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Offshore Petroleum and Greenhouse Gas Storage Amendment (Cash Bidding) Bill 2013

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2013

 

 

 

 

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

 

 

OFFSHORE PETROLEUM AND GREENHOUSE GAS STORAGE AMENDMENT (CASH BIDDING) BILL 2013

 

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

 

 

 

 

(Circulated by authority of the Minister for Industry,

the Honourable Ian Macfarlane, MP
)



OFFSHORE PETROLEUM AND GREENHOUSE GAS STORAGE AMENDMENT (CASH BIDDING) BILL 2013

 

 

OUTLINE

 

The purpose of this Bill is to amend the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (the Act) to provide an optimised model for allocating cash bid exploration permits in the offshore petroleum regulatory regime.

 

The Australian Government announced in November 2012 a decision to apply the cash bidding title allocation method for select blocks as released in the 2014 Offshore Petroleum Exploration Acreage Release. Inclusion of cash bidding as the method of exploration permit allocation in mature areas or those known to contain petroleum accumulations is intended to prevent over-exploration where none or little may be required, and ensure that the release of these areas continues to be equitable, economic and efficient.

 

An auction expert was engaged to provide advice and recommendations on the cash bidding system design and the model which would be consistent with the current provisions in the Act. The review and analysis identified a number of significant risks to the success of the preferred auction model based on use of the current structure provided for in the Act, with its key recommendation being that cash bidding should not be implemented until the risks were addressed. Therefore the Bill will amend the Act to implement the following key features:

1.       Limiting the discretion to refuse an offer of a permit - to ensure that the highest bidder is incentivised to accept the offer of a permit, thereby encouraging genuine bidding to take place. 

2.       Reserve price - a reserve price will be set by the Joint Authority for each of the areas being released, and will reflect an estimate of the value of the resources available. The reserve price will be determined in advance of inviting applications and will be either disclosed or undisclosed.

3.       Separate pre-qualification and bidding processes - to allow for pre-qualification assessment of the potential bidders to take place prior to placing cash bids to ensure they are pre-determined as eligible. This will involve an assessment of technical and financial capacity of an applicant to undertake exploration work offshore, commensurate with being the holder of an exploration permit over the blocks that are being released for cash bidding. As a consequence, bids can be placed with confidence that if they are the highest bidder, they will be offered the permit without delay.  

4.       Tie breaker - to specify a tie-breaker mechanism to deal with circumstances where two or more cash bids are equal.



FINANCIAL IMPACT STATEMENT

The Bill is expected to have a positive financial impact 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.



 STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

 

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

 

This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

 

Overview of the Bill

The Bill makes amendments to the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (the Act) to provide an optimised ‘auction style’ model for allocating cash bid exploration permits in the offshore petroleum regulatory regime. These amendments to the existing cash bid exploration permit allocation model in the Act have the following key features:

1.       Limiting the discretion to refuse an offer of a permit . This feature is designed to ensure that the highest bidder is incentivised to accept the offer of a permit. Where an eligible highest bidder is offered the exploration permit, should they refuse the offer or not meet the permit acceptance requirements (full payment of the balance of the cash bid amount within the specified 14 day timeframe) the 10% deposit which is payable upon placement of the cash bid is forfeited to the Commonwealth. As a consequence the feature will encourage genuine bidding. 

2.       Reserve price . This element is required as the Government has a responsibility to allocate the resource efficiently and to demand a fair price for a public resource. The reserve price helps ensure that the Government does not sell the resource below its public value. The reserve price will be set by the Joint Authority for each of the areas being released, and will reflect an estimate of the value of the resources available. The reserve price will be determined in advance of inviting applications and will be disclosed or undisclosed.

3.       Separation of pre-qualification assessment and cash bidding process . In the existing provisions of the Act, applications for cash bid exploration permits require provision of a range of information as well as the amount of the cash bid, with the Joint Authority consequently given the power to reject any or all of the applications. This Bill will allow for prequalification assessment of the potential bidders to take place prior to applicants placing their cash bids. This feature is to ensure they are pre-determined as eligible, through an assessment of technical and financial capacity, to hold an exploration permit. As a consequence a bid can now be placed by an eligible applicant with the confidence that if they are the highest bidder, they will be offered the exploration permit without delay.  

