Overlapping tenements in Queensland – Part 2

This month’s article is the second in a series of articles focussing on various competing resource regimes in Queensland. In this article we revisit the first overlapping tenement regime that was established by the introduction of the Petroleum and Gas (Production and Safety) Act 2004 (Qld) (P&G Act) and related legislation, the Coal Seam Gas (CSG) regime.

The P&G Act was significant in the development of Australian resources management legislation as it was the first to codify the regulation of directly competing resources developments.

Since the introduction of the CSG regime, the CSG industry in Queensland has flourished together with increased investment in related infrastructure and the development of supportive State Government policies.

At a policy level, the Queensland Government is keen to reduce greenhouse gas emissions by the increased use of natural gas as a replacement for coal in the electricity generation sector. In response to the Council for the Australian Federation’s climate change review and principally, the national emissions trading scheme, the Queensland Government released its ClimateSmart 2050 strategy on 3 June 2007. A component of the ClimateSmart 2050 strategy includes increasing the Queensland Gas Scheme from 13 per cent to 15 per cent by 2010, with the option to increase the target to 18 per cent by 2020. Under the Queensland Gas Scheme, electricity generators and large consumers of electricity are now required to source 15 per cent of their electricity from gas-fired generators by 2010.

As a result of the Queensland Government’s position on clean energy, the State has experienced a remarkable increase in the number of CSG-related tenement applications over the last 18 months.

The CSG regime

The CSG regime is established by Part 7AA of the Mineral Resources Act 1989 (Qld) (MRA) and Chapter 3 of the P&G Act. Each Act contains CSG-related provisions that for the most part, mirror each other.

The common underlying aim of the legislation is to promote resource maximisation.

Project operators who are familiar with the Queensland CSG regime will recognise the concept of resource maximisation and the requirement to coordinate activities. However, this concept does not always suit all parties in situations where tenements overlap.

Although the CSG regime has been operating in Queensland for about five years and is the most prescriptive State regime for resolving overlapping tenement issues, there is still considerable uncertainty in its practical operation. Parties are encouraged to reach private agreements and to contractually clarify their rights and obligations in the form of coordination arrangements, rather than having to rely on the uncertain results of the dispute resolution mechanisms currently available under the legislation.

General principles

The CSG regime is designed to give holders of producing tenements (petroleum leases (PL) (for CSG) and coal mining leases (ML)) priority over the holders of non-producing tenements. Generally, the consent of a producing tenement holder is required before activities can be carried out on non-producing tenements¹.

In relation to overlapping exploration tenements (eg authority to prospect (ATP) over an exploration permit for coal (EPC) or mineral development licence (MDL)) the legislation restricts the conduct of incompatible authorised activities on one tenement if those activities have already started on the other tenement².

ML application over ATP / PL application over EPC

A common situation involves overlapping petroleum and coal exploration tenements where one of the holders applies for a production tenement in its own right.

The MRA and P&G Act prescribe the following general procedure:

• the parties must exchange basic information including a development plan (in relation to the ML or PL applicant) and an outline of the exploration activities carried out or proposed to be carried out (in relation to the other party)
• the parties must use reasonable attempts to negotiate an arrangement between them 
• the holder that has not applied for a production tenement may make submissions about the ML or PL application
• the Minister must make a decision about whether to give a preference to petroleum development, if the Minister is satisfied of each of the following:

  there is a resource or reserve of petroleum in the land

  the petroleum deposit has been identified under the relevant codes (eg the ‘Petroleum Resource Classifications and Definitions’ and the ‘Petroleum Reserves Definitions’)

  there is a prescribed level of knowledge about the petroleum deposit

  the location, quantity, quality, geological characteristics and continuity of the petroleum deposit are known or have been estimated or interpreted from specific geological evidence and knowledge, and

  there are reasonable prospects for the eventual economic production of petroleum from the petroleum deposit.
  
  If the Minister is not satisfied of the matters set out above, the Minister cannot make a preference decision.

