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Energy & Resources Update focuses on issues relevant to the Australian energy, mining, oil and gas industries.
To email any of our lawyers please use firstname.lastname@minterellison.com
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> How and when to use termination for convenience clauses
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Contract clauses that allow the owner to exit the contract at will are commonly seen in the energy and resources sector — and they are very important right now given the rapid changes in this area with variable demand for commodities and the scarcity of capital for project delivery.
The question is when and how can these clauses be used? The answer seems straightforward enough: the principal decides the contract needs to end, notifies the contractor and (in most cases) pays the specified compensation for early exit. But reality can be quite different particularly given the significant amounts which can be involved.
When a party is considering exercising a right to terminate for convenience three interrelated and interdependent themes — certainty, communication, and transparency (CCT) — must be top of mind.
First, certainty requires the precise expression of the termination for convenience clause. The power to terminate by notice and the consequences of that right being exercised must be stated in terms which cannot be misunderstood by either party. Without this certainty some other more limited right potentially may exist.
Secondly, communication requires the party exercising the right to give clear and unequivocal notice that it is relying on the right to terminate for convenience whether expressly or by implication from the exchange of correspondence. Clear communication can save a principal from significant difficulties in exercising their right to terminate and will assist at each stage of any well managed project delivery contract.
Finally, transparency involves the owner being clear about the reasons they are bringing the contract to an end. This is a complex issue involving consideration of the concepts of reasonableness and good faith and whether these ideas are expressly provided or should be implied into the contract. Case law in this area has not resolved when and where these obligations will arise but they cannot be ignored. Importantly, however, even if these duties are found to exist in a contract, the parties will not be required to act contrary to their legitimate commercial interests.
As this preliminary analysis shows, termination for convenience clauses can be a valuable but not necessarily simple tool to use. By keeping in mind the three themes of the 'CCT' model, termination for convenience clauses can assist with effective and commercially realistic project delivery in the energy and resources sector. |
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> The evolution of subsidence management in NSW
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Managing the impacts of subsidence has been a topic of debate in NSW for several years. As far back as 1988 a ministerial committee on mining subsidence and urban development considered 'the serious and widespread problems disrupting the relationship between coal mining and surface development'.
The introduction of a new subsidence management policy and approvals process in 2004 was a significant step in the management of subsidence impacts from underground mining. The process, implemented by the then Department of Mineral Resources (now Department of Primary Industries), via a new condition for all underground mining leases, required the preparation of a Subsidence Management Plan ('SMP') approved by the Department for all underground mining which could lead to subsidence.
Before the dust had settled on this new regime the NSW Government established an independent inquiry into underground coal mining in the Southern Coalfields in 2006. A key objective of the inquiry was to consider best practice for assessing and managing subsidence impacts from underground coal mining. While the inquiry found the SMP approval process 'a substantial improvement in the regulatory process for subsidence impacts, which has led to many improved outcomes' it could be 'strengthened in both the Part 3A and SMP processes', by:
- clarifying the relationships between Part 3A and SMP approvals
- improving the identification of natural features which require detailed assessment and careful management, using the concept of ‘risk management zones’
- improving guidance by government agencies on the significance and value of the natural features of the Southern Coalfield
- mining proponents engaging all stakeholders earlier and involving them in the identification of significant natural features
- improving the timeliness of applications and approvals
- improving documentation for environmental assessments of project applications lodged under Part 3A
- improving baseline data (minimum 2 years for significant natural features, collected at an appropriate frequency and scale)
- clarifying the distinction and articulation of subsidence effects, impacts and consequences
- improving communication between subsidence engineers (on subsidence effects) and specialists in ecology, hydrology and geomorphology (on impacts and consequences)
- increasing transparency, quantification and focus in describing anticipated subsidence impacts and consequences
- increasing use of peer reviewed science and independent expert opinion
- using a net benefit review
- reversing the onus of proof, with contingency planning, for mining where there is insufficient assurance that highly-significant natural features would not be unacceptably impacted
- increasing monitoring and back analysis of predicted subsidence effects, impacts and consequences
- increasing security deposits
- improving regional data sets.
Since then, one Part 3A approval has been issued for a significant underground mining resource, the Metropolitan Coal Project. The approval implemented many of the inquiry's recommendations by:
- introducing Subsidence Performance Measures which the project must meet in respect of impacts on the environment;
- replacing the SMP process with the requirement for Extraction Plans, including a detailed second workings plan that provides for adaptive management, to be approved by the Director-General of the Department of Planning), for all second workings.
