New Zealand: Building a regulatory platform for mining

Excitement has been building around New Zealand's mineral endowment since the National Party took office in 2008 and began promoting a pro-development agenda. So much so that the normally buttoned down Ministry of Business, Innovation and Employment is now saying "the size of the prize could be economy-changing (country making)".

The Government's relentless positivity about the sector's potential may be beginning to infect the general public. A recent New Zealand Herald-DigiPoll survey found that 27% of those polled supported increased oil and gas exploration and that a further 40% were cautiously supportive.

But National will not have forgotten the hit it took in its first term when it tried to open more of the conservation estate to mining. It knows that the politics are tricky and that it is up against the considerable campaign skills of the New Zealand environmental movement – and the redoubtable Lucy Lawless.

The stakes are very, very high. Mining is central to the Government's economic growth strategy but the oil spill in the Gulf of Mexico, the Pike River tragedy and the grounding of the Rena have induced a mood of caution in the electorate and underlined the importance of a robust regulatory framework.

The Government's overarching ambitions for the sector are laid out in the New Zealand Energy Strategy 2010 and the Petroleum Action Plan 2009. But building the regulatory platform to achieve these ambitions will require a technical knowledge which only practical experience can provide.

The current statutory matrix – a broad overview

Stock-take

The Government's policy programme

The Crown Minerals Act (CMA) Review

The review proposes a two-tier system which concentrates the regulatory effort where the risks are higher and where there is the greatest opportunity to generate revenue for the Government.

Tier One activities – petroleum (oil and gas), hard rock gold and silver, coal and ironsands, phosphates and sulphides – will be subject to more hands-on and co-ordinated management. This will include:

• a new upfront health, safety and environment (HSE) assessment process (which will sit on top of the existing HSE regime, creating concerns that it might just add another level of regulation and cost without commensurate benefit to New Zealand)
• streamlined reporting requirements (with firm deadlines at the end of each activity phase but no deadlines within the phase)
• a more pro-active monitoring system which is meetings-based rather than relying entirely on documentation and form-filling
• tweaks to both the minerals and petroleum permitting regimes (including regarding timeframes and size), and
• extending the CMA to mining in the Exclusive Economic Zone (EEZ) and continental shelf.

The CMA will also be amended to provide that access arrangements in respect of significant proposals on Crown (Government) land or the common marine and coastal area must be publicly notified and jointly approved by the Minister of Energy and Resources and the land-holding Minister (generally, the Minister of Conservation).

The aim is to have a Bill introduced into the House before the end of this year. The supporting Minerals Programmes and regulations will be developed as the legislation proceeds through Parliament.

Royalties

The royalties system has been reviewed and an announcement is expected before the end of this year. The Minister has described the 7% royalty regime on oil and gas as "about right" but has said that rates applying to other minerals – gold, coal and silver – "need to be shifted around". These are currently 1% to 2% on revenue or 5% of accounting profits, whichever is the greater.

In 2010, the then Ministry of Economic Development proposed amending section 15 of the CMA to require royalty rates to be specified in regulations, rather than in Minerals Programmes. The effect of this change would be to allow rates to be raised without consultation. No reference is made to this proposal in the 2012 Discussion Paper so it will be interesting to see if it makes its way into the Bill.

Tax treatment

The Inland Revenue Department (IRD) is reviewing the tax breaks available through the "specified" minerals provisions in the Income Tax Act, primarily for gold and silver. IRD is expected to publish an Issues Paper any time now.

This is likely to discuss, and call for submissions on, the various tax concessions currently available to the industry, including the ability to deduct expenditure before it is incurred, to carry forward certain losses regardless of ownership continuity, and to treat capital expenditure as if it were revenue expenditure.

It will be interesting to see how the Government's natural inclination to get rid of tax breaks, in a time of fiscal austerity, plays out against its desire to encourage a greater level of mining activity.

Iwi engagement

The CMA regime imposes a fairly broad obligation on the mining industry and the Government to recognise and provide for Maori interests and for the Government to have regard to the principles of the Treaty of Waitangi. Specific options are now being developed in discussions with affected iwi and the Iwi Leaders Group for how iwi and industry can work together.

The High Court considered the Government's current obligations to consult iwi in Greenpeace of New Zealand Inc v The Minister of Energy and Resources1 and concluded that consultation with the iwi claimant was not necessary at the permit granting stage as iwi had been adequately consulted when the relevant Minerals Programme was issued and when the block offer was made.

The decision, which also clarified that the Minister need not have regard to environmental effects when considering a permit application under the CMA and the Minerals Programmes because this function had "by deliberate policy" been entrusted to other authorities, is being appealed.

The Court considered that this "functional separation" between the Minister of Energy's role in developing the Government's mineral endowment and the Government's broader responsibilities to protect the environment was appropriate but acknowledged that the Resource Management Act's lack of jurisdiction in the EEZ meant that there was a hole in the regulatory fabric. That hole will be filled with the passage of the Exclusive Economic Zone and Continental Shelf (Environmental Effects) Bill.

The Exclusive Economic Zone and Continental Shelf (Environmental Effects) Bill

The Bill extends a variant of the Resource Management Act (RMA) to the EEZ and will apply to seismic surveying and cable laying, seabed mining and the construction and installation of oil and gas rigs. It also anticipates possible future uses, including deep sea aquaculture, carbon capture and storage and marine energy generation.

It is the legislative equivalent of Selley's No More Gaps in that it establishes a broad environmental management jurisdiction in the EEZ and Continental Shelf, then excludes those activities (such as fishing and shipping) which are already covered by existing legislation.

