Insights

15/09/16

WA Energy + Resources Update - September

Welcome to the latest edition of the WA Energy + Resources Update.


Africa holds salutary lessons for Australian Governments and Corporates

By Phil Edmands

As delegates at the Africa Down Under Conference in Perth discuss how to successfully invest in Africa, many themes resonate more broadly. Africa’s emergence as tomorrow’s giant rather than yesterday’s supplicant also underlines why Australia must get its own house in order if it is to be a beneficiary.
 
Like most things in life, success is in large measure about relationships. Australian companies investing in Africa need stabilised investment frameworks, but without strong supporting relationships no project will be fully secure, realise its true potential, or perform in the most cost effective manner.
 
Building those strong relationships is partly a function of attitude. Having a healthy respect for African governments as sovereigns, and for communities as vital, is a good starting point. Africa as a continent is not poor – it has abundant resources. Its people are poor. But that does not make them any different to or less than anyone else. They want the things we have, and as they gain them so Africa’s power will grow.
 
Good relationships also rely on good communication, and in our social media age you need to publicly prosecute your case and get your story out. Otherwise others may well fill the void with mistruths that destroy the trust at the core of good relationships.
 
Australian and Western Australian Governments are implementing many initiatives to improve the competitiveness, administration and governance of mining in Africa – by working directly with African Governments and through the Australian Government’s policy of “economic diplomacy”.
 
These initiatives are not only laudable, but economically rational - both for Africa and for Australia. The pie will grow for both of them.
 
But there is a catch. As Africa develops, its sovereign and operating risk will diminish, and its infrastructure will improve. Australia has to this point enjoyed a distinct advantage in these areas. But the playing field will be much more level going forward.
 
Africa has been strongly impacted by the end of the commodities “super-cycle”. KPMG estimates that whilst FDI inflows to the continent increased 22% between 2010 and 2014 they plunged 31% in 2015. But the longer term trend is for Africa to mature as a destination for investment.
 
As it does, it will be more of a huge future market than a competitor for Australia. Resource sector growth will help propel development of that market. But already two thirds of Africa’s growth comes from increased domestic demand, and the World Bank estimates that addressing Africa’s infrastructure deficit will require investment of more than US$90 billion per annum.
 
By facilitating African resource growth Australia facilitates the success of Australian companies investing in it and facilitates growth of a massive broader market for Australian goods and services.But to be part of this win-win, Australia needs to remain competitive.
 
As stability and certainty increase in Africa, so risk premiums will reduce. Africa has abundant resources. The Africa Development Bank suggests that Africa has about 30% of the world’s known reserves of minerals, with upside because of comparably low levels of exploration.
 
Australia received a disproportionate share of investment during the last boom. The Grattan Institute estimates that in the 8 years to 2013 A$480 billion was invested in Australian mining projects – more than any other country in the world. But Africa is going to increasingly attract its share of international investment – according to the Export-Import Bank of China cumulative Chinese investment alone in Africa will amount to at least US$1 trillion over the next decade.

While other jurisdictions remained unstable and carried greater sovereign risk, Australia enjoyed a competitive buffer. It has been a very stable commodity producer, benefiting from strong rule of law, and has been able to price those benefits through a relatively high fiscal take. That shield will however dissipate as Africa’s stability and governance improve.
 
Current indications are that Australia’s competitiveness will go backwards. There is great opposition  to allowing corporate tax rates to move down and so be less out of step with international  comparators, and there is a suggested increase (for two companies) in per tonne rent for iron ore from 25 cents to $5 – a measure that is the very definition of sovereign risk.
 
Yes currently there are significant funds in the world system looking for a home with any sort of reasonable return, which with the stickiness of incumbent investment, and the sheer cost of bringing on supply in emerging markets when commodity prices are low, mean that changes may not have an immediate effect on investment in Australia.
 
But longer term, moves that damage Australia’s sovereign risk profile – one of its great competitive advantages – and put it out of step with the tax settings of other countries, will degrade Australia’s performance and reduce its living standards. The irony of this is that it need not be so. Australia can both improve its competitiveness and benefit from the strengthening economies of the commodity producers of Africa.


