2.1
In addition to the seven submissions received by the Senate Economics Legislation Committee (the committee) to its prior inquiry into the Offshore Petroleum and Greenhouse Gas Storage Amendment (Benefit to Australia) Bill 2020 (the bill), the committee received a further four submissions to the current inquiry.
2.2
There were mixed opinions on the bill and whether it would achieve its objectives. In her evidence to the committee, Ms Hannah Melville-Rea, a Fellow at the Australia Institute, stated:
… the Australia Institute views the benefit to Australia bill [the bill] as a small but meaningful amendment to existing legislation. Our polling and research indicate that under current policy settings offshore oil and gas is not, on net, benefiting the majority of Australians and as such we encourage this amendment to move forward.
2.3
In contrast, the Australian Petroleum Production and Exploration Association (APPEA) submitted to the committee that:
… [t]he proposals in the Bill and EM will not deliver additional benefit to the Australian community. In fact, the proposed amendments are likely to have the opposite effect by stifling investment and stranding resources that will not be developed.
2.4
Similarly, the Department of Industry, Science, Energy and Resources (the Department) concluded that 'the goals identified in the explanatory material provided to support the bill are unlikely to be achieved by the proposed amendments'.
2.5
As noted in chapter 1, the Senate requested the committee focus its efforts on retention leases, decommissioning costs, and offshore domestic gas reserve obligations, insofar as they relate to the bill. Given this, the discussion below restricts itself to these matters, and relies heavily on the additional information provided to the committee via submissions and through the public hearing held in Canberra on Friday 18 June 2021.
Retention leases
2.6
A petroleum retention lease authorises a lessee to explore for petroleum in a lease area. As stated on the National Offshore Petroleum Titles Administrator's website: '[a] retention lease encourages the timely development of petroleum resources and provides security of title for those resources that are not currently commercially viable but are likely to become so within 15 years'.
2.7
In her evidence to the committee, the General Manager of the Offshore Resources Branch within the Department, Ms Marie Illman, outlined the criteria for granting retention leases. She said:
The three criteria for the grant of the retention lease are that the blocks contain petroleum and recovery of the petroleum 'is not commercially viable at the time of the application' and recovery of the petroleum 'is likely to become commercially viable within 15 years' from that time. So a retention lease is granted for a five-year period and can be renewed for further five-year periods if the renewal criteria continue to be met. At every five year interval there is a check that the company that holds the title has been investigating the commercial pathways to developing the resource. At every five-year period those commercial settings are re‑evaluated by the titles administrator and the technical advice is provided to the joint authority. So every five years it is a review and a check that either the commercial barriers have been removed, the technical barriers have been progressed, or further understood through further drilling, further data analysis, further seismic and understanding of the seabed and the resource and how it will be progressed from the current state of uncommercial to commercial.
2.8
The bill's explanatory memorandum (EM) submitted that a number of international organisations utilise retention leases to 'hoard' Australia's offshore petroleum resources. Specifically it stated that:
Foreign owned integrated gas businesses currently hoard proven and probable gas leases, some for more than 30 years, when they could be capitalised on by businesses that are ready and willing to go into production.
2.9
This issue was considered by the committee in its prior inquiry into the bill. Evidence provided to that inquiry, as highlighted in the committee's final report to the Senate, indicated that the retention, or 'hoarding', of oil and gas leases was not a problem. For example, the APPEA stated the following:
Claims that companies are 'hoarding' resources have been proven incorrect … and changing the objects clauses of the [Offshore Petroleum and Greenhouse Gas Storage Act 2006], under which hundreds of billions of dollars of investment have been made, drastically increases Australia's sovereign risk for no material gain.
2.10
To support this assertion, the APPEA referenced a review commissioned by the former COAG Energy Council in 2018 which found that there was no evidence of gas being withheld; and tenure regimes have been effective in supporting exploration and development, and have provided sufficient flexibility to address the challenges of commercialisation. Further, it stated that the average time for a resource held under a retention lease was only 10 years, and that approximately 89 per cent of leases were renewed fewer than three times.
2.11
In evidence to the current inquiry, the Department noted that around 90 per cent of resources have been developed within 15 years of being first granted a retention lease, and those which aren't have commonly encountered intractable barriers to development, such as technical challenges and uncompetitive distances to market.
