Who does this affect?
- Petroleum lease applicants whose applications are not likely to have been granted by 27 September 2016.
- Gas parties who intend to lodge petroleum lease applications after 27 September 2016.
- Gas parties who are parties to existing co-development agreements (based on the current overlapping tenure laws)
- that may benefit from new, comprehensive and industry accepted approaches.
- The holders of all petroleum exploration and production tenure, who will need to understand the new safety requirements applicable to overlapping areas.
- Coal parties who are caught by the new overlapping tenure regime and need to understand the obligations on gas parties to strategise and plan effectively.
On 27 September 2016, a new regime of laws governing overlapping coal and coal seam gas tenements – which is fundamentally different from the existing system – will commence, unless sooner amended, postponed or repealed. The new regime is based on extensive industry consultation and set out in Chapter 4 of the Mineral and Energy Resources (Common Provisions) Act 2014 (Qld) (MERCP Act).
The new laws contain mandatory requirements which overlapping coal and gas parties must comply with on commencement, or shortly afterwards. Organised proponents will have thought strategically in advance about the decisions required by the new regime, to ensure there are no delays or impediments to project timetables and delivery.
The key issues for the gas party under the new regime will depend on the type of mining tenure which it and the overlapping coal party hold on commencement of the new regime, what applications are on foot at that time, and what type of petroleum tenure is applied for afterwards. There are different consequences under the transitional arrangements for the new regime and under the regime itself depending on the combination of overlapping gas and coal tenures.
In this article, we set out these key issues, so that gas parties are ready for the commencement of the new regime on 27 September 2016 and can take the steps recommended as part of an effective transition plan. Find out how we can help you prepare.
For clarity, any reference to gas or gas tenure in this note is in respect of petroleum, and any reference to mining or mining tenure is in respect of coal. No other commodities are subject to the new laws.
Does the new regime apply to me?
The transitional provisions for the new regime provide that the new laws will apply on commencement in the following circumstances:
- Where the gas party holds a petroleum lease application which has not been granted on commencement which overlaps with coal exploration tenure (i.e. an exploration permit for coal or mineral development licence);
- Where the coal party holds a mining lease application which has not been granted on commencement which overlaps with petroleum exploration tenure (i.e. an authority to prospect); and
- Where the gas party holds a petroleum lease application which has not been granted on commencement which overlaps with a mining lease application which has also not been granted on commencement (or vice versa), and the applicants are not parties to a coordination arrangement under the Petroleum and Gas (Production and Safety) Act 2004 (Qld) (P&G Act) in force immediately before commencement.
The new laws will also apply where petroleum exploration tenure overlaps either coal exploration tenure or a mining lease (granted after commencement) or coal exploration tenure overlaps either petroleum exploration tenure or a petroleum lease (granted after commencement).
The transitional provisions for the new regime provide that the new laws will not apply on commencement (unless the gas party and the coal party agree to opt-in to the new scheme and a joint notice about the agreement is given to the Minister) in the following circumstances:
- Where a petroleum exploration tenure or petroleum lease, whenever granted, overlaps a mining lease that was granted before commencement;
- Where a coal exploration tenure or mining lease, whenever granted, overlaps a petroleum lease that was granted before commencement;
- Where a petroleum lease application not granted by commencement overlaps a mining lease; and
- Where a mining lease application not granted by commencement overlaps a petroleum lease.
Where the new regime does not apply, the P&G Act and the Mineral Resources Act 1989 (Qld) (MR Act) apply to the overlapping tenure as if the MERCP Act has not been enacted.
However the new safety requirements associated with the new regime will apply to all gas exploration and production tenure holders whose tenures overlap coal tenements, irrespective of date of grant, subject to a 6 month grace period from the date the new requirements commence.
How does the new regime apply?
Coal party’s right of way
Arguably the most fundamental change under the new regime is the decision to remove the requirement under the current regime for an applicant for production tenure to reach agreement with the overlapping party before the gas or coal production tenure can be granted. What this has been replaced with under the new laws is, for the coal party, a right of way in, and sole occupancy of, the area or areas which represent the first 10 years of mining activities (called the initial mining area or IMA), subject to the coal party giving the gas party adequate notice regarding the commencement of mining activities in the IMA and compensating the gas party for its affected, qualifying infrastructure and, in certain circumstances, lost gas production.