Put it on the JV tab: Increased scope for Operator to pursue plans and charge costs back to the JV 

Santos (BOL) Pty Ltd v Apache Northwest Pty Ltd [2016] WASC 225

By Emily Tsokos and Marshall McKenna

On 27 July 2016 Chaney J handed down his decision in the case of Santos (BOL) Pty Ltd v Apache Northwest Pty Ltd1.  This case is the latest decision in a series of disputes between Apache and Santos in respect of their various petroleum joint venture arrangements in Western Australia2.  Outside this stream of disputes, there is very little existing Australian case law on petroleum joint operating agreements, as it is unusual for petroleum joint venturers (especially in production) to pursue litigation.

Summary

This decision concerns approval for works and costs incurred by Apache Northwest Pty Ltd (Apache Northwest) and its parent entity, Apache Energy Ltd (together the Apache Group) in undertaking a gas compression project pursuant to the John Brookes joint operating agreement in respect of petroleum production licence WA-29-L, under which Santos (BOL) Pty Ltd (Santos) was also a participant (JOA). Chaney J accepted Apache Northwest’s arguments as to the interpretation of the JOA, the key points of which were:

  • even though a gas compression project may ordinarily be categorised as a development project, it was capable of being the subject of a production programme and budget under the JOA and therefore could be approved under that provision;
  • the Apache Group had undertaken the gas compression project on its own account – the project was not “Joint Operations” under the JOA as it did not fall within the scope of section 161(1) of theOffshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (and was not undertaken on a sole risk basis) and therefore initial Operating Committee approval was not required; and
  • even though the Apache Group had initially incurred the costs on its own account and then Apache Northwest charged it back to the joint venture, the JOA did not preclude past expenditure from inclusion in a production work programme and budget.

Chaney J also placed emphasis on the fact that when Santos and Apache Northwest approved the initial development programme and budget, inherent in that approval was a decision to undertake liability to contribute their percentage interest in future costs (subject to the approval of the Operating Committee) of future programmes and budgets within the regime for that approval.

Implications

Joint venture participants in both mining and oil and gas joint ventures should be wary of:

  • being bound by unquantified “possibilities” in development decisions that are not adequately costed or outlined in the initial development plan whereby it is important to scrutinise initial development plans and request clarification on any items that may be referred to as possibilities, but not necessarily quantified; and
  • operators undertaking (or procuring a related party to undertake) works and incurring costs outside the operation of a joint operating agreement which are then capable of being charged back to the joint venture if there is a perceived “benefit” to the joint venture, even if such works and costs were not authorised.

Santos is appealing the decision.

Footnotes

1 [2016] WASC 225

2 In 2015 the decision of Santos Offshore Pty Ltd v Apache Oil Australia Pty Ltd [2015] WASC 242 related to validity of   pre-emptive rights notices under the Spar JOA.  Also in 2015 in Apache Oil Australia Pty Ltd v Santos Offshore Pty Ltd [2015] WASC 318, Santos successfully argued that Apache was in material breach of the joint operating agreement in question and obtained an order to remove Apache as operator for material breach


Native Title Compensation: An Answer?

By Lauren Shave, Marshall McKenna and Arabella Tolé

On 24 August 2016, the Federal Court handed down the first compensation determination for the extinguishment of native title in Griffiths v Northern Territory of Australia (No 3) [2016] FCA 900 (Mansfield J) (Griffiths). Griffiths resulted in the claimants being awarded $3.3 million in compensation for the extinguishment of their native title, including $1.3 million for ‘solatium’ (i.e. hurt feelings evoked by extinguishment of native title). The provisions of the Mining Act 1978 (WA) provide that the State will seek to pass on any native title compensation claims to mining companies. Similar provisions appear in State and Federal petroleum legislation and in a number of leases and other land tenure agreements with the Crown in right of various States and the Commonwealth.

In this update, we reflect on when compensation may be payable, how much compensation may be payable (in light of Griffiths) and by whom.

How is compensation calculated?

Compensation for the extinguishment of native title addresses both ‘economic loss’ and ‘solatium’. The compensation for ‘solatium’ is significant and, in Griffiths, was more than the value attributed to the ‘economic’ component. As solatium is dependent on the importance of the native title rights and interests impaired, it appears that assessment of solatium and assessment of economic loss are separate and unrelated exercises.

Compensation is payable by the relevant grantor (i.e. the Crown in right of the State, Territory or Commonwealth as applicable). To the extent that there are indemnities or other mechanisms to pass compensation obligations to tenure holders, there are likely to be difficulties in attributing compensation arising for solatium to any particular parcel of land, and provisions purporting to do so may not be effective.

