Please find attached Caltex Australia s submission on the Options Paper: Approaches to regulating coastal shipping in Australia.

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1 Caltex Australia 2 Market Street Sydney NSW 2000 Tel: (02) Fax: (02) GPO Box 3916 Sydney NSW May 2014 Ms Leanne Kennedy A/g General Manager Maritime and Shipping Branch Department of Infrastructure and Regional Development GPO Box 594 CANBERRA ACT CoastalShippingOptions@infrastructure.gov.au Dear Ms Kennedy, Please find attached Caltex Australia s submission on the Options Paper: Approaches to regulating coastal shipping in Australia. Caltex welcomes the opportunity to contribute to the Australian Government s review of the coastal trading regime in Australia. For additional information or any questions regarding this submission, please contact Alisha Salvestro, Government Affairs Adviser via asalves@caltex.com.au or phone Yours sincerely Joe Callaghan Manager Supply Operations Caltex Australia Limited ABN

2 Caltex Australia Limited submission on the Options Paper: Approaches to regulating coastal shipping in Australia 30 May 2014 Contact: Alisha Salvestro Government Affairs Adviser

3 Caltex Australia submission on the Options Paper: Approaches to regulating coastal shipping in Australia 30 May Executive summary Caltex welcomes the release of the federal government s Options Paper: Approaches to regulating coastal shipping in Australia (Options Paper). Caltex does not seek to respond to the discussion questions raised in the Options Paper. Rather, Caltex highlights in this submission its experience with the Coastal Trading (Revitalising Australian Shipping) Act 2012 (CTA) and proposes amendments to simplify the current licensing regime and resolve issues related to the CTA, so that the regulatory burden and costs imposed by the CTA on the oil industry can be minimised within the overall CTA framework. The amendments proposed by Caltex are consistent with Option 3 in the Options Paper i.e. continue to regulate coastal trade, but minimise industry burden and costs. We acknowledge that Option 2 may also be a means to address the issues raised in our submission; however, we believe that Option 3 will require the least legislative change to achieve the desired outcomes. To minimise the regulatory burden of the coastal shipping regime, Caltex recommends: 1. Amending the temporary licence system so that it provides for one, open temporary licence (TL) for a 12 month period, with the following features: Each entity which proposes to undertake coastal voyages during the course of a financial (or calendar) year must apply for a TL for that year (as is currently required under the CTA). Once granted, the TL will be valid for a 12 month period, and will allow the TL holder to conduct an unlimited number of coastal voyages during that period. Upon the completion of each coastal voyage during the year, the TL holder must report to the Department of Infrastructure and Regional Development (the Department) the details of that voyage, as per section 62 of the CTA. These details will then be published on the public register. Having one, open TL for a 12 month period will remove the need for variation applications for approved and new voyages (subdivisions C and D), the minimum requirement of five voyages, and voyage contestability. This recommendation is further detailed in section of this submission. 2. Removing the inconsistency between the CTA and Customs Act 1901 for vessels carrying crude oil and condensate from floating production, storage and offloading (FPSO) facilities to Australian ports, which has the unintended consequence of importation of vessels carrying such cargo. This unintended consequence is summarised as: The CTA includes Section 112 Customs treatment of certain vessels, which the Australian Customs and Border Protection Service (Customs) interprets to mean that foreign vessels engaging in the local economy (including vessels moving cargo from an FPSO facility in Australian waters to an Australian port) must have a TL or be subject to the importation requirements of section 49A of the Customs Act. 3

