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Offshore petroleum exploration and mining

Offshore petroleum exploration and mining

Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion.
Briefing Paper 01/2011 by Daniel Montoya

In December 2010, the first offshore petroleum exploratory well off the coast of NSW was drilled in Petroleum Exploration Permit 11. This well was located primarily in Commonwealth waters 61km east of Newcastle. However, at this point in time, no gas has been found. Facts and figures on gas exploration, production and consumption in NSW, along with information on Petroleum Exploration Permit 11, provide the context for an overview of Commonwealth and NSW regulation of the offshore upstream petroleum sector.

Gas in NSW: exploration

Gas is Australia's third largest energy resource after coal and uranium. However, as of December 2008, gas resources formed a relatively small component of NSW's total economic demonstrated energy resources. [2.1]

Total petroleum exploration expenditure in NSW reached almost record levels in the four quarters between December 2009 and September 2010. Acreage release also reached record levels in 2009-10. A significant proportion of the State is now covered by petroleum exploration titles. [2.2]

Gas in NSW: production and consumption

NSW produced 5 petajoules of gas in 2007-08, all of which was coal seam gas. In comparison, in the same time period, 2,040 petajoules of gas was produced Australia-wide. [2.3]

NSW consumed 128 petajoules of gas in 2007-08, therefore making it a net importer of gas from other States. In 2007-08, gas comprised 8.4% of NSW's total energy consumption. NSW's total primary energy consumption is predicted to increase at 1.2% per annum over the next 20 years. In addition, over 8,000 MW of gas-fired power generation is soon expected to come online. [2.4]

Petroleum Exploration Permit 11: location, exploration and ownership

Petroleum Exploration Permit 11 (PEP 11) is located primarily in Commonwealth waters off the NSW coast between Newcastle and Wollongong, and covers over 8,200 km2. It covers a portion of the offshore part of the Sydney Basin – a proven hydrocarbon basin in which the Hunter coalfields are located. Prior to December 2010, no offshore exploratory wells for petroleum had been drilled in the Sydney Basin. However, over 70 wells had been drilled in the onshore sector, almost all of which had found gas. [3.1]

PEP 11 was first surveyed in 1981. The most recent survey involved the construction of an exploratory well by Advent Energy, which has an 85% share in the title. The well was drilled in December 2010, 61km east of Newcastle. In late December, Advent Energy released an independent report which concluded that PEP 11 may be covering a 'potential Giant Gas province'. However, on 29 December 2010, Advent Energy announced that the exploratory well had failed to find gas. Advent Energy plans to drill more exploratory wells in the near future. [3.1 and 3.2]

Petroleum Exploration Permit 11: key issues

For every action undertaken in PEP 11, Advent Energy was required to have an Environment Plan approved under the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) by the NSW Government. Each Environment Plan had to identify possible environmental impacts and risk management procedures for each impact identified. The northern part of PEP 11 is located within the Hunter Area for Further Assessment – an area identified by the Commonwealth Government for possible inclusion in a nationally representative network of marine protected areas. The northern part of PEP 11 is also located offshore from the NSW Great Lakes Marine Park. [3.3]

According to the Environment Plan for the exploratory well, few socio-economic impacts were expected by Advent Energy. However, most of the media coverage in newspapers like the Newcastle Herald has identified community concerns regarding offshore drilling. Objections raised by those opposed to the drilling include concerns about the potential for environmental damage. Further concerns cited in media coverage include the lack of community consultation conducted by Advent Energy. [3.4]

Regulatory regime: history and overview

The regulatory regime employed by the Commonwealth and NSW Governments for the offshore upstream petroleum sector is a sector-specific legislative system. In essence, this means that, as established under the Offshore Constitutional Settlement 1979, Commonwealth and NSW Government offshore petroleum regulation involves legislatively predetermined conditions under which petroleum titles are granted for all offshore petroleum activities. The 1979 Settlement established NSW's rights over all its coastal waters, which generally extend three nautical miles from the low water mark. The Commonwealth Government retained the rights for all other Australian waters, known commonly as 'Commonwealth waters'. [4.1 and 4.2]

Offshore petroleum exploration and mining in Commonwealth waters is regulated solely by Commonwealth legislation. The two most important Commonwealth Acts are the Offshore Petroleum and Greenhouse Gas Storage Act 2006 and the Environment Protection and Biodiversity Conservation Act 1999. In contrast, both Commonwealth and NSW legislation apply to offshore petroleum regulation in NSW coastal waters. The most important NSW Act, which serves as a 'mirror' Act to the Commonwealth offshore petroleum Act, is the Petroleum (Offshore) Act 1982. The Commonwealth Environment Protection and Biodiversity Conservation Act 1999 may also apply to activities in NSW coastal waters. All offshore petroleum activities require environmental approval under the aforementioned Commonwealth and/or NSW legislation according to the jurisdiction in which they are located. A raft of other NSW and Commonwealth statutes may also apply. [4.3 and 4.4]

PEP 11 lies primarily in Commonwealth waters off the NSW coast. As such, it is regulated and taxed under Commonwealth legislation. However, prior to the proposed introduction of a Commonwealth national offshore petroleum regulator by January 2012, the NSW Government has an important role to play in jointly administering all petroleum activities conducted off the NSW coast under the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth). [4.0]

