Pause, reset and recommence: Release of the NSW gas plan and exploration for the onshore gas industry in new South Wales - Oil, Gas & Electricity

INTRODUCTION

The NSW Government released its Gas Plan on 13 November 2014.¹ The Gas Plan sets out the strategic framework for the coal seam gas (CSG) industry in New South Wales. Legislative amendments already implemented under the Gas Plan have "reset" the system for issuing petroleum exploration licences (PELs). All outstanding applications have been expunged, whilst further amendments are proposed for the strategic release of land, which are to be implemented before the current moratorium on CSG in NSW is lifted, allowing the application process to "recommence".

OVERVIEW OF THE NSW GAS PLAN

In summary, the "key actions" proposed under the Gas Plan include:

extinguishment of all (16) current PEL applications, return of application fees and one-off "buy back" opportunities for current PEL holders;
introduction of a Strategic Release Framework, to be released on 1 July 2015, whereby future CSG development will be limited to about 15% of the State including a prohibition on PELs in National Parks. Under this Framework, proponents will no longer be responsible for identifying gas exploration opportunities and will need to tender for them;
implementation of a "use it or lose it" policy, whereby titleholders who do not efficiently and actively explore for or produce gas may lose their titles;
appointment of the Environment Protection Authority (EPA) as the lead regulator for gas exploration and production; and
introduction of legislation to ensure landholders affected by exploration and production activities have access to independent advice on compensation rates and to establish a Community Benefits Fund for both government and gas companies to contribute to.

The Gas Plan has already been partially implemented, with the commencement of an initial tranche of legislative amendments, comprising the Petroleum (Onshore) Amendment (NSW Gas Plan) Act 2014 (PO Act Amendment)and State Environmental Planning Policy Amendment (Gas Exploration and Mining) 2014 (SEPP Amendment), on 28 November and 18 December 2014 respectively. These legislative and policy amendments are discussed further below.

The majority of actions proposed under the Gas Plan are due to be implemented this year, with a second tranche of draft legislation yet to be released.

BACKGROUND

Release of the NSW Chief Scientist and Engineer's Final Report

The Gas Plan was heavily informed by an independent review of CSG activities in NSW undertaken by Professor Mary O'Kane, the NSW Chief Scientist and Engineer. Professor O'Kane's final report (Final Report)was released on 30 September 2014.

The Final Report is ultimately supportive of the development of the CSG industry in NSW. It concludes that the technical challenges and risks posed by the CSG industry can be effectively managed, but only within a clear, revised legislative framework, the right engineering solutions and adaptive management through constant monitoring and research. The Final Report makes 16 key recommendations, all of which have been accepted and are supported by the NSW Government.² These include:

designating appropriate areas for CSG extraction;
ensuring there are high standards of engineering and professionalism in CSG companies;
promoting knowledge and information sharing amongst all environmental bodies; and
ensuring general ongoing monitoring and compliance.

Review of CSG activities in NSW

The NSW Chief Scientist and Engineer's independent review forms part of a wider governmental review into CSG activities in NSW, which was announced by the Premier on 19 February 2013.

This wider review resulted in the creation of the Office of Coal Seam Gas within the NSW Department of Trade & Investment, which was tasked with, among other things, reviewing and administering CSG titles and activity approvals granted under the Petroleum (Onshore) Act 1991 (PO Act). At the time of the announcement, PELs had been issued across 45% of the area of the State, although no new PELs had been issued since April 2011.

Moratorium on PEL applications

On 26 March 2014, the NSW Minister for Resources and Energy, Anthony Roberts, announced the implementation of a temporary six-month freeze on PEL applications and Petroleum Special Prospecting Authority (PSPA)³ applications to enable the NSW Office of Coal Seam Gas to complete their review into existing PELs and to provide the NSW Government with the opportunity to develop a new assessment and allocation regime. At the same time, the application fee for new PELs was increased from $1,000 to $50,000.

On 25 September 2014, 5 days before the release of O'Kane's Final Report, the moratorium was extended for another 12 months to September 2015.⁴ The moratorium remains in place notwithstanding the introduction of the Gas Plan.

The moratorium does not apply to existing "Strategic Energy Projects" in Gloucester and Narribri. The operators of these projects (AGL and Santos) have both publicly committed to provide all future gas supply from the projects (if approved) for the benefit of NSW consumers. In return, the Government signed a memorandum of understanding with Santos to streamline the assessment process for the Narrabri Gas Project and renewed AGL's Gloucester PEL and granted an activity approval to fracture stimulate 4 wells.