One of the biggest changes to occur after the Metropolitan Coal approval was the cementing of the Department for Planning (not Department for Primary Industries) as the primary approval body for assessing the impacts of subsidence from underground mining. But even today the ground has not yet fully settled and further refinements of the process are inevitable in years to come.
For further information please contact:
Simon Ball, Partner
T: +61 2 9921 4353
simon.ball@minterellison.com
Luke Walker, Senior Associate
T: +61 2 9921 4793
luke.walker@minterellison.com |
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> Legal issues in offshore geosequestration
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To combat the effects of climate change, governments and industry are turning to new technologies, includes geosequestration or greenhouse gas (GHG) capture and storage in underground geological formations. At the moment there are several geosequestration projects operating worldwide and with the imminent commencement of projects in Australia, the legal issues surrounding geosequestration need to be addressed.
This article focuses on the final, and legally most contentious, stages of geosequestration — injection and storage— and the regulation of offshore geosequestration, particularly the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (OPGGS Act).
International framework
Australia is a party to the international legal instruments that regulate offshore geosequestration:
- United Nations Convention on the Law of the Sea 1982 (UNCLOS).
- Convention on the Prevention of Marine Pollution by Dumping of Wastes and Other Matter 1972 (London Convention).
- Protocol to the London Convention 1996 (London Protocol).
Countries that are parties to UNCLOS are legally bound to adopt laws and regulations, and take other measures to control pollution by dumping, which are no less effective than the rules and standards set out in the London Convention and Protocol.
UNCLOS defines a country's territorial sea boundaries and the high seas. Under UNCLOS, the Commonwealth has authority over the sea from the coast of Australia out to 12 nautical miles. Under the Offshore Constitutional Settlement between the Commonwealth and the Australian States, the States have legislative authority over the territorial sea adjacent to the state to the three nautical mile limit.
The London Convention protects the marine environment by regulating the dumping of specific materials at sea. According to the International Maritime Organization the London Protocol is intended to replace the London Convention and extends the regime by regulating the storage of 'waste or other matter' in the sea bed. Annex 1 to the London Protocol lists wastes or other substances which may be considered for dumping. An amendment to the London Protocol that came into force in February 2007 included 'carbon dioxide streams from carbon dioxide capture processes for sequestration' within the Annex 1 list of substances not prohibited by the London Protocol.
Australian legislation
The Offshore Petroleum Amendment (GHG Storage) Act 2008 (Cth) (Amendment Act) amended and renamed the Offshore Petroleum Act 2006 (Cth) from 22 November 2008.
We will consider the following legal issues, which the OPGGS Act addresses:
- access to land
- competing land uses
- long term liability.
The OPGGS Act also address other issues, such as the categories of storage formation, which are not considered here.
Access to land
The OPGGS Act provides that areas which may be explored and assessed for greenhouse gas (GHG) storage formation are released in a similar manner to petroleum acreage, by way of a gazette notice inviting application for a GHG assessment permit on either a work-bid or cash-bid basis.
It also sets out various authorities for GHG transportation and storage, of which some are similar to the current petroleum tenements.
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GHG titles |
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GHG assessment permit |
Authorises exploration for, and assessment of, GHG storage sites in the permit area. |
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GHG holding lease |
Authorises exploration for, and assessment of, GHG storage sites in the leased area. |
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GHG injection licence |
Authorises the injection of GHG into, and its permanent storage in, an identified GHG storage formation situated in the licence area. |
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GHG special authority |
Authorises the activities specified in the authority. |
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GHG authorities |
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GHG search authority |
Authorises exploration for GHG storage formations in the area covered by the authority. |
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GHG research consent |
Authorises exploration for GHG storage formations in the course of scientific research. |
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GHG-related pipeline licence |
Authorises the construction and operation of a pipeline used to convey a GHG substance. |
Recent amendments allow a GHG injection licence to be issued for injection of GHG from any petroleum production licence, not just the production licence area of the applicant for an injection licence.
Transfers of GHG titles must be approved by the Federal Minister for Resources, Energy and Tourism (Minister) and the transfer instrument must be entered on the register of GHG titles. Any dealings in a GHG title must be approved by the Minister, including the creation or assignment of an interest in an existing GHG title.