In what circumstances is compensation payable?

Firstly, most impacts on native title are not going to be the subject of compensation. Native title compensation is applicable only to acts that impacted native title rights and interests where those acts occurred on or after 31 October 1975.  The significance of this date is that it is the date the Racial Discrimination Act 1975 came into effect.  Absent the Racial Discrimination Act and the statutory protection against discrimination it contains, it was within the legislative power of the States to acquire native title without compensation.  The vast majority of improved (and thus more valuable) land in Australia was alienated by the Crown prior to 1 January 1975.

Secondly, quite a lot of compensation has been paid under native title agreements that have been entered into already.  The circumstances giving rise to the highest exposure to compensation are likely to be where native title rights were affected by acts that were allowed after compulsory processes (for example, where the ‘right to negotiate’ or the ‘infrastructure’ process under s24MD(6B) resulted in a grant without an agreement being in force). This is partly due to the likelihood that solatium will be higher where there was resistance to a grant that was overridden through statutory processes.

There are no reliable statistics in relation to what proportion of future acts have been resolved on the basis of native title agreements.   Anecdotally, however, it would appear that more than half and probably in excess of three quarters of future acts (i.e. grants made after 1 January 1994) have been compensated by miners and other proponents already.  There are comparatively few agreements dealing with the period from 31 October 1975 to 1 January 1994 (the commencement of the Native Title Act 1993), and so the bulk of the ‘uncompensated’ acquisitions of native title rights are those that attach to grant of rights between 1975 and 1994.  It remains to be seen how many compensable acts occurred in that timeframe.

How much compensation is payable?

Griffiths sets out a guide for determining how much compensation may be payable. Mansfield J held that compensation for the extinguishment of native title comprises both economic loss and solatium (being the damages for the pain and suffering of loss of connection to country as a result of the extinguishment).
 
Economic loss

His Honour determined that the economic loss component is calculated by reference to the freehold value of the land. If a claimant group holds exclusive native title rights they are entitled to the full freehold value of the land. In the case of a claimant group that holds non-exclusive native title rights, Mansfield J determined that the appropriate amount for economic loss should be 80% of the land’s freehold value. His reasoning for selecting such a relatively high figure was that the existence of native title rights would significantly impair the use to which land could otherwise be put.  Since the applicants enjoyed non-exclusive native title rights, his Honour awarded $512,000 for economic loss, being 80% of the freehold land value.

Solatium (loss of connection to country)

The applicants in Griffiths were able to lead strong evidence of their traditional connection to the land and the effects of that loss of country and were awarded $1.3 million for solatium.  Where evidence of connection to land is weaker, or the importance of the land or the sites on it are less significant, the solatium component will be lower.

In regards to the calculation of the solatium component, his Honour acknowledged that the process required is complex but is essentially intuitive, and that it must reflect the loss or diminution of traditional attachment or connection to land arising from the extinguishment. Evidence about the relationship with country and the effects of acts on that relationship were said to be ‘paramount’. His Honour also held that the loss is to be assessed with respect to the entire native title claim area rather than by reference to loss caused in relation to specific blocks of land

Who is liable to pay compensation?

The States’ ‘recovery’ legislation seeks to flow through compensation payable in relation to the particular tenure held. Unfortunately (or fortunately for the tenure holder) the assessment of native tile compensation was not undertaken on a ‘lot by lot’ approach.  The assessment of compensation in Griffiths was undertaken on an ‘in globo’ approach (that is, with respect to the entire area).  Put another way, the basis of the proposed government ‘flow through’ approach is incompatible with the Court approach.

That is not to say that the Government will not seek to levy a recovery for any compensation to which it is liable.  However, it is more likely that the State will take the approach of recovering native title compensation though increased rents and fees applicable to relevant tenure.  This may therefore be reflected across industry rather than specifically against miners or other tenure holders whose interests have affected native title rights and interests, but who have not made a contribution to compensation. Griffiths simply provides a base level of compensation payable by the States for the extinguishment of native title.


ASIC focus areas for 2016 financial reports

Background

ASIC has released Media Release 16-174MR ASIC calls on directors to apply realism and clarity to financial reports, which outlines ASIC’s areas of focus for 30 June 2016 financial reports of listed entities and other entities of public interest with many stakeholders.

For 30 June 2016 financial reports, ASIC will focus on 3 key areas (discussed further below):

  • asset values;
  • accounting policy choices; and
  • material disclosures in accounts.

