The Law Around Petroleum Exploration and Production in Australia

Introduction Petroleum exploration and production in Australia is carried out between two participants the government (Commonwealth, States or Territory) that owns the petroleum resources; and the oil companies who explores and produces the oil and gas (petroleum). There are two main reasons why governments need Oil Companies, is risk capital which is very expensive, and their lack of expertise to carry out petroleum exploration and production work.

[1] Petroleum is a composite mixture of naturally transpiring hydrocarbon compound, which ranging from gas to solid. Hydrocarbons are organic chemical compounds where carbon and hydrogen are combined together in many ways. When in its simplest configuration it is methane gas when it becomes heavier it will usually change from a gas to a fluid then to a solid (bitumen).

[2] This is a case study and how the good standing in the bidding process of petroleum permits was altered in the year 2000. Gaining Exploration Permits In September 1996 a syndicate comprising Shell Development Australia P/L (Shell) as operator, Chevron Asiatic Ltd (Chevron) and Cultus Timor Sea Ltd (Cultus) (Consortium) discovered petroleum in the Cornea structure. A structure is where petroleum deposits are found in sedimentary rock, this rock is full of holes like a hard sponge.

Petroleum is trapped in these holes under pressure and heat for millions of years.

[3] To search for petroleum an exploration permit (EP) is needed, an EP is where an applicant bids for the right for exclusive rights to explore for petroleum in prescribed areas of land(Blocks), for a six year term renewal for five years (only renewable twice). If petroleum is found a Production Licence (PL) or if currently unprofitable a Retention Lease is needed. An EP is issued to undertake the most comprehensive assessment of the area’s petroleum potential, using best practice management principles, having regard to the environment and to safety.

[4] The Consortium had a Block EP WA-241-P the press had ventured that this EP in Commonwealth waters off Western Australia, was potentially the largest petroleum find outside the Bass Strait. Offshore petroleum exploration is managed by a joint authority (JA) between the Commonwealth and the State and Territory governments. State and Territory legislation relating to exploration encompasses to the coastal waters of three nautical miles starting at the low tide coast line. The area past this border under Exclusive Economic Zone

[5] allows exclusive right to economic activity to the extent of 200 nautical miles from the shore line and to the continental shelf’s outer limit is regulated by Commonwealth legislation, which runs the activities and administration through the JA. All Territories and States have legislation that reflects the Commonwealth legislation.

[6] New Blocks that were contiguous to the Consortium WA-241-P were gazetted for application with a closing date of 31/1/1997. The Government Gazette is the official publication to inform tenders/bidders listing specifications and conditions and the closing date of each tender after which bids are assessed and then awarded.

[7] The Consortium made a bid three times greater than any other previous bid. Because they believed in their research that it would be productive.

The Consortium was awarded the two EP WA-265-P and WA-266-P (WP) Blocks which were the contiguous to its WA-241-P. This was under the previous legislation of Petroleum (Submerged Lands) Act 1967-1985 (Cth) (PSLA). The Commonwealth has subsequently repealed that legislation and replaced it with the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (OPGGSA) which commenced in 2008. The Mandatory Work Program Mandatory work programs benefit not only the applicants as they also provide the most comprehensive assessment of Australia’s petroleum potential and increases geological knowledge of Australia’s offshore sedimentary basins.

[8] If petroleum is discovered it will also provide worldwide interest in developing Australia’s petroleum resources. After the first year the Consortium assessment of WP was it was uncommercial, their analysis was high viscosity, thin rim of oil, with less than ten percent recoverable oil.

High viscosity oil (bitumen) has been degraded from crude oil by erosion and bacteria. High viscosity oil is very resistance to flow at reservoir temperatures making it uncommercial at this time to mine.

[9] The Consortium conceded their scientific bases for their bids were invalid. After using the best available science there is no substitute for actual drilling the wells. The Consortium applied that the second permit year to be suspended, and for the term of each permit to be extended by a similar period.

