As previously reported on 12 September 2014, the Mineral and Energy Resources (Common Provisions) Act 2014 (Qld) (Common Provisions Act) is expected to commence early in 2015.
Amongst other changes, the Common Provisions Act introduces a new overlapping tenure regime, which fundamentally changes the way coal and gas companies must operate when exploring for and extracting resources from the same land.
One thing that is missing from the new regime (contrary to expectations) is that existing, signed co-development agreements are not expressly preserved (i.e. 'grandfathered').
This is significant because, although it is possible to 'contract out' of parts of the new regime, some core requirements are mandatory and will require the amendment by negotiation of co-development agreements which are intended to continue after the Common Provisions Act's commencement. Furthermore, in many cases the agreements contain other key commercial terms (e.g. regarding the provision by the coal party of incidental coal seam gas to the gas party) that were hard-fought and the parties are unlikely to want to step away from, despite commencement of the new regime.
- you have mining or petroleum tenements in Queensland;
- they overlap other petroleum or mining tenements in Queensland; and
- you have a co-development agreement with the overlapping tenement holder,
you will need to amend your co-development agreement and have a clear engagement plan for doing so.
In this Alert, Senior Associate Rob McEvoy explains the new regime, how the co-development agreement may be amended and suggests an approach for engaging with the overlapping party.
HopgoodGanim's Resources and Energy Team has already 'transitioned' a number of co-development agreements under the new regime on behalf of coal and gas clients, so we are well positioned to make sure your co-development agreement is ready for the Common Provisions Act.
For that purpose, please note that the information in this alert is of a general nature only and that specific advice should be sought in relation to specific overlaps or agreements.
Problems with the current regime
Currently, if a coal or gas party applies for a production lease over land the subject of the other party's exploration tenure, it must obtain the consent of that party before grant can occur (or benefit from a 'preference decision' by the Minister, however this has never occurred).
If the application overlaps granted production tenure, then grant is subject to the parties' agreement of a coordination arrangement to be lodged with the Minister; however, the non-applicant party can resist agreement on commercial or technical grounds – essentially, it has a veto.
An explorer seeking to conduct activities within an overlapping production tenement also cannot do so without the producer's consent.
The end result of this 'consent-based' system is a lack of linkage between the grant of exploration tenure and a party's right to produce coal or gas in an overlap scenario, unless it can work with and obtain the consent of the overlapping party. This has resulted in the stagnation of many mining and petroleum lease applications in Queensland, to the detriment of the public interest.
The commercial ingenuity of overlapping parties has generally found a way around these consent 'bars' when negotiating co-development agreements. Unlike coordination arrangements, these agreements are not required to be lodged with the Minister, so the parties are free to spell out their preferred commercial terms on which they will mutually consent to each other's production lease applications.
Clauses of the co-development agreement
Co-development agreements principally deal with:
- coal party's consent to the gas party's petroleum lease applications (PLAs);
- gas party's consent to the coal party's mining lease applications (MLAs);
- the parties' mutual consents for future production lease applications;
- a co-development plan setting out the parties' overlapping tenements, operations and development plans;
- how the co-development plan is amended;
- a scheduled form of coordination arrangement, to be lodged with the Minister where required;
- terms for the provision of incidental coal seam gas by the coal party to the gas party;
- plans and procedures for how the parties will coordinate and manage safety risks; and
- in more recent agreements, terms for the abandonment by the gas party of wells and infrastructure subject to notice of mining and compensation by the coal party, in respect of compromised gas infrastructure and reserves.
The new regime
The fundamental change under the new regime is that there is now a 'direct path to grant' for mining leases (MLs) and petroleum leases (PLs) to coal and gas parties respectively.
This is achieved by permitting the coal party a 'right of way' to produce coal, subject to giving the gas party sufficient notice of the date for commencement of mining and, where applicable, compensating the gas party for certain compromised infrastructure.
The notice period varies according to the tenure underlying the MLA; generally speaking, it is 18 months for an authority to prospect (ATP) and 11 years for a petroleum lease (however the ATP holder can extend the period to 11 years in certain circumstances, which are detailed below). The 11 year period therefore also applies to an overlapping PLA where the MLA is lodged before the grant of the PL.
Where the gas party has 'high performing' wells, it has the ability to extend the mining commencement date. However, this extension (and the 11 year notice period mentioned above) is subject to an additional right of the coal party to accelerate the mining commencement date. Where such acceleration occurs, the general principle is that the coal party must, through compensation, make the gas party whole in respect of compromised infrastructure and lost reserves.