4 However, the Department, which administers the CTA, has interpreted offshore industry vessels (as defined in section 6 of the CTA) to include vessels moving cargo from a FPSO to an Australian port. These vessels are specifically excluded from the CTA. As a result, the Department will not issue foreign vessels moving cargo between a FPSO facility and Australian port with a TL. The consequence is that vessels moving crude oil and condensate cargo from an FPSO in Australian waters to an Australian port are subject to the importation requirements of section 49A of the Customs Act. This has resulted in locally-produced crude oil being exported rather than sold domestically, due to uncertainty over the consequences for ships engaging in trade between FPSO facilities and Australian ports to supply domestic oil refineries. This reduces the availability of crude oil sources for local refineries, resulting in less choice of crude oils and potentially increasing their costs. It is important to ensure that the domestic refining industry is not disadvantaged against overseas competitors. Caltex recommends that defined vessels and cargoes, such as those carrying bulk quantities of crude oil or condensate, be carved out of the offshore industry vessels exclusion from the CTA. These vessels would then be able to apply for, and be granted, a TL. This recommendation is further detailed in section of this submission. To negate concerns about additional regulatory burden, these vessels would then have the option of seeking an exemption under section 11(1) of the CTA. However, an exemption would only be workable in practice if section 112 of the CTA is amended (see section 3.2.3) to remove unintended consequences of importation of a vessel. This would remove the current barrier to trade of domestically-produced crude oil and provide benefits to the downstream and upstream petroleum industries. Amendments to section 112 of the CTA would also have benefits to other vessels that may wish to seek an exemption from the CTA, but currently would face the unintended consequence of importation and/or state-based maritime legislation. We also recommend changes be made to the application of the Fair Work Act 2009 to coastal voyages undertaken by foreign-flagged vessels, particularly where no equivalent Australianflagged vessels exist (see section 3.4). The framework for the Australian International Shipping Register (AISR) should also be reviewed. It is apparent that in its current form the objectives are not being met, as no vessel has been registered on the AISR to date (see section 3.3). Overall, we believe that our recommended changes to the CTA will require the least legislative change and still achieve the desired outcomes, while providing sufficient access to information on coastal voyages being undertaken by foreign-flagged vessels. 2. Overview of Caltex s business Caltex is the leading transport fuel supplier in Australia, underpinned by a flexible and reliable supply chain. Caltex s integrated business incorporates refining, supply, logistics and marketing. Caltex is the only oil refining, fuel and convenience marketing company listed on the Australian Securities Exchange (ASX), with more than 22,000 shareholders, including institutions, retail investors, employees, and Chevron Global Energy Inc. (which has a 50% shareholding). Caltex is an ASX50 company operating under Australian management. About 3,500 people are employed nationally across Caltex s supply chain including refining, terminals, distribution, commercial and industrial sales, and fuel and convenience retailing. 4

5 Caltex has operations in all states and territories with a national network comprising of 76 depots and 12 storage terminals, and supplying about 2,000 service stations, including company-owned and franchised sites, independent operators and Caltex-Woolworths cobranded outlets. The company also sells directly to commercial and industrial customers of all sizes, including transportation, aviation, mining and agricultural enterprises. Caltex supplies over one-third of wholesale transport fuels (petrol, diesel and jet fuel) nationally. Caltex also has a branded retail petrol market share of about 18 per cent nationally (excluding Caltex-Woolworths co-branded sites). Caltex currently operates two oil refineries in Australia Kurnell in Sydney and Lytton in Brisbane. Caltex is in the process closing its Kurnell refinery and converting it into Australia s largest fuels import terminal. This transition is due for completion in the fourth quarter of Caltex operates a number of other fuel terminals which are located along the east coast of Australia, as well as South Australia and Tasmania. Caltex also has access to other terminal facilities which are operated by other parties. The majority of the coastal shipping Caltex undertakes is primarily for the distribution of petroleum products from our refineries to terminals, and between terminal locations. Caltex currently utilises time chartered foreign-flagged petroleum product vessels and spot charters foreign-flagged vessels to transport both crude and petroleum product on the Australian coast. Imports will play an increasingly important role in Australia s supply chain and coastal shipping may be part of the efficient redistribution of imports in the future, particularly to the remote locations in the country. We must be careful not to limit our options for flexible and economically efficient fuel supply. Caltex prides itself on keeping Australia moving through the supply of its fuel products and is committed to the safe and reliable supply of transport fuels nationally. To successfully do this, Caltex requires a flexible supply chain which can adjust to changing market dynamics and be optimised wherever possible to remain efficient and ultimately competitive. 3. Regulation of coastal trading in Australia 3.1 Oil industry shipping background to policy issues Caltex believes it is unproductive for the Coastal Trading (Revitalising Australian Shipping) Act 2012 (CTA) to remain in its current form, which has led to administrative burden, unintended consequences of importation of vessels, and has primarily focussed on providing general licence (GL) holders with the ability to contest applications of temporary licence (TL) holders. In particular, Caltex believes that the requirements of the CTA are unnecessary, especially for those industries where there are no local vessels to contest and benefit from the prenotification of voyages. For example, Caltex is aware that currently there are no Australianflagged vessels available for the shipping of crude oil or petroleum products on the Australian coast. This scenario has not changed with the introduction of the CTA on 1 July In the case of crude oil shipments, the Regulatory Impact Statement (August 2011) prepared by the then Department of Infrastructure and Transport stated that the prospect of an Australian-flagged crude oil vessel was small. In support of this, the House of Representatives Standing Committee on Economics outlined in its 'Report on Australia s oil refinery industry, released in February 2013, that: In Australia imported around 83 per cent of its crude oil and other refinery feedstock. It has and continues to import both crude oil and refined fuels. Following the closure of Clyde and Kurnell, Australia will refine 50 per cent of its fuel needs onshore, predominantly from imported crude. 5