4.       Tie breaker . This feature is designed to specify an automatic tie-breaker mechanism to deal with circumstances where two or more cash bids are equal. Currently in the event of tied cash bid applications, the Joint Authority makes a discretionary decision to allocate the exploration permit. As a result of amendments in the Bill, in the event of two or more equal cash bids, further cash bids will be invited from the tied applicants with the highest cash bid resulting in the offer of the exploration permit. Should a further tie occur, then the permit will be offered to the cash bid first received by the Joint Authority.  

 

Human rights implications

This Bill does not engage any of the applicable rights or freedoms.

 

Conclusion

This Bill is compatible with human rights as it does not raise any human rights issues.

 

 

 



OFFSHORE PETROLEUM AND GREENHOUSE GAS STORAGE AMENDMENT (CASH BIDDING) BILL 2013

 

NOTES ON CLAUSES

 

Clause 1: Short title

Clause 1 is a formal provision specifying the short title of the Act.

 

Clause 2: Commencement

The Act will commence on the day after this Act receives the Royal Assent.

 

Clause 3 : Schedule(s)

This clause gives effect to the provisions in the Schedule to this Act.



Schedule 1 - Cash-bid petroleum exploration permits



The amendments in this Schedule will revise the existing cash bid exploration permit application and allocation provisions in the Act to implement the following key features:

1.       Limiting the discretion to refuse an offer of a permit - to ensure that the highest bidder is incentivised to accept the offer of a permit. As a consequence it will encourage genuine bidding. 

2.       Reserve price - a reserve price will be set by the Joint Authority for each of the areas being released, and will reflect an estimate of the value of the resources available. The reserve price will be determined in advance of inviting applications and will be either disclosed or undisclosed.

3.       Separate pre-qualification and bidding processes - to allow for prequalification assessment of the potential bidders to take place prior to placing cash bids to ensure they are pre-determined as eligible, through an assessment of technical and financial capacity to hold an exploration permit. As a consequence bids can be placed with confidence that if they are the highest bidder, they will be offered the permit without delay.  

4.       Tie breaker - to specify a tie-breaker mechanism to deal with circumstances where two or more cash bids are equal.

An independent expert review and analysis conducted of the Act identified deficiencies in the current model that posed risks to implementation of an effective ‘auction style’ model. The introduction of the abovementioned features into the Act will therefore ensure that the cash bidding model is optimised to ensure the process is as efficient as possible.

 

Item 1: Section 110 (heading)



Item 1 replaces the heading with the new heading ‘Cash-bid petroleum exploration permit - application’.

Item 2: Paragraph 110(1)(a)

 

This item amends the wording of the Gazette notice to clarify that the invitation for applications is for the grant of a permit by way of cash-bidding.  There are two stages to the new granting process - the pre-qualification round and the bidding round. This is the first relevant amendment to allow for a clear delineation between two separate and inherently different processes: pre-qualification (which is an administrative decision by the Joint Authority) and then a purely monetary cash bidding stage.

Item 3: Paragraph 110(3)

 

This item repeals previous paragraph 110(3) to provide notification of the basis for the pre-qualification stage of the application process. The new paragraph requires the Gazette notice, which is published to invite applications by way of cash bidding for the grant of a petroleum exploration permit, to specify the matters that the Joint Authority will take into account in determining the applicant’s eligibility to be invited to submit a cash bid. The purpose of the pre-qualification process is to determine whether the applicant has the technical and financial capacity to viably hold an exploration permit, which is consistent with the Government’s objective to foster exploration and the development of acreage in Commonwealth waters. Cash bidding will be used to allocate offshore petroleum acreage in mature areas and in areas containing known petroleum accumulations.  It is therefore appropriate to confine access to this acreage to applicants who are capable of carrying out further exploration work, so that the blocks may be progressed to the development stage.

Item 4: After subsection 110(3)

 

This item introduces the feature of the reserve price. This element is required as the Government has a responsibility to allocate the acreage efficiently and to demand a fair price for access to a public resource. The reserve price helps ensure that the Government does not sell the resource below its public value. The reserve price will be set by the Joint Authority for each of the areas being released, and will reflect an estimate of the value of the resources available.

 

New subsection 110(3A) requires that the Joint Authority determine a reserve price for the block(s) that constitute the exploration permit. This determination will be recorded in writing.

