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Guide for international investment in petroleum in Australia

23.04.2014

Australia has a long history of international investment in petroleum exploration and development projects. International investors are a crucial part of the growth and success of Australian petroleum projects and industry. Moulis Legal is very happy to provide this international investor guide to the Australian petroleum industry. This guide is designed to provide international investors with an introduction to Australia’s petroleum industry, to assist investors with investigating and preparing for your investment. Moulis Legal has a proud history of working with industry and investors in Australia and across Asia. Moulis Legal has the knowledge and experience to provide you with the necessary legal guidance to work towards making your investment into Australia a success. Moulis Legal is a member of AMPLA, the Resources and Energy Law Association. We invite you to contact us with your questions and we wish you all the best with your new investment. Disclaimer: This document is intended as a guide only, and is not intended to provide the reader with legal, financial or investment advice on any of the subject matter covered in this document. This guide is a summary only, and is not a comprehensive description of all relevant matters to be considered by prospective investors. Prior to making investment decisions, you should obtain professional legal, financial and investment advice.

Australia’s legal system

Three levels of government to consider

Australia has a central national government, as well as individual governments responsible for governing and law making in Australia’s six states and three territories, and local governments responsible for managing cities and regions.

National (Commonwealth) government

Australia’s national government is called the Commonwealth Government, and is located in Canberra, Australian Capital Territory. Under the Constitution of Australia, the Commonwealth Government is empowered to make laws in relation to a limited list of subject areas (generally, subject areas with national or international significance). There are a number of Commonwealth Government laws and regulations that impact on petroleum in Australia, including international investment approval, taxation and environmental oversight.

State governments

Australia has six states: New South Wales, Victoria, Queensland, South Australia, Western Australia and Tasmania. Each state has its own government, which under the Constitution of Australia is responsible for making laws in all areas not covered by the Commonwealth Government. If there is any conflict between a Commonwealth and state law, then the Commonwealth law will prevail. State laws have the most significant impact on petroleum projects because the states own the petroleum within each state. Each state has its own regime for managing exploration, production, licensing, royalties, safety and environmental approvals.

Territory governments

Australia has three territories: Australian Capital Territory, Northern Territory and Norfolk Island. Each territory has its own government system. Territory laws are subject to oversight by the Commonwealth Government. Territory laws have the most significant impact on petroleum projects because the territories own the petroleum within each territory. Each territory has its own regime for managing exploration, production, licensing, royalties, safety and environmental approvals.

Local governments

Across Australia local governments have responsibilities for the management of each city and region. Local governments are relevant to petroleum projects in a number of areas, including the approval of certain property developments and the commercial use of certain local roads, facilities and services.

Council of Australian governments (COAG)

The Council of Australian Governments (COAG) is an intergovernmental organisation in Australia which consists of: – the Federal Government, represented by the Prime Minister; – the State and Territory Governments, represented by respective Premiers and Chief Ministers; and – the Australian Local Government Association, represented by its President. The role of COAG is to initiate and develop reforms of national significance, and reforms which require the cooperation of the federal, state, territory and local governments. COAG can impact on petroleum projects through streamlining of regulatory requirements and approvals processes between jurisdictions.

Petroleum licenses

Identifying, obtaining, and maintaining the right license

Onshore petroleum resources in Australia are owned by the State or Territory where the petroleum is located. Each state and territory government is responsible for granting and overseeing all licenses to explore, maintain and extract petroleum within its borders. A licence entitles the licence holder to an exclusive right to explore, maintain or extract petroleum within the boundaries of the licence area. Holders of petroleum licences must negotiate for access to land in order exercise the rights to explore or extract petroleum under the surface of the land. This usually involves formal agreement with the landholder and the payment of compensation. Petroleum licences in each state and territory are different. Each state and territory maintains a registry of licences, which allows the public to identify the holder of a licence and certain details of the licence. Reviewing the status, conditions and limits of a petroleum licence is an important element of due diligence by investors. There are three key categories of petroleum licences in Australia: Exploration, Production and Retention.

Exploration license

An exploration licence entitles the holder to undertake exploration activities to identify petroleum resources within a designated area. An exploration licence is granted for a limited period, which is set out in the relevant state or territory law. An exploration licence may be renewed. Conditions are attached to each licence, including obligations to: – undertake certain work activities – expend a minimum amount of funds – report to the government on exploration activities – pay rent on the licence Rights granted to the licence holder include: – entry to the land (subject to negotiation with the landholder) – appraisal activities (drilling, surveys, seismic) – exclusive right to apply for a production licence if petroleum is discovered within the licence area Failure to comply with obligations and regulations can lead to penalties being imposed by the state or territory regulator, and can even result in the exploration licence being forfeited.