6 We agree with this assessment given that around 15% of Australian refineries aggregate crude diet is sourced from domestic fields with the majority of that supplied directly by pipelines to refineries 1. As such, the volumes of domestically shipped crude oil will be insufficient to underwrite the economic viability of an Australian-flagged crude oil vessel. We further consider that the likelihood of there being an Australian-flagged petroleum product vessel is small given that Australian refinery production, and coastal product shipping of that production, will decrease following the conversion of local refineries into import terminals. At present, coastal shipping of petroleum products is carried out by foreign-flagged vessels operating under transitional GLs or TLs. Furthermore, most growth in Australian demand for petroleum products will not be met by Australian refinery production but by imported product from export-oriented Asian refineries. We are also seeing global trading companies enter the Australian marketplace who have strong linkages with international product markets and associated shipping networks. These structural changes in the local industry indicate that there will be less commercial opportunities for an Australian-flagged petroleum product vessel to be engaged solely in Australian coastal trade in the future. 3.2 Options to improve the coastal trading regime Caltex believes that amendments to the CTA are required to simplify its application and subsequently reduce the regulatory burden and cost to industry. To achieve this, Caltex recommends: amending the temporary licence system to provide for one, open TL for a 12 month period (see section 3.2.1) removing the unintended consequence of importation of vessels due to the interaction between the CTA and Customs Act 1901 (Customs Act) with respect to vessels carrying crude oil and condensate from floating production storage offloading (FPSO) facilities to Australian ports (see section 3.2.2) providing that all vessels exempt from the Coastal Trading Act are not subject to the importation provisions of the Customs Act or state-based maritime legislation (see section 3.2.3). These amendments are consistent with Option 3: Continue to regulate coastal trade, but minimise industry burden and costs. However, we acknowledge that Option 2 may also be a means to address the issues raised in our submission. We also recommend changes be made to the application of the Fair Work Act 2009 to coastal voyages undertaken by foreign-flagged vessels, particularly where no equivalent Australianflagged vessels exist (see section 3.4). The framework for the Australian International Shipping Register (AISR) should also be reviewed, as in its current form no vessel has yet been registered on the AISR (see section 3.3) Recommendation 1: Amend the temporary licence system to provide for one temporary licence for a 12-month period To minimise the administrative burden on industry, Caltex recommends amending the TL system so that it provides for an open TL for a 12-month period with the following features: Each entity which proposes to undertake coastal voyages during the course of a financial (or calendar) year must apply for a TL for that year (as is currently required under the CTA). 1 Australian Petroleum Statistics, Bureau of Resources and Energy Economics 6

7 Once granted, the TL will be valid for a 12-month period, and will allow the TL holder to conduct an unlimited number of coastal voyages during that period. Upon the completion of each coastal voyage during the year, the TL holder must report to the Department of Infrastructure and Regional Development (the Department) the details of that voyage, as per section 62 of the CTA. These details will then be published on the public register. We believe this system would greatly reduce the administration burden on industry, and facilitate greater flexibility within supply chains to allow companies to optimise their operations, which is a necessity when companies like the downstream petroleum industry operate in a global marketplace. This system would also facilitate, rather than mandate, commercial negotiations between a TL holder and any GL holders in relation to future voyages through the provision of information post-voyage, without the time pressures imposed by the current requirements for TL applications and variations under the CTA. Having one, open TL for a 12-month period will remove the need for: variation applications for approved and new voyages (Subdivisions C and D) minimum requirement of five voyages voyage contestability. These issues and the benefits of moving towards one, open TL are explored further in the following sections. (i) Variations and the minimum voyage requirement Flexibility is crucial given the variable and unpredictable nature of the downstream petroleum industry. Due to daily supply balancing, shipping scheduling changes are inevitable and as such unplanned movements will always occur and are a business reality. In some cases these requirements are urgent and the timely movement of product can be critical in maintaining continuity of supply to the market. Flexibility is particularly important for security of supply in Australia, given its remote location, dependence on imports, and spread-out population centres. Notwithstanding that the inclusion of the energy-related variation has provided a certain degree of flexibility, the requirements of the CTA have overall materially increased the administrative burden on our business (and presumably the Department) without any resulting benefit. Exact movements of crude oil and petroleum products are often only known up to three months in advance making it difficult to provide upfront the terms of section 28(2) of the CTA, which requires the following details in an application: the number of voyages, which must be five or more expected loading dates the name of the vessel (if known) the kinds and volume of cargo expected to be carried the type and size, or type and capacity, of the vessel to be used the ports at which the cargo is expected to be taken on board and unloaded. Once details of the voyages (and vessels) are confirmed we are required to vary our TL, either by varying matters already authorised (subdivision C) or to include new matters on a TL (subdivision D). For variations of new matters, the minimum requirement of five voyages needs to be satisfied. Even where a shipping plan is set three months ahead, the actual shipping movements can vary materially from the shipping plan due to a multitude of factors, such as: 7