 

New subsection 110(3B) allows for the discretionary decision by the Joint Authority to publish (disclose) the reserve price by way of inclusion in the Gazette notice inviting applications for the permit. It is not required that the reserve price is disclosed - there is the ability for the Joint Authority to determine a reserve price but not disclose the amount.

 

New subsection 110(3C) is included to assist readers, as such a determination is not a legislative instrument within the meaning of section 5 of the Legislative Instruments Act 2003. It is made for the purposes of a particular administrative process (the granting of a particular permit) and not for a general situation.

 

Items 5 and 6: Subsection 110(6); Sections 111, 112, 112A, 112B

 

These items repeal the existing subsections and sections which contain the existing single-stage process which is being replaced.

 

The new subsections inserted by these items provide for two separate stages -

  1. a pre-qualification assessment resulting in the selection of eligible applicants; and 
  2. invitation extended to eligible applicants with a corresponding receipt of cash bids and the offer of a permit made based on non-discretionary rules (amount of the cash bid, with timing of the bid taken into account in the event of a tie). 

 

New subsection 110(6) provides the parameters for the pre-qualification stage of the application process, by specifying the information about the applicant that is required for the application.  These are in fact the same as for a work-bid exploration permit.  The assessment of this information under new section 111, in accordance with the criteria set out in the Gazette notice under section 10(3)(c), leads to a suitably qualified applicant becoming what is termed an ‘eligible applicant’.

 

Subsection 111(1) requires the Joint Authority to write to every applicant either notifying them that they are an eligible applicant and inviting them to submit a cash bid within a specified time period, or that their application has been rejected (ie that they have failed the pre-qualification stage).

 

Subsection 111(2) sets out the requirements that an eligible applicant must comply with to make a qualifying cash bid.  If a cash bid is not made in accordance with subsection 111(2), the application lapses by virtue of subsection 111(3). A cash bid must set out the amount that the eligible applicant is prepared to pay for the grant of the permit. The notice to the Joint Authority containing the cash bid must be made within the specified time period as stated in the subsection 111(1) invitation, and must be accompanied by a deposit payment of 10% of the cash bid.

 

New section 112 applies only to applicants whose cash bids are less than the reserve price.  Subsection 112(2) provides that, generally, cash bids that are less than the reserve price must be rejected by the Joint Authority.  There is, however, an exception provided in subsection 112(2) where the reserve price was not disclosed in the notice under subsection 110(1) and the applicant’s bid is the only sub-reserve bid or the highest, or equal highest, sub-reserve bid.  These highest sub-reserve bids cannot be rejected until after all bidders equal to or over the reserve decline offers, thereby ensuring that the Joint Authority can still offer the permit to the highest sub-reserve bidder.  Subsection 112(3) applies where the reserve price is not specified in the notice under subsection 110(1) and the only cash bids are less than the reserve.  In this case, the Joint Authority may give an offer document to the highest sub-reserve bidder, stating that the Joint Authority is prepared to grant the permit to the applicant for a price equal to the reserve price.  Tied highest bids are to be resolved on a first-received basis. . Subsection 112(4) requires that the Joint Authority must have regard to the difference between the applicant’s cash bid and the reserve price in making a decision to make a reserve price offer to the higher sub-reserve bidder - in other words if the margin between the reserve price and the cash bid made is considered too great, then a reserve price offer will not be made.

 

Subsection 112(5) provides that, where the Joint Authority rejects a below-reserve cash bid under this section, the 10% deposit is refunded by the Titles Administrator.

 

New sections 112A and 112B outline the methodology for the treatment of the qualifying cash bids that are equal to or higher than the reserve price. As explained above, a qualifying cash bid is a term used to describe a cash bid which is received from an eligible applicant which also meets all the necessary requirements as outlined in section 111.

 

New section 112A contains a table set out under subsection 112A(2) which specifies the treatment of the qualifying cash bids as first received, whereby if:

  • there is a qualifying cash bid that is by itself the highest in value, the Joint Authority offers the permit to that eligible applicant; or
  • there are 2 or more qualifying cash bids which are both the highest and equal in value, the Joint Authority must invite a higher cash bid within a specified period of time from all highest and equal tied applicants.

 

New section 112B deals with the tie-breaker circumstances, where the Joint Authority has given an invitation under section 112A to tied applicants to submit a further, higher cash bid than their original qualifying cash bid.