Production license

A production licence entitles the holder to extract, develop and sell petroleum from within the licence area. Generally, a party holding an exploration licence over an area will have the first option to apply for a production licence if and when a discovery is made. A production licence is granted for a limited period, which is set out in the relevant state or territory law. A production licence may be renewed. Conditions are attached to each licence, including obligations to: – pay royalties and rent resource tax (if applicable) – pay rent on the licence – undertake certain work activities – report to the government on exploration and production activities Rights granted to the licence holder include: – entry to the land (subject to negotiation with the landholder) – selling extracted petroleum (royalties must be paid) – constructing and operating production infrastructure (additional approvals and permits will be required) Failure to comply with obligations and regulations can lead to penalties being imposed by the state or territory regulator, and can even result in the production licence being forfeited.

Retention license

When an exploration licence holder makes a discovery and it is not commercially viable to extract the petroleum at that time, the licence holder may apply for a retention licence. A retention licence preserves the interests of the licence holder against other parties seeking to undertake production or exploration in the area for up to 15 years, unless or until extraction becomes commercially viable. The retention licence may be amended or forfeited if the extraction does become commercially viable. During the period of the retention licence the licence holder must: – pay rent on the licence – undertake certain work activities (if applicable) – report to the government on the commercial viability of extracting petroleum Failure to comply with obligations and regulations can lead to penalties being imposed by the state or territory regulator, and can even result in the retention licence being forfeited.

Investment vehicles

Choosing the best way to invest and setting it up correctly

Traditionally most petroleum exploration and development in Australia has been conducted using a joint venture structure; either as an incorporated joint venture, or unincorporated joint venture. Often a joint venture arrangement is preceded by an earn-in period for the investor. The earn-in period is governed by a ‘farm-in agreement’, which operates as follows: – the investor secures its interest in the project through contributions (financial, work or both) made over a period (earn-in period) – at the end of the earn-in period, the investor receives a share in the project if it has satisfied its contribution commitments – the parties then undertake further exploration or development activities in respect of the petroleum project in accordance with a joint venture or partnership arrangement The table overleaf describes some of the advantages and disadvantages of the different investment structures.

Investment vehicle Description Advantages Disadvantages
Partnership The parties undertake a joint enterprise for profit. The parties contribute their respective shares and receive a share of profits. Petroleum extracted will be jointly sold by the partners and they share in the profits. A partnership allows each party to easily share in the inputs and outputs of the project. A partnership is a separate legal entity for the purposes of taxation, which can become complicated. Partners can bind each other, and each partner is severally liable for the liabilities of the other partners.
Incorporated joint venture Uses a company as the project vehicle and each party holds shares in the company. The company has a constitution that sets out the operation of the company. This model largely insulates the parties from personal liability (i.e. shareholders will not be exposed to the company’s creditors). A party may be liable or vulnerable in instances of insolvency of the project company as a result of control over the company. Parties may be exposed to director’s liability actions.
Unincorporated joint venture The joint venture is not a separate entity for taxation purposes, and the parties take their interests and losses directly from the joint venture. The joint venture is a contractual arrangement. The joint venture contract defines the rights, interest and obligations of each party. This is a highly flexible model, and allows parties to control their participation and interest. Each party receives and controls its share of the output from the project (i.e. each party receives its share of the extracted petroleum in kind). The legal documentation can be complicated, and needs to be accurate to cover off legal issues to ensure that it qualifies as a joint venture (not a partnership). Due to the flexibility, there are a large number of matters that require negotiation, such as decision making in the joint venture, operating the joint venture and withdrawing from the joint venture.

Investors should carefully consider which investment structure is most suitable for their investment goals and the particular petroleum project.

Foreign investment approval

Navigating the Notification and Approval Process

Foreign investment into Australia is overseen by the Foreign Investments Review Board (FIRB). The role of the FIRB is to examine proposals by foreign persons to undertake direct investment in Australia and to make recommendations to the Government on whether those proposals are suitable for approval under the Government’s policy. Certain types of investments require approval from the Commonwealth Government Treasurer. Under the Foreign Acquisitions and Takeovers Act 1975, investments by foreign persons must be notified to Foreign Investments Review Board if the investment meets certain requirements. A foreign person includes a company owned by foreign individuals, a foreign state owned enterprise, and also an Australian subsidiary of a foreign company. Notification must occur prior to the investment taking place or the commencement of the new business. Investment in petroleum projects may require notification to the Foreign Investments Review Board depending on: – whether the licence provides rights in respect of ‘urban land’ – the length or term of the licence – exclusivity of the rights in respect of the land Investors should review each investment to assess whether a notification to the Foreign Investments Review Board should be made. This review should include a review of all of the assets and rights that will be acquired as part of the investment. Notifications to the Foreign Investments Review Board are considered by the Commonwealth Government Treasurer. The Treasurer is required to make a decision within 30 days of receiving a notification, unless an interim order is made giving a 90 day extension. The Treasurer may attach conditions to certain investments, which may be subject to negotiation. In certain cases the Treasurer can prohibit an investment if it is found to be contrary to the national interests of Australia.