ASIC provides some commentary on the role of directors and notes that even though directors do not need to be accounting experts, they should seek explanations and professional advice supporting the accounting treatments chosen if needed and, where appropriate, challenge the accounting estimates and treatments applied in financial reports. Directors should particularly seek advice where a treatment does not reflect their understanding of the substance of an arrangement.

ASIC also proposes to review financial reports looking at risk-based criteria and also from a random selection.

Asset values

ASIC encourages preparers of financial reports and their auditors to carefully consider the need to impair goodwill, inventories and other assets. ASIC notes that it continues to find impairment calculations based on unrealistic cash flows and assumptions, as well as material mismatches between the cash flows used and the assets being tested for impairment. The recoverability of the carrying amounts of assets such as goodwill, other intangibles and property, plant and equipment continues to be an important area of focus for ASIC.

Focus should also be given to the pricing, valuation and accounting for inventories, including the net realisable value of inventories, possible technical or commercial obsolescence, and the substance of pricing and rebate arrangements.

ASIC notes that fair values attributed to financial assets should also be based on appropriate models, assumptions and inputs and that directors and auditors should focus on the valuation of financial instruments, particularly where values are not based on quoted prices or observable market data. This includes the valuation of financial instruments by financial institutions.

ASIC will also focus on assets of companies in the extractive industries or providing support services to extractive industries, as well as values of assets that may be affected by the risk of digital disruption.

Accounting policy choices

Directors and auditors should consider how the choice of accounting policy can affect reported results. These include the treatment of off-balance sheet arrangements, revenue recognition, expensing of costs that should not be included in asset values, tax accounting, and inventory pricing and rebates.
 
Material disclosures

ASIC’s surveillance continues to focus on material disclosures of information useful to investors and others using financial reports, such as assumptions supporting accounting estimates, significant accounting policy choices, and the impact of new reporting requirements.


Working on your signature move...

By Claire Boyd

"Electronic signature” is a term used to describe various methods of electronically replicating or replacing a paper signature in a document.

Affixing electronic signatures and relying on them has been a growing and evolving business practice, allowing individuals and companies to conduct business faster and more efficiently, and facilitating the conduct of business across borders.

Contract negotiations are now almost exclusively conducted via electronic means, and it is only fitting that electronic execution would also be developing at the same rate.

Although there is ordinarily nothing legally wrong with executing a contract by electronic signatures, such practice, must be conducted with care in certain situations.  When considering the use of electronic signatures, two useful questions are:

  • Is this a document I can execute electronically?
  • If I can, is this execution method reliable in the circumstances?

When not to use electronic signatures 

Statutory requirements have not evolved as fast as technology.  As a result, longstanding statutory requirements apply to these new circumstances and this has created certain situations where electronic signatures may not be used.  For example:

  • Deeds – Electronic signatures cannot be used to legally execute deeds, as under common law, deeds are made on paper or parchment, and this requirement has remained unchanged even after the introduction of the Electronic Transactions Act1.
  • Witnessed signatures for individuals – Nearly all Australian jurisdictions require the signature of an individual executing a deed to be attested in person by at least one witness who is not a party to the deed, and this requirement is unlikely to be satisfied if the signatory and the witness are not in the same place at the same time.  In general, electronic signatures should be avoided for any document that requires a witness for execution.
  • Section 127 and 129 of the Corporations Act2 –  Section 129 entitles a person to assume that a document has been duly executed by a company, if the document has been signed in accordance with section 127.  It isn’t clear if that protection will be available if a company executes a document electronically.
  • Signatures affixed by third parties – These days specific software and online services, through the use of identification and authentication barriers, allow signatories to affix electronic signatures and notify the user prior to a document being signed and after such document has been signed.  The New South Wales Supreme Court’s decision of Williams Group Australia Pty Ltd v Crocker(Williams v Crocker)3, although not binding on Western Australia Courts, is a substantial indication that the safeguards commonly offered by such programs or services may not be sufficient, particularly in proving an intention to be bound by the terms of a contract.

Better safe than sorry 

Two common issues that arise are proving the identity of the person affixing an electronic signature to a contract and whether that person had an intention to be bound by such contract.

The nature and the importance of the document, the reliability of the party signing, the authentication mechanism and protection features of the technology used to affix the electronic signature should all therefore be considered before accepting an electronic signature.

