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Offshore Petroleum and Greenhouse Gas Storage Amendment (Cash Bidding) Bill 2013 [and] Offshore Petroleum and Greenhouse Gas Storage (Regulatory Levies) Amendment Bill 2013



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ISSN 1328-8091

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BILLS DIGEST NO. 26, 2013-14 9 DECEMBER 2013

Offshore Petroleum and Greenhouse Gas Storage Amendment (Cash Bidding) Bill 2013 [and] Offshore Petroleum and Greenhouse Gas Storage (Regulatory Levies) Amendment Bill 2013 Moira Coombs Law and Bills Digest Section

Dr Alexander St John Science, Technology, Environment and Resources Section

Contents

Commencement .................................................................. 3

Purpose of the Bill ............................................................... 3

Structure of the Bills ............................................................ 3

Background ......................................................................... 3

Nature of exploration permits ................................................. 4

Committee consideration .................................................... 5

Senate Standing Committee for the Selection of Bills ............. 5

Senate Standing Committee for the Scrutiny of Bills .............. 5

Parliamentary Joint Committee on Human Rights .................. 5

Statement of Compatibility with Human Rights .................... 5

Policy position of non-government parties/independents ..... 5

Position of major interest groups ......................................... 5

Key issue—additional cost to industry .................................... 6

Key issue—impeding exploration ............................................ 6

Preventing over-exploration ............................................... 7

Key issue—new and immediate revenue to the Commonwealth 7

Financial implications .......................................................... 8

Key provisions ..................................................................... 8

Cash Bidding Bill .................................................................. 8

Reserve Price ........................................................................... 9

Date introduced: 20 November 2013

House: House of Representatives

Portfolio: Industry

Commencement: See page three of this Bills Digest.

Links: The links to the Bills, their Explanatory Memoranda and second reading speeches can be found on the Bills’ home pages for the Offshore Petroleum and Greenhouse Gas Storage Amendment (Cash Bidding) Bill 2013 and the Offshore Petroleum and Greenhouse Gas Storage (Regulatory Levies) Amendment Bill 2013, or through http://www.aph.gov.au/Parliamentary_Business/Bills_ Legislation

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website at http://www.comlaw.gov.au/.

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Cash Bids .................................................................................. 9

Cash bids below the reserve price ........................................... 9

Highest cash bids at or over the reserve price ...................... 10

Tie-breaking invitation ........................................................ 10

Specified information in offer documents ............................ 10

Failure to respond to an offer ............................................... 10

The Levies Bill .................................................................... 10

Appendix : Comparison of work-bid and cash-bid exploration permits 11

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Commencement The Offshore Petroleum and Greenhouse Gas Storage Amendment (Cash Bidding) Bill 2013 (the Cash Bidding Bill) commences on the day after Royal Assent. The operative provisions of the Offshore Petroleum and Greenhouse Gas Storage (Regulatory Levies) Amendment Bill 2013 commence at the same time as the Cash Bidding Bill, but does not commence at all if the Cash Bidding Act does not commence.

Purpose of the Bill The purpose of the Cash Bidding Bill 2013 is to amend the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (the OPGGS Act) 1 to:

 allow the Joint Authority to set a reserve price for the award of a petroleum exploration permit under the cash-bid system

 set out more clearly the system by which tied cash-bids will be decided

 allow for applicants to be assessed for financial and technical competence before assessment of their cash-bid and

 provide that applicants who fail to take up an offer of an exploration permit awarded by cash-bid will forfeit any deposit paid.

The purpose of the Offshore Petroleum and Greenhouse Gas Storage (Regulatory Levies) Amendment Bill 2013 (the Levies Bill) is to make consequential amendments to the Offshore Petroleum and Greenhouse Gas Storage (Regulatory Levies) Act 2003 (the Regulatory Levies Act).2

Structure of the Bills Schedule 1 of the Cash Bidding Bill amends the existing cash-bidding regime in the OPGGS Act by:

 changing the existing cash-bidding regime for petroleum exploration permits in the OPGGS Act to allow setting of a reserve price, direct how the Joint Authority must decide the awarding of a permit in the event of tied bids or bids below the reserve price and instituting the requirement for a deposit to accompany bids and

 providing procedures for dealing with deposits, including the forfeiture of deposits to the Commonwealth by applicants who do not take up the offer of an exploration permit, and minor consequential amendments.