8 delays at the load port (e.g. berth congestion, delay in loading) inclement weather berth congestion at the discharge port the need to redirect a vessel due to product shortage or tankage constraints variations in the quantity of products required or available The current regime for TL applications under the CTA has resulted in Caltex becoming reliant on variations, as outlined below in Table 1. Overall, Caltex has made 72 variations to its 2012/13 TL and 112 variations to its 2013/14 TL (as at 30 April 2014). These figures alone demonstrate the administrative burden of the current licensing regime and the large number of applications (i.e. variations) a company must make to undertake its shipping operations on the Australian coast. This is particularly burdensome when considering that no equivalent GL holder operates on the Australian coast and, as outlined earlier, is not expected to. Table 1: Comparison of coastal trade regulation pre- and post-1 July 2012 Number of permits, licences, and variations applied for by Caltex Single voyage permits Temporary licence Total voyage variations made on a temporary licence / /14* Breakdown of variations by type: *As at 30 April Subdivision C Variation for authorised matters Subdivision D Variation for new matters Variation for energyrelated scenarios A number of factors have contributed to the increased applications including the change in the voyage definition from empty to empty to port to port, and the minimum requirement of five voyages per variation for new matters. Like many companies, Caltex operates in a global marketplace and the need to maintain competitiveness is crucial. The imposition of variation applications and associated restrictions due to tolerances and approval timeframes, also limits the ability of companies to optimise their supply chain and maximise efficiencies. For example, the approval timeframe for variation applications for new matters is seven business days. However, the time period a shipper could await approval for a voyage could extend to nine days should the application timeframe include weekends. Most, if not all, product scheduling and shipping operations operate on a 24/7 basis. Therefore, a sevenbusiness day approval timeframe is unproductive particularly for companies like Caltex where it is known that there is no (or limited) prospect of contestability by a GL holder. 8

9 The following example is a real life scenario which illustrates the legal and operational uncertainty and limitations the CTA places on companies undertaking coastal shipping in Australia. Example: Caltex planned a coastal movement of Fluidised Catalytic Cracking Unit (FCCU) feed from our Kurnell refinery in Sydney to our Lytton refinery in Brisbane. The foreign-flagged vessel we intended to use for this coastal movement was also being used to import a fuel oil cargo. This was to maximise efficiency of our shipping schedule. The vessel was contracted to deliver the imported cargo at Kurnell between 8 12 May. Prior to this delivery, the vessel was delivering a different parcel of product for another party at Gladstone, Queensland. For the coastal movement of FCCU feed from Kurnell to Lytton, we had an authorised voyage under our TL with a loading date of 10 May. This voyage originally had a loading date of 15 March 2014, when authorised by the Department on 17 December The voyage was applied for in December to satisfy the minimum voyage requirement and then subsequently varied to change the loading date. On Tuesday 6 May, the vessel indicated an estimated time of arrival at Kurnell on Monday 12 May; which required the authorised voyage to be varied to indicate the revised loading date of FCCU feed. Due to the weekend approaching and to ensure we complied with our TL conditions, we submitted the voyage notification to the Department the following day (Wednesday 7 May) i.e. voyage notification is required at least two business days prior to the loading date. On Friday 9 May, the shipping agents advised that due to delays at Gladstone, the vessel s estimated time of arrival at Kurnell was delayed by two days to 14 May. Caltex had a planned maintenance shutdown of all three berths at Kurnell during the period May where no ships could be loaded or discharged. Our supply operations team knew there would not be enough time to discharge the import cargo of fuel oil and commence loading the FCCU feed before the berth was closed on 15 May. Based on this scenario, the earliest the FCCU feed could commence loading was 17 May. However, changing the loading date (again) from 12 May would be outside the tolerance requirements of the TL. As the voyage notification had already been submitted, this authorised voyage could not be varied again and a variation for energy-related purposes was not justifiable in this instance. So we were faced with the possibility of having to proceed with a voyage on a date which was not consistent with the date notified pursuant to our TL. (ii) Voyage contestability Clearly the intent of variations and the minimum voyage requirement was to allow GL holders to determine if they want to nominate to carry the cargo outlined in an application. However, if there are no equivalent Australian-flagged vessels (i.e. GL holders) operating on the Australian coast then the benefit of the contestability provisions is non-existent. This is demonstrated by no Caltex voyages being contested by GL holders in 2012/13 or 2013/14 (as at 30 April 2014). The CTA has placed a large amount of emphasis on contestability by allowing GL holders to contest TL voyage applications, rather than facilitating normal commercial negotiations. We see the following issues with this approach: 9