This would allow them to stop work and give them time to be able to work out a way of not fulfilling any further obligations they have under their EP. The JA rejected the Consortium applications, their grounds were not considered to be force majeure. The term force majeure concerns the law of indemnity and is used in contracts to safeguard the participants in the occasion that a section of the contract can’t be executed due to reasons that are beyond the power of the participants, such as physical disasters, that couldn’t be avoided through the implementation of due care.[10] JA stands for joint authority,[11] membership for each State and Territory, consist of the responsible Commonwealth Minister and the relevant State or Territory Minister. The JA can delegate all or any of their powers and functions to appropriate State/Territory and Commonwealth department officials. Key functions and powers of the JA include: the release of exploration areas for offshore petroleum, evaluation of trade bids of these areas, refusal or granting and renewing of offshore petroleum titles, alteration of title conditions, extension and suspension to title terms and the cancelling of titles.[12] The Consortium drilled a further five wells and applied to surrender their permits, as the Consortium wished to obtain future contracts, and it didn’t wish to comprise its good standing arrangements (GSA) with the Government. The Consortium didn’t refuse to complete the mandatory work program and suffer the cancellation of the EP. A refusal could mean loss of GSA and costly long drawn out legal action and could have ramification for its present/future permits, not only with the Australian Government but they could lose face worldwide.

This could also make it very difficult with their other acreage if they were successful in finding productive fields they may find very difficult to obtain a petroleum production licence to harvest their find. Good Standing Arrangements Under S104 of the PSLA [now OPGGSA s 270 (6)] if the Consortium didn’t complete the primary work program for the first three years they would have breached the EP conditions. At that time it was government policy to only surrender the EP and retain good-standing at the commencement of the fourth year after fulfilling the conditions once the first three years were completed. The Commonwealth maintains a GSA register, of all offshore petroleum joint authorities and records all evolvement against GSA agreements. Any miscarriage to comply with the terms of the GSA would cause the permittee and company directors, being recorded as ‘not in good standing’ with the JA for five years from the when the cancellation of the permit was gazetted.[13] The federal minister responded to the Consortium in a negative manner stating it would not be consistent with maintaining the integrity of the work program bidding system, and the need of fairness to all companies exploring offshore. Offshore petroleum titles were granted on the system of work-programme bidding.

This scheme allocates exploration acreage to applicants who are offering the greatest amount of work to investigate the petroleum capability of a release area. This is subject to having the financial and technical capability to comply with their work commitments.[14] Maintaining the integrity of the work program bidding system, with fairness to all companies exploring offshore, is an overriding concern of the Government.[15] Because of the impact the Consortium application to surrender their WP permits may have, the JA started proceedings to cancel the WP permits. As the Consortium didn’t complete the primary work program for the first three years, it would be taken they had not complied with EP conditions regarding work.[16] The minister of state for territories, as the designated authority (DA) cancelled the WP permits on 10/12/1999.[17] The likely impact on the Consortium at that time would have meant loss of their GSA (Government policy at that time), costly long drawn out legal action and have ramification of its present/future permits. New Agreement on Good Standing Arrangements On 19/10/1999 the federal minister announced the Consortium had reached agreement with the Commonwealth and West Australian governments to maintain their GSA. Shell persuaded the government that thirty million dollars was their share of the cost of the remaining obligatory wells. They offered to spend that amount on exploration in areas not taken up in recent releases. Not all Blocks have companies that wish to explore them some have no bidders after tenders close, so Shell will spend the thirty million dollars on some of those Blocks. Chevron offered to spend seventeen and a half million dollars drilling additional wells on its other EP in lieu of completing its share of its WP outstanding leases.

The Government could see the benefit in coming to these arrangements with Shell and Chevron. As the Australian Government is looking to achieve the most comprehensive assessment of Australia’s petroleum potential and increasing geological knowledge of Australia’s offshore sedimentary basins.[18] To maximise the financial value of Australia’s petroleum resources, supply Australians with a dependable supply of competitively valued energy and at the same time ensuring a suitable return to Australians for the depleting of these non-renewable resources.[19] Australia has an active policy to attract international investment, and seeks to encourage and retain investment from international oil companies.[20] Both Shell and Chevron has provided considerable risk capital previously and it is in the Australian Government best interest to continue to have them as bidders in the future. There isn’t a large amount of companies wishing to risk a large amount of risk capital in Australia as it doesn’t obtain a bidder for some of its blocks.