Schedule 1 of the Levies Bill makes consequential amendments to the Regulatory Levies Act.

Background On 14 November 2012, the then Minister for Resources and Energy, Martin Ferguson, announced that the Commonwealth would re-introduce cash-bidding for selected offshore petroleum exploration permits.3 This was in response to a recommendation of the review of Australia’s Future Tax System (commonly known as the Henry Review).4 According to the announcement, cash-bidding would replace the work-bid system for awarding exploration permits in some ‘mature areas, or those known to contain petroleum accumulations’.5 Subsequently, the then Department of Resources, Energy and Tourism released information that the Government intended to award some offshore petroleum exploration permits by cash-bidding from 2014 onwards.6

1. Offshore Petroleum and Greenhouse Gas Storage Act 2006, accessed 3 December 2013. 2. Offshore Petroleum and Greenhouse Gas Storage (Regulatory Levies) Act 2003, accessed 3 December 2013. 3. M Ferguson (Minister for Resources and Energy), Address to the Committee for Economic Development of Australia (CEDA) - ‘Australia’s energy options’, speech, Sydney, 14 November 2012, accessed 4 December 2013.

4. K Henry, Australia’s Future Tax System, ‘Chapter 12: list of recommendations’, Treasury website, December 2009, recommendation 49, accessed 26 November 2013 5. M Ferguson, Address to CEDA, op. cit. 6. Department of Resources, Energy and Tourism (RET), Australian petroleum news, RET, December 2012, accessed 25 November 2013;

Department of Resources, Energy and Tourism, Competitive cash-bidding, fact sheet, RET, December 2012, accessed 25 November 2013.

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In the second reading speech in support of the Cash Bidding Bill, the Minister for Resources and Energy, Ian Macfarlane noted that an object of the re-introduction of cash-bidding is to ‘prevent over-exploration where none or little may be required’, and to ‘support… the earliest commercialisation of our resources’.7

Nature of exploration permits The development of undersea petroleum resources in Commonwealth waters8 is regulated by the OPGGS Act which sets out two procedures for the award of petroleum exploration permits9 to applicants—being the cash-bid system and the work-bid system. Appendix 1 of this Bills Digest contains a table which allows for a quick comparison of the systems.

Under the work-bid system, an applicant for an exploration permit outlines a program of exploration work that they will undertake over the period of the exploration permit; this may include seismic surveys, geochemical analysis and drilling of exploration wells. Ordinarily, the applicant that commits to the most extensive work program in their tender will be awarded an exploration permit; the successful applicant must then carry out that work program during the term of the exploration permit.10

Under the cash-bid system, an applicant is not required to tender a guaranteed work program for the award of the permit. Instead, an applicant nominates a sum that they would be prepared to pay for the award of the exploration permit. Although a work program is not a requirement of the bid, applicants must still demonstrate their financial and technical competence to undertake petroleum exploration work, as part of their application.11

Currently, offshore petroleum exploration permits are awarded only through the work-bid system. Although cash-bidding was used by the Commonwealth to award petroleum exploration permits in the mid to late 1980s, the practice has not been used since 1992.12 Cash-bidding was only used in a relatively small number of cases, and the Howard Government ruled out using cash-bidding in 1997.13 Although work-bidding has been the dominant practice in Australia, cash-bidding has been used extensively in the United States’ offshore tenements in the Gulf of Mexico.14 Cash-bidding was also introduced by the Queensland Government in 2012 to award some onshore coal and petroleum tenements.15

The OPGGS Act provides that decisions about petroleum and greenhouse gas activities in Commonwealth waters are made by the Joint Authority for the area.16 The Joint Authority is constituted by the responsible Commonwealth Minister and the responsible Minister of the state or territory jurisdiction that adjoins the offshore area.17 However, in cases where there is disagreement between the members of the Joint Authority, the Commonwealth has the final decision.18