Notice of mining commencement
The assumption behind this change in regulatory design is that the gas party has more operational agility than the coal party and therefore – provided the coal party gives the required notice of mining commencement – the gas party can plan to produce from the IMA and exit the area (including, ideally, abandoning and/or relocating infrastructure) ahead of mining commencing. The amount of notice to be given to the gas party will depend on the combination of overlapping tenure in question. Generally speaking, a coal party must give 18 months’ notice of mining commencement before accessing petroleum exploration tenure and 11 years’ notice before accessing a petroleum lease (granted after commencement), however, as indicated below, there are variations to these rules. It is therefore vital that the gas party ensure that it receives the correct period of notice of mining commencement under the new laws, to safeguard its limited production window.
There are three additional aspects regarding notice of mining commencement that the gas party must be across. Firstly, where the gas party has high performing wells or fields in the IMA and the relevant notice period is not sufficient for production at the prescribed rate, the gas party can nominate its preferred mining commencement date (subject to a maximum extension and limits on the timing of such nomination). Notification of any new mining commencement date must be accompanied by relevant reasons, data and modelling, which can be objected to by the coal party, in which case the gas party (or the parties jointly) may apply for arbitration of the dispute.
Secondly, where a gas party holding petroleum exploration tenure receives notice from the coal party (due to the coal party applying for a mining lease over such tenure) of the mining commencement date for the overlapping area, and then subsequently, within 3 months of receiving such notice, the gas party notifies the coal party of its intention to apply for a petroleum lease and then actually does so within 6 months of the coal party’s notice, unless otherwise agreed by the parties, generally the mining commencement date for the coal party must be 11 years after the date notice was given by the coal party.
Thirdly, in all these scenarios, the coal party has an overriding right to truncate the relevant period of notice for the gas party’s production, subject to limits on the extent of the truncation and compensating the gas party for all of its lost gas production in the overlapping area due to the shortened production window.
Finally, there are special notice requirements which apply to gas parties holding petroleum leases granted after commencement but not later than 31 December 2016 and which are in the “Surat Transitional Area” (Surat PLs). Where a coal party lodges a mining lease application which overlaps a Surat PL, the mining commencement date must not, unless the gas party agrees to an earlier date, be before 1 July 2030 or, where the overriding truncation right is used by the coal party, before 1 July 2020.
Joint Development Plan
Another key requirement where the new regime applies and the gas party has lodged a petroleum lease application over a mining lease application or mining lease granted after commencement is, in prescribed circumstances, for the gas party to agree a joint development plan (JDP) with the overlapping coal party (or amend the existing JDP if there is already one in place). The JDP is broadly equivalent to a co-development plan (typically attached to a co-development agreement) agreed by the coal party and gas party in respect of the current overlapping tenure system. However, under the new laws, the significance of the JDP is elevated. This is because, unlike a co-development plan (agreed privately to coordinate the parties’ activities), the gas party will be unable to conduct authorised activities under its petroleum lease (once granted) unless there is an agreed JDP with the coal mining lease applicant or holder (ML Holder) and the Minister is notified of such agreement.
The new laws also prescribe mandatory content requirements for the JDP. The JDP must: identify the ML Holder and gas party and state the term of the JDP; establish the IMA; state the agreed mining commencement date for the IMA; describe the parties’ proposed activities in the overlapping area and locations for such activities; identify zones for simultaneous operations (i.e. outside of the IMA); and describe how the activities proposed by the gas party and the ML Holder optimise the development and use of the State’s coal and gas resources.
The gas party must include the JDP (or amendments to any pre-existing JDP) in a notice called the petroleum production notice, which must be given to the ML Holder within 10 business days after the gas party applies for the grant of the petroleum lease. Where the petroleum lease application overlaps coal exploration tenure, the petroleum production notice does not have to include a JDP and essentially need only include a copy of the petroleum lease application (redacted to remove details regarding financial and technical resources).
