The NSW Government recently released its Improved Management of Exploration Regulation policy (IMER) which applies to exploration licences (PELs), special prospecting authorities and assessment leases issued under the Petroleum (Onshore) Act 1991 (NSW) (Petroleum Act).
The reforms set out in the IMER commenced on 1 July 2015 and will apply to:
- all new applications for the grant, renewal or transfer of a petroleum exploration title; and
- any renewals of other petroleum titles granted after 1 July 2015.
The IMER is a continuation of the NSW Government’s changes to the regulation of its onshore gas industry following the release of the NSW Gas Plan in late 2014. Our summary of the NSW Gas Plan is available here
This update focuses on the impact of the IMER on petroleum exploration titles, however the IMER reforms cover all types of onshore exploration activities including minerals and coal.
2. Current state of play for NSW petroleum exploration titles
For the moment, the IMER reforms are largely academic in respect of new or transferring petroleum exploration titles.
The NSW onshore petroleum industry has effectively been in lock-down since March 2014, when the NSW Government adopted a freeze on the processing of all new applications for PELs and special prospecting authorities. Further, since December 2014 the Government has been operating a PEL buy-back scheme and the Minister for Resources and Energy (Minister) has said he will not approve the transfer of any titles until the Government has exhausted potential buy-back negotiations.
The Minister has advised that the freeze will remain in place until the implementation of the Government’s proposed framework for the strategic release of areas for gas exploration. The detail of this framework is yet to be announced, however the Minister has indicated that new PELs will only be issued in areas formally released by the Government (as opposed to the “first come, first served” approach which applied prior to the freeze). The Minister has also indicated that a “triple bottom line” assessment of environmental, financial and social factors will be undertaken before these areas are released.
The buy-back scheme was recently extended until 1 October 2015. To date the Government has successfully bought-back and cancelled 15 PELs under the program. The Government has also cancelled a further three PELs through compliance and enforcement action.
The IMER reforms will, however, be of increasing importance as the NSW onshore petroleum industry is finally released from these restraints.
3. Key features of the IMER reforms
The IMER has been pitched to industry and the community as a complete overhaul of the regulation of NSW petroleum exploration.
From 1 July 2015 the NSW Environment Protection Authority (EPA) became the sole authority responsible for compliance and enforcement of all conditions of petroleum titles and exploration activity approvals, excluding work health and safety issues. The Division of Resources and Energy within the NSW Department of Industry will continue to be responsible for the compliance and enforcement of work health and safety requirements.
Petroleum title instruments have been streamlined, reducing the number of standard conditions to 13 (down from 69 in the most recent iteration of the conditions). These revised conditions will be phased-in as new petroleum exploration titles are granted, or existing titles are renewed or transferred. The conditions which apply to existing title holders will remain in place until the relevant title is renewed or transferred.
The streamlining of conditions has largely been achieved through the adoption of mandatory codes of practice (Codes), setting out the requirements for title holders. These Codes, and significantly any amendment or replacement thereof, apply through the conditions to the petroleum exploration title. The following Codes took effect from 1 July 2015:
- Environmental management;
- Produced water management, storage and transfer; and
A number of Codes relevant to petroleum exploration are still under development and will be released at a later date. These Codes will address matters such as community consultation, fracture stimulation and drilling (well integrity and deep drilling). The existing Codes for coal seam gas fracture stimulation activities and well integrity, both published in September 2012, will continue to apply until revised Codes are released.
The Codes largely adopt a risk-based regulatory approach, moving away from the previous prescriptive regulation regime. The onus will now be on the title holder to assess and adopt the most suitable measures to prevent harm and achieve the relevant regulatory requirement. These measures can be tailored to the localised risk, type and scale, phase and duration of exploration activities. However, prescriptive regulation will continue to be applied for higher risk activities.
The Government has also released a number of guidelines to assist title holders in understanding the requirements and processes associated with various activities. These guidelines address matters such as work programs, land access, annual activity reporting and the preparation of a review of environmental factors. These guidelines are not mandatory but may be considered in any investigation to determine whether the measures put in place by a title holder were reasonable and appropriate in preventing or minimising the risk. In addition, an industry guideline for petroleum explorers is reported to be under development for release at a later date.
4. Who can apply for a NSW petroleum exploration title?
In addition to the IMER reforms, the NSW Government recently adopted a new framework for determining applications for the grant, renewal and transfer of petroleum exploration titles. The ‘Minimum Standards and Merit Assessment Procedure’ requires applicants for a petroleum exploration title to meet a number of criteria, including:
- demonstrating their technical capability and financial standing;
- a sound compliance history; and
- satisfying the ‘fit and proper person’ test.
4.1 Technical capability
Applicants must demonstrate that they have the ability to comply with the regulatory requirements which are imposed on them, along with access to the appropriately qualified and experienced technical experts.
The Government also requires the applicant to evidence that they have both an environment management system and work health and safety management system that conforms to relevant Australian standards.
4.2 Financial capability
Any applicant must satisfy the Minister that it possesses, or has the ability to secure, the required funding to meet the planned expenditure for the term of the work program, in addition to commitments and liabilities on all other titles held or pending in any Australian jurisdiction. The application must be supported by a prescribed certificate from an external accountant who does not have a financial interest in the applicant (other than the receipt of professional fees). The accountant is required to warrant the sufficiency of the applicant’s funds or its ability to secure the required financing to meet the planned expenditure for the term of the work program.
