobs.

The Hon. J.S.L. Dawkins interjecting:

The Hon. P. HOLLOWAY: Again I make the point that the current legislation has no protection at all; so, if we do not pass this, we simply go back to just a simple limit on the shareholding cap. Obviously, what has been negotiated here gives the state significantly more comfort than what existed under the present act, which, as I said, is simply a restriction on shareholding.

This provides for an undertaking by Santos to provide significant benefits to the state, or face compensation, or face the payment of losses up to $100 million. If you read on, clause 4(4)(f) provides that 'the company will pay to the state by way of compensation such amounts as the state shall certify as its loss, which certificate is conclusive in the absence of manifest error provided that, before issuing the certificate, the Premier must discuss and consult with the chief executive officer or the chairman of the company and have regard to their views regarding the state's loss'.

Again I make the point that the state has various ways of assessing these things, and not just in relation to payroll tax. I know through my other portfolios that in the Petroleum Act there is a lot of significant information available in relation to Santos's activities in the state, and I am sure that there are also other departments in possession of it. I can only make the point that I believe the state has a number of ways that it can assess or detect whether Santos, or some subsequent owner of Santos, were to not comply with the spirit of the letter of this particular deed.

The Hon. R.D. LAWSON: The minister has, I suggest, a gullible appreciation of what is involved in obtaining a loss which you seek to certify against a company like Santos. I want to move on to clause G(5) which provides that, where the earliest compensable event occurs after the fifth anniversary of the commencement date, $50 million is paid. That is a capped amount—$50 million. If that says that it is $50 million after five years, it is not correct to say, as the Premier did, that the commitments are supported by a $100 million legally enforceable compensation mechanism.

The Hon. P. HOLLOWAY: My advice is that the deed does not terminate until either the 10 years have past and Santos has met its obligations or $100 million has been paid. The termination payments are compensation to South Australians for the losses incurred by the breaching or breaking of this agreement. As each year of the terms of the deed is completed, the loss to the state is reduced; therefore, the amount of compensation a company would be owe to the state would be equally reduced.

Each year of the agreement Santos will provide South Australia with significant amounts of community funds totalling $60 million, including $5 million to the Royal Institution in the first 12 months, and during the 10-year term of the deed it will pay $10 million towards the Santos Indigenous fund, a further $10 million towards education initiatives, and an aggregate amount of at least $35 million to organisations or projects of demonstrable benefit to Santos and South Australians.

In the life of the agreement, Santos will provide at least $60 million to the South Australian community through these various payments. That will come during the course of the agreement. The reduction, therefore, in the compensation that will be paid obviously reduces as time lapses and as these benefits from Santos to the community accrue.

The Hon. R.I. LUCAS: When we were looking through the points that the Hon. Mr Lawson raised in 4(2)(f), where it refers to clauses 4(1) and 4(1), why did the government not include 4(2)(a), which is the warranties? In response to the question of how you actually determine the loss, the minister referred to payroll tax and jobs. The only clear reference to that is in clause 4(2)(a). Why didn't the government include 4(2)(a) in the drafting of the subsection to which the Hon. Mr Lawson has referred?

The Hon. P. HOLLOWAY: This was all drafted. Obviously crown law was involved in the drafting of this document. My advice really is that clause 4.2(a) is simply a statement of warranties. It is clauses 4.1 and 4.2 that define the corporate presence, and essentially that is what we are dealing with in terms of compliance and reporting. In clause 4.4(f) we are dealing with that corporate presence. Clause 4.2(a) provides:

The company acknowledges and warrants that the roles covered by clauses 4.1 and 4.2 represent...

That is just a definitional clause.

The Hon. R.I. LUCAS: The points the Hon. Mr Lawson is making are well founded, and the government would do well to at least consider them. My understanding is that the amounts of the compensation in paragraph (g)—the $50 million through to $100 million about which you are talking—must be established by losses under the definition outlined in paragraph (f). As I understand it, the point the Hon. Mr Lawson is making is that they are all predicated on the basis of clauses 4.1 and 4.2, which refer to the head office and the roles of Santos.