In the situation where the gas party has lodged a petroleum lease application (not granted by commencement) over a mining lease application, the gas party must give the coal party a compliant petroleum production notice (including a JDP or amendments to an existing JDP) within 10 business days of the new regime commencing (i.e. 27 September 2016). In the situation where the gas party has lodged a petroleum lease application (not granted by commencement) over a coal exploration authority, the gas party must provide a compliant petroleum production notice (including a redacted copy of the petroleum lease application) to the coal party within 10 business days of the new regime commencing (i.e. 27 September 2016).
The new laws generally require that an agreed JDP is notified to the Minister within 12 months of the proposed document being given to the coal party. If the gas party is unable to achieve agreement with the coal party within
6 months, the gas party is responsible for commencing arbitration proceedings in respect of relevant disputes so that the 12 month deadline is met.
Joint Interaction Management Plan
Shortly after the MERCP Act was passed by Parliament, associated legislation (which has not yet commenced) was passed creating new safety obligations for gas parties carrying out on-site exploration or production activities in an overlapping area which will or may physically affect coal exploration or production activities. The new safety provisions will apply to existing and future gas and coal operations, however a grace period of 6 months will apply prior to the new provisions taking effect. The new safety provisions are expected to commence on or around the date of commencement of the new overlapping tenure laws.
The key obligation for the gas party under the new safety provisions is that before any on-site exploration or production activities are carried out in the overlapping area, the operator (i.e. the person responsible for prescribed exploration and production activities) must make a compliant joint interaction management plan (JIMP) that applies to all operators of petroleum plant in the overlapping area. Importantly, before making the plan, the operator must agree the content of the proposed JIMP with the site senior executive (SSE) of any coal mine in the overlapping area. If the operator and the SSE cannot agree on the content of a proposed JIMP within 3 months after the SSE receives a copy of the plan, the operator must apply for arbitration of the dispute.
Mandatory content requirements of the JIMP relate to identifying the IMA and other coal mining zones under the JDP, identifying hazards and assessing the risks that are, or may be, created by mining operations or petroleum activities carried out in the overlapping area, monitoring triggering events or changes in circumstances that may affect the safety and health of persons in the overlapping area, describing processes for reviewing and amending the plan and communicating changes of senior safety personnel to the coal party’s site senior executive.
As soon as practicable after making a JIMP, and before the coal party carries out any exploration or production activities in the overlapping area which are subject to the JIMP, the operator must notify the chief safety inspector that the plan has been made.
Incidental coal seam gas
A gas party which holds petroleum exploration tenure or a petroleum lease has a right to be offered, on reasonable terms, any incidental coal seam gas (ICSG) in an overlapping area that is subject to a mining lease (to which the coal party is otherwise entitled under the MR Act). If the gas party accepts the offer, it must enter into a gas supply contract for delivery of the ICSG with the coal party, take the ICSG within 2 years of accepting the offer (or later agreed period) and pay the coal party the royalty amount that is payable for the ICSG under the MR Act. The coal party has the ability to offset its compensation liability (see below) to the gas party to the extent that the coal party supplies ICSG to the gas party and, in limited circumstances, where the gas party rejects an offer of ICSG.
Apart from notice, the other mechanism favouring the gas party to balance the impact of the coal party’s right of way is the right of the gas party to claim compensation from the coal party. The new laws provide that the gas party may claim compensation as soon as it considers that a compensation liability has arisen.
Where the authorised activities of the coal party under the mining lease will cause the holder of petroleum exploration tenure to have to abandon certain infrastructure, the coal party is liable to compensate the gas party for the cost of abandoning the infrastructure. Qualifying infrastructure in these circumstance includes pilot wells (not planned for abandonment and being used or held for future use) and ancillary infrastructure, and abandonment costs are determined in accordance with regulations.
Where the uthorised activities of the coal party under the mining lease will cause the holder of a petroleum lease to have to replace certain infrastructure, the coal party is liable to compensate the gas party for the cost of replacing the infrastructure. Qualifying infrastructure in these circumstance includes major petroleum pipelines and facilities, water observation bores, facilities and equipment used to transport water and electricity, accommodation camps, major roads, communication facilities, workshops, stores and infrastructure connecting major facilities to in-field petroleum wells. Replacement costs are determined in accordance with regulations.