Various Mining SEPP amendments

Legislative reform has included a range of amendments to the State Environmental Planning Policy (Mining, Petroleum Production and Extractive Industries) 2007 (Mining SEPP), which brought about initiatives such as the Gateway Process, Strategic Agricultural Land mapping, residential CSG exclusion zones and 2km buffers, as well as Critical Industry Clusters in the Upper Hunter, and clarified the State Significant Development criteria for CSG exploration wells. Further changes to the Mining SEPP were also introduced to stipulate criteria to protect water resources, habitat and amenity; in an effort to ensure that decisions around approvals balance economic (resource) and environment issues; and to require the consent authority to consider biodiversity mitigation and offsets.

Strategic Regional Land Use Policy

The Strategic Regional Land Use Policy (SRLUP) was introduced in 2012 to provide greater protection for valuable agricultural land and water resources from the impacts of mining and CSG proposals and to better balance competing land uses.
A new Gateway process was introduced for all State significant mining and CSG proposals on Strategic Agricultural Land. The SRLUP was implemented through development of:

Strategic Regional Land Use Plans for the Upper Hunter and New England North West regions of NSW;
the Aquifer Interference Policy, which requires any mining or petroleum activity using more than 3ML of water per year to hold a water access licence from the NSW Office of Water and has been designed to protect aquifers and groundwater by setting objective criteria to assess the potential impact of all activities, including CSG activities, on valuable water resources; and
two Codes of Practice for CSG relating to Fracture Simulation Activities and Well Integrity, which are currently being reviewed. Codes for Safety Management Systems and Emergency Responses are also being developed; and
consequential amendments to the Mining SEPP, including the implementation of CSG exclusion zones and buffer zones.

More details about the SRLUP are available here.

Land access arrangements

The NSW Government has introduced a number of initiatives relating to land access, designed to provide additional protections for landowners impacted by extractive activities. In August 2014, the Government endorsed all 31 recommendations made by Mr Bret Walker SC following an independent review of the land access arbitration processes relating to mining and petroleum exploration, and committed to implement the recommendations progressively.⁵ A voluntary Code of Practice for Land Access has also been developed by the NSW Division of Resources & Energy.

Commonwealth 'water trigger'

The Commonwealth Government has also introduced legislative changes that impact the NSW CSG industry, in particular the introduction of the 'water trigger' under the Environmental Protection and Biodiversity Conservation Act 1999 (Cth) (EPBC Act), requiring the CSG-related proposals that are likely to impact significant water resources to be referred to the Commonwealth Minister for the Environment for assessment. However, later entry into the Assessment Bilateral Agreement between the Commonwealth and NSW Governments devolved the authority for assessing these impacts from the Commonwealth to the NSW Government, with the Commonwealth accrediting the NSW processes.

Predictions regarding gas shortages in NSW

In the context of the regulatory reforms outlined above, which have placed additional restrictions on CSG development in NSW, there have been several predictions that NSW will face gas shortages as early as 2016.⁶ Concerns have been raised that these shortages could result in job losses and increases in gas prices for consumers, unless either the moratorium on CSG in NSW is lifted or gas supplies can be sourced from alternative locations at reasonable costs.

THE GAS PLAN

The various legislative and policy developments over the past few years have been reactive and piecemeal, resulting in a fragmented regulatory framework for the onshore gas industry. The Gas Plan proposes a "reset" to the approach to onshore gas development in NSW, recognising the need to balance two competing interests:

community concerns regarding CSG developments, particularly health and environmental impacts; and
security for NSW's energy supply needs.

Five "priority pathways" are identified:

Better science and information to deliver world's best practice regulation

The NSW Government aims to implement the NSW Chief Scientist and Engineer's recommendations to create an online data portal allowing comprehensive monitoring, and the application of new technological developments as they become available. The data portal is to be developed using data from the NSW Office of Water's existing network of groundwater and surface water bores. This network is to be expanded to 3,500 bores located across the State.

Pause, reset and recommence: Gas exploration on our terms

A Strategic Release Framework is intended be introduced, which will ensure that the Government's approach to issuing new PELs and titles is more transparent, informed and strategic than past practice.

Under the Strategic Release Framework, the land covered by petroleum titles and applications is to be reduced from 60% to 15% of the State. Community consultation will be conducted up-front and the title area will be put out for public expressions of interest so that the Government can identify the most suitable proponent. This will ensure that PELs will only be issued to those companies with histories of environmental compliance and sufficient financial capacity to undertake exploration activities.