2.12
The Department also referenced the abovementioned review commissioned by the former COAG Energy Council, and highlighted the importance of accessible infrastructure to the investment decision. Specifically it noted that the review held the belief that:
… given the scale and long-term nature of investment in a development, a positive investment decision will hinge on access to the necessary infrastructure and sufficient feedstock gas to maintain operations and deliver the return of and return on capital required by investors.
2.13
Given this, the review found that retention leases play a specifically important role in the Australian context due to the geographic remoteness of some gas discoveries, where there may be limited, or non-existent, infrastructure in place. It contrasted this with the international experience, where the development of many discovers can be expedited through brownfield expansion which commonly incurs lower capital costs.
2.14
In further evidence to the committee, Ms Illman expanded on this:
The regime supports the development of Australia's offshore resources by recognising that this development can take a decade or more, as petroleum extraction can be challenged by remote locations, lack of access to commercial infrastructure and complex geological structures. The management of Australia's offshore regime through exploration permits, retention leases and production licences has supported the supply of gas to the domestic market while also facilitating the emergence of Australia as an LNG producer.
2.15
The Department also clarified that, if the Joint Authority is satisfied that recovery of petroleum from a lease area is commercially viable at the time of an application to renew the lease, it must refuse the application. The lessee can then, within a twelve-month period following such a refusal, apply for a production licence to enable the recovery of petroleum from the area.
2.16
Reflecting on the efficacy of the bill in promoting the timely development of Australia's resources, the Department concluded that:
… the proposed amendment would not improve the commercial viability of resources covered by retention leases, nor streamline their development.
2.17
Dr Diane Kraal suggested to the committee that the bill be amended to ensure that the environmental effects of extraction and production be taken into account when leases come up for renewal. Specifically, she recommended that the bill introduce a requirement that leases should only be renewed 'provided there are no greenhouse gases over the prescribed levels, either from extraction or production, that will affect the environment'. Supporting this proposal, Dr Kraal suggested that 'prescribed levels of greenhouses gases' be defined in the bill.
Decommissioning costs
2.18
Australia's offshore oil and gas industry has existed for over 50 years, and it is estimated that US$310 billion has been invested in the industry since 2010 alone. Given this long history and ongoing investment, there will be an increasing number of projects which will exhaust their reserves over the coming decades and, hence, require decommissioning. The Department noted that this stage is a normal part of the resource development lifecycle, and that it is a planned and regulated activity.
2.19
The Northern Territory Government highlighted that, as petroleum fields approach end of life, decommissioning is becoming an issue. It noted the complex nature of this stage in a project's lifecycle and that the regulatory framework 'requires [a] balance between reducing liabilities on government and investment attraction'.
2.20
Although not commenting directly on whether the new objects clause, as proposed in the bill, would materially impact the decommissioning stage, the Department highlighted that, given the projected increase in decommissioning activity, it had undertaken a review of the existing legislative, regulatory, and policy frameworks, and concluded that, although the framework was 'robust', enhancements were needed.
2.21
Given this, the Department subsequently identified a number of areas for potential enhancement which it grouped under the three key themes of financial oversight; planning and management; and accountability and trailing liability. These areas were then considered and endorsed by the Australian Government, which subsequently released draft legislation for comment between 8 April 2021 and 23 April 2021.
2.22
The Department stated that the enhanced framework would:
… strengthen the regulation of decommissioning and ensure future decommissioning challenges have effective regulatory oversight and robust financial safety nets to strengthen protections for the environment, the Australian Government and taxpayers.
2.23
Following this consultation, on 26 May 2021 the Minister for Resources, Water and Northern Australia, the Hon Keith Pitt MP, introduced the Offshore Petroleum and Greenhouse Gas Storage Amendment (Titles Administration and Other Measures) Bill 2021 (Decommissioning Bill) into the House of Representatives.
2.24
The Decommissioning Bill's EM states that it aims to:
… [strengthen] Australia’s offshore oil and gas regulatory regime to ensure that emerging decommissioning challenges facing the industry are able to be managed effectively, and the costs of decommissioning an offshore project remain with the entity or entities who are or were responsible for, or had the capacity to influence, the carrying out of the project, and does not fall to Australian taxpayers.