The outcome of these negotiations by Shell and Chevron became embodied as an amendment to the PSLA in 2000, then was Offshore Petroleum Act 2006 (Cth) s 84 (2) and now OPGGSA s 106 (2). Before this amendment to the PSLA in 2000 the JA had no discretion to negotiate an agreement so as a defaulter not be placed on the banned list for GSA. Since the amendment the JA can now negotiate with permit holders to ensure that they are not placed on the banned list. GSA is the consideration of the assessment of the applicants past performance for an EP. Being recorded as ‘not in good standing’ would mean the permittee would be banned from holding an EP for five years. A full list of GSA guidelines can be found under Exploration Permit Guideline: Permit Conditions and Administration (2012) s 5.[21] Ranking of multiple applicants for work-bid petroleum exploration permit, is the negotiation held between the permittee and the JA to prevent being recorded as ‘not in good standing’, all of the negotiation guidelines are laid out in the OPGGSA.[22] Conclusion The association involving the Oil Companies and the governments of Australia is one where they both have different reasons for coming together to explore for Australia’s petroleum resources. For the Oil Companies it is profit, so for them they want to spend the least amount of their funds for maximum amount of profit for their company and shareholders. This is why governments of Australia have to be very careful when dealing with Oil Companies especially in the areas of safety and the environment. Even when Governments lay down laws and regulations to control safety and the environment Oil Companies take short cuts and don’t follow safety regulations.

Look at the BP Deepwater Horizon accident in the Gulf of Mexico, where people have been killed and injured, and environment ruined.[23] Where Governments have different priorities, they look to develop Petroleum benefit of current and future Australians. This includes revenue, many other related businesses and employment. This study shows how both Oil Companies and Governments need each other for their own goals. When problems occur there is a need for common sense and both parties need to work together to find a solution.[24] Bibliography A Articles/Books/Reports The APPEA Journal, [2003] David Maloney, ‘Australia’s Offshore Petroleum Work Program Bidding System’ [2008] Journal of Natural Resources 127 Hunter Tina and John Chandler, Petroleum Law in Australia (LexisNexis Butterworths, 2013) B Case Law C Legislation Petroleum (Submerged Lands) Act 1967-1985 (Cth) Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) D Treaties E Other Australian Government Gazettes, AusTender (2013) https://australia.gov.au/publications/australian-government-gazettes Commonwealth Department of Resources, Energy and Tourism, Exploration Permit Guideline: Permit Conditions and Administration (2012) <https://www.nopta.gov.au/_documents/guidelines/PermitConditionsAdministration.pdf> Department of Resources, Energy and Tourism, Australian Petroleum News (October 2010) https://www.innovation.gov.au/resource/Documents/upstream-petroleum/apn/APN%20Oct%202010.pdf Department of Resources, Energy and Tourism, Competitive Cash Bidding System (2013) https://www.google.com.au/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CEIQFjAA&url=http%3A%2F%2Fwww.innovation.gov.au%2Fresource%2FDocuments%2Fupstream-petroleum%2FCash-Bidding-Fact-Sheet.doc&ei=t9PdUtjfMsaLkwW8yICIAg&usg=AFQjCNGNRcGMMNLx5NYwdi7Ct_HquJ8tEQ&bvm=bv.59568121,d.dGI Encyclopedia of Earth, Deepwater Horizon Disaster (December 2010) <https://www.eoearth.org/view/article/161185/> Energy Task Force, Securing Australia’s Energy Future (2004) <https://www.efa.com.au/Library/CthEnergyWhitePaper.pdf> Farlex, The Free Legal Dictionary (January 2014) <https://legal-dictionary.thefreedictionary.com/Force+Majeure> Government of Western Australia, Petroleum Exploration Permits (3 July 2013) < https://www.dmp.wa.gov.au/1691.aspx> Kansas Geological Survey, Energy Research (June 2008) <https://www.kgs.ku.edu/Publications/Bulletins/Sub9/page2.html> LexisNexis, Minerals Exploration and Prospecting (11 August 2011) https://www.lexisnexis.com.au/pdf/exploration.pdf National Offshore Petroleum Titles Administrator, Joint Authority (January 2012) <https://www.nopta.gov.au/joint_authority.html> United Nations, Convention on the Law of the Sea (1982) a 56 < https://www.un.org/depts/los/convention_agreements/convention_overview_convention.htm> U.S. Geological Survey, Fact Sheet 70-03 Heavy Oil and Natural Bitumen (August 2003) <https://pubs.usgs.gov/fs/fs070-03/fs070-03.html> 1