Regulatory regime: petroleum royalties and taxation

Petroleum resources in Commonwealth waters are subject to the Commonwealth Petroleum Resource Rent Tax. Petroleum resources in NSW coastal waters may be subject to the Commonwealth crude oil excise and NSW royalty provisions. NSW petroleum royalties are calculated at 10% of the well head value, less allowable deductions. The Commonwealth Government receives a portion of this royalty according to a formula set in the Petroleum (Offshore) Act 1982 (NSW). Given that the majority of PEP 11 is located within Commonwealth waters, any gas recovered from PEP 11 will most likely be taxed under the Commonwealth Petroleum Resource Rent Tax. [4.5]

Regulatory regime: incident response

The Commonwealth and NSW Governments share responsibility for responding to offshore petroleum incidents. Should an offshore petroleum incident occur in PEP 11, the first authority to respond would be the Australian Maritime Safety Authority. The NSW authorities most likely to be involved in such an event, were the oil to spread to NSW coastal waters, would be the Newcastle Port Corporation and the Sydney Ports Corporation. [4.6]

Commonwealth regulatory framework: overview

The Offshore Petroleum and Greenhouse Gas Storage Act 2006 regulates all petroleum exploration and mining activities and all greenhouse gas storage activities in Commonwealth waters. Administration of the Act is currently shared by the Commonwealth and NSW Governments according to a division of responsibilities between a Joint Authority (the relevant Commonwealth and NSW Ministers) and a Designated Authority (the relevant NSW Minister). The Designated Authority is responsible for day-to-day administration of the OPGGSA. [5.1.1]

The Commonwealth Government administers Commonwealth OH&S laws in Commonwealth waters through the National Offshore Petroleum Safety Authority. While the Authority also administers State OH&S laws in several Australian States, the required provisions for it to do so in NSW do not exist in the NSW 'mirror' Act – the Petroleum (Offshore) Act 1982. [5.1.5]

Commonwealth regulatory framework: petroleum titles

Eight petroleum titles are provided for by the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth). A typical offshore petroleum project may require five of these at various stages of the project. Initially, a petroleum exploration permit is required for any exploration activities. A petroleum retention lease must be acquired should any discovered petroleum prove commercially unviable initially, but is likely to become so within 15 years. Where a commercially viable source is found, the operator must acquire a petroleum production licence, infrastructure licence and pipeline licence prior to petroleum mining. [5.1.2]

Commonwealth regulatory framework: regulatory requirements

Along with requiring an appropriate title, all petroleum activities also require either an Environment Plan and/or a Well Operations Management Plan. In addition, the construction of a pipeline may only take place once a pipeline management plan is approved by the Designated Authority. The Offshore Petroleum and Greenhouse Gas Storage (Environment) Regulations 2009 outline the requirements of every Environment Plan. Each Plan must describe all environmental risks; specify management strategies for each risk; and identify suitable environmental performance objectives and standards. Well Operations Management Plans are currently regulated by the Petroleum (Submerged Lands) (Management of Well Operations) Regulations 2004. These regulations will soon be replaced by the Offshore Petroleum and Greenhouse Gas Storage (Resource Management and Administration) Regulations 2010. [5.1.2, 5.1.6 to 5.1.8]

All offshore petroleum activities may require approval under the Environment Protection and Biodiversity Act 1999 if the proposed activity has the potential to impact upon a matter of National Environmental Significance. [5.2]

NSW regulatory framework

The Petroleum (Offshore) Act 1982 is the 'mirror' Act to the Commonwealth Offshore Petroleum and Greenhouse Gas Storage Act 2006. As such, it establishes the jurisdiction of the NSW Designated Authority with regard to Commonwealth waters, and provides for a series of equivalent petroleum titles. Each title may be awarded, subject to meeting certain conditions, by the NSW Minister for Primary Industries. This Act also dictates that all NSW laws and statutory instruments under those laws apply to NSW coastal waters. The following Acts may therefore apply in the event that offshore petroleum activities take place in the coastal waters of the State: Coastal Protection Act 1979; Environmental Planning & Assessment Act 1979; Fisheries Management Act 1994; Heritage Act 1977; Marine Parks Act 1997; Marine Pollution Act 1997; National Parks and Wildlife Act 1987; and the Protection of the Environment Operations Act 1997. [6.0]

Recent reviews of the offshore upstream petroleum sector

Two reviews of the offshore upstream petroleum sector have recently been conducted. The Productivity Commission reviewed the regulatory burden on the upstream petroleum sector. One of its most significant recommendations was for the establishment of a national offshore petroleum regulator. The second review was a Commission of Inquiry into the blowout at the Montara rig off the north-west coast of Western Australia in 2009. The findings of the Inquiry reiterated the Productivity Commission's recommendation for the creation of a national offshore petroleum regulator. At the COAG meeting on 13 February 2011, in-principle agreement was given to the creation of a national offshore petroleum regulator. However, the Western Australian Government remains opposed to the proposal. [7.0]