• if the production tenement applicant does not comply with the procedural requirements, the Minister may refuse the application, and
• if the holder that has not applied for a production tenement does not comply with the procedural requirements or does not indicate that it requests a preference decision, the production tenement application may be considered under the normal MRA or P&G Act application procedures (as the case may be).

ML application over PL / PL application over ML

An application for a PL over an existing coal or oil shale ML (ie producing tenement) or vice versa, may only be granted if the applicant has negotiated a coordination arrangement with the existing production tenement holder³. The Minister may refuse the production tenement application in cases where the parties have had reasonable attempts to reach an arrangement but the existing production tenement holder does not consider that an arrangement can be made.

Incidental coal seam gas

The regulation of incidental coal seam gas (incidental gas) is one component of the CSG regime that has been considered by the industry as a peculiarity or even discriminatory in its operation against the petroleum industry.

Incidental gas is defined by the MRA as being CSG mined or released as a result of any of the following:

• coal or oil shale mining under a ML 
• actions necessary to ensure a safe coal or oil shale mine working environment, or
• actions necessary to minimise the fugitive emission of methane during the course of coal mining operations.

The MRA provides a coal mining lease holder with a right to mine incidental gas, so long as the incidental gas is used for ‘mining purposes under the mining lease’. The MRA gives examples of what is considered to be mining purposes as:

• power generation for equipment used for mining on the ML, and
• heating.

Commercialising or processing the incidental gas is forbidden under a ML.The peculiarity in the CSG regime is that it provides a mechanism to allow a ML holder to commercially exploit CSG4. Under section 340 of the P&G Act the holder of a ML has a right to be granted a PL provided the basic PL application requirements are met. This provision has been considered discriminatory because the holder of an ATP that overlaps an EPC requires the consent of the EPC holder to be granted a PL. In addition, the ML holder does not require the prerequisite junior tenure (ie an ATP) to be granted a PL.

However, if a PL granted under section 340 of the P&G Act is overlapped by an ATP held by another person, in the absence of an agreement with the ATP holder, the PL holder is limited only to the right to mine incidental gas within the ‘mine working envelope’. The mine working envelope includes areas of past and current mine workings and mine workings that are proposed to be undertaken in the next 5 years.

The incidental gas provisions raise several uncertainties and from a legislative point of view, potentially undesired effects. Firstly, the operation of the provisions may cause signifi cant CSG resources to be ‘sterilised’ from future development. This may occur where a ML and a PL are held by one person in relation to certain land and an ATP held by a different person overlaps the ML and PL. In the absence of an agreement between the holders of the overlapping tenements, no party would be able to commercially mine the CSG. This would become a signifi cant problem if the ATP holder’s project is targeting a CSG resource that lies at a deeper stratigraphical level than the coal seam targeted by the ML holder.

Other problems and uncertainties in the legislation relate to identifying a commercially effective way of disposing incidental gas that is mined by a ML holder. Ultimately, the most effective way of achieving certainty is through a coordination arrangement between the overlapping tenement holders.

Administrative and Ministerial control

The administrative procedures adopted by the Department of Employment, Economic Development and Innovation – Mines and Energy (DME) have a signifi cant influence on the grant and renewal prospects of overlapping tenement grant and renewal applications, with the ultimate control held by the Minister.

The initial development plan will be crucial. An overlapping tenement applicant will, more often than not, have diffi culties in obtaining grant of the application unless the applicant obtains the support of the other tenement holder.

Increasingly, industry participants are developing strategies based on the complex CSG regime procedures in order to maximise their security of tenure and rights. In some cases, this has resulted in what the DME consider to be improper application of the CSG regime.

With the rapidly expanding CSG industry, we can expect to see further legislative developments in the future.

This article was written by Philip Christensen, Partner and Peter Hwang, Senior Associate, Brisbane.

Endnotes

1. section 318CI MRA, section 360 P&G Act
2. section 318CH(2) MRA, section 358(2) P&G Act
3. section 318CB MRA, section 350 P&G Act
4. A holder of a coal mining lease that includes the mineral hydrocarbon has the right to commercially exploit CSG.

More information

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