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[1] Tina Hunter and John Chandler, Petroleum Law in Australia (LexisNexis Butterworths, 2013) 14.

[2] Ibid 2-3.

[3] Kansas Geological Survey, Energy Research (June 2008) <https://www.kgs.ku.edu/Publications/Bulletins/Sub9/page2.html>.

18] Government of Western Australia, Petroleum Exploration Permits (3 July 2013) < https://www.dmp.wa.gov.au/1691.aspx>.

[5] United Nations, Convention on the Law of the Sea (1982) a 56 < https://www.un.org/depts/los/convention_agreements/convention_overview_convention.htm>.

[6] LexisNexis, Minerals Exploration and Prospecting (11 August 2011) <https://www.lexisnexis.com.au/pdf/exploration.pdf>.

[7] Australian Government Gazettes, AusTender (2013) <https://australia.gov.au/publications/australian-government-gazettes>.

18] Government of Western Australia, Petroleum Exploration Permits (3 July 2013) < https://www.dmp.wa.gov.au/1691.aspx>.

[9] U.S. Geological Survey, Fact Sheet 70-03 Heavy Oil and Natural Bitumen (August 2003) <https://pubs.usgs.gov/fs/fs070-03/fs070-03.html>. [10] Farlex, The Free Legal Dictionary (January 2014) <https://legal-dictionary.thefreedictionary.com/Force+Majeure>. [11] Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) s 56. [12] National Offshore Petroleum Titles Administrator, Joint Authority (January 2012) <https://www.nopta.gov.au/joint_authority.html>. [13] Department of Resources, Energy and Tourism, Australian Petroleum News (October 2010) <https://www.innovation.gov.au/resource/Documents/upstream-petroleum/apn/APN Oct 2010.pdf>. [14] Department of Resources, Energy and Tourism, Competitive Cash Bidding System (2013) <https://www.google.com.au/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CEIQFjAA&url=https://www.innovation.gov.au/resource/Documents/upstream-petroleum/Cash-Bidding-Fact-Sheet.doc&ei=t9PdUtjfMsaLkwW8yICIAg&usg=AFQjCNGNRcGMMNLx5NYwdi7Ct_HquJ8tEQ&bvm=bv.59568121,d.dGI>. [15] The APPEA Journal, Volume 43 (2003) <https://www.appea.com.au/industry-in-depth/appea-submissions-and-reports/appea-journal/>. [16] Petroleum (Submerged Lands) Act 1967-1985 (Cth) s 104. [17] Petroleum (Submerged Lands) Act 1967-1985 (Cth) s 105 (1) (e). [18] Government of Western Australia, Petroleum Exploration Permits (3 July 2013) < https://www.dmp.wa.gov.au/1691.aspx>. [19] Energy Task Force, Securing Australia’s Energy Future (2004) <https://www.efa.com.au/Library/CthEnergyWhitePaper.pdf>. [20] David Maloney, ‘Australia’s Offshore Petroleum Work Program Bidding System’ (2008) 21 Journal of Natural Resources 127. [21] Commonwealth Department of Resources, Energy and Tourism, Exploration Permit Guideline: Permit Conditions and Administration (2012) <https://www.nopta.gov.au/_documents/guidelines/PermitConditionsAdministration.pdf>. [22] Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) s 106. [23] Encyclopedia of Earth, Deepwater Horizon Disaster (December 2010) <https://www.eoearth.org/view/article/161185/>. [24] Tina Hunter and John Chandler, Petroleum Law in Australia (LexisNexis Butterworths, 2013).

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