Competing land uses
The OPGGS Act sets out tests for determining whether overlapping GHG and petroleum titles may be granted or whether certain 'key' GHG operations or petroleum operations may be authorised. These tests require a determination as to whether granting the title or authority will have 'significant adverse impact' or 'adverse impact' on an existing title or operation.
The existence of 'a significant adverse impact' is determined in accordance with regulations made under the OPGGS Act. There are currently no regulations governing this matter.
The OPGGS Act specifies that there will be an 'adverse impact', only if:
- capital or operating costs (except those costs excluded by regulation) increase
- petroleum recovery rates or GHG injection rates (as relevant) are reduced, or
- the quantity of petroleum recovered or GHG that is able to be stored (as relevant) is reduced.
The Minister must reject an application for a GHG title or an authority to carry out key GHG operations if there is high risk of a significant adverse impact on an existing petroleum title or petroleum operations, and there is no agreement between the petroleum title holder and the applicant agreeing to the title or authority being granted. Applications for petroleum titles or authority to undertake key petroleum operations must be similarly rejected if the title or operations would represent a high risk of a significant adverse impact on existing GHG operations. The Minister may refer the issue to an expert advisory committee constituted under the OPGGS Act.
Where petroleum is discovered in the area covered by a GHG injection licence — which overlaps with a petroleum exploration permit, petroleum retention lease or petroleum production licence issued prior to the commencement of the Amendment Act — the Minister can direct the holder of the greenhouse injection licence to eliminate or mitigate, manage or remediate (as relevant) the risk of a significant adverse impact on operations to recover the petroleum or the commercial viability of the recovery of the petroleum.
Long term liability
Under the OPGGS Act the Commonwealth accepts long term liability for stored GHG conditional on the provision of a site closing certificate and the declaration of a closure assurance period for the GHG storage formation.
The OPGGS Act provides for the granting of a site closing certificate to a GHG injection licensee. The application must be accompanied by prescribed information including the behaviour of the stored GHG and its expected migration pathways.
The Minister will declare a closure assurance period if, at least 15 years after a site closing certificate is issued, they are satisfied that:
- the GHG injected is behaving as predicted, and
- there is no significant risk that the GHG will have a significant adverse impact on the geological integrity of the formation, the environment, human health or safety.
The closure assurance period extends from the date on which the site closing certificate is granted to the date on which the closure assurance period is declared. If the closure assurance period is declared then the Commonwealth will (subject to conditions which may be specified in regulations) indemnify the GHG title holder for liability for damages for any act or omission done in the carrying out of operations authorised by the GHG title incurred or accrued after the end of the closure assurance period. The Commonwealth will also assume liability in similar circumstances if the GHG title holder has ceased to exist.
For further information please contact:
Kathryn Barras, Associate
T: +61 8 9429 7685
kathryn.barras@minterellison.com |
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> The OTN mechanism and transferring liability for fossil fuels emissions
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The Commonwealth Government's proposed Carbon Pollution Reduction Scheme (CPRS) generally imposes liability for emissions from fossil fuels on upstream fuel producers rather than downstream users. The rationale is that it is more efficient to administer the scheme with the relatively small number of upstream producers than it would be with the larger number of downstream users.
Many upstream producers are likely to insist on the inclusion of CPRS cost pass through clauses in their sales agreements. This will result, in most cases, in upstream fuel producers acquiring and surrendering permits for the emissions of downstream fuel users, and passing on the costs to them. The cost of complying with the CPRS will ultimately form part of the cost of purchasing the fuel.
The problem
While this model is expected to work well in many cases it is an undesirable approach where:
the fuel user can efficiently manage compliance with the CPRS. In these cases the fuel user is deprived of a full appreciation of the cost of emissions associated with its fuel use, and the associated incentive to reduce fuel consumption
the way the fuel is used will result in lower emissions than those for which the upstream fuel user is required to surrender permits. Fuel can be used in a way that results in low or no emissions, for example, to produce plastic or solvents or converting coal into coke.
The solution
To deal with these issues the Commonwealth developed the Obligation Transfer Number (OTN) mechanism. Where an OTN is quoted in connection with a fuel supply, the seller (upstream fuel producer/supplier) can transfer CPRS liability for the fuel being sold to the purchaser (downstream user). The user is then responsible for acquiring and surrendering permits to comply with the CPRS.
