Australia: Greater scrutiny of offshore Retention Leases under proposed "use it or lose it" policy

Key Points:

Recent comments by the Commonwealth Government's Industry Minister Ian MacFarlane regarding the Government's plan to boost the development of offshore oil and gas projects under its "use it or lose it" policy are likely to be reflected in the stricter enforcement of Retention Lease conditions.

Under the Coalition Government's Policy for Resources and Energy released in September 2013, oil and gas companies may have their offshore Retention Leases revoked if they fail to commence development of the underlying petroleum resource in certain circumstances.

OPGGSA and Retention Leases

The Offshore Petroleum and Greenhouse Gas Storage Act 2006 (OPGGSA) has, as two of its objectives, the promotion of the development of commercial discoveries and ensuring that lessees actively seek to address matters inhibiting the commercialisation of their discoveries.

Retention Leases granted under the OPGGSA provide security of title for petroleum resources that are not currently commercially viable but which have genuine development potential (ie. development is likely to be commercially viable within 15 years). If granted, a Retention Lease is excised from an Exploration Permit following the discovery of petroleum.

Commercial viability means that the discovery could be developed given existing knowledge of the field, having regard to prevailing market conditions and using proven technology readily available within the industry so as to provide an acceptable rate of return. A holder of a Retention Lease must be prepared to acquire or apply proven technology readily available within the industry.

It should be noted that the Commonwealth Government's jurisdiction under the OPGGSA extends to offshore areas only; the States and Territories control onshore mining and petroleum tenements.

Retention Leases are subject to any such conditions as the Minister thinks fit.

Curiously, in connection with the Woodside-operated Browse Basin project, all seven of the Retention Leases (two of which were onshore and therefore granted under State legislation), as granted in 2009, obliged the holders to explore the creation of onshore LNG facilities, referred to as the James Price Point Gas Hub proposal. While the Western Australian Government has strenuously insisted on the James Price Point Gas Hub proposal, in August 2013 the previous Commonwealth Government removed this condition as to the five offshore Retention Leases granted under the OPGGSA.

Coalition Government's policy on Retention Leases

The Policy provides that the newly formed Government intends to verify that Retention Leases granted under the OPGGSA are being held for "a legitimate need to secure gas for long-lived production projects" and not to "obtain a competitive commercial advantage".

The Policy also provides that, should a field the subject of a Retention Lease become commercial, the holder of the Retention Lease "should be required to apply immediately to the Minister for a Production Licence to bring the field online".

It is against this background that Mr MacFarlane (whose portfolio includes that of the previously named Resources and Energy Minister) said on 18 September 2013 that companies wanting to develop offshore oil and gas projects could have their Retention Leases revoked if they fail to start work in the "next two to three years".

Mr MacFarlane was quoted as saying, prior to the election, that (if the Coalition Government were to be elected) he would ask the Department of Resources, Energy and Tourism to present a report on Retention Leases due for review over the next three years, suggesting that his statement on 18 September 2013 that he would pay attention to failures "to start work in the next two to three years " relates to Retention Leases expiring in that timeframe.

The Government has indicated that Mr MacFarlane will meet with major resources companies holding Retention Leases under OPGGSA to discuss the need to retain their Retention Leases.

Possible change in the assessment of applications for renewal of Retention Leases

The initial term of a Retention Lease under the OPGGSA is five years and may be renewed for further five year periods in certain circumstances.

Section 155(3) of the OPGGSA provides that if the recovery of petroleum from a Retention Lease area is commercially viable, an application to renew must be refused (the "use it or lose it" provision). In practice, this condition has not been strictly applied as Retention Leases are commonly renewed despite the presence of commercially viable petroleum reserves.

The Policy provides that "at the end of the Retention Lease period, the lease should be offered on a tender basis for a Production Licence". Consistent with this, Mr MacFarlane said "if the companies genuinely can't do it or don't want to do it or for whatever reason, then I think those tenders for retention leases when they come up for renewal should be put out to the market".

Therefore, the election of the Coalition Government may signal a change in the way applications for offshore Retention Lease renewals are treated. In particular, it would appear that a stricter enforcement of the "use it or lose it" provision in the OPGGSA is likely.

Thanks to Armin Fazely for his help in writing this article.

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.