The Queensland Government recently opened the second round of competitive cash tenders for authorities to prospect for petroleum in the Surat and Bowen basins. The results of the first round will do nothing to allay fears that junior explorers might be squeezed out of the state’s most highly prospective acreage.

At a time when the nation’s competitiveness in the global resources industry is declining, will cash bidding sharpen or further erode Queensland’s competitive edge?

Earlier this year, Queensland’s Mining and Other Legislation Amendment Act 2013 introduced a cash bidding process for exploration permits for coal (EPCs) and amended the existing tender process for authorities to prospect for petroleum (ATPs). 

The second round of competitive cash tenders for ATPs in Queensland involves six areas of potentially highly prospective land located throughout the Surat and Bowen basins.  The round closes on 10 October 2013. 

The second round call for tenders requires each tender to be accompanied by an unconditional bank guarantee of 10% of the cash bid which constitutes security for the performance of the tenderer’s obligations. 

The applicant must also state the amount of the cash bid offered as consideration for the grant of the ATP.  Tenders will be assessed according to the cash bid, work program and financial and technical capability. 

Competitive cash bidding for exploration permits has been criticised by some in the industry.  Chief Executive of the Australian Petroleum Production & Exploration Association (APPEA), David Byers, described it as a ‘disruptive change’ which increases costs.  APPEA is also opposed to the Federal Government’s plan to introduce cash bidding for offshore petroleum exploration because ‘it reduces the funds available for future exploration’. 

In a submission to the Productivity Commission’s inquiry into non-financial barriers to mineral and resource exploration in Australia, the Queensland Resources Council (QRC) expressed concern that cash bidding disadvantages smaller explorers who do not have the up-front capital to bid for tenure. 

The QRC further pointed out that “...small explorers are the best at making discoveries, the best at juggling risks.  They have the best track record of delivering discoveries of new deposits.”. 

The contrary view on cash bidding, as expressed in a probity report prepared by O’Connor Marsden for the Department of Natural Resources and Mines, is that new quality reserves are scarce and the Government should receive an appropriate return for access to potentially highly prospective coal and petroleum areas. 

The Minister for Natural Resources and Mines has also confirmed that competitive cash bidding will apply to highly prospective land while non-cash land releases will continue to apply in ‘greenfield’ and under-explored areas of Queensland. 

Cash bidding for exploration permits is not unique to Queensland.  In the United States, offshore oil drilling leases in the Gulf of Mexico are granted using a cash bidding process. 

In Australia, cash bidding was available for the grant of offshore exploration permits from 1985 to 1992 and for the grant of exploration permits in NSW until 2011 when it was replaced with a pre-determined fee schedule. 

In 2001, a cash bidding process was used unsuccessfully for small blocks of petroleum acreage in the South Australian Cooper Basin.  In Victoria, cash bidding is available for offshore petroleum exploration permits and greenhouse gas assessment permits.

In Queensland, the first round of tenders for ATPs with a cash bid component opened on 19 October 2012.  The tenders involved two petroleum prospecting areas in the Surat and Bowen basins.1 According to the probity report prepared by O’Connor Marsden, no tenders were received for the area PLR2012-1-1 which met the minimum criteria in the call for tenders, so no preferred tenderer was nominated and the area was withdrawn from the process.  With respect to the area PLR2012-1-2 (BRIS 2595-All), Australia Pacific LNG Pty Limited (an incorporated joint venture between Origin Energy Limited, Conoco Phillips and Sinopec) was granted ATP 1178 on 2 May 2013. 

Given that only one round of competitive tenders has been completed, it’s too early to fully assess the impact of this process on junior explorers.   Will it precipitate the exodus of junior explorers from highly prospective exploration areas of Queensland?  Time will tell.

Unfortunately, the Productivity Commission’s current inquiry into the non-financial barriers to mineral and energy resource exploration in Australia is unlikely to consider the impact of the introduction of cash bidding for exploration permits.  

In February this year, we expressed concern that the inquiry was flawed because financial barriers to resource exploration were excluded. Costs related to taxation, financial incentives, fees, charges and royalties are crucial to investment decisions and the cash bid component of a tender for an exploration permit is no exception.

The results of round two may provide a clearer indication of the impact of cash bidding on the resources industry, particularly with respect to junior explorers, and an opportunity for industry and government to re-examine concerns about the process.