7. I Macfarlane, ‘Second reading speech: Offshore Petroleum and Greenhouse Gas Storage Amendment (Cash Bidding) Bill 2013’, House of Representatives, Debates, 20 November 2013, pp. 7-8, accessed 4 December 2013. 8. Since the 1979 offshore constitutional settlement between the Commonwealth and the states (as implemented by the Coastal Waters (State Powers) Act 1980 and the Coastal Waters (State Title) Act 1980), the states have generally enjoyed jurisdiction of coastal waters up to three

nautical miles (5.56 kilometres) offshore; the Commonwealth has jurisdiction outside of this line. See M White, ‘Australia’s offshore legal jurisdiction: part 1 - history and development’, Australian & New Zealand Maritime Law Journal, 25(1), 2011, pp. 3-18, accessed 5 December 2013; Attorney-General’s Department, ‘Offshore constitutional settlement, Attorney-General’s Department website, accessed 25 November 2013. 9. An exploration permit awards exclusive licence to an individual or corporation to explore for petroleum in a nominated area. The permit itself

does not necessarily allow exploration activities like drilling wells or conducting seismic surveys, but prohibits any other person from exploring for petroleum in that area. This allows for the orderly development of resources by preventing many people trying to develop the same resource—this averts an ‘oil rush’. 10. Department of Resources, Energy and Tourism (RET), Petroleum law and government, fact sheet, RET, accessed 5 December 2013. 11. Department of Resources, Energy and Tourism (RET), Cash bidding system - a guideline in relation to the Offshore Petroleum and Greenhouse Gas Storage Act 2006, RET, October 2009, accessed 25 November 2013. 12. Ibid. 13. K Willett, P Balfe and A Smart, Review of Australia’s offshore petroleum exploration policy, ACIL Tasman, 3 January 2012, p. 17, accessed 26 November 2013; W Parer, Release of offshore petroleum exploration areas, media release, 17 June 1996, accessed 26 November 2013. 14. WJ Mead, A Moesidjord and PE Sorensen, ‘Competition in outer shelf oil and gas lease auctions: a statistical analysis of winning bids’, Natural Resources Journal, 26, 1986, pp. 95-111, accessed 5 December 2013. 15. A Cripps (Queensland Minister for Natural Resources and Mines), New competitive cash bidding process for exploration rights, media release, 9 October 2012, accessed 26 November 2013. 16. Offshore Petroleum and Greenhouse Gas Storage Act 2006, sections 56-60. 17. Offshore Petroleum and Greenhouse Gas Storage Act 2006, subsections 56(2) and 56(4). 18. Offshore Petroleum and Greenhouse Gas Storage Act 2006, section 59.

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Committee consideration Senate Standing Committee for the Selection of Bills On 4 December 2013, the Selection of Bills Committee decided that the Bills should not be referred to Committee for inquiry and report.19

Senate Standing Committee for the Scrutiny of Bills The Senate Standing Committee for the Scrutiny of Bills had no comment on these Bills.20

Parliamentary Joint Committee on Human Rights At the time of writing this Bills Digest, the Parliamentary Joint Committee on Human Rights had not published any comments in relation to the Bills.

Statement of Compatibility with Human Rights As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bills’ compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act.21 The Government considers that the Bills are compatible with human rights as they do not raise any human rights issues.22

Policy position of non-government parties/independents The Bills are likely to receive bipartisan support, as the re-introduction of cash-bidding was initiated under the Gillard Labor Government in 2012, and is being proceeded with by the Abbott Coalition Government.23

At the time of writing this Bills Digest, neither members of minor parties nor independent members have spoken specifically to the re-introduction of the cash-bidding system. In general, the Australian Greens have previously supported measures to increase taxation revenue from resource extraction activities (such as the Mineral Resource Rent Tax), whereas Katter’s Australian Party and the Palmer United Party have both opposed the MRRT.24

The exact positions of the minor parties in relation to these Bills are not yet clear.

Position of major interest groups The major group representing petroleum explorers and producers, the Australian Petroleum Production and Exploration Association (APPEA), was ‘disappointed’ at the announcement of the re-introduction of cash-bidding:

APPEA has consistently been a strong supporter of the work program bidding system. Cash bid payments reduce the overall pool of funds available for companies to undertake exploration, because they divert funds from the drilling of wells to the payment of government access charges. The introduction of cash bidding has the potential to impact on Australia’s small explorers who may have limited funds available for exploration. Many of these companies have been directly responsible for identifying the resource potential of regions and basins that are now producing oil and gas in Australia.

