New rules for the apportionment of petroleum recovered from pools straddling Commonwealth and State

Key takeaways

• Schedule 1 of the Offshore Petroleum and Greenhouse Gas Storage Amendment (Petroleum Pools and Other Measures) Act 2017 (Cth) (Petroleum Pools Act) commenced on 23 February 2017.
• The Petroleum Pools Act amends section 54 of the OPGGS Act so as to allow an Apportionment Agreement to remain valid if it relates to an area which contains multiple petroleum pools and to allow an Apportionment Agreement to be made under that section in respect of part of the seabed that contains a common petroleum pool but where connectivity between the relevant jurisdictions is not confined to that pool.
• The purpose of those amendments is to improve the functionality of section 54 of the OPGGS Act so that an Apportionment Agreement can be entered into under that section early in a project’s life, even though information regarding the geological formation in which petroleum is located is not fully known. It is also envisaged that the amendments will allow titleholders and governments to choose appropriate apportionment mechanisms with boundary changes identified in the next few years.⁴

Ongoing validity of Apportionment

Introduction

Schedule 1 of the Offshore Petroleum and Greenhouse Gas Storage Amendment (Petroleum Pools and Other Measures) Act 2017 (Cth) (Petroleum Pools Act) commenced on 23 February 2017. It amended section 54 of the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (OPGGS Act) and made consequential amendments to the Petroleum Resource Rent Tax Assessment Act 1987 (Cth) (PRRT Act).

Section 54(1) of the OPGGS Act sets out how petroleum recovered from a pool that is within the area of both a Commonwealth petroleum title and a State or Northern Territory petroleum title held by the same titleholder will be apportioned. The apportionment is to be either agreed between the titleholder, the Joint Authority and the responsible State or Territory Minister (such an agreement being an Apportionment Agreement) or, in the absence of such an agreement, to be determined by the Federal Court or the relevant Supreme Court on the application of one of those parties. The apportionment agreed or determined is required to reflect a good faith best estimate of the recoverable petroleum in place, made having regard to information that provides a rational basis for that estimate.¹

Purpose

One of the purposes for entering into an Apportionment Agreement is to give a titleholder certainty as to its future liability for petroleum resource rent tax and State or Territory royalties, which can be important in making a final investment decision. It must be noted, though, that an Apportionment Agreement entered into pursuant to section 54 of the OPGGS Act (including pursuant to the new provisions inserted by the Petroleum Pools Act) must not apportion petroleum recovered between the jurisdictions in a manner that cannot be justified.²

Issues

An issue identified with section 54(1) of the OPGGS Act was that it only permits an Apportionment Agreement to be made in respect of a discrete petroleum pool, rather than multiple pools. An Apportionment Agreement is usually entered into early in the life of a project when the technical knowledge of a petroleum pool is not fully developed. If what was thought to be a single petroleum pool at the time that an Apportionment Agreement was made is, in fact, multiple petroleum pools, then the Apportionment Agreement would be invalid.³

Amendments

The Petroleum Pools Act amends section 54 of the OPGGS Act so as to allow an Apportionment Agreement to remain valid if it relates to an area which contains multiple petroleum pools and to allow an Apportionment Agreement to be made under that section in respect of part of the seabed that contains a common petroleum pool but where connectivity between the relevant jurisdictions is not confined to that pool.

The purpose of those amendments is to improve the functionality of section 54 of the OPGGS Act so that an Apportionment Agreement can be entered into under that section early in a project’s life, even though information regarding the geological formation in which petroleum is located is not fully known. It is also envisaged that the amendments will allow titleholders and governments to choose appropriate apportionment mechanisms with boundary changes identified in the next few years.⁴

Ongoing validity of Apportionment Agreements

Schedule 1 of the Petroleum Pools Act inserts sections 54(1A) to (1D) into the OPGGS Act, the purpose of which is to ensure the ongoing validity of an Apportionment Agreement which covers an area containing multiple petroleum pools. In order for such an Apportionment Agreement to be validated under those sections, the following criteria must be satisfied:

