In response to concerns about the existing financial assurance framework for resources projects in Queensland, and the current rehabilitation framework for disturbed land, the Queensland Government has introduced the Mineral and Energy Resources (Financial Provisioning) Bill 2017.
The Bill does two key things:
- firstly, it establishes a new financial assurance system for resource activities in Queensland, including a pooled fund for resource entities that meet the criteria; and
- secondly, it reforms the mine rehabilitation process, including requirements for upfront commitments to progressive rehabilitation and mine closure though a progressive rehabilitation and closure plan (PRC Plan).
The Bill has been referred to the Agriculture and Environment Committee which is to report to the House by 8 December 2017.
The new requirements for financial assurance and rehabilitation for resources activities are expected to commence on 1 July 2018.
The Bill has been introduced following a review of the current system undertaken by Queensland Treasury Corporation (QTC) and consultation on a number of discussion papers.
How does the financial assurance system currently work?
It is a condition of every environmental authority for a resource activity that the holder must lodge a financial assurance in the form and amount calculated by the State. A financial assurance must be in place before a resource activity can commence.
The amount of the financial assurance is determined by the maximum disturbance area, which is identified through the plan of operations and financial assurance calculator. Some companies are eligible for a discount of up to 30%.
The financial assurance is re-calculated when a new plan of operations is lodged (every 1-5 years).
Financial assurance is held by the State generally by bank guarantee, but can in some instances be held by cash, and in one case by an insurance bond.
Why is it broken?
According to the QTC review paper, everyone is unhappy:
- the State does not hold enough financial assurance for the estimated $8.7 billion liability;
- there is an opportunity cost to the way the current system operates, and the State does not generate cash flow;
- the incentives for progressive rehabilitation have not delivered as planned, with only 8-9% of the mined land in Queensland having been rehabilitated, and only 0.25% having been certified as rehabilitated;
- the miners say that the inflexibility in the calculations and the way surety can be provided means that the financial assurance costs too much and unnecessarily ties up capital;
- it is expected that the cost of bank guarantees will increase, and that conditions will tighten.
How does the Financial Provisioning Bill propose to fix the financial assurance regime?
The Financial Provisioning Bill proposes to:
Replace the current financial assurance requirements for resource activities under the Environmental Protection Act 1994.
Establish a Financial Provisioning Fund, including a pooled fund, surety arrangements and appointment of a "scheme manager".
Establish a risk allocation process, which will determine whether resource companies have to provide a contribution to the Financial Provisioning Fund or a surety (or both), and the amount of any contribution or surety. The rules for the contributions include that the scheme manager will make risk allocation decisions to determine the risk category of a resource authority holder. There is no right of appeal against a risk allocation decision (although judicial review of the decision would still be available to the holder of the resource authority). Risk category allocation reviews will be undertaken annually, and when the holder of the resource authority changes (including a change in control).
The estimated rehabilitation cost (ERC) and the risk allocation will determine whether an entity can participate in the pooled fund, or must provide a surety, and the amount of a contribution:
- entity holders with a total ERC of less than $100,000 will not participate in the pooled fund, but will be dealt with separately;
- resource authority holders who are participating in the pooled
fund must make an annual contribution to the fund within 30
business days after the scheme manager makes an allocation
decision. The formula for the contribution payable is:
Contribution = ERC X contribution for risk category under regulation
- where an entity (and its corporate group) hold authorities with a total ERC of $450m or more (or another prescribed amount), then:
- the entity will be required to make a contribution to the fund at the fund threshold (ie. $450m X contribution under regulation); AND
- give a surety for the amount of the ERC that exceeds the fund threshold.
Expand the forms of surety available. Where a surety is required, it may be in the form of a bank guarantee, an insurance bond by a prescribed insurer or cash payments.
Require mines in "care and maintenance" to give the scheme manager notification if the mine has not been in production for 6 months, or is not expected to restart production within 6 months of cessation.
Transition existing financial assurances as sureties under the new legislation, until allocations for the fund are made.
How does the Financial Provisioning Bill change rehabilitation obligations?
The main change introduced by the Financial Provisioning Bill is that plans of operations for mining projects with site-specific environmental authorities will be replaced with PRC plans, that will essentially:
- provide the plan for the mining activity;
- identify the post mining land use;
- detail progressive rehabilitation, including milestones and timeframes. Land will be available for rehabilitation generally if it is not being used for mining, does not contain permanent infrastructure and will not be mined within the next 10 years.
It is recognised that some areas may not be able to be rehabilitated to a stable condition, and these will be known as "non-use management areas". Evidence needs to be provided to justify an area being a non-use management area, and a methodology for achieving best practice management must be included in the PRC.
A PRC guideline will be developed, including the criteria for acceptance of non-use management area. For greenfield sites, there is an expectation that non-use management areas will not be able to be justified.
The PRC schedule will be a separate approval to the environmental authority, but will be publicly notified either as part of the environmental authority application or an EIS and will be subject to the Land Court process. Major amendments to the PRC schedule will go through public notification.
The PRC schedule may be approved subject to conditions, however the environmental authority will override the PRC schedule in the event of inconsistency. The PRC schedule takes effect and ends with the environmental authority, however it will continue where an environmental authority is suspended.
Non-compliance with a PRC schedule will be an offence, and importantly transitional environmental programs cannot be used to achieve compliance. Environmental protection orders can be issued for non-compliance.
Existing plans of operations for mining leases will be phased out. All existing holders of mining lease will be required to commence the transition to PRC plans within 3 years of commencement of the new provisions. Petroleum leases will still require a plan of operations.
There are a number of other amendments to the Environmental Protection Act that relate to the PRC plans, including auditing requirements, increased powers of entry and notification obligations for rehabilitation auditors for a PRC schedule.
Watch out for this...
For the new financial assurance system, the big thing we still don't know is how much it will cost. The risk allocation decisions have not yet been made, and the proposed regulation with the risk category contributions is not available, and the administration fee that is payable for sureties is unknown.
In preparing for the proposed new regime, resource authority holders will need to determine:
- who "the entity" is for the risk allocation and the ERC across all resource authorities. This is likely to be complicated with joint venture arrangements, and between parent and subsidiary companies;
- what the risk allocation is likely to be;
- their ERC.
The detail required for the progressive rehabilitation requirements will not be known until the guideline is released, and it will be important for resource entities to be involved in the consultation process for the draft guideline once it is available. A number of guidelines will be required to support the Financial Provisioning Bill, including about the risk allocation process, forms of surety and the PRC plans and schedules.
The Bill has been referred to the Agriculture and Environment Committee who has to report on the Bill to the House by 8 December 2017. The Committee has called for submissions, however the program for submissions and public hearings on the Bill has not yet been released.
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.