Earlier this year the Foreign Investment Review Board (FIRB) changed its policy treatment in respect of Australian petroleum titles. The acquisition of an interest in any such titles – now including exploration and retention titles – or of a company which holds them, is likely to require prior notification to FIRB. Investors should carefully consider FIRB notification requirements before making a direct or indirect oil and gas acquisition. The policy changes may also have further implications on timing of FIRB decisions given the increased volume of work it is likely create for FIRB.
FIRB has also reaffirmed its position with respect to state-owned enterprises (SOEs) "upgrading" an exploration title to a production title, which will require FIRB approval. This effectively means that a SOE acquiring non-producing assets would also need to make a further application if it subsequently wishes to develop a project.
The application of the "national interest" test in determining whether a business proposal should be rejected is currently a high profile issue. The future application of the test, especially relating to investments by SOEs, may depend on which political party wins the Federal election in 2013.
Background: Regulation of oil and gas acquisitions by foreign persons
Foreign investment in Australia is regulated by the Foreign Acquisitions and Takeovers Act 1972 (Cth) (FATA). The FATA provides that the Treasurer may refuse to allow foreign investment which is contrary to the "national interest". Certain types of transactions involving "foreign persons" require prior notification under the FATA. Relevantly for the oil and gas sector, transactions requiring notification include a proposed acquisition:
- of "Australian urban land" or of an "Australian urban land corporation"; or
- that results in the acquirer holding 15% or more of the shares in a "prescribed corporation" (or that results in foreign persons together holding greater than 40% of the shares in the corporation) where the proposal values the corporation at more than A$244 million (A$1062 million for US investors, and soon for New Zealand investors); or
- of controlling interests in Australian businesses valued at more than A$244 million (A$1062 million for US investors, and soon for New Zealand investors).
There are some exemptions to these requirements, and special notification requirements apply to proposed investments involving foreign governments or SOEs (see below). The monetary thresholds are adjusted annually for inflation on each 1 January.
The grant of new petroleum titles generally will not trigger any requirement to notify FIRB, as the grant of property rights by a government does not constitute an acquisition for the purposes of the FATA. However, please note the position with respect to foreign governments or SOEs (discussed below).
The Treasurer can block, or impose conditions on the implementation of, a notifiable transaction if it is considered contrary to the national interest. What constitutes the "national interest" is not defined in the FATA, and the Treasurer has discretion in deciding what constitutes the national interest at any given point in time. The Treasurer publishes Australia's Foreign Investment Policy (the Policy) to provide guidance on Australia's foreign investment regime, including some of the issues to be taken into account in assessing the national interest. Generally speaking, if a proposed transaction does not meet the requirements set out in the Policy, it is likely to be assessed as contrary to the national interest.
Policy changes to "Australian urban land": How is it relevant to oil and gas?
Notification to FIRB is required where a foreign person acquires an "interest in Australian urban land" or acquires shares in an "Australian urban land corporation". Broadly speaking, such acquisitions must be notified to FIRB irrespective of value. There are some exemptions, which are discussed below.
Australian urban land
Land the subject of a petroleum title will typically be considered, somewhat paradoxically, to be urban land. The term "Australian urban land" is defined to mean any land that is not "Australian rural land". The term "Australian rural land" is defined to mean land that is used wholly or exclusively for "primary production", which includes most types of farming but does not include petroleum production. Relevantly for oil and gas, land for these purposes includes the seabed in Australia's Exclusive Economic Zone.
The term "interest in Australian urban land" is defined to include (amongst other things):
- a legal or equitable interest in Australian urban land;
- an interest as lessee or licensee in Australian urban land for a term (including extensions) which is likely to exceed 5 years; and
- an interest in a share in an "Australian urban land corporation" (discussed below).
The current Policy dated January 2012 notes that notification is required for acquiring "prospecting, exploration, mining or production tenements" where they provide a "right to occupy" urban land for more than 5 years. The reference to "tenements" includes petroleum titles, and as most petroleum titles will have a term that is likely to exceed 5 years, they will likely be characterised as interests in Australian urban land.