The question the Hon. Mr Lawson is asking is: how do you establish a greater than $5 million loss in relation to the undertakings from clauses 4.1 and 4.2? As I understand it, if you want to claim $100 million, $70 million, or whatever the number happens to be, you must have established and then certified the extent of that loss under paragraph (f) as it relates to clauses 4.1 and 4.2. Those clauses do not refer to the number of jobs specifically; they talk about general roles and the head office.

Is it correct that the numbers to which the minister refers in terms of the potential compensation of $50 million to $100 million based on losses are the losses referred to in paragraph (f) which are therefore, going back, based on breaches of clauses 4.1 and 4.2?

The Hon. P. HOLLOWAY: Clause 4.2(a) is just a definitional clause, and clauses 4.1 and 4.2 define the roles that are required to be here. I am advised that the government quantifies the contribution that jobs make to the economy all the time. It is just standard practice for DTED, as it was for its previous incarnations as other departments. As I understand it, that is what it does all the time. It looks at the contributions companies make to the economy in relation to jobs, and that is really what is being spelt out here.

The Hon. R.I. LUCAS: Obviously, we will not convince the minister to concede that there is an error or a problem in relation to this. However, the minister is giving an assurance to the parliament that he has had legal advice that this collection of clauses will allow the state and its lawyers in certain circumstances to indicate that there have been losses of $50 million to $100 million, or whatever it is, and be able to ensure that, in those circumstances, Santos must pay the compensation of $50 million or $100 million.

The Hon. P. HOLLOWAY: The state government received a legal sign-off on the deed of undertaking by both crown law and independent legal advisers, Corrs Chambers Westgarth. The Crown Solicitor has advised that the deed represents a good outcome for the state and there are no escape clauses in the final version of the deed. Corrs Chambers Westgarth has also advised that the executed deed is valid and enforceable.

Of course, as a final step, the passage of this bill will guarantee that the deed will have the full force and effect of the law. That is the advice on which we are operating. As I say, if we had done nothing, then within the next decade the Cooper Basin's contribution to Santos would become less and less. There is absolutely nothing in the current legislation which gives any protection to Santos other than in terms of its being taken over.

The Hon. R.I. LUCAS: I have not seen the exact nature of the Corrs Chambers Westgarth sign-off, but if it says 'valid and enforceable', in essence that means next to nothing. Of course it is enforceable. If, as the Hon. Mr Lawson has highlighted through his questions, it is not possible to calculate the extent of the loss of $5 million or more, as a state you will not be able to collect ultimately in a court of law or wherever else the compensation up to $100 million from Santos.

It is entirely possible for lawyers to say that this is valid and enforceable, and there is no disagreement with that but, in the end, the circumstances of the drafting of the deed of undertaking might be such that for all practical purposes you will never be able to get the money that is at least notionally indicated you might be able to get in the deed.

The Hon. P. HOLLOWAY: The final point I make is that, of course, the act that is before us has section 4, ratification, which provides:

The deed will have full force and effect and will be binding and enforceable by virtue of the enactment of this act and without any other legal requirement or step in order to create a valid and binding instrument, and despite the operation or effect of any other law.

As I said, it has been drafted by crown law. Again, I make the point that it is far better than what we have at the present, whereby there are no guarantees whatsoever under the current act.

The Hon. R.D. LAWSON: I agree with the perceptive comments of my colleague the Hon. Rob Lucas. Of course it is possible for it to enforce this deed, but what does that mean? What do you get when you do enforce it? That depends upon the nature of the covenants within the deed. We are pointing out that these covenants are not as strong as they look; and, in any event, the Premier has been overstating them.

In any event, there is no guarantee (and there does not even purport to be when you read the deed) of the number of jobs that will be maintained in South Australia or the amount of payroll tax that will be paid, or the amount of any payments to be paid to the state. I strongly suspect that the state would never be able to establish, to the degree required, the loss that the state government suffers in consequence of most of these breaches.

Clause passed.

Remaining clauses (2 to 7) and title passed.

Bill reported without amendment.

Third Reading

Bill read a third time and passed.

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