Under the CPRS, certain users must quote an OTN and others will have the option of quoting an OTN.
Users who must quote an OTN:
- large users of a single fuel (other than liquid petroleum fuels) for that fuel (e.g. coal fired power stations)
- natural gas retailers and liquid petroleum gas marketers
- feedstock users of liquid petroleum gas (e.g. chemical producers).
Users who have the option of quoting an OTN:
- existing large fuel users, for fuels other than the fuel or fuels in respect of which they are large fuel users
- packagers of fuel for non-consumption use (e.g. solvent producers)
- manufacturers that produce products from fuel, without emitting greenhouse gases (e.g. plastic producers)
- users who transform certain fuels from one type into another type (e.g. coke producers)
- exporters and intermediate suppliers of certain fuels and synthetic greenhouse gases.
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Improving the solution
Broadly, the OTN mechanism is well adapted to achieving its objectives but it could be made even more effective. Three limitations of the current OTN regime are set out below along with suggested improvements.
OTN mechanism not well adapted for efficient dealing with CPRS liability within corporate groups.
The CPRS Bill contemplates each entity in the fuel supply chain quoting an OTN to pass liability down the chain to the person with whom liability will ultimately rest. This could lead to numerous subsidiaries of a single corporation being required to hold OTNs and transfer CPRS liability between themselves, resulting in substantial compliance costs. This problem could be avoided by requiring the fuel purchaser to quote an OTN directly to the member of the corporate group with the initial CPRS liability.
CPRS Bill requires OTNs to be quoted before a supply is made for contracts entered into after 1 July 2010.
This may lead to difficulties in practice, particularly in the early years of the CPRS, such as purchasers not being registered or forgetting to quote an OTN or quoting the wrong OTN, particularly when making hurried purchases (e.g. where they act quickly to obtain supply when usual sources are interrupted). These issues might be dealt with by allowing OTNs to be quoted and corrected after supply (without requiring the regulator's approval) and by taking a light-handed approach to the enforcement of technical rules, at least in the early years of the CPRS.
CPRS Bill prohibits the supply of fuel where the purchaser quotes a number as an OTN that is not on the OTN Register.
Unless this prohibition is removed, upstream fuel suppliers could find themselves having to choose between breaching their contractual obligations to supply fuel and breaching the CPRS legislation. Fuel suppliers need to consider this issue when preparing new supply contracts – their obligation to supply under these contracts will need to be expressed to be subject to quotation of a valid OTN by the purchaser.
The OTN mechanism has the potential to encourage emissions reduction and provide fairness for non- or low-emitting fuel users but the limitations of the mechanism must be raised with the Commonwealth now to ensure a smooth transition to a CPRS economy for fuel producers and purchasers alike.
For further information please contact:
Lucy Lovelock, Senior Associate
T: +61 7 3119 6524
lucy.lovelock@minterellison.com
Tim Sumner, Lawyer
T: 61 7 3119 6191
tim.sumner@minterellison.com |
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Adelaide:
Neil Gordon
Partner
| T: | +61 8 8233 5425 |
| F: | +61 8 8233 5556 |
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Kent Grey
Partner
| T: | +61 8 8233 5402 |
| F: | +61 8 8233 5556 |
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Brisbane:
Craig Bowie
Special Counsel
| T: | +61 7 3119 6424 |
| F: | +61 7 3119 1424 |
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Simon Scott
Partner
| T: | +61 7 3119 6153 |
| F: | +61 7 3119 1153 |
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Canberra:
Neal Parkinson
Partner
| T: | +61 2 6225 3243 | +61 2 9921 4160 |
| F: | +61 2 6225 1243 |
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Darwin:
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Gold Coast:
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Hong Kong:
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London:
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Melbourne:
Marcus Best
Partner
| T: | +61 3 8608 2946 |
| F: | +61 3 8608 1089 |
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Mark Green
Managing Partner International
| T: | +61 3 8608 2380 | M: +61 419 340 492 |
| F: | +61 3 8608 1132 |
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Perth:
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Shanghai:
Yi Yi Wu
Partner and Chief Representative
| T: | +86 21 6288 2171 |
| F: | +86 21 6288 2172 |
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Sydney:
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