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19. Senate Standing Committee for the Selection of Bills, Report No. 10 of 2013, The Senate, Canberra, 4 December 2013, accessed 5 December 2013. 20. Senate Standing Committee for the Scrutiny of Bills, Alert Digest No. 8 of 2013, The Senate, Canberra, 4 December 2013, accessed 5 December 2013. 21. The Statement of Compatibility with Human Rights can be found at page 2 of the Explanatory Memoranda to the Bills. 22. Explanatory Memorandum, Offshore Petroleum and Greenhouse Gas Storage Amendment (Cash Bidding) Bill 2013, p. 2, accessed 5 December

2013 and Explanatory Memorandum, Offshore Petroleum and Greenhouse Gas Storage (Regulatory Levies) Amendment Bill 2013, p. 2, accessed 5 December 2013. 23. W Swan (Treasurer), Treasurer’s economic note, media release, 16 December 2012, accessed 4 December 2013. 24. Australian Greens, ‘Resourcing a caring society’, Australian Greens website, accessed 26 November 2013; B Katter, Katter votes to axe mining tax, media release, 21 November 2013, accessed 26 November 2013; C Palmer, OZ minerals sackings direct result of mining tax, media release, 18 July 2013, accessed 26 November 2013. 25. D Byers (Chief executive officer, Australian Petroleum Production and Exploration Association), Exploration changes could cost industry, media release, 14 November 2012, accessed 5 December 2013.

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APPEA has also argued that the imposition of cash-bidding, in combination with the addition of other taxes and charges and changes to taxation accounting rules, has undermined the stability of the fiscal regime under which oil and gas companies operate. APPEA argues that Australia needs a ‘stable, predictable and competitive taxation regime that encourages exploration and development investments’, to maximise oil and gas production.26

Key issue—additional cost to industry A key argument that APPEA raises against cash-bidding is that it imposes yet another cost on the industry, which could undermine the attractiveness of investing in Australia’s petroleum industry.27

The cash-bidding regime as articulated by the Government would seem to be targeting larger petroleum developers, who have the resources to bring relatively well understood petroleum deposits to market quickly. In this context, the amount that the Government expects industry will pay (about $50 million annually) is relatively small in the context of an industry that reported export earnings of $31.2 billion in 2012.28

Although this new charge for exploration permits is not strictly a tax, the petroleum industry commonly combines all moneys that it remits to Government. In reality, taxation of resource companies is comprised of corporate taxes (that apply to all companies) and resource taxes (that are levied in consideration of the resources extracted by the company). In the offshore petroleum regime, resource taxation is imposed by the Petroleum Resource Rent Tax (PRRT), which is applied to net profits of petroleum developments at a rate of 40 per cent of project profits after all project expenses have been deducted.29 Corporate taxes are represented principally by the company income tax; the risky and capital-intensive nature of petroleum developments often means that significant, deductible expenses are incurred.30

Although petroleum development is an inherently risky business, it remains highly profitable.31 Yet prior to the Henry Review, the share of revenue the Commonwealth was receiving from petroleum taxation was declining. The Henry Review noted that petroleum tax and royalty revenue, as a share of petroleum profits before tax, declined from around 40 per cent in 2002-03 to around 25 per cent in 2007-08. The 2012 annual report from Woodside Petroleum, (operator of several highly profitable gas fields in Commonwealth waters off Western Australia), discloses a 2012 taxation expense of US$614 million on a profit before tax of US$3,658 million— representing an effective tax rate (including both resource and corporate taxes) of 16.8 per cent.32

This would suggest that there is some scope for the share of petroleum resource revenue to be increased, at least from larger petroleum developers - and that the scope of the new charges brought about by cash bidding could be seen to be reasonable.

Key issue—impeding exploration The principal criticism by APPEA of the re-introduction of cash-bidding has been that forcing explorers to pay up-front for the award of exploration permits reduces the pool of funds a company has for exploration.33 This would be particularly problematic for the so-called ‘junior explorers’, who are often small companies that sell their discoveries on to larger companies for development.34 The implication of APPEA’s assertion is that cash-bidding would delay exploration and the new petroleum discoveries that it brings.

