Overview (May 2000) - International Law Office

Oil, Gas and Mining
Electricity
Carbon Trading and Greenhouse Emissions
Native Title

The energy and natural resources industry is an important domestic and export industry for Australia. In 1999 Australia derived around one-third of its gross domestic product from energy and resources exports.

Oil, Gas and Mining

Mineral and petroleum ownership
In all states and federal territories, petroleum, natural gas, gold, silver and uranium belong to the government. Other minerals may be privately owned in all states and federal territories except South Australia and the Northern Territory. Private ownership of other minerals generally occurs on land alienated by the government between the late 1800s and the early 1900s.

Onshore petroleum and mining regime
Each state and territory jurisdiction has its own mining and petroleum legislation and regulations that govern onshore exploration and mining. Also, most jurisdictions have separate legislation that deals with particular types of mining, such as the extraction of sand, clay or gravel. There is little uniformity of legislation and regulations on an Australia-wide basis.

Exploration and mining for minerals are prohibited by the legislation except under, and in accordance with, a licence or lease granted under the legislation.

Rights to explore, mine and produce minerals onshore are granted by the state or federal government in the jurisdiction where those rights are sought. The rights may be held by multiple parties and, for reasons associated with Australian taxation laws and limitation of liability, multiple holders usually associate themselves in a joint venture and hold their rights as tenants in common.

The first-stage exploration titles are usually granted for a relatively short period upon approval by the government of a programme of work and expenditure, and are subject to payment of an annual fee. Because there is little uniformity in the onshore legislation between the various jurisdictions, the terms and conditions of the grants can vary markedly from place to place. Exploration titles are usually readily renewable for reasonable periods upon compliance with their terms, and generally are transferable with prior government consent.

The second-stage onshore mining or production titles may be granted, usually with priority given to the holder of the exploration title, upon application to the government of the jurisdiction where the deposit or reservoir is located. The granting by the relevant government of these titles is discretionary and is not made as of right upon application. The relevant government will require a royalty from the miner in consideration for the grant of a mining or production lease, and will need to be satisfied that there is no adverse environmental impact from the proposed mining or extraction operation. Onshore mining or production titles are usually readily renewable upon compliance with their terms for the life of the mine or reservoir, and are also generally transferable with prior government consent.

Onshore exploration, mining and production titles may be made the subject of security in favour of other parties, such as banks, but generally only with prior government consent.

In most jurisdictions the legislation provides that no dealing, whether direct or indirect, in an exploration, mining or production title shall be of any force or effect unless and until it receives approval from the relevant government. Also, in most jurisdictions, the legislation provides that a condition of the grant of an exploration, mining or production title over privately owned land, or of the exercise of rights conferred by the title, is that the miner has agreed to pay compensation to the landowner for any damage suffered from the exercise of rights.

Federal and state legislation in varying degrees prohibits exploration and mining on or around defined, aboriginal sacred sites.

Offshore petroleum and mining regime
In relation to petroleum exploration and production in offshore Australia, the federal government alone has legislative responsibility for Australia's continental shelf beyond the three-mile territorial seas of the states and the Northern Territory. A joint federal and state authority administers this area.

Within the area that extends from the mean low water mark to the three-mile limit, the adjacent state or Northern Territory law applies, and state or territory titles may be granted.

The separate state and federal legislation (ie, the Petroleum (Submerged Lands) Acts) dealing with offshore areas correspond closely, unlike the position onshore.

Exploration for, and production of, petroleum in the offshore area are prohibited by the legislation except under and in accordance with a permit or licence granted under the legislation.

An application for an exploration title within the three-mile limit is made to the relevant state or Northern Territory authority, and beyond that limit to the joint federal and state authorities. Usually an application is made in response to a public invitation and is generally based upon a bidding system. The relevant granting authority has a wide discretion to grant or deny applications which, if granted, cover defined graticular blocks.

Offshore exploration and evaluation titles are of longer duration than their onshore counterparts. For example, retention leases are for a five-year period, with opportunities of renewal after assessment of the economic viability of a discovered reservoir.