Generally, if electronic signatures are used as a common business practice in an organisation, the organisation must put in place a reliable execution method in order to prove the intent of the signatory and, have a specific execution system for more important documents. 

Included below is a non-exhaustive list of items to consider when using electronic signatures:

  • avoid a standardised method which does not take into consideration the type and importance of the document, the context or the identity of the signatory;
  • ensure careful management and oversight of systems and instances in which electronic signatures may be used;
  • obtain the other party’s consent to the use of electronic signatures;
  • obtain an acknowledgement from the signing party that it has executed the document;
  • send a copy of the executed document to the signatory of that document and request an acknowledgment of receipt;
  • exercise caution when choosing an electronic signature software or service provider; and
  • if any electronic signature software or service provider is used:

- set up web, phone identity and knowledge based authentication systems, for example using specific questions with a response only known by the signatory; and

- use unique or complex passwords, which are regularly updated.

Electronic signatures when cross-borders parties are involved

The United Nations Convention on the Use of Electronic Communications in International Contracts (New York, 2005), which only entered into force in 2013, and to which the Australian Government is currently considering accession, aims at assuring that contracts entered into and other communications conducted electronically are as valid as the traditional paper-equivalents. 

This is a reminder that the law applicable to a contract involving cross-borders parties should therefore also be considered when executing a contract, as a particular jurisdiction may still require handwritten and/or witnessed signatures before binding the parties.

In conclusion

Where the enforceability of a contract has come into question because of an electronic signature, the Australian Courts have made findings in these specific circumstances only and will look at the specific facts in order to establish whether the parties intended to be bound.

This causes uncertainty as to what the findings may be in any particular circumstance.

If you have any queries before you execute your next contract or before accepting another party’s electronically executed document, please do not hesitate to contact us.

Footnotes

1 Electronic Transactions Act 1999 (Cth) and Electronic Transactions Act 2011 (WA).

2 Corporations Act 2001 (Cth).

3 [2015] NSWSC 1907.


Are you fairly standard?

It's time to review your purchase orders and other standard form contracts.

By Claire Boyd

From 12 November 2016, the unfair contract term protections in the Australian Consumer Law (ACL) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) will extend to small businesses, regardless of whether the small business is an acquirer (customer) or a supplier. This will result in a range of standard form contracts routinely used by companies in the energy and resources industry now falling under the unfair contract term protections regime of the ACL.

The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 will protect businesses against unfair terms in standard form contracts provided that:

  • the contract is for the supply of goods, services or a sale or grant of an interest in land (including, potentially, mining tenements);
  • at the time the contract was entered into, the business seeking protection from the regime employed fewer than 20 persons (on a headcount basis and excluding any contractors or subcontractors); and
  • the “upfront price” payable under the contract is not more than $300,000 (or $1,000,000 if the duration of the contract is more than 12 months), noting that the “upfront price” is the consideration that is provided or is to be provided under the contract and does not include any consideration that is contingent on the occurrence or non-occurrence of a particular event (e.g. amounts payable in the event an option is exercised by one party, or in the event of a default etc).

The new provisions will apply to all small business contracts that are:

  • entered into on, or after, 12 November 2016;
  • renewed on, or after 12 November 2016, in which case the protections will apply to the entire contract as renewed; or
  • varied on or after 12 November 2016, in which case the protections will apply to the varied terms.

A term of a small business contract will be void if:

  • the term is unfair; and
  • the contract is a standard form contract.

A term in a small business contract will be unfair if all of the following tests are met:

  • the term would cause a significant imbalance in the parties’ rights and obligations under the standard form contract; and
  • the term is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term (there is a rebuttable presumption that the term is not reasonably necessary to protect those interests unless that party can prove otherwise); and
  • the term would cause detriment, whether financial or non-financial, to a party to the contract if the term was to be applied or relied on.

Terms that could potentially fall foul of these tests include terms that:

  • allow a business to vary the contract without the consent of the counterparty;
  • unfairly restrict a right to terminate the contract;
  • suspend or terminate the services as of right; and
  • impose unreasonable liability and indemnification obligations.

As the 12 November 2016 commencement date approaches, businesses should review their standard form contracts to ensure that they are in compliance with this new regime, noting that businesses that seek to include, apply or rely on unfair terms in small business contracts not only face reputation risks but also compensatory claims under the existing enforcement regimes in the ACL and the ASIC Act.

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