2.25
In her evidence to the committee, the National Offshore Petroleum Safety and Environmental Management Authority's (NOPSEMA) General Counsel, Ms Suzanne Hillier, highlighted to the committee that the authority now has a dedicated decommissioning team and has increased the resources applied to regulating this stage of a project's lifecycle. Specifically she said:
… we [NOPSEMA] have stepped up our resourcing to deal with the decommissioning of late-life assets in Australia because … end-of-field life is more prevalent now for many more companies than in previous decades. We have now a dedicated decommissioning team in NOPSEMA. That's not to say that we weren't focusing on decommissioning previously, but now we have a dedicated team whose focus is to assist duty holders meet their late-life asset and decommissioning obligations. We have recently published a decommissioning strategy and along with that a decommissioning implementation plan. We'll be focusing on working with our duty holders to ensure they do meet their obligations for decommissioning, removal of infrastructure and remediation of the environment in that regard.
Domestic gas reserve obligations
2.26
Australian domestic gas supplies mainly come from sources located in Commonwealth waters, offshore Western Australia, the Northern territory, Victoria and Tasmania. The Department noted in its submission that the states have policies in place which either reserve, or preference, petroleum or tenements for domestic supply.
2.27
Notwithstanding policies at the state level, the Australian Workers' Union (AWU) submitted to the committee that Australia does not currently have a national gas reservation policy which delivers competitively priced energy. It noted that no other country has a gas export industry without a gas reservation program and, hence, Australia was unique in this respect. In conclusion, the AWU stated:
… [a]s the world’s richest resource-exporting nation, we [Australia] have failed at providing the affordable energy prices required to underpin an adequate manufacturing and other ancillary industries.
2.28
The Australian Government is currently considering options for a prospective national gas reservation scheme following its announcement of a gas‑led recovery from the COVID‑19 pandemic. In October 2020 it released an issues paper which explored possible costs and benefits of a gas reservation scheme and considered issues including certainty of supply and investment confidence in Australia’s oil and gas industry. Specifically the issues paper considered:
the outlook for Australian gas markets;
the importance of gas to Australian trade and investment;
the importance of gas to Australian industry; and
other jurisdictions’ approaches to gas market intervention.
2.29
The next step of the process is for the Minister for Resources, Water and Northern Australia to consider a draft options paper.
Committee view
Retention leases
2.30
The committee believes that retention leases play an important role within the Australian context given the geographic remoteness of many discoveries, and the fact that there may be limited, or non‑existent, infrastructure already in place. The committee also notes that these leases provide a level of certainty to companies to allow the development of such resources.
2.31
The committee does not believe the accuracy of claims that foreign‑owned businesses are hoarding proven and probable offshore gas resources under retention leases. Supporting this, the committee notes evidence to the inquiry which stated that around 90 per cent of resources are developed within 15 years of first being granted a retention lease; the average time a resource is held under a retention lease is only 10 years; and approximately 89 per cent of leases are renewed fewer than three times.
2.32
Importantly, the committee does not believe that the bill's amendment to the objects clause of the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (the Act) will have any material beneficial impact on the commercial development of Australia's offshore resources.
Decommissioning costs
2.33
The committee notes that an increasing number of oil and gas projects will exhaust their reserves over the coming decades. It is vital that Australia has an effective regulatory framework in place to ensure the challenges of this stage of the lifecycle are adequately addressed into the future.
2.34
The committee notes that the Australian Government has identified a number of areas for potential enhancement to the decommissioning framework, and has subsequently undertaken a consultation process and introduced proposed reforms into the House of Representatives. The committee does not believe that amending the objects clause of the Act, as the bill does, will have any material impact on the decommissioning of projects as they approach end of life.
Domestic gas reserve obligations
2.35
The committee notes that the Australian Government is currently considering options for a national gas reservation scheme and that it conducted a consultation process in late 2020. The committee believes this process should be able to conclude and should not be pre‑empted.
2.36
The committee recommends that the bill not pass.
Senator Slade Brockman
Chair
Liberal Senator for Western Australia