Coal seam gas: Queensland’s legal landscape

In 2004, Queensland overhauled the legislative regime regulating the exploration and production of petroleum by introducing the new Petroleum and Gas (Production and Safety) Act 2004 (P&G Act).

The industry welcomed the long overdue introduction of the P&G Act, which, unlike the Petroleum Act 1923 (1923 Act), recognises that the rapidly expanding coal seam gas industry straddles both coal and petroleum tenures.

Production water

Prior to coal seam gas being extracted from within the coal seam, water must first be removed in order to reduce the pressure and allow the gas to be pumped to the surface – known as “˜dewatering’. During dewatering, anywhere between 80,000 and 470,000 litres of water per day can be removed.

Under the P&G Act this water is known as “˜associated water’ and can either be used by the tenure holder or on-supplied. The on-supply of associated water is governed by the P&G Act, the Environmental Protection Act 1994 (EP Act) and the Water Act 2000.

These three Acts have several implications for tenure holders. For example, the P&G Act allows the on-supply of the associated water to the owner of the land on which the tenure is situated, but it can only be used for stock or domestic purposes.

Under the Environmental Protection Act, associated water is considered regulated waste. Therefore, before any storage, treatment, processing or disposal of this regulated waste, the user must obtain an environmental authority. This Act allows extraction of water only in relation to the authorised activity for the tenure.

Furthermore, the Water Act allows on-supply only after applying for a water licence but the tenure holder cannot charge for the on-supply of this water, unless the receiver is a registered water service provider. The Water Act also imposes “˜make good’ obligations upon tenure holders to restore water supplies to the owner of a bore or compensate the owner of the bore for the effects of the dewatering process. A bore is affected if its level drops due to the petroleum tenure holder exercising its rights.

Coordination arrangements

To ensure that both coal mining and petroleum leases coexist and production of coal, oil shale and petroleum resources continues, both the P&G Act and the Mineral Resources Act 1989 allow for six types of coordination arrangements between coal producers and petroleum tenure holders. However, to date, only three coordination arrangements have been approved by the Minister.

The Department of Natural Resources, Mines and Water provides guidelines to assist in the negotiation of coordination arrangements. However, it is commercial and technical factors that are the key to negotiating a coordination arrangement.

Factors to be considered include:

* Which seam is to be targeted for each party?
* Will it be open or underground mining?
* When are the resources being extracted?
* Which tenure holder was first in time?
* What are the safety issues? Who is responsible for compensation and rehabilitation?
* Is it commercially and technically feasible for the parties to have co-ordinated production?

Landowner compensation

Due to the growth in Queensland’s coal seam gas industry, petroleum tenures increasingly overlap private land, which has in turn seen a natural increase in the number of compensable events. To account for this, the P&G Act introduced new landowner compensation provisions which were brought in line with provisions contained in the Mineral Resources Act.

Importantly, the new legislation allows for payment of compensation for injurious affection. Injurious affection is when land is not directly affected by the impact of petroleum activities but is still affected in a more secondary way, for example a pipeline now separates stock from a dam, requiring a new dam or alternative watering for the stock. So, petroleum producers prefer compensation to be determined under the 1923 Act whilst landowners prefer compensation to be determined under the new P&G Act. The Land and Resources Tribunal has ruled that if an application for compensation was made prior to the introduction of the P&G Act in 2004, then it will be determined under the 1923 Act; that is, before 31 December 2004.

There have not been enough cases under the Act’s compensation regime to give much guidance. However, it can be gleaned from compensation given under the Mineral Resources Act 1989 that a landowner’s valuation and legal costs are not recoverable. Further, the Land Resources Tribunal has decided that compensation will be calculated on separate heads and then added up, rather than being given one collective approach to a sum. In other words, the landowner must specifically address each head of compensation and how much is being claimed under each one.

Relinquishment conditions

Under the 1923 Act, certain relinquishment conditions were placed upon an “˜authority to prospect’ (ATP) holder, requiring blocks to be given up at certain times. However, an ATP holder could apply to the Minister to vary the terms and waive this relinquishment condition. The current regime does not allow for the Minister to change relinquishment conditions and imposes that a holder must relinquish at least 20 per cent of the total number of original blocks granted and after the first year must relinquish 8.33 per cent per year of the total number of original blocks granted under the ATP.

The idea is that land will be available for exploration by other explorers and developers. This means that an entire ATP must be relinquished within 12 years. However, an ATP holder may wish, at the end of its 12 years, to undertake more detailed testing prior to applying for a petroleum lease. In this case, an ATP holder may apply for and declare an area as a potential commercial area (PCA), which has the effect of allowing the ATP to continue. There is no relinquishment requirement under a PCA for up to 15 years but the holder of a PCA has greater obligations, including reporting the commercial viability of the tenement to the Minister.

It is important to note that 1923 Act ATPs cannot be converted to PCAs and must be converted to an ATP under the P&G Act prior to doing so. Prior to converting a 1923 Act to an ATP under the Act, Native Title must be addressed. In addition, a PCA declaration is only at the discretion of the Minister and only if the Minister considers that the petroleum tenure will become commercially viable in the next 15 years.

Conclusion

The rapid growth of the CSG industry created an unforeseen legal issue for a resource that straddles both coal and petroleum tenures. The Queensland Government has responded by introducing the much needed P&G Act. In the brief period since the introduction of the Act several issues have arisen that are unique to CSG, those of what to do with production water, how to coordinate dealings between CSG producers and coal miners, the amounts of compensation payable to land owners and the need to relinquish tenures to allow further development in Queensland. It is vital that CSG participants make themselves aware of these and other requirements of Queensland resources law so that the industry continues the strong growth that has been seen to date.

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