26. D Byers, ‘Urgent need for policy reform’, Blog article, APPEA website, 18 March 2013, accessed 26 November 2013. 27. Anonymous, ‘APPEA slams cash bidding system for offshore exploration acreage’, PESA News Resources, June/July 2013, accessed 28 November 2013. 28. Australian Petroleum Production and Exploration Association (APPEA), Key statistics 2013, APPEA, Canberra, 2013, p. 10, accessed

28 November 2013, 29. Petroleum Resource Rent Tax (Imposition-General) Act 2012, accessed 5 December 2013. Offshore petroleum developments are also subject to other charges, such as tenement rental fees. However, these fees and charges are relatively small compared to the resource taxation burden. 30. K Willett et al, Review of Australia’s offshore petroleum exploration policy, op. cit., p. 59. 31. Three of the top ten companies in the Financial Times Global 500 are oil and gas producers. See: Financial Times, ‘FT 500’, Financial Times

website, 2013, accessed 28 November 2013. 32. Woodside Petroleum, 2012 annual report, Woodside Petroleum, pp. 90-91, accessed 27 November 2013. 33. D Byers, Exploration changes could hurt industry, op. cit. 34. T Williams, ‘Exploration and the listed resource sector’, Bulletin, Reserve Bank of Australia, September 2012, pp. 37-43, accessed 5 December

2013.

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This would be true if cash-bidding was to become the norm for all offshore exploration permits. However, according to the Explanatory Memorandum, the Government proposes to use cash-bidding only for ‘mature’ areas, or those that are known to contain petroleum deposits—that is, where the geology of the area is already well understood.35 The intention of the new cash-bidding system appears to be to sell these permits to larger companies that can appraise and develop the permit area within a relatively short time frame, without the need to do extensive additional exploration. This, then, is not the role for capital-poor junior explorers; the business model of junior explorers is to explore areas with lower prospectivity and turn them into areas of higher prospectivity by creating new knowledge about petroleum resources in the area.36

Preventing over-exploration One of the Government’s specific intentions in re-introducing cash-bidding is to ‘prevent over-exploration where none or little may be required’, and ‘support… the earliest commercialisation of our resources’.37 Although the Government may have a legitimate interest in expediting the development of resources, it has not publicly made a serious case that over-exploration is a significant problem. Nevertheless, the Government’s decision to try measures to expedite development of petroleum resources is legitimate; some petroleum resources in the Browse basin off Western Australia remain undeveloped, more than forty years after discovery.38

Currently, Part 2.2 of the OPGGS Act provides that work-bid exploration permits may have a term of up to sixteen years (the original six-year permit plus two five-year renewals). Permit holders may explore for petroleum throughout the life of the permit, so long as they comply with permit conditions (which generally means continuing an exploration program). However, the OPGGS Act does not oblige the exploration permit holder to immediately apply for a production or exploration lease if a petroleum resource is discovered. The permit holder’s obligation is simply to inform the relevant authority of the discovery.39 Permit holders can spend additional time appraising the resource, or exploring for other, adjacent resources.

In contrast to work-bid exploration permits, cash-bid exploration permits come with fewer conditions, meaning that a permit holder is not obliged to carry out any particular exploration work during the life of the permit.40 Rather, the intention is that they perform only as much exploration work as is necessary to apply for a production licence (if the resource is commercial) or a retention licence (if the resource is not). This should be driven by the economic imperative of obtaining a return on the financial investment in the exploration permit as soon as possible.

In addition, cash-bid exploration permits can have a term of no more than eleven years (the original six-year permit plus one renewal), or just a single six-year term if the cash-bid process so specifies.41 This means that a cash-bid permit holder has an additional incentive to move to production or retention licences quickly, or risk losing their exclusive right to develop petroleum resources in the permit area. So whilst it is not clear that over-exploration is in fact a serious problem, the cash-bidding system should certainly provide incentives for permit holders to expedite the development of petroleum resources.

Key issue—new and immediate revenue to the Commonwealth Although the provision to award offshore petroleum exploration permits through cash-bidding already exists in the OPGGS Act, the introduction of the Cash Bidding Bill signals the intention of the Government to pursue cash-bidding as a means of raising additional revenue from offshore petroleum resources.