10 Firstly, for some industries, this is likely to have created a level of uncertainty and operational risk for TL applicants. Specifically, the allowance for negotiation time between GL holders and TL applicants has been built into the timeframes for application approvals. For companies like Caltex, the inclusion of contestability unnecessarily extends the approval timeframes of applications, which consequently reduces flexibility in supply chain operations, where it is clear that no equivalent Australian-flagged vessels can contest. Under the CTA, GL holders are currently notified of a TL application or variation, whereas TL holders are not notified when a GL application has been approved. The TL application process is also premised on a GL holder initiating contact with the TL applicant (if the GL holder is interested in carrying out that voyage), and all negotiations being able to be concluded within the limited timeframes set out as part of that process. This fails to facilitate trade or encourage negotiations between licence holders for the carrying out of coastal voyages in the ordinary course of business. Rather than mandating commercial negotiations as part of the TL application process, we believe the federal government should provide information to help facilitate these negotiations: Firstly, the government could ensure that once a GL application has been approved, TL holders who may be able to utilise the services of the GL holder are informed Secondly, historical information published on the Department s website regarding coastal voyages performed would inform GL holders (or any entity who is interested in becoming a GL holder) of the commercial opportunities of performing future coastal voyages, and hence encourage commercial negotiations between relevant parties, without unnecessary regulatory intervention Recommendation 2: Remove the unintended consequence of importation of vessels due to the interaction between Coastal Trading Act and Customs Act Caltex has identified amendments to the CTA required to resolve the unintended consequence of importation of vessels because of the interaction between the CTA and the Customs Act 1901 (Customs Act). This issue is impacting local trade of crude oil and condensate, and the industry requires legislative clarity and consistency to operate as competitively and efficiently as possible. This unintended consequence is a serious matter for the local petroleum industry. The introduction of the CTA has led to the Australian Customs and Border Protection Service (Customs) regarding foreign-flagged vessels carrying Australian crude oil or condensate from Floating Production, Storage and Offloading (FPSO) facilities in Australian waters to Australian ports for use by local refineries as being imported into Australia for the purposes of the Customs Act. As a result, notices under section 49A (i.e. ships and aircraft deemed to be imported) have been issued in some cases. This issue is having implications for both the upstream (i.e. local crude oil sellers) and downstream (i.e. local crude oil buyers) petroleum industries in Australia. As a result of this issue, Caltex understands that some upstream petroleum companies have ceased selling crude oil domestically due to the threat of importation and associated costs. This has effectively reduced the availability of local crude as a source of crude oil for local refineries. The issue arose with the introduction of the CTA on 1 July 2012, which resulted in both the CTA and Customs Act operating with respect to foreign-flagged vessels moving cargo from an FPSO facility to an Australian port. This issue and recommended amendments are outlined in further detail in the following sections. 10

11 (i) Relevant provisions of the Coastal Trading Act and their implications Section 10 Act does not apply to certain vessels While the CTA introduced a new licensing regime for foreign-flagged vessels engaging in the Australian coastal trade, offshore industry vessels are specifically exempted from the CTA, via section 10. Under section 6 of the CTA, an offshore industry vessel is defined as: a vessel that is used wholly or primarily in, or in any operations or activities associated with or incidental to, exploring or exploiting the mineral and other non-living resources of the seabed and its subsoil. [Italics added] The italicised words in the definition are very broad and could be read to include foreignflagged vessels used to ship crude oil or condensate from an FPSO to an Australian port. Caltex understands that this is the interpretation of the Department of Infrastructure and Regional Development. As a result, foreign-flagged vessels moving crude oil or condensate from an FPSO to an Australia port are unable to apply for a TL. Implications of Section 112 Customs treatment of vessels engaged in coastal trade Section 112 of the CTA states that: a vessel is not imported into Australia for the purposes of the Customs Act 1901 only because it is used to carry passengers or cargo under a temporary licence or an emergency licence. Caltex understands that it is Customs view that a foreign-flagged vessel entering Australian waters may be subject to importation into Australia with associated consequences, unless it is exempt from importation because it holds a TL or emergency licence (EL) under the CTA. Due to offshore industry vessels being excluded from the CTA (and unable to apply for a TL), foreign-flagged vessels moving crude oil and condensate cargo from an FPSO in Australian waters to an Australian port are subject to the Customs Act s importation requirements (i.e. section 49A of the Customs Act). This problem has only arisen since the introduction of the CTA. Caltex understands that the previous permit system under the Navigation Act 1912 had exempted vessels such as those moving crude oil from an FPSO to an Australian port from the need to import under the Customs Act. However, this exemption status was removed with the introduction of the CTA. (ii) Relevant provisions of the Customs Act 1901 and their implications Caltex understands that it is Customs view is that a ship arriving in Australia may be subject to importation while in Australia unless it is continuing on an international voyage. As per section 49A of the Customs Act, Customs may issue a vessel with a section 49A notice if a foreign-flagged vessel is deemed by Customs to require importation (and has not yet done so). The vessel then has 30 days to present itself for importation or leave Australian waters; however, time extensions may be issued and there are no fines or penalties attached to the notice. Therefore, if a foreign-flagged vessel is transporting cargo from an FPSO in Australian waters to an Australian port and isn t covered by a TL, then due to section 112 of the CTA it is intended to be imported and consequently covered by section 49A of the Customs Act. 11

