On 12 June 2009, the Minister for Resources and Energy confirmed that the Department of Resources, Energy and Tourism (RET) will apply a ‘use it or lose it’ principle to petroleum titles, meaning that RET will rigorously apply the commercial viability test set out in the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (Act) to ensure gas fields are developed at the earliest possible time.
On 25 March 2011, Nexus Energy Limited (Nexus) became the latest company to lose one of its petroleum titles under the ‘use it or lose it’ regime. It is understood that Nexus failed to drill an exploration well by a specified date (after being specifically notified to do so). RET subsequently stripped Nexus of its exploration permit WA-368-P in the offshore Perth Basin that was granted in 2005 and which contains the 90 million barrel Yngling prospect.
The ‘use it or lose it’ policy applies to exploration permits and retention leases granted under the Act, and subsequent renewal applications in respect of these titles.
The rationale behind the Government’s policy is the perceived warehousing of resources and their belief that oil and gas companies may delay developing Australian resources in favour of overseas projects due to Australia’s low sovereign risk.
Applicability of the policy
A title holder is at risk of being issued with a ‘use it or lose it’ notice stating that the title will be cancelled if (for example):
- in respect of work-bid exploration permits, the title holder fails to comply with conditions relating to work to be carried out in the title area within a specified timeframe;
in respect of retention leases:
- the title holder fails to comply with conditions requiring the lessee to carry out work in, or in relation to the lease area, or
- the title holder fails to respond to a written request of RET or the state or territory designated authority to re-evaluate the commercial viability of petroleum production in the lease area within a specified timeframe.
RET and the state or territory designated authority will also apply the ‘use it or lose it’ policy when considering the renewal of a retention lease or exploration permit. When it comes to renewing a retention lease, lease holders must provide RET or the state or territory designated authority with:
- proposals for work and expenditure in relation to the lease area
- details regarding the commercial viability of recovery of petroleum from the lease area
- submissions on the possible future commercial viability of recovery of petroleum from the lease area,
and if commercial viability cannot be demonstrated, it is most likely that the lease holder will lose their title
Other examples of the policy in action
On 2 December 2009, RET and the Department of Mines and Petroleum Western Australia (DMP) issued a ‘use it or lose it’ notice to Woodside Petroleum Limited (Woodside) and its four joint venture partners in respect of nine leases held by the joint venture in respect of the Browse LNG development in Western Australia. The joint venturers were given 120 days from the notice to decide on the preferred onshore processing site for the project (which has now been settled on as James Price Point).
Woodside and its North West Shelf joint venture partners were also subject to the ‘use it or lose it’ policy when DMP decided not to renew the Dixon retention lease in December 2009. This meant that the joint venturers had 12 months in which to apply for a production licence and then five years to start recovering petroleum or lose the petroleum title completely.