Australia: No 'royalty' holiday; NSW to increase CSG royalties and penalties; new template NSW land access agreement

Last Updated: 31 October 2012
Article by Graham Taylor and Graeme Dennis

Last Thursday, the New South Wales Parliament passed the Petroleum (Onshore) Amendment (Royalties and Penalties) Bill which will put an end to a "royalty holiday" for petroleum producers and significantly increase penalties for offences under the Mining Act and the Petroleum (Onshore) Act.

These changes build on the work of the Government on mining and petroleum project approvals we discussed previously and reflect the heightened interest in the regulation of the energy and resources industry in New South Wales. The Bill, coupled with recommendations for a selective audit of coal and petroleum exploration licences we noted in April, underscore the need for explorers and producers to continue to ensure they have appropriate compliance arrangements.

This month has also seen the release of a template land access agreement for mining exploration in NSW, which has been foreshadowed in legislation for some time, and should lead to a streamlining of at least part of the negotiation process.

No "royalty holiday"

To encourage petroleum (including CSG) exploration and production in New South Wales, no royalty is payable on petroleum for the first 5 years of production, with a 6% royalty payable in the sixth year, incrementally increasing to 10% in the tenth year of production.

The Bill puts an end to this royalty holiday from 1 January 2013, with a 10% royalty applying from the date of the commencement of production. The Government has said that, given the rapid growth and strength of the petroleum industry in New South Wales, a royalty holiday is no longer appropriate. This responds to concerns expressed recently by some stakeholders (including some land holder groups) that the Government was not recovering sufficient royalties from CSG production. The Government has also said that at least some of the increased royalty revenues will be applied to fund projects to benefit regional communities.

The Bill also amends the manner in which the value of the petroleum at the well-head (on which the royalty applies) is determined, so that only the Minister decides that value. Currently, this is decided by the Minister only if the Minister and the holder of the petroleum title cannot agree on that value.

These amendments will:

  • result in petroleum royalties being applied in a similar manner to coal royalties in NSW (albeit not necessarily at the same rate). The new royalty rate, with some exceptions, also broadly mirrors the royalty rates applying to petroleum production in other States and Territories; and
  • require petroleum producers in New South Wales to prepare for an increase in their operating costs on and from 1 January 2013, with petroleum explorers required to consider those increases should they get to production.

The royalty changes will apply to existing and new petroleum tenements.

Significant penalties for some breaches of the Mining Act and the Petroleum (Onshore) Act

The other major effect of the Bill is to substantially increase the maximum penalties for certain breaches of the Mining Act and the Petroleum (Onshore) Act. This is because, according the Government, the existing penalties are "inadequate as effective deterrents for a breach or wrongdoing, particularly in relation to environmental management".

For example, for corporations, the maximum penalty for:

  • prospecting except in accordance with an authorisation or a petroleum title will increase from $22,000 to $550,000;
  • mining except in accordance with an authorisation or a petroleum title will increase from $110,000 to $1.1 million;
  • a contravention of an environmental condition of an authorisation, including a mining or petroleum lease or exploration licence, will increase from $110,000 to $1.1 million; and
  • a contravention of any other condition of a mining or petroleum authorisation will increase from $22,000 to $220,000.

The Bill also confers jurisdiction on the Land and Environment Court to deal with offences under the Petroleum (Onshore) Act. The Court already has similar jurisdiction under the Mining Act.

These amendments, together with the Government's recent release of the Strategic Regional Land Use Policy for mining and petroleum projects, continue to signal a stronger regulatory focus on activities relating to exploration and production in New South Wales and highlight the need for explorers and producers alike to ensure they have appropriate compliance arrangements.

Template NSW land access agreement for mining exploration released

The long-awaited template land access agreement for mining exploration in NSW has also been released this month. It is the result of a collaboration by the NSW Minerals Council, the NSW Farmers Association and the Resources and Energy Division of the NSW Department of Trade and Investment.

There have been calls for template land access agreements for resources projects for several years, particularly in the wake of recent high-profile court cases concerning land access. In 2010 the Mining Act and the Petroleum (Onshore) Act were amended to provide for the making of template land access agreements, in a sign that the Government supported this.

Both Acts provide that a person holding an exploration licence and wishing to access the surface of land under that licence must have a written arrangement with key land holders for that land, before obtaining access.

The recently released template covers only mining exploration. The Minister for Resources and Energy indicated in Parliament last week that a template agreement for petroleum (including CSG) exploration was "imminent".

The template covers matters like:

  • the nature and scope of land access (including provision for separate short-form "deeds of entry" for separate activities);
  • compensation (in accordance with the relevant legislation);
  • provision of information about the exploration activities to the land holder;
  • insurance and indemnity requirements for the licence holder; and
  • specific controls on exploration activities on site.

The Government has prepared a guide to negotiating land access arrangements, and the template agreement allows a land holder to terminate the agreement if the licence holder has not provided the land holder with a copy of the guide before the agreement commences.

It is not compulsory for licence holders or land holders to use the template agreement, and the template provides considerable scope for negotiation on a case-by-case basis. However, the template should serve as a useful tool for licence holders and land holders, in making the negotiation "basics" more efficient.

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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.

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