12 The consequences for a company of unintended importation is that it would have to incur significant additional and unnecessary costs, as described below: An immediate impact of importation will be the requirement to pay customs duty and GST on the value of the vessel including anything that is on board when the vessel arrives in Australia. Firstly, this will involve obtaining a valuation of the vessel itself and the payment of customs duty and GST on the total value of the vessel including all the goods on board. This will have a direct impact on cash flow and working capital of the company. Given that the cost of petroleum product sold to our customers is based on international set prices, these costs of valuation, customs duty and GST are generally not recoverable from the customer. In addition, importation will result in immigration complications under the Migration Act 1994 (Migration Act) as the international crew s Maritime Crew Visa (MCV) will no longer be valid on these foreign-flagged vessels. The Migration Act provides that non-citizens who intend to enter Australia s migration zone are required to obtain an appropriate visa, as determined by the proposed activity to be conducted in Australia s migration zone. Generally, an MCV (subclass 988) is required for all foreign crew of non-military ships entering and departing Australia. The importation of a vessel has a significant impact on crew visa requirements, because that vessel would no longer satisfy the definition of a non-military ship under the Migration Regulations The definition of non-military ship specifically excludes any ship that: o o has been imported under section 49A of the Customs Act, or entered for home consumption under section 71A of that Act is not registered in the Australian International Shipping Register. Consequently, the crew members must either leave Australia; or obtain a visa with appropriate work rights in Australia (which is generally the Temporary Business (Long Stay) (subclass 457) visa) (457 visa); or sign on to another non-military ship, all within five days of arriving into Australia. In practice, for business operations to continue, the company will need to engage an Australian crew (or foreign crew with 457 visas) to come on board the vessel to take over, and redeploy the foreign crew previously on board or return them overseas. Once the voyage is completed, the vessel s return voyage will require additional Customs compliance associated with an export of the vessel and anything on board the vessel. This demonstrates why companies are so concerned about this issue. (iii) Proposed amendment to the Coastal Trading Act Caltex notes that it is proposed in the Options Paper (page 14) that the geographical reach of the CTA could be extended to include voyages that are not within the coastal waters of Australian States or Territories. Caltex does not support this broad-brush proposal due to the increase to the regulatory burden that would occur which is not the intent of Option 3. Rather Caltex proposes that a defined type of vessels and cargoes be carved out of the offshore industry vessels definition and associated exclusion from the CTA. To achieve this, Caltex proposes amending the definition of an offshore industry vessel under the CTA so that foreign-flagged vessels carrying crude oil or condensate to an Australian port are carved out of that exclusion, can apply for TLs, and therefore no longer be subject to unintended importation under the Customs Act. 12

13 Amend the definition of offshore industry vessel An offshore industry vessel under the CTA is defined as: a vessel that is used wholly or primarily in, or in any operations or activities associated with or incidental to, exploring or exploiting the mineral and other nonliving resources of the seabed and its subsoil. This is a very broad definition, which captures foreign vessels shipping cargo from an FPSO in Australian waters to an Australian port and excludes them from the CTA and applying for a TL. Caltex considers that the simplest legislative amendment to resolve the FPSO issue is for foreign-flagged vessels shipping only crude oil or condensate from an FPSO to an Australian port to be captured by the CTA. For this to occur, a foreign-flagged vessel undertaking such a voyage would need to be excluded from the offshore industry vessel definition, effectively removing its exclusion from the CTA. Caltex suggests that section 4(8) of the Customs Act provides a useful reference point for amending the definition of an offshore industry vessel. Section 4(8) states that the reference in section 4(6) of the Customs Act (which defines a resources industry mobile unit ) to a vessel that is used wholly or principally in operations or activities associated with, or incidental to, activities of the kind referred to in subparagraph (i) (i.e. exploring or exploiting natural resources by drilling the seabed or its subsoil with equipment on or forming part of the vessel) does not include a vessel that is used wholly or principally in transporting persons or goods to or from a resources installation. While the underlined words above may be too broad to be included as an amendment of the CTA, we suggest this provides a precedent to propose a narrower amendment to the offshore industry vessel definition. We therefore propose that the offshore industry vessel definition in the CTA be amended to read: a vessel that is used wholly or primarily in, or in any operations or activities associated with or incidental to, exploring or exploiting the mineral and other nonliving resources of the seabed and its subsoil. This does not include a vessel that is used wholly or principally in transporting crude oil or condensate to an Australian port. The above amendment will result in foreign-flagged vessels moving crude oil or condensate from an FPSO to an Australian port being captured by the CTA and required to apply for a TL. This may or may not be acceptable to vessels engaged in trade from FPSOs, as it may add to the regulatory burden of vessels moving crude oil or condensate from an FPSO to an Australian port. To negate this, these vessels and/or cargoes could apply to be exempt from the CTA, via section 11(1) of the CTA. However, to avoid the issue of consequential importation under the Customs Act, a legislative amendment is required to section 112 of the CTA (see Section 3.2.3) Recommendation 3: Provide that all vessels exempt from the Coastal Trading Act are not subject to the importation provisions of the Customs Act The preceding sections have discussed the particular case of foreign-flagged vessels carrying crude oil and condensate from FPSOs, and the unintended consequence of the importation of vessels due to inconsistency between the CTA and Customs Act. However, this issue is more general and is not limited to FPSO related voyages. 13