Other offshore exploration permits are of six years duration, with the possibility of subsequent five-year renewals, subject to compliance with the permit terms. However, upon renewal the holder must surrender at least half of the blocks contained in the permit.

An exploration title-holder who discovers petroleum offshore is entitled as of right to the grant of a production licence for nominated graticular blocks containing the discovery.

When competitive bidding applies for an offshore tenement the choice, at the discretion of the granting authority, may be between a work programme system, cash bonus bidding and royalty bidding. In the case of a successful royalty bidder, the grant may nevertheless be subject to the payment of a cash amount as well. If a cash bonus bidder is successful, a royalty on production is payable. The cash and royalty bidding systems are usually favoured by the granting authority in selected areas that are considered highly prospective. In the case of bids for offshore exploration or production titles, the bidder must submit to the relevant granting authority a detailed work and expenditure programme. That programme of the successful bidder will be incorporated in the conditions of the grant of the title.

The Petroleum (Submerged Lands) Acts are currently subject to a review against competition policy, which will be completed by June 2000. In addition, the Petroleum (Submerged Lands) Legislation Amendment Bill 1999, passed by the House of Representatives on August 26 1999, is under consideration by the Senate. Proposed amendments include the introduction of a new class of title (ie, an infrastructure licence) for at-sea operations outside the ambit of the existing pipeline or production licences.

A similar scheme to that applicable for offshore petroleum exists for offshore minerals in the federally enacted Offshore Minerals Act 1984 and the complementary state/territory offshore mining legislation. This opens up the seabed beyond the three-mile territorial sea for exploration and exploitation of minerals.

Except for environmentally sensitive areas (eg, the Great Barrier Reef), petroleum and mineral operations are permitted on most parts of Australia's continental shelf. Offshore operations must comply with the requirements and standards set by law in areas such as navigation, fisheries and the environment.

There are special offshore petroleum arrangements applying in the Timor Gap area off the northern coast of Australia. The arrangements were established by the 'Treaty between Australia and the Republic of Indonesia on the Zone of Cooperation' in an area between the Indonesian province of East Timor and northern Australia. The treaty has been given effect in Australia by the Petroleum (Australia - Indonesia Zone of Cooperation) Act 1990.

The Zone of Cooperation (in the continental shelf area of the Timor Sea) is subdivided into Areas A, B and C, each of which has a different petroleum exploration and production regime applicable to it.

The central and largest Area (A) is a shared zone, with a substantial new regulatory framework (administered by a joint authority) to facilitate petroleum exploration and production. Private companies do not acquire ownership of petroleum in the ground but rather must enter into a production-sharing contract with the joint authority for any petroleum produced from the relevant blocks.

The joint regulatory framework for Area A includes a comprehensive Petroleum Mining Code and a special Taxation Code (which purports to prevent double taxation of profits derived by a contractor) and prescribes the applicable laws relating to civil and criminal jurisdiction.

Area B and Area C are essentially administered by Australia and Indonesia respectively, although limited cooperative arrangements (including the payment by each country of 10% of the taxation revenue derived by it from its area) have been agreed.

With the independence of East Timor, it is expected that East Timor may agree to a treaty on similar terms. Further developments are expected on this subject in the near future.

Electricity

Electricity is an important source of energy for Australian companies and comprises between 0.3% and 6% of industry costs. For energy intensive industries (eg, smelters and non-ferrous metals), it is significantly higher. Consequently, the cost of electricity heavily influences competitiveness of Australian firms both domestically and overseas.

Before 1990 the electricity supply industry in each state and territory was dominated by a single vertically integrated state owned authority or a combination of state owned authorities responsible for the generation, transmission and distribution of electricity. Investment in new generation was largely driven by state governments and their electricity authorities.

Over the last decade, successive Australian governments have introduced fundamental reforms aimed at improving the performance of the electricity supply industry. In May 1996, the governments of the Australian Capital Territory, New South Wales, Queensland, South Australia and Victoria signed the National Electricity Market Legislation Agreement. Under this agreement each jurisdiction agreed to adopt the National Electricity Law giving effect to the National Electricity Code. The code defines the terms of participation in the wholesale electricity market for generators, transmission and distribution network owners and service providers, retailers and customers.