Under the current work-bid system, the holder of a petroleum exploration permit may retain the permit for up to sixteen years, providing they comply with the conditions of the permit.42 If a permit holder finds a deposit of petroleum in their permit area, they may apply to extract and sell that petroleum via a petroleum production licence (or apply for a retention lease in the case that the deposit is uneconomic to develop at that time). If the

35. Explanatory Memorandum, Offshore Petroleum and Greenhouse Gas Storage Amendment (Cash Bidding) Bill 2013, op. cit., p. 1. 36. T Williams, ‘Exploration and the listed resource sector’, op. cit. 37. I Macfarlane, ‘Second reading speech: Offshore Petroleum and Greenhouse Gas Storage Amendment (Cash Bidding) Bill 2013’, op. cit. 38. I Willis, ‘Results of exploration, Browse Basin, North West Shelf, Western Australia’, North West Shelf - Proceedings of the North West Shelf

Symposium, Perth, 1988, Petroleum Exploration Society of Australia (WA Branch), Perth, 1988, pp. 265-272. 39. Offshore Petroleum and Greenhouse Gas Storage Act 2006, section 284. 40. Offshore Petroleum and Greenhouse Gas Storage Act 2006, section 99. 41. Offshore Petroleum and Greenhouse Gas Storage Act 2006, section 121. 42. Offshore Petroleum and Greenhouse Gas Storage Act 2006, sections 119 and 126.

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petroleum is extracted for sale, the producer may eventually pay a consideration to the Commonwealth for the petroleum through the PRRT, once the project becomes profitable.43 This means that there can be many years’ delay before the Commonwealth receives any payment for these petroleum resources under the current work-bid-only system.

In contrast, the cash-bid system allows for some revenue to be derived from well-understood petroleum resources immediately, while still allowing for the bulk of the revenue to come through the PRRT system later on. The 2013-14 Budget predicts that the re-introduction of cash-bidding will provide $160.3 million in additional revenue from 2014-15 to 2016-17.44 Of course, actual revenue will depend on market conditions.

The application of cash-bidding provides for an additional and immediate (albeit relatively small) stream of income from petroleum assets held by the Commonwealth. Prior to the announcement of the re-introduction of cash bidding, the then Department of Resources, Energy and Tourism commissioned a report from ACIL Tasman consulting (now known as ACIL Allen) to evaluate policy options; this report includes a substantial review of the literature on the subject. The report is strongly in favour of cash-bidding, in combination with resource rent taxes, as a means of efficiently recovering part of an optimal level of resource rent.45

Ultimately, the price that is paid for Australia’s resources is a decided by the community through the elected Government, but a substantial amount of academic literature exists on the subject of effective resource taxation. The issue of the price paid by companies or individuals to the community for the resources that they extract and sell is a highly contentious one in Australia. This was most recently demonstrated in the controversy surrounding the proposed Resources Super Profits Tax and its successor, the Mineral Resources Rent Tax, in which the mining industry bitterly opposed the introduction of a new tax.46 Despite this fact, the introduction of the Cash Bidding Bill has raised relatively little interest so far.

Financial implications According to the Explanatory Memorandum, the financial impact of the Cash Bidding Bill will be positive if the amount paid for the cash-bid exploration permit exceeds the reserve price. The amount paid will form part of the Commonwealth Consolidated Revenue Fund. 47 Importantly, the prices that the Commonwealth receives for the award of certain petroleum exploration permits will depend on the market conditions at the time that the permit is tendered and the analysis made by applicants of the prospectivity of the permit area.

The 2013-14 Budget predicted that the re-introduction of cash-bidding will provide $160.3 million in additional revenue from 2014-15 to 2016-17.48 Should the Bill be rejected, it is likely that this will negatively affect revenue in future years.

The Explanatory Memorandum states that the Regulatory Levies Bill has no financial impact.49

Key provisions Cash Bidding Bill The Cash Bidding Bill provides refinements to the existing cash-bidding regime to give greater transparency and clarity to its operation by:

 enabling the Joint Authority to set a reserve price for offshore petroleum exploration permits

 refining the procedures for awarding a cash bid, to remove the Joint Authority’s discretion (and provide explicit legislative direction) in deciding which applicant (if any) will be offered a cash-bid exploration permit

 instituting the requirement to lodge a 10 per cent deposit when making a cash-bid, which is forfeited if the applicant fails to take up an offer of an exploration permit and