Most significantly, the coal party will have to compensate the holder of a petroleum lease for lost petroleum production where the coal party exercises its overriding truncation right to accelerate mining commencement. In this context, ‘lost production’ means gas production forgone by the petroleum lease holder and must be calculated in accordance with detailed principles and mechanics set out by the MERCP Act and regulations under that Act.
Disagreements regarding the amount of compensation, when a compensation payment must be made and other aspects of the compensation provisions, can be referred by either party to arbitration. Qualifying arbitration institutes are prescribed and decisions are to be handed down within months of referral. Therefore, gas parties who are proactive and seeking to avoid resolution of compensation matters by third parties should already be talking with their overlapping coal parties about each coal party’s compensation liability. These discussions are easily broached in the context of agreeing the JDP, as described above, and at other suitable junctures.
Is there anything I need to consider if the new regime does not apply to me?
Just because the new regime does not apply to a gas party because of its overlapping tenure combinations, this does not mean there is nothing for the gas party to consider regarding the new laws. These gas parties should carefully consider the benefits of opting-in to the new scheme and prospects for landing an opt-in agreement with the overlapping coal party, even where there is an existing co-development agreement in place.
Some reasons for opting-in to the new scheme may include:
- Certainty regarding exclusive mining zones, mining commencement and associated notice periods to inform production windows and planning, as well as rights to extend the prescribed notice period in certain circumstances (such as high performing wells and in circumstances where a petroleum lease application is made on the heels of a mining lease application), where existing co-development agreements are uncertain in respect of such matters;
- A unilateral right to accelerate mining commencement subject to compensating the gas party for lost gas production;
- The facilitating effect of the JDP in relation to clearly defining dates for mining commencement and gas party exit, exclusive and simultaneous zones of operations, and relevant mapping;
- Certainty regarding compensation procedures (e.g. where an existing co-development agreement does not provide for this, or does so in an uncertain or outdated manner) and calculation of compensation (as prescribed by regulation);
- A prescribed process for the giving and taking of ICSG produced during mining; and
- Mandatory arbitration referral in the event of prescribed disputes.
How can KWM help?
We can work with you to:
- Analyse your matrix of overlapping tenure to identify issues and solutions under the new laws;
- Draft, as applicable, precedent petroleum production notices, JDPs and JIMPs ready for completion and proposal to overlapping coal parties and gas operators on commencement of the new laws and associated legislation;
- Determine development priorities;
- Draft and advise on the prescribed and other commercial terms of a gas supply agreement in respect of ICSG taken by the gas party;
- Advise on the pre-requisites under the new regime for claiming compensation from the coal party (including proving the value of lost production, replacement costs or costs of abandonment), preventing duplicated or overlapping payments (which are prohibited) and limits to compensation entitlements in accordance with principles prescribed by regulation;
- Work with your commercial team or consultant to determine compensation entitlements for specific assets that may be the subject of accelerated mining commencement;
- Advise on strategies to manage off-setting by the coal party of the coal party’s compensation liability in respect of ICSG offered and/or taken by the gas party from the coal party, and the principles and mechanics for reconciliation payments by the gas party to the coal party (which apply where the gas party subsequently recovers petroleum that was the subject of an earlier compensation payment by the coal party to the gas party);
- Determine a strategy for engagement with overlapping coal parties to ensure petroleum operating priorities are met whilst maintaining legal compliance;
- Engage with coal parties to discuss development plans, mining commencement, proposed JDPs, proposed JIMPs, pre-determined compensation liability and to discuss opting-out of any non-mandatory provisions of the new scheme;
- Where the new laws do not apply, review existing co-development agreements (based on the current system) to identify provisions or schedules for replacement by sections or parts of the new system (typically via a deed of amendment);
- Advise on strategy for arbitration referrals and dispute resolution under the MERCP Act; and
- Provide advice and conducting workshops on any specific aspects of the new regime which are unfamiliar or to upskill in-house capability.