Royalties, duties and taxes

Three Levels of Taxes to Consider

Taxes, royalties and duties will be applicable to petroleum projects and investments. Taxes, royalties and duties are imposed by each of the three levels of government. Detailed consideration and calculation of the specific taxes, royalties and duties applicable to a petroleum investment should be included in your investment analysis.

Commonwealth Government

The Commonwealth Government can impose  customs and import duties, rent resource tax,  fuel tax, withholding tax, income taxes and  goods and services tax.

State and Territory Governments

State and territory governments can impose resource  royalties, stamp duty, land tax and payroll tax.  Resource royalties are calculated differently in each  state and territory in accordance with specific laws  and regulations.  Stamp duty is imposed by each state and territory,  and is calculated in accordance with each state and  territory’s own laws and regulations. Some states now  impose stamp duty on the transfer of certain energy and resource licences.

Local Governments

Local governments collect rates in respect of land,  which may be payable on certain petroleum projects.

Health, safety and environment

A Central Part of Each Petroleum Project

Investment into petroleum in Australia is impacted by Commonwealth, state and territory laws in relation to health, safety and environment.

Health and Safety

Health and safety of employees working on  petroleum projects is strictly managed in Australia.  Health and safety on petroleum projects is governed  by a national employment system and industry specific regulations. Owners, managers, supervisors and employees  on petroleum projects must comply with strict  health and safety rules relating to: – risk identification – reporting risks and incidents – qualifications and safety training – security and prohibited substances – insurance and compensation – compliance with safety audits and inspections – compliance with various industry standards and/or codes of practice

Environment

Environmental assessment, approvals and compliance  are critical to all petroleum projects in Australia and  must be carefully considered by investors.  Environmental assessment and approval is generally  governed by state and territory laws and regulations.  Depending on the size, significance and impact of  each proposed petroleum project the state or territory  regulator may require an environmental assessment  be undertaken in respect of: – impact on wildlife and habitats – impact on flora, vegetation and land – air and noise pollution – managing the use and protection of water resources Assessments are prepared by project proponents, often in conjunction and consultation with the relevant regulatory body. On completion the assessment is often subject to public consultation, and members of the public may be able to lodge objections to certain aspects of the project or environmental assessment. A determination regarding environmental approval of a petroleum project is usually the responsibility of the relevant state or territory government minister. In some states and territories an appeals process is available in certain circumstances. Water is a particular concern in certain Australian states and territories and is carefully managed. Water is a critical element in petroleum projects, and so water use, management and protection regulations need to be carefully considered.

Commonwealth

In addition to state and territory environmental regulation, the Commonwealth Government Department of Sustainability, Environment, Water, Population and Communities is concerned with environmental matters of national significance. Certain petroleum projects will require an environmental impact assessment and approval by the Commonwealth Government pursuant to the Environment Protection and Biodiversity Conservation Act 1999.

Access to land infrastructure

Special Rules Can Apply and Should be Investigated

Access to land and infrastructure is different across Australia, and investors should investigate how applicable regulations may impact on their petroleum investment.

Land and Access

Access to land in Australia to undertake petroleum exploration and production activity is controlled by state and territory governments, and is different for each state and territory. Access to private land must be negotiated with the landowner, and may require the payment of compensation for: – access to the land – damages and improvements to the surface land – loss of use of the land – loss of earning and enjoyment of the land Access to land owned by the Commonwealth Government or a state or territory government is different depending on the nature of the land and where it is located. Special permission may be required for access to this land, and restrictions may be imposed for conservation, agricultural and cultural reasons.

Infrastructure Access

Australia has Commonwealth, state and territory regimes that impact on access to private and public infrastructure, such as ports, railways, gas pipelines and transport infrastructure. The National Competition Council of Australia (NCC) is a research and advisory body established by agreement of the Council of Australian Governments (COAG). Its main function is to make recommendations on the regulation of third party access to services provided by monopoly infrastructure. The NCC has the power to ‘declare’ certain public and private infrastructure facilities. If an infrastructure facility is ‘declared’ then third parties have the right to negotiate with the facility owner to gain access to the infrastructure facility. Investors should investigate key infrastructure facilities that may be applicable or required for a petroleum project and how the access regime may impact on each facility.

Native title and cultural heritage

Investigations Must Be Undertaken

Native title is the common law recognition of rights and interests of Aboriginal peoples or Torres Strait Islanders, arising pursuant to their traditional law and customs. Australia has a national system for the recognition and protection of the traditional connection of Aboriginal people and Torres Strait Islanders to the land, and to areas and objects of cultural significance. Most states and territories have regimes that complement the national system. Petroleum exploration and production licence holders must obtain approval prior to undertaking certain activities in a native title or cultural heritage area. Approval usually requires direct engagement with the traditional owners of the land.The rules surrounding native title and cultural heritage in Australia have changed in recent years and investors must ensure that a petroleum project has complied with all relevant obligations. Investors should undertake detailed investigations to identify whether native title and cultural heritage obligations exist in respect of a petroleum project, and whether obligations have been satisfied.