On 14 May 2014, a delegate (Delegate) of the NSW Minister for Resources and Energy (Minister) suspended the activities allowed under Metgasco Limited’s (Metgasco) Petroleum Exploration License No 16 (PEL 16) at its Rosella site near Bentley in Northern NSW (First Decision).  The Delegate relied on powers set out in the Petroleum (Onshore) Act 1991 (NSW) (the Act).

Background

No prior notice was given to Metgasco of the Delegate’s intention to suspend activities under the licence.  The Delegate also required that Metgasco satisfactorily demonstrate that it had complied with condition 8 of PEL 16 (which sets out community consultation requirements), before it would lift the suspension.

On 21 May 2014, Metgasco wrote to the Office of Coal Seam Gas requesting a review of the Delegate’s decision to suspend activities under PEL 16.

On 3 June 2014, Metgasco commenced proceedings in the NSW Supreme Court, claiming that the decision to suspend the licence was unauthorised by legislation and that it lacked procedural fairness.

On 26 June, the Delegate sent additional correspondence to Metgasco, confirming her decision to suspend Metgasco’s activities on the same terms set out in her correspondence of 14 May 2015 (Second Decision).  The Delegate’s reasons for the suspension were that Metgasco had not engaged in effective consultation or developed a community consultation plan that contained a detailed description or analysis of stakeholders.

Section 22 (6) of the Act requires that before cancelling or suspending operations under a PEL, the Minister must:

  • cause written notice of and grounds for the proposed cancellation or suspension to be served on the PEL holder
  • must give the PEL holder reasonable opportunity to make representations with respect to the proposed cancellation or suspension, and
  • must take any representations into consideration.

Judgment

On 24 April 2015, Justice Richard Button of the NSW Supreme Court handed down his judgment.  The Court found that:

  • the First Decision was invalid, as the Delegate failed to comply with the regime of procedural fairness set out in section 22(6) of the Act, and
  • the Second Decision was invalid because it purported to confirm the First Decision, which in itself was invalid.

In addition, Justice Button found that the Second Decision was separately invalid for a number of reasons, as the PEL activity was suspended for an alleged breach of condition 8.

The Act allows the Minister to suspend a PEL, or suspend an activity permitted by a PEL because of non-payment of royalties or a breach of environmental conditions only, and then only after consultation.  As condition 8 of PEL 16 is not an environmental condition, there was no statutory basis that would enable the Minister to suspend activities under PEL 16 for a breach of condition 8 - i.e. there was no capacity for the Minister to make a ‘suspendable decision’.

Metgasco has made a public announcement that it intends to seek compensation for the impacts the suspension has had on Metgasco and its 5,000 shareholders.

The Minister’s alternative argument

The Court chose to consider the alternative grounds put forward by the Minister in regards to the Second Decision.

The Minister made the assertion that ‘Metgasco had not engaged in effective consultation or developed a community consultation plan that contained a detailed description or analysis of stakeholders’.

The Minister argued that the Delegate imposed the suspension not for a breach of a condition of PEL 16, but because Metgasco had breached a condition of its Activity Approval.  The Minister argued that the conditions in Schedule 2 of PEL 16 (which include condition 8) were incorporated into Metgasco’s Activity Approval because it contained the words ‘including the conditions in Schedule 2 of PEL 16’.  The Minister was of the view that while the Act ‘speaks of the kinds of conditions in the title that can found a suspension; it says nothing of the conditions in the Activity Approval that can found suspension of activity’.

The Minister also argued that condition 3 of PEL 16 (which required Metgasco to comply with the conditions of an approval granted by the Minister prior to carrying out an Category 2 or Category 3 prospecting operations in the exploration licence area) ‘empowers the broad imposition of conditions in an Activity Approval without limitation, and without importing the bifurcation in the Act… between suspendable and non-suspendable conditions’.

Justice Button rejected these arguments setting out a number of reasons including that:

  • the Act applies the bifurcation between suspendable and non-suspendable conditions to activity approvals.  The reference to ‘specified operations under a petroleum title’ extended to the activities of Metgasco’s well that were authorised by the Activity Approval
  • the words ‘including the conditions in Schedule 2 of PEL 16’ contained in the Activity Approval do not create a new regime of suspendable conditions attaching to the Activity Approval, and
  • the Act did not empower the Delegate to suspend the Activity Approval for breach of a condition that was not identified as an ‘environmental management’ condition in PEL 16.

Commentary on ‘effective consultation’ by the Court

Justice Button considered the ancillary submissions made by the parties as to what constitutes ‘effective consultation’, which is an obligation imposed upon a licence holder and set out in the NSW Government’s publication Guideline for community consultation requirements for the exploration of coal and petroleum, including coal seam gas (Guidelines).

The Court was of the view that Guidelines set out the activities that a licence holder is required to undertake, but does not set out what the results of those activities must be:

‘the guidelines are not prescriptive and admit a degree of flexibility depending on the circumstances…construing them as a whole, their reference to “constructive consultation” to my mind focusses on the quality of the process of consultation, rather than any outcome whereby the persons who are the focus of the consultation are persuaded by it’.

Justice Button found that the Delegate took an irrelevant consideration into account by asserting that Metgasco had breached the Guidelines and by placing substantial weight on the failure of the consultation process to persuade community members who participated in the process, many of whom ‘remained firmly opposed to its activities even after the consultation was well advanced’.

However, the Court found that Metgasco was not successful in its argument that it was irrelevant if Metgasco has ‘failed to assuage concerns about production of natural gas, when in truth all that Metgasco was engaged in was exploration’.

Justice Button found that the Second Decision was not separately invalid to the extent that it:

  • ‘was founded on the concerns of many about extraction of coal seam gas when there was no evidence that Metgasco was engaging or would engage in such a process’, and
  • ‘asserted that the consultation engaged in by Metgasco had to be effective not only with regard to exploration but also with regard to any production that could ensue from that exploration’.

Implications for the NSW gas industry

Justice Button acknowledged the contentious issue that the gas industry posed in NSW, stating from the outset in his judgment that ‘it is no part of my function to assess the desirability of any activities of Metgasco, or the desirability of the suspension of any of those activities.  All that I am being asked to do, and all that I am empowered to do, is to determine the lawfulness of the decisions made by the Delegate’.

Prior to Metgasco’s licence being suspended, protesters had camped outside the company’s Rosella drilling site.

The gas industry has expressed concern that the Delegate’s decision sets a precedent that the NSW government will not allow coal seam gas exploration to go ahead if there are significant protests. The Australian Petroleum Production & Exploration Association has said: ‘The industry is concerned that the presence of protesters at an operational site should not mean that genuine consultation with the community has been ineffective.’

The NSW Gas Plan was released in November 2014, which identifies that the NSW Government is supportive of growing the NSW gas industry.  The NSW Gas Plan sets out a number of key actions to develop the industry which will include the introduction of new legislation to entitle landholders to receive compensation for petroleum exploration and production.  The Independent Pricing and Regulatory Tribunal will benchmark compensation rates annually.  In addition, a Community Benefits Fund which will be funded voluntarily by gas companies and the NSW Government to fund local projects in communities where gas exploration and production occurs.

The re-election of the coalition after the recent NSW election means that the roll out of the NSW Gas Plan is likely to happen during the next 12 months, however, as the coalition will not have a majority government in the Upper House, the opposition and minor parties will have the capacity to introduce changes to any new bills relating to CSG.