1. the Apportionment Agreement must:
   • set out the areal and vertical extents of the petroleum pool to which it applies (the relevant pool); and
   • contain a provision (the apportionment provision) that provides, for the purpose of section 54 of the OPGGS Act, a specified proportion of the petroleum recovered from the relevant pool that will be taken to be recovered from the area of the relevant Commonwealth petroleum title (the specified proportion);
2. assuming that petroleum was recovered from the area of the seabed within the areal and vertical extents of the relevant pool, the specified proportion must be consistent with the proportion of petroleum that may reasonably be treated as being derived from the Commonwealth petroleum title area, having regard to the nature and probable extent of the petroleum in that part of the seabed. The reasonableness of the specified proportion is to be determined on the basis of information known at the time of the commencement of the apportionment provision;⁵
3. the Apportionment Agreement must contain a provision to the effect that, if it becomes apparent that the areal and vertical extents of the relevant pool (as specified in the agreement) comprise or are likely to comprise more than one petroleum pool, the apportionment set out in the apportionment provision will apply to petroleum recovered from any or all of those pools;
4. after the time of making the Apportionment Agreement, it must become apparent that the areal and vertical extents of the relevant pool (as specified in the agreement) comprise or are likely to comprise two or more petroleum pools. The location of such pools is immaterial provided that they are within the extents of the relevant pool specified in the agreement, which means the pools are not required to straddle the jurisdictional boundary;⁶ and
5. petroleum must be recovered from any of the pools through a well or wells located in the relevant Commonwealth petroleum title area and/ or the relevant State or Territory petroleum tile area.

If the above criteria are satisfied, section 54(1) of the OPGGS Act will not apply and, for the purposes of the OPGGS Act, a titleholder will be taken to have recovered the specified proportion from the relevant Commonwealth petroleum title area.

Apportionment Agreement for a specified part of the seabed

Schedule 1 of the Petroleum Pools Act also inserts sections 54(1E) to (1G) into the OPGGS Act, which allow a titleholder to enter into an Apportionment Agreement where there is a petroleum pool straddling the boundary of Commonwealth and State or Territory waters but either the boundary of the pool is not yet known or circumstances indicate that there is a broader area of the petroleum titles on either, or both, sides of the jurisdictional boundary between which petroleum has the potential to move.⁷

Section 54(1E) of the OPGGS Act sets out a number of requirements which need to be satisfied in order for a titleholder to have the benefit of an Apportionment Agreement made pursuant to that section. Those requirements contain similar considerations to the criteria under section 54(1A) of the OPGGS Act. The following, however, are the key differences:

1. the Apportionment Agreement must be made after 23 February 2017 and must specify part of the seabed (and not the relevant petroleum pool) by reference to its areal and vertical extents (the specified part);
2. the specified part must cover the whole or part of the area of the relevant Commonwealth petroleum title and the whole or part of the area of the relevant State or Territory petroleum title, and include the relevant petroleum pool; and
3. the apportionment provision must specify that a proportion of the petroleum recovered from the specified part will be taken to be recovered from the area of the relevant Commonwealth petroleum title.

If the requirements in section 54(1E) are satisfied, then, for the purposes of the OPGGS Act, a titleholder will be taken to have recovered the proportion of petroleum specified in the apportionment provision from the relevant Commonwealth petroleum title area and section 54(1) of the OPGGS Act will not apply to a petroleum pool located in the specified part.

PRRT Act amendments

Schedule 1 of the Petroleum Pools Act also amends section 3 of the PRRT Act to give effect to the apportionment pursuant to section 54(1E) of the OPGGS Act. Section 3(2) of the PRRT Act now provides that where petroleum is taken by section 54(1E) of the OPGGS Act to have been recovered from a particular area of the seabed or from particular areas of the seabed in particular proportions, the petroleum is taken for the purposes of the PRRT Act to have been recovered from that area or from those areas in those proportions (as the case may be).

---

¹Explanatory Memorandum, Offshore Petroleum and Greenhouse Gas Storage Amendment (Petroleum Pools and Other Measures) Bill 2016 (Cth), 5; see also OPGGS Act, s 54(1)(c).

²Explanatory Memorandum, Offshore Petroleum and Greenhouse Gas Storage Amendment (Petroleum Pools and Other Measures) Bill 2016 (Cth), 5 – 6, 8 and 9.

³Ibid, 1 and 6.

⁴Ibid, 7.

⁵OPGGS Act, s 54(1C).

⁶OPGGS Act, s 54(1D); see also Explanatory Memorandum, Offshore Petroleum and Greenhouse Gas Storage Amendment (Petroleum Pools and Other Measures) Bill 2016 (Cth), 9.

⁷Explanatory Memorandum, Offshore Petroleum and Greenhouse Gas Storage Amendment (Petroleum Pools and Other Measures) Bill 2016 (Cth), 9.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).