Updates to Australias offshore oil and gas framework
28 September 2021
28 September 2021
As noted in our previous articles (here and here), an increasing number of offshore petroleum projects will need to be decommissioned in Australia as these assets mature. To prepare for this, in October 2018, the Australian Government commenced reviewing the framework for decommissioning offshore petroleum infrastructure in Commonwealth waters.
On 14 December 2020, the Department of Industry, Science, Energy and Resources released its consultation paper aimed at enhancing Australia's decommissioning framework (Consultation Paper). We previously reported on the proposed changes to Australia's offshore oil and gas decommissioning framework.
The content and recommendations of the Consultation Paper were inspired by the Walker Review into the circumstances leading to the administration and liquidation of Northern Oil and Gas Australia, which left the Commonwealth responsible for the cost of decommissioning of a floating production storage and offloading facility.
Following the consultation process, Parliament passed the Offshore Petroleum and Greenhouse Gas Storage Amendment (Titles Administration and Other Measures) Act 2021 (Amending Act), which received royal assent on 2 September 2021. The Amending Act reflects a number of the recommendations proposed by the Consultation Paper and a majority of the new provisions are due to commence immediately after a day to be fixed by proclamation or, if proclamation does not occur within six months of Royal Assent, the amendments will automatically commence on 3 March 2022.
The Amending Act aims to strengthen Australia’s offshore oil and gas regulatory regime by increasing government oversight and scrutiny of entities throughout the lifespan of an offshore project1. The increased oversight will ensure that entities which intend to carry out petroleum or greenhouse gas activities are capable, competent and responsible in managing their project and discharging their obligations under the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (OPGGS Act).2
The Amending Act:
The current OPGGS Act deals with transfer of title related to a project under the existing provisions for transfers of petroleum titles or greenhouse gas titles (GHG titles). However, the existing provisions do not capture circumstances where interests in offshore projects are bought and sold through a transfer of shares in a titleholder (also known as 'change in control'). This is because a change in control does not typically involve a transfer of title held by the titleholder.
The new Chapter 5A applies to both petroleum and GHG titles and it requires a 'change in control' to be approved by NOPTA to ensure that the new controllers of the titleholder are suitable to carry on their obligations under the OPGGS Act.
Failure to seek approval from NOPTA for a 'change in control' transaction is an offence with the contract being void and certain contraventions can result in cancellation of the title. All titleholders are subject to the change in control restrictions regardless of their percentage interest in the title (eg if a titleholder only holds a 5% percentage interest they are still subject to the change in control restrictions).
Under the new provisions, a person has control of a titleholder if that person (whether alone or acting jointly with other persons):
The key concepts of the above definition are control and ownership. A change in control of a titleholder applies to persons who are in a position to exercise control or influence over the titleholder, and those who hold a substantial interest in the titleholder but may not be able to exercise influence (for example, where shares have no voting rights attached to them).
The Amending Act also defines what is meant by acting jointly with another person to control a titleholder.4 This concept aims to cover agreements or practices in which a person acts together or in concert with other persons to control a titleholder.
A change in control occurs if one or more persons (either acting alone or jointly) begin or cease to control, 20% of the titleholder.
Where a change in control is to take place, persons involved must first seek the approval of NOPTA before completing the relevant transaction. As mentioned above, failure to obtain NOPTA approval may result in civil or criminal penalties and/or cancellation of a titleholder's title(s).
An application for the approval of a change in control must be made in the manner and form approved by NOPTA. This application must also be accompanied by any information or documents required by the form (which will be published on NOPTA's website).
In deciding whether to approve or refuse a change in control, NOPTA must consider whether the technical advice and financial resources available to the titleholder after the change in control are sufficient to carry out the operations and works that are authorised by the titles and that the titleholder can discharge the obligations that are imposed under the OPPGS Act.
NOPTA must also consider, among other things, the compliance history and experience in offshore petroleum operations of a person who will begin to control the titleholder, and may consider any other matter it considers relevant.
During the approval process, NOPTA must also be notified of any material changes that occur before a decision is made or before the change in control takes effect.
NOPTA must note in the titles register the date the application for approval of a change of control was made, the decision made in relation to change in control and the date the change in control took effect.5
The Amending Act is drafted in such a way for NOPTA to have broad powers to obtain any information or documents relevant for the proper administration of Chapter 5A.