It had previously been understood that an exploration permit or retention lease did not constitute an interest in Australian urban land and its acquisition was therefore not notifiable (unless the acquisition is to be made by a foreign government or SOE). In recent discussions, FIRB has confirmed that they no longer distinguish between exploration and retention titles on the one hand and titles that facilitate commercial production of petroleum on the other hand. Rather, the key question is whether the title gives the holder a right of entry onto the "land". If it does, and the term of the title is likely to exceed 5 years, there is an obligation to notify FIRB. As discussed above, the Policy refers to a "right to occupy", which FIRB appears to interpret to mean a right of entry.
Whether or not a petroleum title gives the holder a right of entry will depend on the particular circumstances in each case and can vary depending on the specifics of the relevant petroleum legislation. Accordingly, an accurate assessment of whether a title constitutes Australian urban land will often require knowledge of the nature of the title being acquired and any co-existing interests.
In general, however, it seems FIRB will regard most types of petroleum titles as interests in Australian urban land, and therefore the acquisition of an interest in a petroleum title by a foreign person is likely to require notification to FIRB, subject to the exceptions below.
"Exemptions" to notification?
The Foreign Acquisitions and Takeovers Regulations Act 1989 (Cth) (FATA Regulations) provides for an exemption to the Australian urban land provisions where there is an acquisition of non-residential commercial land valued at less than A$53 million (or A$1062 million for US investors) which is not vacant land.
This is known as the "developed commercial property" exemption. The Policy notes that where a mining tenement has been developed into an operational mine, it will be regarded as developed commercial property. Accordingly, the acquisition of an interest in that tenement will need to be notified to FIRB unless the property as a whole, and not just the interest being acquired if less than the whole, is valued at less than A$53 million (or A$1062 million for US investors). FIRB has indicated that the position is the same with respect to producing petroleum projects. While it is unlikely that such projects will be valued at less than A$53 million, it is conceivable that the value of a producing petroleum project being acquired by a US investor would be under the A$1062 million threshold.
It should be noted that this exemption only applies to asset acquisitions and will not apply to the acquisition of shares in a corporation that holds a producing petroleum project. The exemption may also be of limited application to asset acquisitions. For example, if a transaction is for an interest in a production title containing an operational production platform, together with interests in exploration or other titles not relevant to production, the other titles (not being developed commercial property) would not have the benefit of the "developed commercial property" exemption. Accordingly, the acquisition of the petroleum title package as a whole could still need to be notified to FIRB, even if the production assets are valued at less than the threshold.
Petroleum titles applying to rural land
The Policy notes that if a mining tenement (which includes a petroleum title) applies to land currently being used as rural land, there is no obligation to notify FIRB unless the title is valued at more than A$244 million (or A$1062 million for US investors).
Discussions with FIRB have clarified that whether this "exemption" is available depends on whether the area the subject of the title is wholly and exclusively used for primary production at the time of acquisition. Particularly with respect to offshore titles, this would appear to be a rare occurrence.
Foreign governments and SOEs
Under the terms of the Policy, foreign governments and their related entities are required to notify FIRB of any "direct investments" (which include the acquisition of petroleum titles or corporations which hold petroleum titles) and obtain prior approval regardless of the value of the acquisition. As the regime applicable to foreign governments and their related entities is under the terms of the Policy and outside of the FATA, none of the exemptions noted above will apply.
The grant of a new petroleum title to a foreign government or its related entity will require FIRB approval. This includes the "upgrade" of an exploration title to a retention title or production title, or of a retention title to a production title. This effectively means that a SOE acquiring non-producing assets would also need to make a further application if it wishes to develop a project.