14 This issue actually relates to all crude oil and petroleum product vessels engaged in coastal trade between refineries and coastal ports that are not covered by, or have been exempted from, the CTA (i.e. may be deemed imported by Customs). Caltex has identified a resolution to this, which requires further amendment of the CTA in relation to exempted vessels. (i) Proposed amendment to the Coastal Trading Act Amend Section 112 Customs treatment of certain vessels Vessels that are engaged in the coastal trade in Australia could apply for an exemption from the CTA if their case is demonstrated and accepted by the relevant Minister. However, an exemption under the CTA would currently result in the unintended consequence of importation (as described earlier). In order to avoid consequential importation under the Customs Act, Caltex recommends the following amendment to section 112 of the CTA: A vessel is not imported into Australia for the purposes of the Customs Act 1901 if it is used to carry passengers or cargo under a temporary licence or an emergency licence, or if it is a vessel or within a class of vessels that is the subject of an exemption under section 11(1). That is, if a vessel is operating under a TL, EL or is exempted under section 11(1) of the CTA then that vessel is exempt from the importation requirements of the Customs Act. In relation to the FPSO issue, this amendment to section 112 of the CTA together with the amendment to the offshore industry vessel definition proposed in section 3.2.2(iii) above would provide the industry with no added regulatory burden but also with the legislative certainty that these voyages can proceed without the consequence of being subject to importation. This amendment to section 112 would also ensure other exempt vessels are not subject to importation. (ii) Removing the impact of state-based coastal shipping regulation A further complexity and unintended consequence is that the exemption of vessels from the CTA could trigger the application of state-based marine safety regulation in Queensland and Western Australia. Looking specifically at Queensland, an exemption of a foreign-flagged vessel from the CTA would trigger the application the Transport Operations (Marine Safety) Act 1994 (Qld) (TOMS Act). The TOMS Act regulates the movements of foreign-flagged vessels in Queensland waters by requiring them to obtain a restricted use flag (RUF). The TOMS Act expressly states that it does not apply to the extent that the Navigation Act 1912 applies to the vessel in question. In November 2013, Maritime Safety Queensland (MSQ) issued a public communication to the effect that the reference to the old Navigation Act in the TOMS Act would be read as if it were referring to the replacement legislation (i.e. the Navigation Act 2012 and the CTA). Accordingly, MSQ s interpretation is that if a foreignflagged vessel is involved in coastal trading or it has obtained a declaration under section 12(2) of the CTA, then the TOMS Act would not apply. Conversely, if a foreign-flagged vessel is used to carry out an intrastate or coastal voyage in Queensland waters and that vessel or voyage is exempt from the CTA under section 11(1) of the CTA, Caltex s understanding is that the TOMS Act would then apply to this vessel or voyage. This would mean that the foreign-flagged vessel would need to apply for a RUF for the purpose of carrying out that voyage. 14

15 We believe that one of the circumstances where an exemption under section 11(1) of the CTA may be warranted is where the Minister is of the view that the costs imposed by regulation under the CTA in respect of a vessel (or class of vessel) carrying out certain voyages outweigh the benefits of regulation. If, notwithstanding that the Minister may have come to that view and granted an exemption in respect of a vessel (or class of vessel) on that basis, the TOMS Act then applies and consequently imposes additional administrative burden on that vessel (or class of vessel), that outcome would defeat the objective that an exemption from the CTA is intended to achieve in the first place. While this issue is largely the outcome of the application of state-based legislation, it does hinder the overall objectives of the federal government to reduce unnecessary regulatory burden in Australia. We would welcome cooperation between the federal and state governments to implement appropriate amendments to relevant state-based marine safety legislation to ensure that responsibility for the regulation of all commercial shipping remains with the federal government and that state-based legislation does not inadvertently apply. Alternatively, we suggest this issue could be resolved by inserting a new subsection (6) in section 11 of the CTA as follows: (6) Where a vessel is used to carry out a voyage which is covered by an exemption under subsection (1), then for the purposes of determining whether or not a State Marine Safety Legislation applies in respect of that voyage (or the vessel used to carry out that voyage), that voyage or vessel will be deemed to be a voyage or vessel to which this Act applies. A definition of State Marine Safety Legislation will need to be inserted in section 6 of the CTA to cover all existing state-based marine safety legislation and all similar state-based legislation that may be enacted in the future. 3.3 The Australian International Shipping Register Based on the objectives of the coastal trading regime, Caltex suggests that the current regime does not sufficiently promote the Australian International Shipping Register (AISR). The financial incentives provided for ship owners or operators to put their vessels on the AISR are far outweighed by the costs of complying with the regulatory regime (including the Shipping Registration Act, Navigation Act and Fair Work Act). This has been demonstrated by there being no vessel placed on the AISR to date. Operationally, Caltex believes there is also no advantage of using a vessel which is registered on the AISR compared to using a foreign-flagged vessel to undertake coastal trading. In particular, vessels registered on the AISR are still required to apply for TLs for the purposes of carrying out coastal trade. Under the current structure of the CTA, the administrative requirements and burden would not encourage a vessel operator to pursue this option. Caltex understands that Customs interprets section 112 of the CTA as applying only to foreign-flagged vessels and not to vessels registered on the AISR. That is, a foreign-flagged vessel transporting goods under a TL is not imported, but if a vessel registered on the AISR is operating under a TL, it is still subject to importation once it enters Australia. As previously outlined in section 3.2.2(ii), importation would create significant operational and financial issues for companies because of customs duty and GST consequences. Therefore, we propose that AISR vessels operating under a TL should also be exempt from importation under section 112 of the CTA. This exemption can be applied via section 112 of the CTA by extending the previously proposed amendments to include the following amendment (underlined): A vessel is not imported into Australia for the purposes of the Customs Act 1901 if it is used to carry passengers or cargo under a temporary licence or an emergency licence, if it is a vessel registered on the Australian International Shipping Register, or 15