43. Department of Resources, Energy and Tourism (RET), Petroleum taxation, factsheet, RET, 2013, accessed 25 November 2013. 44. Australian Government, ‘Part 1: Revenue measures’, Budget measures: budget paper no. 2: 2013-14, accessed 25 November 2103. 45. K Willett et al, Review of Australia’s offshore petroleum exploration policy, op. cit., pp. 163-165. 46. C Cooper, ‘Fair go or forlorn?’, Intheblack, 82(10), November 2012, pp. 46-51, accessed 5 December 2013. 47. Explanatory Memorandum, Offshore Petroleum and Greenhouse Gas Storage Amendment (Cash Bidding) Bill 2013, op. cit., p. 1. 48. Australian Government, ‘Part 1: Revenue measures’, Budget measures: budget paper no. 2: 2013-14, op. cit. 49. Explanatory Memorandum, Offshore Petroleum and Greenhouse Gas Storage (Regulatory Levies) Amendment Bill 2013, p. 1, accessed

5 December 2013.

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 providing that the revenue from cash-bids accrues to consolidated revenue, rather than a special account.

These amendments are consistent with the orderly operation of a cash-bidding regime. However, the Bill reflects the Government’s decision to re-introduce cash-bidding, which is a significant change in policy.

Reserve Price Section 110 of the OPGGS Act empowers the Joint Authority to publish a notice inviting applications by way of cash bidding for the grant of a petroleum exploration permit. The notice must identify the block over which the permit will be given and specify whether the permit is able to be renewed. Item 4 of the Cash Bidding Bill inserts proposed subsections 110(3A), (3B) and (3C) into the OPGGS Act to require the Joint Authority to set a reserve price for the grant of a permit. A notice published in the Gazette under subsection 110(1) to invite applications by way of cash bidding may include the reserve price which has been determined, but is not required to do so. The determination of the reserve price is not a legislative instrument.50

Cash Bids Item 6 of the Cash Bidding Bill repeals existing sections 111 and 112 and inserts proposed sections 111-112B. Having issued the notice inviting applications under section 110, the Joint Authority must take into account the matters contained in proposed section 111 of the OPGGS Act. Proposed subsection 111(1) provides that the Joint Authority must by written notice to each applicant and taking into account relevant matters (which must be specified in the notice under section 110) either invite the applicant to make a cash bid or reject the application. Proposed subsection 111(2) enables an eligible applicant to make, in writing to the Joint Authority, a single cash bid in response to the invitation under proposed subsection 111(1) within the time specified in the invitation, specifying the amount of the cash bid and accompanying the bid with a deposit equivalent to 10 per cent of the bid amount. The deposit is paid to the Titles Administrator on behalf of the Commonwealth.51 If there is no response to the invitation, the application lapses.52

Cash bids below the reserve price Whilst the Government may set a reserve price for an exploration permit, oil and gas companies might not be prepared to pay the reserved amount for that particular permit. This may be because the assessment of the permit’s worth by Government may be too optimistic, or because it may require too much exploration work to develop.

Proposed section 112 of the OPGGS Act relates to cash bids that fall below the reserve price. Under proposed subsections 112(1) and (2) a cash bid that is less than the reserve price must be rejected by the Joint Authority by written notice unless:

 the reserve price was not specified in the notice issued under section 110 and

 the cash bid or bids is/are the only ones or the highest cash bid or bids that are less than the reserve price.

Proposed subsection 112(3) provides for the offer of grant of a permit at the reserve price. Conditions apply and are set out in the table contained in the subsection. Where the reserve price was not specified in the notice under subsection 110(1) and the only cash bids made under section 111 are less than the reserve price. In these situations, the Joint Authority must give written notice that it is prepared to grant the permit at the reserve price or reject the application. When deciding whether to offer the permit at the reserve price, the Joint Authority must have regard to the difference between the cash bid made and the reserve price.53 Proposed subsection 112(5) of the OPGGS Act provides that the Titles Administrator must refund the deposit that has been paid in accordance with section 111 if the application is rejected under this section.

Importantly, there is nothing to stop the Government from offering a permit by a work-bid tender after an unsuccessful cash-bid process.

