In Brief

In November 2013, the Federal Government introduced the Offshore Petroleum and Greenhouse Gas Storage Amendment (Cash Bidding) Bill 2013 (OPGGS Bill). This was in response to the government’s decision to incorporate a competitive cash bidding technique for certain blocks available as part of the 2014 Offshore Petroleum Exploration Acreage Release.

The OPGGS Bill will allow companies to make cash bids for certain offshore acreage, instead of the traditional work programme bidding method.

It is intended that cash bidding will apply to ‘mature’ areas or blocks which are known to contain existing petroleum accumulations’1. The 2014 Offshore Petroleum Exploration Acreage Release shortlist has identified 4 of the 30 release areas for cash bidding. 3 of these are located in the Carnarvon Basin and 1 is located in the Browse Basin.

The rationale for the changes is expressed to be to ‘prevent over-exploration where none or little may be required’ and to ‘support the earliest commercialisation of [Australia’s] resources’2.

While a cash bidding regime has been a feature of the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (OPGGS Act) since 1985, in recent years the Federal Government’s policy has been not to use the cash bidding regime for the award of acreage.

What you need to know

  • Once passed, the OPGGS Bill will supplement the existing regime for cash bidding for exploration permits.
  • Cash bidding is only intended to apply for mature areas or blocks which are known to contain existing petroleum accumulations. As part of the nomination process for offshore acreage, companies may make submissions as to areas which are suitable for cash bidding.
  • The 2014 Offshore Petroleum Acreage Release shortlist contains 4 cash bid areas.
  • A reserve price for blocks subject to the cash bidding process is set by the Joint Authority. The reserve price may or may not be disclosed.
  • Bidders must pre-qualify before submitting a cash bid. Qualification is assessed on technical and financial grounds.
  • The timing of receipt of a cash bid is relevant where tied bids are received. The earliest received bid prevails.
  • NOPTA have stated that Administrative Guidelines are being prepared.
  • Cash bid payments are not deductible for PRRT purposes.

Current regime

Currently the OPGGS Act contains 2 regimes for the award of exploration permits: a work programme bid system and a cash bid system.

Under the work programme bidding system, acreage is awarded to the applicant intending to undertake the most extensive program of exploration work in ascertaining petroleum potential. The grant is also conditional upon technical and financial competencies of the applicant. 

Under the cash bidding system, the applicant who bids the highest monetary value for acreage will successfully obtain exploration rights. The applicant does not tender an exploration work programme and can do whatever work it thinks is appropriate.

Cash bid exploration permits are issued for a period of 6 years and are (unless stated otherwise in the Gazettal notice offering the permit) subject to only one renewal period for half the blocks held under the exploration permit.

The cash bidding system was used in a small number of cases during the mid to late 1980s to 1992, and one title was awarded. The Howard Government ruled out the use of cash bidding in 1997. The introduction of the OPGGS Bill marks a change in policy which was initiated by the Labour Government and continues to receive support under the new Coalition Government.

The changes proposed under the OPGGS Bill are a result of a recommendations issued by an independent auction expert who conducted a review of the current regime with a view to suggesting an optimal model.

Key changes

The key features of the OPGGS Bill include:

Reserve price

A reserve price must be determined by the Joint Authority for each area subject to cash bidding, which reflects the estimated value of the resources available. The reserve price will be recorded in writing, and the Joint Authority has the discretion to publicly release this price by way of inclusion in the Gazette notice, or alternatively, not to disclose the price.

The Joint Authority can only offer a grant of a permit to an applicant at a price which is equal to or greater than the reserve price. If all bids are lower than the reserve price, then the treatment of bids depends upon whether the reserve price was published in the Gazette.

If the reserve price was published and all bids are below the reserve price, then the Joint Authority must reject all the bids. Naturally, if a reserve is published then there is no point in lodging a bid lower than the reserve price.

However, if the reserve price was not published, the Joint Authority has the discretion to either:

  1. give notice to the highest bidding applicant (or the earliest bidding applicant, if bids are tied) that it is prepared to grant the permit at a price equal to the reserve price, or
  2. reject all applications such that the permit will not be offered to any applicant.