The new Part 5A.5 of the OPGGS Act contains tracing and anti-avoidance provisions, which are intended to capture any change in control in the chain of entities that control the titleholder.
The tracing provisions are intended to capture changes in control of titleholders that involve a change to the ‘real owners’ of titleholders, that are not an immediate holder of the titleholder, such as a holding company. It also aims to prevent tactics (such as setting up a "shell" company) to avoid government scrutiny as a result of only providing for oversight of changes in relation to the immediate holders of the titleholder.6
Part 5A.5 deems a person (whether acting alone or jointly) who:
to hold the same level of rights or interests in the lower party as the higher party holds.7 Therefore, if the lower party is a titleholder, the person sitting above the higher party is deemed to ‘control’ the titleholder. The operation of this provision is illustrated below, noting that the same tracing provisions apply to interests in trusts and partnerships.
As a consequence, a person proposing to begin or cease controlling the titleholder by virtue of the tracing provision, will also be required to make an application for the approval of the change in control of the titleholder under the OPGGS Act.
The tracing provision may be applied multiple times so that a change in control of a titleholder may be traced to a change in control of a higher party, regardless of how ‘high up’ in the corporate group the higher party is.8
The purpose of the anti-avoidance provision is to penalise a person who has managed to avoid the application of the 'change in control' provisions by entering into or carrying out a scheme for the sole or dominant purpose of avoiding the application of the 'change in control' provisions.9
The penalties for contravention of the anti-avoidance provision are severe. This is to reflect the consequences that beginning or ceasing to control a titleholder may have on the suitability of the titleholder to operate in the offshore resources regime.
The Amending Act expands the recipients (eg former titleholder and other persons) who may be called upon to remediate the site or undertake decommissioning activities, even if NOPTA has previously consented to the sale of the title.
Once the Amending Act commences, the trailing liability changes will take effect retrospectively from 1 January 2021.
Application of these provisions are intended to be an option of last resort in circumstances where the current titleholder is unable to meet its decommissioning obligations and all other regulatory avenues have been exhausted.10 This is not however, expressly specified in the Amending Act.
Under the new provisions, National Offshore Petroleum Safety and Environmental Management Authority (NOPSEMA) and the Minister have broad powers to issue a remedial direction for certain decommissioning activities to:11
The Amending Act does not specify the order in which a remedial direction will be issued to former titleholders or related persons. Instead, it will be done on case-by-case basis.
The above regime is mainly aimed at covering entities who have received a sizeable financial benefit from their shareholding, having regard to the net profit from operations.
This gives rise to some tax uncertainty. Under the Petroleum Resources Rent Tax Assessment Act 1987 (Cth) (PRRT), a production licence holder that incurs decommissioning expenditure is eligible for a number of tax benefits, including tax deductions and refundable credits. It is not yet clear how the liability of a former titleholder or other recipient of a remedial direction under the new trailing provisions would interact with the PRRT regime, and whether they may also be eligible for these tax benefits.
If a person fails to comply with a direction to undertake remediation or decommissioning activities under the OPGGS Act, the relevant government entity may take actions required by the direction and recover the costs or expenses incurred from that person in the Federal Court or a court of a State or Territory that has jurisdiction.12
Another key amendment is the expansion of the definition of 'vacated area'. A vacated area can be subject to a remediation direction or may require additional decommissioning activities after the permit has been surrendered. The key changes are:13
It is also worth noting that the Government expects that if a direction is given to the joint venture titleholder (and the parties are individually named), the parties must determine among themselves the manner of compliance with the direction, and how reimbursement will be sought.14
Authors: Cassandra Wee, Partner; Amy Saunders, Lawyer and Rebecca Bahrami, Lawyer
1. Explanatory Memorandum, Offshore Petroleum and Greenhouse Gas Storage Amendment (Titles Administration and Other Measures) Bill 2021.
2. Commonwealth, Parliamentary Debates, House of Representatives, 26 May 2021, 9 (MP Keith Pitt).
3. Amending Act, section 566B.
4. Amending Act, section 566B.
5. Amending Act, section 566B.
6. Explanatory Memorandum, paragraph 176.
7. Amending Act, section 566Z.
8. Explanatory Memorandum, paragraph 180.
9. Amending Act, section 566ZA.
10. Explanatory Memorandum, paragraph 336.
11. Amending Act, section 587.
12. OPGGS Act, section 577.
13. Amending Act, section
14. Explanatory Memorandum, paragraph 339.