50. Offshore Petroleum and Greenhouse Gas Storage Act 2006, proposed subsection 110(3C). 51. Offshore Petroleum and Greenhouse Gas Storage Act 2006, proposed subsection 111(3). 52. Offshore Petroleum and Greenhouse Gas Storage Act 2006, proposed subsection 111(4). 53. Offshore Petroleum and Greenhouse Gas Storage Act 2006, proposed subsection 112(4).

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Highest cash bids at or over the reserve price Proposed section 112A applies to cash bids at, or over, the reserve price which is determined under section 110. Proposed subsection 112A(2) sets out, in table form, when the Joint Authority must offer the permit to the applicant (this is to occur where the applicant’s bid is the only bid above the reserve price, or the highest bid above the reserve price) or invite specific applicants to make a tie-breaking cash bid (when two or more applicants make bids that are equal and the highest bids above the reserve price).

Tie-breaking invitation Proposed section 112B applies to the Joint Authority making a tie-breaking invitation to two or more tied applicants for the grant of a cash bid petroleum exploration permit. Proposed subsection 112B(2) provides that a tied applicant may notify the Joint Authority in writing in response to a tie-breaking invitation with a further cash bid that is higher than the applicant’s previous bid. A note to proposed section 112B cross references to section 255, which sets out the manner in which a tie-breaking bid must be made. The table in proposed subsection 112B(3) sets out the process for dealing with responses to the tie-breaking invitation.

Specified information in offer documents Existing section 259 relates to offer documents for various applications under the OPGGS Act. Existing subsection 259(3) deals with the offer document for the grant of cash-bid petroleum exploration permits. Proposed paragraphs 259(3)(a) and (b) require that the offer document must:

 specify as the permit price:

 the amount of the cash bid or tie-breaking bid, or  in the case of an offer document issued under section 112, the reserve price determined under section 110  set out the balance of the permit price—which will be the difference between the permit price and the deposit given by the applicant under section 111

 state that if the balance of the permit price is not paid within 14 days , the application will lapse and the deposit will be forfeited to the Titles Administrator (except in the case of an offer document under section 112 where the cash bid is less than the reserve price).54

Failure to respond to an offer Item 18 of the Cash Bidding Bill inserts proposed section 260A which relates to the failure to respond to an offer for the grant of a cash-bid petroleum exploration permit. Proposed subsection 260A(1) provides that the section applies to an applicant who has not responded to an offer document within the required 14 days, or has not paid the balance of the permit price specified in the offer document within that timeframe. In these circumstances, proposed subsection 260A(2) provides that the application lapses and the deposit is forfeited to the Commonwealth (unless the offer document was given under section 112). Proposed subsection 260A(3) provides for further offers to be made to applicants other than non-responding applicants or those with lapsed or rejected applications. The table in proposed subsection 260A(3) sets out the circumstances where further offers can be made.

The Levies Bill Section 10E of the Regulatory Levies Act imposes the ‘annual titles administration levy’. Subsection 10E(7) sets out the definitions that apply to the section. The Bill amends subsection 10E(7) to insert a definition of ‘cash-bid petroleum exploration permit’ and amend the definition of ‘eligible title’, to ensure that the annual titles administration levy applies to cash-bid petroleum exploration permits.

54. The 14 day time period is set out at item 2 of the table at subsection 260(1) of the OPGGS Act, as amended by item 15 of the Cash Bidding Bill.

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Appendix: Comparison of work-bid and cash-bid exploration permits Work-bid exploration permit Cash-bid exploration permit

Awarded by: Competitive tender of

exploration program.

Competitive tender of cash sum.

Up-front payment? No (small application fee) Yes, potentially substantial.

Exploration program required? Yes, as a condition of permit No

Permit lifetime: Up to 16 years with renewals. 6 years (or 11 if permit is

renewable)

Annual permit fees? Yes No

Immediate revenue to Government?

No Yes - potentially significant

Subsequent revenue to Government?

Maybe - PRRT if profitable resource discovered Maybe - PRRT if profitable resource discovered

Intended future use: Immature or low prospectivity

areas

Mature or high prospectivity areas

Suited to Smaller, capital-poor junior

explorers

Larger, capital-rich petroleum developers

Table sources: Offshore Petroleum and Greenhouse Gas Storage Act 2006; ACIL Tasman report; second reading speech; address to CEDA.

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