10 May, 2016
In brief
An interim report following a Department of Industry, Innovation and Science review of the Australia’s offshore petroleum regime has been published.
The report outlines over 20 recommendations to enhance the regime.
Key recommendations include:
- Frontier exploration: categorising some exploration permits as ‘frontier’ acreage and establishing different conditions for that acreage,
- Retention leases: allowing holders to nominate a maximum term of 3 to 15 years, and
- Decommissioning: development of a decommissioning framework.
The period for submissions on the interim report has closed and no date on a final report has been provided.
Introduction
On 22 December 2015, the Department of Industry, Innovation and Science published an interim report on the Offshore Petroleum Resource Management Review (the Review), a review of the current federal regime for regulating Australia’s offshore petroleum resources (the Interim Report). The Review was undertaken alongside the operational review of NOPTA required to be conducted under the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth), and those findings were integrated into the Interim Report.
The Interim Report and Review indicate that the Department is aware of the changing state of the of the petroleum regime in Australia, in particular the shift to the production and decommissioning stages for larger resources, and the need to fill the gaps that will be left by those resources in the market. While the Interim Report has not identified any material flaws with the current regime, it proposes 20 actions across the phases of the petroleum lifecycle, as well as in the general management process, designed to:
- improve transparency in the management process,
- reduce costs, particularly those associated with the administrative process, and
- provide greater flexibility in line with the technical realities of the petroleum process, for example improvements in technology and exploitation of smaller resources.
Some of the key actions to come out of the Interim Report include:
- the proposal of an annual report on Australia’s offshore petroleum activities, covering emerging national and regional
- issues,
- a focus on promoting exploration, particularly in frontier and lightly explored areas;
- further engagement with industry to determine the best options for gathering, interpretation and usage of pre-competitive exploration activities and data,
- a holistic approach to administration of retention leases, including providing a minimum and maximum term for retention leases, and
- development of a decommissioning policy.
A full list of actions is included in Appendix 1 to the Interim Report.
The Department asked for further stakeholder engagement in the process in order to determine the scope and efficacy of the proposed actions. Submissions on the current recommendations of the Interim Report were due on 28 February and will be published in due course.
Management of Australia’s petroleum resources
Initially, the Interim Report focuses on the regulation of offshore resource management as a whole. The Interim Report notes that, given the increasing number of smaller resources being exploited as opposed to resources being part of infrastructure hubs such as North West Shelf or Gorgon, the management of resources needs to be able to be implemented system-wide, rather than on a title by title, or project by project, basis. In order to deal with this shift in management, the Interim Report recommends actions to:
- strengthen offshore resource management capacity through an improved understanding of the management issues associated with emerging resources, early and effective engagement with industry on resource management issues and building on the technical skills and capabilities within NOPTA; and
- promote more timely decision making from the regulatory authorities. This may include providing a set of indicative timeframes for decisions by the Joint Authority, promoting the use of NEATS by titleholders and allowing certain decisions that would usually be considered by the Joint Authority in the first instance to be immediately referred to the Titles Administrator or Minister.
Given the broad nature of these actions and the fact that they relate to the administrative actions of the Joint Authority, the scope and nature of these changes is likely to be influenced by stakeholder submissions and their practical experiences.
Exploration
Offshore exploration in Australia has been on a declining trend for the past three years, due to the lack of large undeveloped offshore resources, as well as an increase in exploration costs. Developments in technology have supported an increase in deep water and frontier exploration. The Interim Report notes that Australia’s long term exploration trends are shifting towards:
- a reduction in the number of wells drilled, but improved success rate from those that are drilled,
- smaller hydrocarbon finds, and
- a focus on mature, rather than frontier areas, due to the risks associated with emerging resources.
As a result, the challenge for the Government is to ensure that exploration is maintained to ensure that production levels can remain steady over time.
The Interim Report makes a number of recommendations for the exploration process, based around de-risking exploration, particularly in emerging areas, proving flexibility for resources in lightly explored areas and improving the acreage release process.
Access to data
In order to promote exploration in riskier or lightly explored areas, the gathering, interpretation and distribution of precompetitive geoscience information collated by Geoscience Australia and NOPTA needs to improve and be more aligned with the acreage release program.
The Interim Report’s recommendations also focus on the confidentiality periods surrounding data. Stakeholder feedback indicated that a number of titleholders are utilising multi-client surveys in order to meet their work program commitments, as this allows a greater confidentiality period. However, this also results in a large amount of data remaining unavailable to other parties for a longer period of time. As a result, the Interim Report has proposed a full review of the current confidentiality regime in the OPGGSA and Resource Management and Administration Regulations to ensure that geoscience data that can be made publicly available is made publicly available in order to promote exploration activity.