16 if it is a vessel or within a class of vessels that is the subject of an exemption under section 11(1). That is, if a vessel is operating under a TL, EL, is exempted under section 11(1) of the CTA, or is an AISR vessel, then that vessel is exempt from the importation requirements of the Customs Act. 3.4 Relationship between the Coastal Trading Act and the Fair Work Act 2009 Under the Fair Work Act 2009, any foreign-flagged vessel operating under a TL has to comply with the Fair Work Act where it has already commenced two voyages under any TL (i.e. not specific to a company or entity) in the past 12 months. Compliance with the Fair Work Act requires the crew to be paid in accordance with Part B of the Seagoing Industry Award, which prescribes the minimum weekly wage which must be paid to each crew member on board the vessel whose rank is covered by Part B of the Seagoing Industry Award. Caltex understands that the requirement for foreign-flagged vessels to comply with the Fair Work Act was introduced to create a level playing field with respect to wages between Australian-flagged vessels and foreign-flagged vessels. However, Caltex believes that the perceived benefits of this requirement are far outweighed by the detriments to the public it causes, in that: For many sectors there are no Australian-flagged vessels available to charter, so the perceived benefits cannot be achieved anyway. Unlike financial incentives, such as tax breaks or subsidies, this policy not only fails to increase the competitiveness of the Australian shipping industry, but actually has the undesired effect of increasing the overall costs of transporting goods around Australia. It is our experience that the ship owner passes the additional wage costs to the charterer where possible, which ultimately may be passed on as increased costs to consumers. This requirement does not provide any benefit to the Australian workforce. Seafarers who are the beneficiary of this requirement are not subject to the Australian income tax regime or the cost of living in Australia. This creates an anomaly in the global shipping industry whereby seafarers who are employed to work on coastal voyages around Australia are paid significantly more than those seafarers who are employed on much more hazardous or risky voyages. This is particularly so where the allowances normally received by these seafarers (in addition to their basic wages) are not taken into account when compared against the minimum wage rates under Part B of the Seagoing Industry Award. For the above reasons, Caltex believes that the Fair Work Act should not apply to foreignflagged vessels undertaking voyages under TLs. In any event, there appears to be confusion within industry in relation to the application of the Fair Work Act and Part B of the Seagoing Industry Award. In particular: It is not clear whether the Fair Work Act and Part B of the Seagoing Industry Award only apply in respect of the laden voyage, or whether their application extends to the ballast / preparation voyage as well. This position should be clarified in the legislation if the requirement to comply with the Fair Work Act is retained. There also appears to be differing interpretation within industry as to whether or not allowances paid to the foreign crew on board (i.e. in addition to their basic wages) 16

17 can be taken into consideration in determining compliance with the minimum wage requirements set out in Part B of the Seagoing Industry Award. If the Fair Work Act requirement is to remain, then at least the employer of the foreign crew on board the relevant vessel should be allowed to take into account the total remuneration (i.e. aggregating the amounts of basic wage plus allowances) paid to each crew member for the purposes of meeting the minimum wage requirements under Part B of the Seagoing Industry Award and the National Minimum Wage Order. We understand it is common in the global shipping industry for a vessel s crew to be paid a minimum basic wage but with significant allowances built on top. We have seen cases where the basic wage component represents 20% of the total remuneration payments to foreign crews. This percentage does vary considerably depending on the origin of the foreign crew; however it highlights the necessity of including the total remuneration for comparison which would go some way towards alleviating the anomaly described above. 17