The National Electricity Market, established in 1998, is a wholesale market for the supply and purchase of electricity in New South Wales, Victoria, South Australia and the Australian Capital Territory. The market utilizes the concept of a pool where the electricity output from generators is centrally controlled by the National Electricity Market Management Company to balance with the customer demand.

The state of Victoria has privatized its electricity distribution, transmission and generation assets. The state of South Australia is in the process of privatizing its electricity, distribution and generation assets and expects to have that process completed by the end of 2000. The privatization of electricity assets of New South Wales, Tasmania, Queensland and Western Australia is expected in due course.

Carbon Trading and Greenhouse Emissions

The Kyoto Protocol was agreed in December 1997 and represents an international framework for reducing global greenhouse emissions. Methods for giving effect to the aims of the protocol are still being negotiated and developed. Australia signed the protocol on April 29 1998, but has yet to ratify it.

Australia contributes around 1.5% of global greenhouse gas emissions. Australia's annual average emission allocation in the first five-year commitment period (2008-2012) under the protocol is equivalent to 108% of its 1990 greenhouse gas emissions. It is anticipated that Australia will be able to help meet its emission obligations through international permit trading, carbon sequestration (chiefly growth of forests and other carbon sinks), earning emission credits from abatement projects in developing and developed countries (ie, the Clean Development Mechanism and Joint Implementation respectively).

There are many issues to be resolved before any government-sanctioned trading scheme is introduced.

Native Title

As a result of the significant decision by the Australian High Court in Mabo v Queensland in June 1992, the Australian common law recognizes a native title which is sourced from the traditional aboriginal occupancy of, and connection with, the land by the people as a community or society. The rights comprised in native title over particular land derive from the traditional laws acknowledged by, and the traditional customs observed by, the indigenous inhabitants of that land. The nature and incidents of native title must be ascertained as a matter of fact by reference to those laws and customs.

The High Court declared in the Mabo decision that the Meriam people of the Murray Islands (which is part of Australia) are entitled as against the whole world to possession, occupation, use and enjoyment of the lands of the Murray Islands (excluding certain leased areas). The decision is also applicable in mainland Australia.

A group of Australian aborigines seeking to establish native title over an area of land will be required to prove the following to a court:

• a traditional connection with, or occupation of, the land under the laws and customs of the group;
  
  
• the existence of an identifiable community or group which is entitled to the native title; and
  
  
• the substantial maintenance of the connection with the land since the annexation of the land by the government at the time of the first British settlement.

The Mabo decision created uncertainty about the validity of land and mining titles where native title exists or may have existed, and where compensation was required to be paid as a result of the Racial Discrimination Act and was not paid. The federal native title legislation in 1993 and subsequent complementary state and territory native title legislation validated land and mining titles that were invalid because of native title. They also required payment of compensation on just terms by governments to holders, or former holders, of native title for extinguishing or impairing native title. The federal legislation also established a 'right to negotiate' procedure to be followed for the grant of rights to mine, certain variations to those rights, and certain compulsory acquisitions in respect of native title land.

In another High Court decision in 1996 (The Wik Peoples v Queensland), it was held that pastoral leases do not necessarily extinguish native title. This led to some uncertainty as to whether mining titles granted over pastoral lease land without following the 'right to negotiate' procedure were valid. Substantial amendments were made to the federal native title legislation in 1998 including provisions to validate or enable validation of such titles. Complementary state and territory legislation providing for validation of those titles has been passed in most states and territories.

The 1998 amendments also provided certain exceptions to the 'right to negotiate' procedure, which included low-impact exploration regimes and alternative state/territory procedures. Some states are attempting to take advantage of those exceptions.

For further information on this topic please contact Chris Fogarty at Allen Allen & Hemsley by telephone (+61 2 9230 4000) or by fax (+61 2 9230 5333) or by e-mail (chris.fogarty@allens.com.au).

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