Flexibility for resources
Despite progress in exploration technology, exploration in frontier areas remains high risk under the current regime. For example, the fact that acreage awards place an emphasis on drilling of exploratory wells may discourage frontier exploration, as parties are more willing to pursue other exploration techniques such as surveys before committing to expensive well-drilling activities.
The Interim Report recommends that the Government first determines the areas that should be identified as ‘frontier’ exploration areas, and then considers establishing a ‘frontier’ title category allowing for different requirements in permit size, length of the permit, renewability and minimum work commitments. Further submissions in relation to this action are likely to focus on whether a new category of title is necessary, whether the current regime can be adapted to take into account frontier titles and the scope of the changes to requirements for frontier titles.
The Interim Report also recommends adapting the current Special Prospecting Authority and Access Authority arrangements. These arrangements are not adequate for frontier and emerging exploration. For example, a Special Prospecting Authority only allows access for 180 days for 180 days, does not provide exclusive data rights and does not provide security of title over the area following the conclusion of the arrangement (i.e. the Special Prospecting Authority holder is still required to bid through the acreage process). As a result, the Interim Report recommends that the Department conduct a further review of these regimes in order to adapt them to a suit frontier and emerging exploration areas.
Acreage releases
While the current acreage release process is working, it could be improved. Only one in four acreage releases receive bids from more than one group, and lengthy processes and lack of transparency in the award of titles does not sit comfortably with companies in such an uncertain market.
As a result, the Interim Report suggests to streamlining the acreage release process. The proposed changes include:
Immediate award of acreage to sole bidders, subject to an assessment of their ability to meet the bid’s requirement,
Reducing the timeline for acreage releases to 12 months, with releases included smaller blocks and industry-nominated areas,
An ‘over the counter’ approach to acreage releases for certain classes of acreage. To ensure fairness and equity for smaller companies, this would likely be combined with a competitive bid process following the submission of an expression of interest in the acreage.
These actions are very general at this stage and whether or not they are eventually implemented will be influenced by stakeholder submissions. However, parties considering bidding on future acreage releases should remain aware of the potential changes to this process.
Development and production
The current development and production framework in Australia provides titleholders with the time to develop a pre-commercial resource to a final investment decision while providing surety of title, along with the ability for the Government to monitor development progress. While this framework is adequate for the current market, as noted above the current regime needs to be adapted to be able to deal with challenges emerging in the changing market, such as encouraging sharing of infrastructure, or the use of existing infrastructure, as well as a streamlining of the current
processes.
As a result, the Interim Report proposes a number of changes, with focuses including:
- Encouraging the development of smaller discoveries by allowing a Location to be declared over smaller petroleum pools, or allowing smaller discoveries to move directly from exploration to production without having to prove a petroleum flow by excising those pools into an adjacent production licence.
- Allowing for a more flexible retention lease regime. The proposed change would leave the five year timeframe for retention leases as the default position but also allow applicants to nominate a maximum timeframe for their retention lease (between three and 15 years). The Joint Authority could then approve the retention lease for timeframe up to, but not exceeding, that timeframe. Longer retention leases would be heavily scrutinised to ensure titleholders are maintaining an effort to commercialise the resource. The current application period for retention and production licences would also be increased to a flat four year period, rather than two years with an optional two year extension period.
- Considering the introduction of a voluntary project management regime that would allow titleholders to link economically or physically linked titles, or an option to combine retention leases and production licenses over the same petroleum field.
- Creating a fact sheet or guidance not on the retention lease process and releasing summaries on the Joint Authorities decisions to grant retention licenses in order to create a better understanding of the retention lease regime.
The recommended changes to the retention lease and production licence regimes are the most far reaching of the Interim Report and current or prospective titleholders, particularly those with interests moving from exploration towards development and production, should ensure they remain informed as these changes are taking place.
Decommissioning
The current Australian decommissioning framework remains relatively uncertain, which has lead a number of operators assuming the most conservative position, being total site restoration. The Interim Report recognises that, given a large number of facilities will require decommissioning over the coming decades, the Government, industry and NOPSEMA will need to work together to develop a clear framework surrounding decommissioning obligations. The first port of call in developing a framework will be the current international regimes in place, including the United Kingdom’s decommissioning regime.
Conclusion
While Australia’s offshore petroleum regime is adequate in its current form, the increased knowledge of Australia’s resources and the changing nature of resources that will be available to be exploited means that improvements in the regime could be made. The Government is yet to publicly take any action following the Interim Report and a number of the actions set out in the Interim Report require further government, industry and stakeholder input before they can be implemented.
Ultimately, titleholders should be aware that the proposed reforms may be implemented over the medium term, depending on the outcome of stakeholder consultation.
For further information, please contact:
Sharon Wilson, Partner, Herbert Smith Freehills
sharon.wilson@hsf.com