Amendments to the Mining SEPP have extinguished all (16) outstanding PEL applications. Application fees paid by those companies are to be refunded and no new applications will be considered until the Strategic Release Framework is in place. A one-off buy back of PELs will be offered to existing licence holders, to provide an opportunity for PEL holders to surrender their titles in exchange for limited compensation.

Existing PELs will be modified to remove areas that have been granted over National Parks, reducing the total area covered by petroleum titles by about 11%.

Finally, a "use it or lose it" policy is to be introduced, whereby titleholders who do not demonstrate a "serious commitment to invest in the State" by the end of 2015 may face cancellation of their titles. The Gas Plan notes that whilst presently 15% of the State is under active petroleum title, there are currently only 3 active projects in the State – Camden, Gloucester and Narribri.

Strong and certain regulation

It is intended that the EPA will become the lead regulator for compliance and enforcement of conditions of approval for gas activities, including consent conditions and activity approvals. Currently, this is a role of the NSW Department of Resources and Energy, a Division of the Department of Trade & Investment.

In 2015, it is intended that new standard licence conditions will be introduced on Environment Protection Licences (EPLs) issued by the EPA for gas activities. These are intended to be flexible and outcomes-based, in order to achieve and promote world best environmental practice, but also leave space for industry-led innovation.

Projects which demonstrate that they will provide substantive amounts of gas into the NSW market will be designated as Strategic Energy Projects. Such designation will not result in a reduction in community consultation or environmental standards, but will presumably provide security in terms of approval pathways and timelines. Strategic Energy Projects in Gloucester and Narribri, and NSW's sole production project in Camden, will be required to meet new environmental standards.

Sharing the benefits

It is intended that legislation will be introduced to mandate the payment of compensation to landholders affected by petroleum exploration and production and IPART will be commissioned to benchmark compensation rates annually.

A Community Benefits Fund will also be established, with voluntary contributions from both Government and the relevant gas companies. The Government indicates that it will begin consultation on its approach to the Fund shortly.

Securing NSW gas supply needs

The Government considers domestic gas production to be "vital" to securing NSW's gas supply needs. In light of predictions from the Australian Energy Market Operator that NSW could face potential gas shortages in the near future, the Government is exploring options for increasing pipeline capacity with Victoria and South Australia and developing gas pipelines linking with other States, including the Northern Territory.

Gas companies will be required to voluntarily disclose information about their gas supply arrangements to demonstrate how the development of NSW gas reserves will benefit consumers. Projects verified through this process will receive Strategic Energy Project status.

Finally, the Government intends commissioning an independent review of royalties, to provide recommendations to the Government by May 2015 on the settings required to facilitate investment in securing NSW's gas supply needs.

LEGISLATIVE CHANGES

Petroleum (Onshore) Amendment (NSW Gas Plan) Act 2014

The PO Act Amendment commenced on 28 November 2014, two weeks after the release of the Gas Plan. The PO Act Amendment has "reset" the petroleum development landscape by expunging all (16) outstanding PEL applications, to "wipe the slate clean"⁷ in preparation for the introduction of a new, more strategic, approach to the allocation of PELs.

The 16 expunged applications previously covered approximately 43% of the area of the State, including large areas of the Northern Rivers, Riverina District and the Southern Highlands. No compensation was paid to applicants for the voiding of these applications, but application fees were refunded.

State Environmental Planning Policy Amendment (Gas Exploration and Mining) 2014

The SEPP Amendment commenced on 19 December 2014. The SEPP Amendment:

amended the Mining SEPP to remove petroleum exploration activities from being development permissible with development consent, so that these activities are no longer assessed by DPE, but rather by the Minister under Part 5 of the EPA Act. This included removal of the "5 wells rule" (whereby development consent was required for drilling or operating petroleum exploration wells, other than a set of 5 or fewer petroleum wells more than 3km from any other production well in the same petroleum title). Under Part 5, proponents will be required to prepare a Review of Environmental Factors which will be assessed by the Office of Coal Seam Gas. If the Office of Coal Seam Gas considers the proposed activity will have a significant impact on the environment, an Environmental Impact Statement must be prepared. Gas production proposals (as opposed to exploration) will still have to seek approval from DPE as State significant development;
amended the Mining SEPP to require a consent authority to consider the Voluntary Land Acquisition and Mitigation Policy (VLAM Policy) in determining applications for State significant mining, petroleum and extractive industry projects. The VLAM Policy provides guidance on measures to reduce the impact of noise and dust on adjoining properties from proposed new extractive activities, including voluntary negotiations on the acquisition of land, and will apply to new and existing applications; and
amended the State Environmental Planning Policy (State and Regional Development) 2011 (SRD SEPP) to remove references to petroleum exploration, including the 5 wells rule, from specified development in Schedule 1 under petroleum (oil and gas) so that it is no longer considered to be State significant development.