In exercising this discretion, the Joint Authority will have regard to the differential between the reserve price and the bid price. Presumably, a situation where the bid is close to the reserve will likely result in the Joint Authority exercising its discretion to give notice that it is prepared to grant at a price equal to the reserve, although this is not expressly stated.

If all applications are rejected, the acreage is available for release in subsequent years, either as cash bid or work programme bid acreage.

Separation of pre-qualification assessment from cash bidding process

Existing provisions in the OPGGS Act which govern the cash bidding process require the applicant to provide a variety of information about their technical and financial capacity, as well as the cash bid amount.

The OPGGS Bill introduces a requirement that all potential bidders must undergo a prequalification assessment, prior to placing a cash bid. The amendment creates two distinct steps, both of which must be satisfied before a cash bid is accepted by the Joint Authority and an offer for the exploration permit is made.

This essentially shifts the stage at which the applicant’s technical and financial competency is assessed to an earlier time, instead of contemporaneously with a cash bid. As a consequence, following pre-qualification, if a bid is placed and the applicant succeeds, they will be offered the exploration permit without delay. Indeed, the timeframes for acceptance of the offer of the permit have been reduced from 30 to 14 days.

The steps involved are as follows:

Step 1: ‘eligibility precondition’, which is addressed by assessing the:

  • technical qualifications of the applicant and of the applicant’s employees,
  • technical advice available to the applicant, and
  • financial resources of the applicant,

as it relates to holding an exploration permit in the relevant offshore area.

These parameters for the pre-qualification stage of the application process are the same as that for work bid exploration permit. Presumably, the cash bidding NOPTA Guidelines will contain similar considerations as those contained in the NOPTA Guidelines for assessment of work programme bid applications.

The intention of this step is to facilitate a prompt grant and to confine acreage access to applicants who are capable of carrying out further exploration work, so that these blocks can soon progress to the development stage.

The Gazette notice, which invites applications for the grant of a permit through cash bidding, must contain the factors that the Joint Authority will consider in evaluating the applicant’s eligibility to be invited to make a cash bid.

Step 2: If the applicant pre-qualifies, the Joint Authority invites the applicant to make a cash bid for the acreage. When the cash bid is made, it must be accompanied by a 10% deposit of the cash bid. If an applicant is not successful, the deposit is refunded.

If the applicant is successful with its cash bid, the Joint Authority issues an offer document and the applicant may request the Joint Authority to issue the permit. The OPGGS Bill contains a process for treatment of applications if an applicant fails to respond to the offer document.

Tie-breaker mechanism

The OPGGS Bill specifies a non-discretionary tie-breaker mechanism which is activated in the event where two or more cash bids are equal.

Presently, the OPGGS Act confers an absolute discretion on the Joint Authority to allocate the exploration permit to any of the highest bidding applicants where the cash bidding process gives rise to a tie.

Under the OPGGS Bill should there be two or more equal bids, further cash bids will be requested from the tied applicants, with the higher cash bid resulting in a successful permit offer. If such bids give rise to a further tie, then the offshore petroleum acreage will be offered to the applicant whose bid was received by Joint Authority first in time.

Alternatively, if a further cash bid is invited from the tied applicants, and no further cash bids are submitted, the permit will be offered to the first applicant whose original qualifying but tied cash bid was received by the Joint Authority.

While these changes improve the certainty for bidders, it gives rise to the following implications:

  • The tie-breaking mechanism is likely to influence the behaviours of parties interested in submitting a bid. It may mean that potential bidders are likely to bid more than what they would pay as consideration for the permit, as applicants do not wish to deal with risk associated with the tie-breaking process.
  • It is in the interests of applicants to make bids as soon as possible.

