The NSW Supreme Court has quashed a decision by the NSW Office of Coal Seam Gas to suspend operations at Metgasco’s Clarence Moreton Basin project on the basis the decision was ‘not made according to law’.1

The decision, handed down on the 24th April 2015, has given Metgasco the green light to resume exploration activities in northern NSW after it was forced to suspend drilling on its Rosella E01 conventional gas well near Lismore in May 2014.

Metgasco had sought judicial review of the decision by the Office of Coal Seam Gas, claiming that the decision was invalid because it was not authorised by the petroleum legislation and because the company had been denied procedural fairness.

In granting the relief sought by Metgasco, Justice Richard Button said the decision by the Office of Coal Seam Gas on behalf of the NSW Government to suspend the construction of the Rosella well came as a ‘bolt from the blue’ to Metgasco, which saw the gas company’s share price drop by 40%.2

The decision highlights the importance of ensuring strict compliance with legislation by resource companies and governments alike, but it also provides some interesting insight into how governments may be influenced by public opinion and how resource companies can reduce the risk of political opportunism putting a stop to projects.

Background

In March 2013 Metgasco sought approval for the construction of the Rosella conventional gas well on freehold land located in Bentley, near Lismore, pursuant to Petroleum Exploration Licence 16 (PEL 16). In NSW, explorers need additional approvals to carry out Category 3 activities within the area of a petroleum exploration licence pursuant to theEnvironmental Planning and Assessment Act 1979 (NSW) and the State Environmental Planning Policy (Mining, Petroleum Production and Extractive Industries) 2007.

The NSW Government, through the Office of Coal Seam Gas, approved the activities in February 2014, subject to the conditions imposed under the Petroleum (Onshore) Act 1991 (NSW) (Petroleum (Onshore) Act) and the conditions which attached to PEL 16, which included a community consultation condition (Activity Approval). In addition, the approval stipulated that the activities had to be carried out in accordance with the methods stated in Metgasco’s Review of Environmental Factors for the Rosella well, which had been submitted to the government for approval.

The Review of Environmental Factors provided details of stakeholder and community consultation that would be carried out by Metgasco prior to the commencement of drilling. This included negotiating land access agreements with affected landholders, holding open community meetings and conducting letter box information drops.

Following the approval, protesters blockaded the Bentley site, with thousands of protesters setting up camp near the site. The protest generated substantial media attention over several weeks.

On 14 May 2014, the Director of the Office of Coal Seam Gas suspended the approval for the construction of the Rosella well on the basis that Metgasco had not complied with the community consultation condition of PEL 16 (first decision). The suspension was purportedly given effect under s 22 of the Petroleum (Onshore) Act, which inter alia provides that the Minister may suspend operations under a petroleum title if the Minister is satisfied that the holder has contravened a condition of the title that is related to environmental management.

Metgasco sought an internal review of the decision and commenced judicial review proceedings.

Following the internal review, the Office of Coal Seam Gas ‘confirmed’ its decision to suspend Metgasco’s activities (second decision), primarily because it was not satisfied that Metgasco had engaged in ‘effective consultation’ in contravention of the community consultation condition of the petroleum exploration licence.

Specifically, the state contended that:

  • Metgasco’s community consultation program did not address the ‘particular challenges’ associated with PEL 16, referring to the intense community opposition to coal seam gas activities in the northern rivers region of NSW;
  • the program failed to identify groups that ought to have been consulted during the process, including Lismore City Council and some environmental groups;
  • the program did not adequately address protest activity near the Rosella well site; and
  • Metgasco had not delivered presentations with the assistance of scientific experts to address ‘confusion and misinformation within the community’.3

The legislation

The NSW Supreme Court considered the construction of the Petroleum (Onshore) Act insofar as it relates to the cancellation and suspension of titles.

Section 22(3A) sets out the basis on which a petroleum title may be suspended, and relevantly provides:

‘The Minister may suspend all or any specified operations under a petroleum title … if the Minister is satisfied that the holder of the title has contravened … any condition of the title that is identified as a condition related to environmental management.’

Section 22(3B) provides that a condition is related to environmental management if it is identified in the title. In the case of PEL 16, the environmental management conditions were identified by reference to condition numbers. Relevantly, the community consultation condition which attached to Metgasco’s exploration licence was not classified as an environmental management condition.