It remains to been seen whether, as we suspect, this requirement for an accountant’s certificate is an awkward element of the new regime. It may be difficult for an accountant to give such an unqualified warranty regarding the ability to secure the required financing due to the inherent uncertainty of commodity prices and market conditions over the full term of the permit. This will be particularly relevant for any applicant which proposes to finance some of its work program by attracting future farm-in partners or raising capital, but without current commitments for such funding. The criminal sanctions which apply to the certificate pursuant to the Crimes Act 1900 (NSW) are likely to focus the mind of the accountant to ensure any warranty given is not misleading.
4.3 Compliance history
In assessing any application for the grant, renewal or transfer of a petroleum exploration title, the Minister will consider the compliance history of the applicant, in particular whether or not the applicant has:
- demonstrated satisfactory compliance with the conditions of any title held in NSW;
- demonstrated satisfactory compliance with other regulatory obligations associated with any title held; and
- in respect of title renewals only, completed their approved work program under the relevant title.
In addition, each applicant is required to submit a statutory declaration sworn by a relevant officer as to whether any of the following events have occurred in relation to the applicant, any holding company, any wholly-owned or majority controlled subsidiary companies, or any other companies which current directors of the applicant were or continue to be associated with:
- suspension, cancellation or revocation of any approval authorising exploration or production of coal, mineral or petroleum resources in any jurisdiction;
- contraventions in the previous five years (being any breach, regardless of whether there has been a prosecution) of authorities, approvals, consents or legislation relevant to coal, mineral or petroleum exploration or production in any Australian jurisdiction; or
- non-compliances in the previous five years with reporting obligations relevant to coal, mineral or petroleum exploration or production in any Australian jurisdiction.
4.4 Fit and proper person test
Under section 24A of the Petroleum Act, the Minister is entitled to refuse to grant, renew or transfer a petroleum title on the ground that, in the Minister’s opinion, an applicant is not a ‘fit and proper person’. This test was introduced into the Petroleum Act in 2014 and replaced the previous public interest test which applied.
To enable an assessment of whether an applicant is a fit and proper person, the applicant is required to provide statutory declarations confirming various matters in respect of the applicant and other ‘relevant persons’. These ‘relevant persons’ are:
- any officer bearer (director, secretary, CEO or CFO) of the applicant;
- any shareholder of the applicant that is a natural person and who has more voting power than all of the other shareholders combined (i.e. the majority shareholder); or
- any natural person who has the capacity to determine the outcome of decisions about the applicant’s financial or operating policies.
The required statutory declarations cover matters such as convictions for various offences, directorships of insolvent companies, personal bankruptcy and the disqualification from management of a company. If any such matters are identified, the applicant must provide details of events and actions taken to minimise or eliminate the risk that the applicant is not a ‘fit and proper person’ to hold the petroleum exploration title.
5. Change in control condition
The Government has released a “mock up” of the PEL instrument implementing the IMER reforms. The title instrument includes a change of control condition which provides that if a title holder is a corporation or trust, the Minister’s prior written approval is required before any:
- change in effective control of the title holder; or
- foreign acquisition of substantial control in the title holder.
Ministerial approval is not required where the change or foreign acquisition occurs as a result of the acquisition of shares or other securities on a registered stock exchange.
This condition is similar to an existing condition in petroleum exploration titles granted after the 2012 version of the conditions was adopted.
5.1 Change in effective control
A change in effective control of the title holder is defined in the title instrument to mean any occurrence which results in any person, not being a related body corporate of the title holder, newly being in one or more of the following positions:
- having the capacity to appoint or control more than 50% of the number of directors of the title holder's board;
- being entitled to exercise (directly or indirectly) more than 50% of the votes entitled to be cast at any general meeting of the title holder; or
- holding more than 50% of the issued share capital (other than shares issued with no rights other than to receive a specified amount in distribution) of the title holder.
5.2 Foreign acquisition of substantial control
A foreign acquisition of substantial control in the title holder is defined in the title instrument to mean any occurrence which results in a foreign party, not being a related body corporate of the title holder, newly being in one or more of the following positions:
- having the capacity to appoint or control 15% or more of the number of directors of the title holder's board;
- being entitled to exercise (directly or indirectly) 15% or more of the votes entitled to be cast at any general meeting of the title holder; or
- holding interests in 15% or more of the issued share capital (other than shares issued with no rights other than to receive a specified amount in distribution) of the title holder.
The term ‘foreign party’ is not defined in the new title instrument. The previous version of the title conditions set out the attributes of a foreign person, and the lack of clarity on this point is an important omission from the new regime.
The 15% threshold is reminiscent of the substantial interest test triggering Foreign Investment Review Board (FIRB) review pursuant to the Foreign Acquisitions and Takeovers Act 1975 (Cth). However, the transaction value thresholds which apply to FIRB notification do not apply in this case. Accordingly, any such transaction (irrespective of value) will require Ministerial approval.
At this stage the Government has not yet provided details of the criteria upon which the Minister will exercise his or her discretion in respect of a change in effective control or the foreign acquisition of substantial control of a title holder.
More information regarding the IMER reforms is available from the Division of Resources and Energy within the NSW Department of Industry at: http://www.resourcesandenergy.nsw.gov.au/miners-and-explorers/codes-and-guidelines/imer.