Incentivising acceptance of an offer

The OPGGS Bill contains a requirement for an applicant to pay a 10% deposit on placing the cash bid. If the highest bidder eligible is offered the exploration permit and either:

  • refuses the offer, or
  • does not meet the permit acceptance requirements (i.e. full payment of the balance of the cash bid amount within 14 days of receipt of the offer document for the exploration permit),

then the deposit is forfeited to the Commonwealth.

The introduction of this requirement is designed to incentivise acceptance of an offer of an exploration permit and promote genuine bids and certainty in the auction process. However, in doing so, it potentially limits the absolute discretion conferred on the applicant in refusing an offer of offshore petroleum acreage (as currently exists with acreage award), as there is a financial consequence in refusing an offer or failing to meet permit acceptance requirements.

Implications of the OPGGS Bill

The reintroduction of a cash bidding system gives rise to the following implications for prospective bidders:

Decision as to whether cash bidding applies

Apart from a general policy statement from the Minister for Resources and Energy that cash bidding will apply to the ‘mature’ areas or blocks which are known to contain existing petroleum accumulations’, there is currently no guidance on how the Joint Authority will select which areas are subject to the cash bidding system. This could possibly be addressed by NOPTA Guidelines once released.

Previous discussions involving the use of cash bidding have focussed on the situation where the gazetted acreage contains an extension of a known discovery from an adjoining awarded permit. While it is clear that this situation would result significant competition for blocks, it is less clear whether there would be significant competition for known accumulations which are a challenge to produce, either due to technical or economic challenges (e.g., insufficient reserves for a standalone development and limited tie-back options).  

The Joint Authority currently calls on industry to nominate release areas for application. It has stated that as part of the nomination process that it will also consider acreage nominations for cash bidding. It is possible that the Joint Authority will be guided by industry nominations as to the level of interest and whether that might translate to competition for acreage.

Determining the reserve price

The Explanatory Memorandum for the OPGGS Bill states that the reserve price will reflect an estimate of the value of the resources available. Apart from this general statement, there is no guidance on the valuation principles involved. Again, this may be an area which is addressed by NOPTA Guidelines.

Federal Government literature on cash bidding3 has referenced the fact that offshore petroleum acreage is leased in the Gulf of Mexico using a cash bonus bidding system. In the Gulf of Mexico case, the relevant agency analyses bids on a fair market value basis based on the value of the right to explore, rather than the value of oil and gas potentially discovered or produced4. Detailed procedures exist to ensure that the bids are adequate and that the Government receives a fair return on the adequacy of bids.

To ensure a transparent and effective auction process, there is some sense in ensuring that bidders are operating on similar assumptions, particularly if the Joint Authority does not disclose the reserve price.

The OPGGS Bill has also not addressed the manner in which objections by applicants, regarding the reserve price would be resolved. This may be a matter which is addressed by NOPTA guidelines in due course. We also note that the reserve price could be subject to administrative law review as the determination of the reserve price is expressed not to be a legislative instrument.

The eligibility of cash bid expenditure as an eligible Petroleum Resource Rent Tax deduction

Currently, under the Petroleum Resource Rent Tax (PRRT), the amount a successful applicant must pay for the grant of a cash bid exploration permit cannot be included as deductible expenditure, as it is classified as an ‘excluded fee’5.

Given Government’s intention to re-initiate the cash bidding process for offshore acreage, it is likely that this treatment will be the subject of increased industry attention. To date, the Government has not indicated any intention to revisit this policy.

Industry response

APPEA has not been supportive re-initiation of the cash-bidding system. It has stated that:

The introduction of cash bidding has the potential to impact on Australia’s small explorers who may have limited funds available for exploration. Many of these companies have been directly responsible for identifying the resource potential of regions and basins that are now producing oil and gas in Australia. It is important the industry and the Government work together to ensure the cash bidding system is not introduced in a way that impairs Australia’s overall attractiveness for exploration activity. This includes continuing the work program bidding system where appropriate and providing clarity on cash bidding application rules where they apply.”6

Previously APPEA has also commented that in the event that cash bidding is used, that the Government’s policy on deductibility of cash-bids for PRRT purposes should also be revisited.