The coal party will also not be able to commence mining activities until it has agreed a joint development plan (JDP) with the gas party that is lodged with the Minister. This plan must be agreed within six months of the coal party's notification of the mining commencement date, otherwise its content must be arbitrated (to prevent deadlock) within 12 months. Although similar in intent to the co-development plan, the JDP is not the same and the co-development plan must be updated in accordance with the requirements prescribed by the Common Provisions Act.
Application of the new regime to existing production lease applications
The transitional provisions for the Common Provisions Act make it clear that the new regime will also apply to:
- MLAs which are lodged but not decided before commencement and which overlap ATPs (with or without consent) or PLAs; the scheme will not apply to PL overlaps (including if a PLA is granted pre-commencement); and
- PLAs which are lodged but not decided before commencement and which overlap exploration permits for coal (with or without consent) or mineral development licences for coal. The scheme will not apply to ML overlaps (including if a MLA is granted pre-commencement).
What are the mandatory requirements of the new regime?
During industry discussion of the new regime, it was agreed that overlapping parties would be free to negotiate their own, bespoke arrangements; that is, the new regime would apply by default.
However, this concept is only partly recognised by the Common Provisions Act: parties can opt out of certain, peripheral aspects of the regime; however the core requirements are mandatory and will always apply.
Key mandatory aspects include these:
- The coal party providing an 'advance notice' enclosing the MLA and JDP (agreed or proposed), specifying the mining commencement date according to applicable notice periods.
- The parties' agreement to the JDP within 12 months or six months to avoid compulsory arbitration.
- The prescribed requirements for a JDP (for example, the delineation of all initial mining areas, rolling mining areas and simultaneous operations zones).
- Other requirements in respect of the JDP, including that development plans and authorised activities under mining and petroleum legislation must comply with it and that such compliance is a condition of the applicable tenement.
- The gas party giving a 'petroleum production notice' where it has lodged a PLA, enclosing the PLA and stating amendments to the JDP (or providing a JDP, where there is no underlying ATP).
- The right of the gas party holding an ATP to require 11 years notice of the mining commencement date where it lodges a PLA within six months of receipt of the advance notice and notifies the coal party of this intention within three months.
- The right of the Minister to require amendment of the agreed JDP (subject to a right of appeal by the coal or gas party to the Land Court).
- The requirement for notices under the regime not otherwise given to the Department, to be so given.
Amendment of the co-development agreement
In short, existing co-development agreements will have to be amended to meet the mandatory requirements. At the very least, this will include adapting the co-development plan to meet the prescribed requirements of a JDP (in most cases, we would expect this process to be straight-forward).
It is noteworthy that the following aspects of the new regime are not mandatory:
- The coal party's right to accelerate the mining commencement date.
- The gas party's right to extend the notice period for high performing well.
- The compensation regime in respect of compromised gas wells, gas infrastructure and lost reserves.
- Therefore, there may be other issues to address under the amended co-development agreement:
- Does the coal party need to negotiate for opting into the right to accelerate? If so, is there already an equivalent 'abandonment' right under the co-development agreement that can be deemed an acceleration for this purpose (subject to complying with minimum the Common Provisions Act notice periods)?
- Does the gas party need to negotiate for opting into the right to extend the mining commencement date for high performing wells? Or is this already dealt with under the co-development agreement (perhaps using different terminology)?
- Are there provisions for compensating the gas party in the event of abandonment of wells and infrastructure? If so, which is more favourable – the agreement or the Common Provisions Act (noting that the Common Provisions Act does not yet provide for how to determine compensation in respect of lost reserves)?
- Are there mechanisms dealing with the provision of incidental coal seam gas to the gas party? Again, which process is more desirable – the agreement or the Common Provisions Act?
- Is there are a prescribed process for amending the co-development plan? Is this compliant with the requirements under the Common Provisions Act for amending a JDP?
Engaging with the overlapping party
How you approach an overlapping party in very important. The key is to be prepared. Ideally, you will already know what clauses you want in a deed of variation for the co-development agreement and, working back from there, have a plan for engagement. Obviously, each overlapping scenario will be different, but the plan should at least consider:
- your relationship with the overlapping party;
- the level of development of the overlapping party's project (are they ready to produce or still proving-up the resource);
- the overlapping party's level of knowledge of the Common Provisions Act and ability to get up to speed (do you need to help them with this – eg provide a flowchart to facilitate discussions);
- third parties that may be relevant (is there a background corporate transaction involving third party assignments or interests that will not have completed by commencement?);
- for a coal party, what minimum notice periods are you subject to and how does this align with your desired mining commencement date (if not aligned, you may need to accelerate); and
- how simple will it be to amend the JDP to meet the Common Provisions Act's prescribed requirements.
On 18 and 19 November 2014, HopgoodGanim is hosting two breakfast seminars on the wider changes under the Common Provisions Act for mining and petroleum clients, respectively. More details about these events are available below:
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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.