"WHERE TO" FOR THE ONSHORE GAS INDUSTRY IN NSW?

The PO Act and SEPP Amendments represent the first step in implementing the NSW Gas Plan, enabling a "reset" of the approach to issuing PELs in the context of the "pause" provided by the moratorium on PEL applications.

The Government has committed to introducing a second, comprehensive tranche of legislation in 2015 to "recommence" gas exploration in NSW.⁸ This second tranche of legislation is intended to implement a number of other actions set out in the Gas Plan, including:

establishing the EPA's new role;
introducing new landholder compensation requirements;
ensuring that standards and conditions are continually updated and improved; and
equipping regulators with the tools they need to strictly enforce compliance.

The Strategic Release Framework is intended to be released on 1 July 2015.

Assuming all of the actions under the Gas Plan are implemented, this should provide greater security for communities in that there will be:

a substantial reduction in land open to petroleum exploration and the release of additional land will be strategic and controlled; and
greater security of gas supply in NSW and visibility as to the locations from which this gas will be sourced.
Regulatory certainty is also critical for restoring confidence and facilitating investment in the gas industry in NSW in view of our looming gas shortage concerns.

However, at only 15 pages, the Gas Plan falls somewhat short of providing a comprehensive vision for the onshore gas industry in NSW. Until draft legislation is introduced, it is not clear:

how a number of the "actions" under the Gas Plan will be implemented;
how new players will be able to demonstrate the necessary skills and financial backing to participate in the industry;
how the Strategic Release Framework will sit within the existing legislative and policy framework, particularly how it will overlap with the SRLUP;
what the implications of the EPA's new compliance and enforcement powers will mean for the industry and communities and for improving environmental outcomes;
what the implications of the new proposed compensation arrangements will mean for both investors and landholders;
what factors will be taken into consideration in implementing the "use it or lose it" policy;
how the Community Benefits Fund will work and who will have access to this fund;
what additional regulatory requirements and "new environmental standards" will be imposed to ensure protection of health and the environment sufficient to address community concerns; or
whether recommendations of the NSW Chief Scientist and Engineer's Final Report that are not specifically addressed in the Gas Plan, such as the recommendation to move to a single Act for all onshore subsurface materials, will be implemented at all.

Within the next 12 months, existing licence holders can expect the introduction of legislation and/or policies which will prohibit extractive activities taking place in National Parks and require PELs to be acted upon within a certain timeframe or else they may be revoked. Licence holders will have a one-off "buy back" opportunity, whereby PELs may be surrendered in exchange for compensation in an amount yet to be revealed. Additional environmental standards may also be imposed.

Proponents seeking to apply for new PELs will be required to wait until the moratorium is lifted, which is due to occur in September 2015. The Strategic Release Framework should be in place by this time, meaning applicants will no longer be responsible for identifying gas exploration opportunities and will need to tender for them. The "use it or lose it" policy and additional environmental standards will mean successful tenderers will need to have funding and resources in place to move projects forward within short timeframes.

Footnotes

¹Available at: http://www.resourcesandenergy.nsw.gov.au/energy-supply-industry/legislation-and-policy/nsw-gas-plan.

²See Government Response to the Final Report of the Independent Review of Coal Seam Gas Activities in NSW by the NSW Chief Scientist and Engineer, available at: http://www.resourcesandenergy.nsw.gov.au/energy-supply-industry/legislation-and-policy/nsw-gas-plan.

³A PSPA is a desktop or geoscientific review.

⁴The Hon Anthony Roberts MP, "Media Release: Freeze Extended on Petroleum Exploration Licence Applications", 25 September 2014.

⁵ NSW Government, Government response to the review of the arbitration framework under the Mining Act 1992 and the Petroleum (Onshore) Act 1991, August 2014.

⁶See, for example, "Will New South Wales run short of gas by 2016?", ABC Online, 23 April 2014.

⁷The Hon Matthew Mason-Cox (Minister for Fair Trading), Second Reading Speech, Petroleum (Onshore) Amendment (NSW Gas Plan) Bill 2014, 18 November 2014.

⁸ The Hon Matthew Mason-Cox (Minister for Fair Trading), Second Reading Speech, Petroleum (Onshore) Amendment (NSW Gas Plan) Bill 2014, 18 November 2014.

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Australia: Pause, reset and recommence: Release of the NSW gas plan and exploration for the onshore gas industry in new South Wales