There is no official guidance on what the Treasurer's key considerations with respect to the approval to develop a project would involve. However, on 6 August 2012, the current chairman of FIRB confirmed that one compelling consideration is that investment decisions should be made on a commercial basis, and not as part of a "policy, political or economic agenda of a foreign government."1
Although national interest concerns will have been considered when the exploration or retention project was initially acquired, the additional review at the time of "upgrading" enables the Treasurer to consider if there have been any changes in the Policy or national security considerations since the time of the initial review, of if the development plans raise new issues (e.g. new processing facilities or a pipeline corridor adjacent to sensitive military installations) that may not have been apparent at the time of granting the initial approval.The additional FIRB review process creates significant uncertainty for a prospective foreign government investor.
The Annual Report notes that in 2010-11, $4.56 billion was invested in the Australian oil and gas sector, representing around 3% of total foreign investment (as shown in the diagram below). This represents almost a one-third decline of approximately A$2.2 billion in investment from the previous financial year, and a substantial decline from the A$35.08 billion invested in 2008-09. However, the number of approvals in the sector has increased (from 23 approvals in 2008-09, 29 approvals in 2009-10 and up to 37 in 2010-11). None of the proposals in the oil and gas sector were rejected in 2010-11.
Foreign investment by industry sector 2010-112
Future policy directions
On 3 August 2012, the Federal Opposition3 released a discussion paper on foreign investment policy. The discussion paper invites interested parties to make submissions (by 31 October 2012) on:
- establishing a register of foreign ownership (of both real property and of Australian businesses) valued at above an appropriate threshold, and requiring foreign investors to notify the register of new acquisitions (valued above that threshold) 90 days in advance of the acquisition;
- reducing the notification threshold for an acquisition of "rural land" (discussed above) from A$244 million to A$15 million; and
- requiring all foreign investors subject to any existing notification requirements to disclose direct or indirect ownership or direct source of influence by, or funding from, foreign governments.
The discussion paper is, on its face, primarily concerned with investments in agribusiness and agricultural land. Nevertheless, the proposals suggested above would impact foreign investment generally if adopted. In a recent speech delivered in Beijing, the Opposition Leader Tony Abbott expressed the Opposition's views on the national interest test when stating that it would "rarely be in Australia's national interest to allow a foreign government or its agencies to control an Australian business".
While the discussion paper states that "the Coalition unambiguously welcomes and supports foreign investment", the above recommendations have the potential to significantly increase compliance costs for foreign investors, and the number of foreign investment transactions that need to be notified to and scrutinised by FIRB. The discussion paper, together with comments made by senior members of the Opposition, indicate that a more rigorous assessment process could be implemented if there is a change of government during the 2013 Federal elections.
We expect that the changes to FIRB's policy regarding the treatment of petroleum titles will lead to an increase in the number of oil and gas transactions being considered by FIRB each year, and a corresponding increase in the number and value of approvals. This appears to run counter to the Commonwealth government's stated intention to streamline the foreign investment process and avoid "unnecessary compliance costs" 4. There is also greater scrutiny and uncertainty for foreign governments and their agencies. The Federal Opposition's proposed changes to foreign investment policy and approach to the question of the "national interest" may, if adopted, exacerbate this issue further.
We understand that updated guidelines are likely to be issued by FIRB with respect to Australia's policy for assessment of foreign investment in oil and gas projects.
Investors should carefully consider FIRB notification requirements before making an oil and gas acquisition. Investors, and in particular SOEs, should also carefully consider the content and manner of presenting the notification to FIRB, to ensure the "national interest" question is adequately addressed within the prevailing Policy. In our experience, if a transparent approach to FIRB notification is taken, approval of an acquisition can usually be obtained in a timely manner.
1 "Don't mix politics and deals: FIRB" The Australian,7 August 2012, pp 1-2
2 Data taken from FIRB Annual Report
3 There are two major political parties represented in the Australian federal parliament (the Labor Party and the Liberal Party/National Party coalition), one of which (almost always) forms government in its own right. The party not in government is referred to as the Opposition. The Labor Party is currently in government (with the support of the Australian Greens party and several independent parliamentarians). The Opposition is the Liberal Party/National Party coalition, which on current opinion poll projections is likely to take government following the 2013 federal election.
4 Press Release by Commonwealth Treasurer Wayne Swan on 4 August 2009