Australia: Contractual Issues For Overlapping Mining And Petroleum Activities

• A range of commercial and legal issues need to be carefully considered and addressed in contracts for concurrent and co-operative mining and petroleum activities.

The big open spaces of Australia aren't as big as they used to be. Increasingly miners (both coal and hard rock) and petroleum producers Australia-wide are seeking to access the same territory to explore for and extract their favoured resource, particularly in areas where there are commercial quantities of coal seam gas.

In doing so, petroleum producers and miners have to deal with a new range of technical, commercial and legal issues that differ markedly from well-established legal processes.

Commercial certainty amidst uncertainty in legislative regimes is increasingly being sought and found through contractual arrangements.

This article will discuss some of the legal issues confronting petroleum producers and miners as they seek to negotiate these contracts.

Each jurisdiction in Australia deals with the issue of overlapping mining and petroleum tenements to different extents (if at all) and in different ways.

Queensland has introduced extensive legislation to encourage co-operative and concurrent resource extraction by different parties operating in the same area. This legislation introduces the coal seam gas regime which establishes processes for the resolution of some types of competing resource claim.

Western Australia and New South Wales have put in place a basic mechanism for the resolution of disputes for competing petroleum and mining activity.

The other states do not have special purpose provisions for overlapping tenements and in these states overlaps will need to be resolved through common law principles such as negligence and trespass.

One common aspect of each jurisdiction is that in no case does the legislation provide certainty as to how activities are to be carried out at an operational level. This certainty is being sought in contractual solutions. These contractual solutions will require considerable planning as the legislation does not do the deal for you.

A useful model to conceptualise the formation of a legal agreement is for the parties to firstly determine if there is a technical solution that allows both parties to conduct their activities simultaneously. Secondly the parties should ensure that those arrangements are commercially palatable. Finally, the parties must reduce the agreement to write inconsistent with the legal and statutory (if any) frameworks.

Scenario planning is of critical importance in the preparation of any agreement. If the agreement is to provide certainty, it must anticipate and provide a solution for the parties in any combination of circumstances. The two key variables in scenario planning in agreements for overlapping tenements are location and time. The parties should understand the extent to which they each intend to conduct activities in the same area at the same time.

Some of the relevant issues, both operational and legal, that will need to be considered when preparing any agreement of this nature are set out below. In particular, standard clauses will need to be carefully considered to ensure that they will fit into the particular circumstances created by overlapping tenements.

As already mentioned the exchange of information is critical for each party to evaluate the impacts on each other and to plan activities with certainty. Any agreement should provide for information to be exchanged by the parties as required, usually on a regular basis and to adequately protect the value of that information through confidentiality provisions.

Ownership of various resources, for example coal seam gas, will need to be considered. A blanket statement as to which party has the right to extract which minerals may not work in practice pending the particulars of the legislative regime.

In addition, other resources, for example water, may also need to be considered in light of each party's particular resource requirements and the legislative framework for the management of those resources.

Miners and petroleum producers have obligations at law to rehabilitate the site after their operations have finished. When two parties are proposing to conduct activities in the same area, whether or not at the same time, this may complicate each party's rehabilitation obligations. In practice it may not be possible or practicable for one party to rehabilitate an area where the other party has not yet finished its activities. In such a case, the parties need to apportion responsibility and liability for rehabilitation as between themselves. It may not be as simple as stating that the second party in time has the obligation to rehabilitate the totality of the area as the impacts of the second party may be minor compared to those of the first party. Indeed the second party in time may not in fact enter the land for a considerable period (if at all). The parties should contemplate various scenarios relating to the conduct of activities and how they will impact rehabilitation. Any such apportionment will also need to be consistent with the environmental obligations imposed by legislation.

Mining and petroleum operations are quite different in many material respects. Consequently, the safety regimes are also different. The implication of concurrent mining and petroleum extraction is that different people may be acting in the same area at the same time but under different safety obligations. The parties will need to co-ordinate their efforts to maintain safety but at the same time comply with their respective legal obligations. Questions will need to be asked about the extent to which the obligations can be displaced, amended by agreement and properly discharged.

The parties will need to consider the circumstances in which they would be prepared to allow a termination of the agreement. The impacts of termination may be greater than the usual commercial and contractual impacts. For example, in Queensland the holders of overlapping petroleum leases and mining leases can only conduct activities if there is a co-ordination arrangement in place. If the arrangement were terminated for the default of one party, the non-defaulting party cannot conduct its activities. In such a case the parties may not want the agreement to terminate under any circumstances.

Different default regimes need to be developed, particularly if termination is a limited option. In the absence of termination provisions, damages are likely to be the primary right of recourse in the event of a breach. Careful consideration of default provisions and damages regimes, including likely types of damage or loss that may arise, will need to occur before any such clause can be finalised.

The majority of disputes that are likely to arise in relation to these sorts of contractual agreements will relate to the conduct of operational activities. For example, whether a party can conduct an activity without impacting on the other and if so under what terms and conditions.

There are two issues relevant to these types of disputes:

• the parties need to get to a certain outcome at the end of the dispute resolution process; and

• there is usually no legal wrong which invokes the jurisdiction of any court.

These two issues generally mean that mediation and expert determination are the preferred means of resolving operational disputes. Mediation enables the parties to develop technical and commercial solutions to the operational dispute. However, mediation does not always lead to resolution and a binding determination by an expert may be a suitable option of last resort to ensure that both parties can conduct their activities with certainty.

The parties should consider whether or not to list factors that the expert must take into account when making their determination, for example, the quantity and value of the resources to be extracted and the cost to a party to change its operational plans to accommodate the proposed plan of the other.

The parties will also need to carefully consider the potential experts who they believe are capable of determining any such dispute and will need to ensure that any expert has adequate skills and knowledge in the relevant technical areas.

A final issue to consider is whether or not to limit the orders that an expert is able to make in the determination. For example, if both parties are proposing competing parties of work which cannot both be carried out, can the expert determine new programs of work for each party or is the expert's power to be limited to choosing one of the proposed programs?

In any event, any dispute resolution clause should be drafted so that it is not merely an "agreement to agree," which is not enforceable. The dispute resolution clause must lead to certainty in outcomes.

As any information exchanged is likely to be significant, important and of commercial value, it will need to adequately protected by a confidentiality clause. As it may be necessary and, indeed, operationally useful for a party to be able to use the information provided by the other in developing their own plans (including submission of this information to various government and regulatory departments), any confidentiality clause should enable the other party to use of the confidential information of the other for these purposes.

Contractual arrangements for managing overlapping petroleum and mining activities are increasingly being used as a vehicle for giving certainty to the parties' rights. In no case does the legislation in any Australian jurisdiction do the deal for the parties and it is therefore necessary for the parties to carefully work out as between themselves how they will operate cooperatively.

Key issues that the parties will face in preparing these agreements are:

1. the disclosure of adequate information for each party to understand the plans of the other and develop their own plans;
2. anticipating the multitude of scenarios that may arise and then addressing each of these scenarios in the agreement.

The parties will also need to carefully scrutinise the terms of the agreement, especially the boilerplate clauses to ensure that they match the legislative framework and the commercial deal that is being made by the parties.

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.