Section 22(6) of the Petroleum (Onshore) Act goes on to establish the process for suspending operations or cancelling a title under the legislation, which provides that the Minister must give written notice of the proposed cancellation or suspension and the grounds for doing so, and that the title holder must be given a reasonable opportunity to make representations with respect to the proposed cancellation, which must be taken into account by the Minister.

The court’s decision

Metgasco had sought declarations that the various decisions by the Office of Coal Seam Gas to suspend its activities were not made according to law.

The NSW Supreme Court had no difficulty quashing the first decision on the basis that the Minister had failed to comply with the requirements of the Petroleum (Onshore) Act, which required the Minister to give notice of the proposed suspension and provide an opportunity for Metgasco to respond to the notice. Justice Richard Button said the first decision came as a ‘bolt from the blue’ to Metgasco and that procedural fairness had not been followed.4

Metgasco argued that the second decision was invalid because it purported to confirm the first decision, which the court accepted had been made contrary to law. Further, Metgasco claimed that the petroleum legislation did not contain a mechanism for the Minister to ‘confirm’ suspensions.5

Counsel for the state argued that although the characterisation of the second decision as a ‘confirmation’ of an earlier, invalid decision was ‘defective’, the Minister had complied with the requirements of section 22(6), and that to strike out the decision on that basis would constitute ‘excessive formalism’.6

The court disagreed and, in quashing the second decision, acknowledged that the decision had ‘substantially damaged’ Metgasco and exposed it to criminal sanction under the petroleum legislation.7

The court went a step further and set out an alternative basis upon which the second decision was invalid, which related to the classification of conditions as environmental management conditions and the construction of the petroleum legislation.

Metgasco had argued that the wording of s 22(3B) of the Petroleum (Onshore) Act provided that only a breach of an environmental management condition of a petroleum title could constitute a basis for the suspension of activities.

Counsel for the NSW government argued that the suspension was for a breach of a condition of an Activity Approval, which was intended to allow more flexibility and the broader imposition of conditions without the distinction between suspendable and non-suspendable conditions adopted in the petroleum legislation.

The court held that the clear meaning of the legislation suggested that parliament intended that the bifurcation between suspendable and non-suspendable conditions applied to ‘specified operations under a petroleum title’, which may be authorised by an activity approval.8 As the community consultation condition was not classified as a condition relating to environmental management, it could not form the basis for a suspension under s 22(3B) of the Petroleum (Onshore) Act.

Community consultation and ‘effective’ engagement

The decision in Metgasco Limited v Minister for Resources and Energy9 provides some interesting commentary on community consultation for resource projects and how that may impact its legal obligations pursuant to the petroleum title and the government’s land access guidelines.

The NSW Supreme Court considered Metgasco’s community consultation program in the context of considering whether the Minister took irrelevant considerations into account when deciding to suspend the Activity Approval.

The Minister had submitted that Metgasco had failed to engage in ‘effective consultation’ because in spite of its community consultation program, widespread community opposition to its activities subsisted.

The court contemplated the meaning of ‘effective consultation’ and determined that the relevant focus was the ‘quality of the process of consultation, rather than on any outcome’. The court held that the Minister had placed substantial weight on the fact that many people remained opposed to Metgasco’s activities in the region, rather than the steps taken by the company to consult with the community. Accordingly, Justice Button held the second decision was also invalid on the basis the Minister had taken into account an irrelevant consideration.10

Other arguments

The court rejected arguments by Metgasco that the Minister took into account other irrelevant considerations, being the deep opposition to coal seam gas extraction (in circumstances where the Rosella well was a conventional gas well) and community concerns that exploration would lead to production in the future. The court also rejected the contention that the decision was so unreasonable as to be amenable to judicial review.

Costs and compensation

The NSW Supreme Court ordered that the NSW government pay Metgasco’s costs of the proceedings. Metgasco has indicated that it will seek compensation from the state for the damage to the company and its shareholders as a result of the suspension.

Lessons from the decision

The Metgasco case provides interesting insight into how governments may be persuaded by public opinion, and how they may seek to utilise legislative mechanisms to achieve a political outcome.

Much of the NSW government’s case against Metgasco focused on the quality of its community consultation, including the skills of Metgasco’s spokespeople to engage with a hostile audience and a lack of contingency planning for protest events.

This highlights the importance for resource companies to implement comprehensive procedures for key activities, such as community consultation and incident response planning. With continued community opposition to resource development, particularly in respect of coal seam gas activities, and the increased sophistication of protest groups, resource companies should take steps to adopt civil disobedience management strategies into their project plans.