 

There are 3 possible situations dealt with as follows:

  1. there is a further cash bid that is by itself the highest in value of the tied applicants’ further cash bids, in which case the Joint Authority offers the permit to that applicant; or
  2. another tie occurs, in which case the Joint Authority offers the permit to the tied applicant whose further cash bid is received first in time; or
  3. no further cash bids are submitted, in which case the Joint Authority offers the permit to the applicant whose original qualifying but tied cash bid was received first in time.

 

Item 9: Paragraph 113(1)(c)

 

This item makes an amendment to require that if the balance of the cash bid is paid (together with the other current requirements under this section) then the Joint Authority must grant the permit to the applicant.

 

Item 10: Subsection 113(2)

 

This item specifies that once a permit is granted, all remaining applications are rejected and the deposits held from these applicants are refunded. As the notes describe, in effect this means that it only applies to those applications remaining before the operation of this subsection, in that in some other deposits have already been refunded or forfeited to the Commonwealth by way of operation of other sections.

 

Items 12 and 13: After subsection 255(1) and Subsection 255(2)

 

This item requires both the application and cash bid(s) to be made in an approved manner as specified by NOPTA.

 

Item 14: Paragraphs 259(3)(a) and (b)

 

This item amends section 259 which outlines procedures and requirements relating to offer documents, and to this end requires the cash-bid petroleum exploration permit offer document to specify the permit price, the balance of the permit price payable to the Commonwealth once the deposit already paid is taken into account, and the fact that if the applicant fails to pay the balance to the Commonwealth within the statutory timeframe of 14 days under section 260 - the consequence is that the application lapses and the 10% deposit is forfeited to the Commonwealth. New subsection 259(3)(c) provides an exception to the forfeit of the 10% deposit in relation to offers made under section 112.

 

Permit price is defined in this section as either the cash bid amount as specified by the eligible applicant or, in the case of an offer made under section 112, the reserve price.

 

Item 15: Subsection 260(1)(table item 2)

 

The previous timeframe for acceptance of offer by the applicant has been lowered from 30 days to 14 days. This is a policy decision to reduce timeframes in response to a preference from industry for the ‘auction’ to run as efficiently as possible.  

 

Item 18: After section 260

 

One of the key recommendations of the independent review was, in keeping with the auction model, to deter ‘faux bidding’ by requiring that the ‘winning’ bidder must accept the offer of the permit. The policy response to this recommendation is somewhat more measured and in keeping with similar existing cash-bidding models (special exploration permits and cash-bid production licences) that already exist within the OPGGS Act that use a 10% deposit that may be forfeited under certain circumstances. At the time of submitting a cash bid, it must be accompanied by a deposit of 10% of the amount that the applicant has specified they are prepared to pay for the permit. By operation of new section 260A as inserted by this item, this deposit is non-refundable in the event that an applicant effectively refuses a permit offer, by failing to make a request for the grant of the permit together with paying the amount specified in the offer document as the balance of the amount that the applicant must pay for the permit within 14 days from the time the offer is made by the Joint Authority. This is intended to drive genuine bidding for the permit in that the highest bidder is heavily incentivised to accept the offer of a permit. New subsection 260A(2)(b) provides an exception to the forfeit of the 10% deposit in relation to offers made under section 112 which are subsequently declined.

 

Section 260A goes on to provide for circumstances where the original permit offer is not accepted. In these circumstances, section 112A or 112B (for tied applicants) applies in relation to any remaining qualifying cash bids as if the applicant whose application has lapsed, had never made a cash bid. This cascading down of offers to the highest bidder includes a further offer under section 112 to be made to the highest bidder under the reserve in the event of an undisclosed reserve where the lapsed qualifying cash bid(s) had been above the reserve.

 

This principle and approach includes not only an offer of the permit but also the consequential treatment of deposits of those applicants, in that they too will be forfeited in the event of an offer of the permit made and consequentially declined (except the exception of the offer made under section 112).

 

Items 23-26: Section 695K

 

These items collectively make the necessary amendments to enable money paid into the NOPTA Special Account to be transferred into general Commonwealth Consolidated Revenue Fund as appropriate: forfeited deposits as well as the cash bid amount paid by the applicant who is granted the petroleum exploration permit.