On 29 October 2012 the Petroleum (Onshore) Amendment
(Royalties and Penalties) Act 2012 (Amendment Act) was
assented to and amends the Petroleum (Onshore) Act 1991
(NSW) and the Mining Act 1992 (NSW).
To encourage initial investment in the petroleum industry, the
Petroleum (Onshore) Act and ancillary regulations
established a royalty holiday for production companies followed by
an introductory sliding scale of royalty payments. This meant that
petroleum producers did not have to pay a royalty on petroleum for
the first five years of production.
Over the next five years, the royalty amount would increase
incrementally by 1% per year from a base of 6% in the sixth year
after commencement of production, up to 10% of the value of the
petroleum produced in the 10th year after production.
Removal of royalty holiday
The Amendment Act now removes this royalty holiday so that
royalty payments will commence when petroleum production starts at
a flat rate of royalty of 10% of the value at the well-head of
petroleum. This will apply to all current and future production
leases from 1 January 2013.
The NSW Government has noted that given current estimates of
potential NSW coal seam gas resources are larger than the existing
total natural gas reserves for Australia, there is a massive
potential for coal seam gas production revenue in NSW to exceed A$1
billion annually by 2025 and in such circumstances, a royalty
holiday is no longer necessary or appropriate.
The NSW Government has also stated that such increased royalty
revenue will support the establishment of regional community funds
to channel royalties from coal seam gas production into projects to
benefit local communities. The revenue will also go towards funding
an enhanced enforcement and compliance framework under the
Petroleum (Onshore) Act and the Mining Act,
particularly in respect of environmental management.
This enhanced enforcement and compliance framework is supported
by substantially increased penalties for certain offences under
both the Petroleum (Onshore) Act and the Mining
Act. The Amendment Act significantly increases the maximum
penalty for several offences such as mining without an authority,
failure to comply with a direction and a breach of a condition. The
maximum penalties for these offences have mostly increased to A$1.1
million for a corporation or A$220,000 for individuals.
This represents a substantial increase to earlier penalties
which were not considered to be an effective deterrent to
Valuation of production
Importantly, the Amendment Act also removes the ability for
petroleum title holders to make agreements with the Minister as to
the value of the petroleum produced at the well-head which will be
the base for the royalty calculation. Now, such value must be
determined by the Minister in all cases. This is consistent with
the approach taken with respect to coal under the Mining
Jurisdiction of Land and Environment Court vs Local Court
The Amendment Act also confers jurisdiction on the Land and
Environment Court to hear proceedings under the Petroleum
(Onshore) Act and establishes a maximum penalty limit for
offences that can be dealt with by the Local Court. These changes
are designed to expedite any offences under the Petroleum
(Onshore) Act and make it consistent with the approach taken
under the Mining Act.
The Amendment Act represents yet another example of governments
looking to take advantage of the growing size and number of energy
and resources projects, increase regulatory oversight, and spread
the benefits throughout the community. Explorers and producers
should increase their emphasis on compliance with these
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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