Important departures from the RMA model are:

• the decision-maker is the Environmental Protection Agency (EPA) rather than local government (local government's mandate stops at the 12 nautical mile limit)
• the EPA is required only to "take into account" environmental values in its decision-making as opposed to the stronger RMA requirement to "recognise and provide for" these values
• appeal rights are to the High Court rather than to the Environment Court and are limited to points of law rather than the substance of the decision, and
• all marine consents need to be publicly notified. This will have significant cost and process implications compared to the RMA which requires public notification only where the adverse environmental effects of the proposed activity are likely to be "more than minor". Fewer than 5% of applications under the RMA are publicly notified.

The Bill, which went through its third reading on 28 August 2012, had a bumpy ride through the select committee process where it attracted strong criticism from submitters—including from the Parliamentary Commissioner for the Environment who considered that it was too focussed on economic development and not sufficiently protective of the environment.

The committee sought to address these concerns by identifying nine factors which should drive the EPA's decision-making. Several of these reflect environmental or biodiversity values but they also include the economic benefit to New Zealand and the efficient use and development of New Zealand's mineral resource. Given the obvious scope for tension among these competing criteria, there may be significant uncertainty in the first years of the new regime regarding how the EPA will exercise its broad discretion.

The committee was at impasse on most issues, preventing it from making any other significant changes but Environment Minister Amy Adams introduced four substantive amendments through Supplementary Order Paper from the floor of the House.

Two of these strengthened the environmental provisions in the Bill by:

• increasing the maximum penalty for breach of a marine consent from $600,000 to $10 million, and
• importing the RMA concept of sustainable management into the purpose of the Bill.

The other two increased operating and investment certainty for business by:

• clarifying that the transitional period for planned petroleum activities will cover the 2013/14 drilling season, and
• introducing a six-month time limit for the marine consenting process.

The regulations

Given the Bill's imperfections, it is perhaps fortunate that all of the operational and technical detail will be supplied through regulations. These were put out for submission in June and are now being finalised in consultation with directly affected companies.

Activities will be classed as permitted (requiring no consent), discretionary (requiring consent) and prohibited. No activities have been identified for prohibition at this stage.

Proposed permitted activities for oil and gas and seabed mining are still being decided but will include: shallow core and spot sampling, seismic surveying, use of submersible vehicles, rock dredging, submarine cabling and marine scientific research. All other mining-related activities will require a consent.

Phase II Resource Management Act reforms

Phase II of the Government's RMA reforms will include changes to fresh water management, urban planning, infrastructure and to the consideration of sections 6 and 7 in the Act.

Phase I set a nine-month timeframe for consenting projects of national significance. Phase II will set a six-month limit for regionally significant projects, and is expected to make these decisions challengeable only on points of law.

These changes would provide greater certainty of process for mining-related activities, but no greater certainty of outcome. Mining should, however, benefit from amendments to sections 6 and 7 of the Act proposed by a Technical Advisory Group (TAG).

The TAG recommends:

• amending these provisions to more clearly identify those landscapes, areas of indigenous biodiversity, habitats, and historic places which are valued (rather than such an assessment being carried out on a project-by-project basis)
• clarifying through a new definition of "mitigation" that, while consent authorities may require measures to mitigate, avoid or remedy any adverse environmental effects, they may not require "any form of environmental or financial compensation or similar measure". Should any such offers be made voluntarily, they must have "regard" to them
• adding "the significant benefits to be derived from the use and development of natural and physical resources" to the list of principles which RMA decision-makers must recognise and provide for, and
• aligning section 6 with current judicial practice by explicitly recognising the "overall broad judgement" approach to decision-making to achieve sustainable management.

At the time of writing, the Government had yet to respond to the recommendations.

The Emissions Trading Scheme (ETS)

The Climate Change Response (Emissions Trading and Other Matters) Amendment Bill, now before the House, further softens the scheme's implementation to avoid imposing increased costs on business in the current difficult economic environment.

The legislation does not specify a phase-out date for the transitional arrangements, the 'one for two' surrender obligation and the fixed price option, meaning that they will remain in place until at least the next ETS review in 2015.

Continued unlimited access to international units and plans to increase the domestic supply via the auctioning of NZUs should ensure that businesses can still acquire relatively cheap carbon credits.

On the negative side, the status quo is, in effect, maintained regarding the treatment of liquid fossil fuels and fugitive emissions for mining companies. This means that exported product from mining (e.g. coal, gold) will include emissions costs with no ability to access free allocation of units.

Other changes which will affect the mining and energy sectors include:

• extending the "opt-in" provisions for liquid fossil fuels to all obligation liquid fuels (instead of just jet fuels) to allow large purchasers of fuel to take responsibility themselves for the emissions from the fuel they purchase, rather than having that cost built into the price they pay the fuel supplier
• updating global warming potential (GWP) values, including increasing the GWP of methane (and therefore increasing surrender obligations for underground coal miners), and
• placing an ETS obligation on the combustion of crude oil or oil products by a miner.

The Bill will need to be passed by the end of this year to prevent the transition measures from lapsing. There will be the opportunity to make submissions in the normal select committee process.

Also on the Government's agenda

Other work streams either in progress or signalled include:

• legislation, now before the select committee, to replace and modernise the intent of the Historic Places Act. The Heritage New Zealand Pouhere Taonga Bill seeks to improve the regulatory framework for archaeological heritage and to better calibrate the balance between heritage interests, private ownership interests and economic development objectives
• a review of the health and safety regulations applying to well-drilling operations (on shore and deep sea) and of the safety case regime for offshore installations, and
• the Ministry of Transport's proposed review of minimum insurance requirements for offshore oil rigs in the territorial sea and EEZ.

Other developments

Fracking investigation

The Parliamentary Commissioner for the Environment is expected to present her report in November. Consistent with her role as an independent Officer of Parliament, she will report to Parliament rather than to the Executive.

She may recommend preventative measures or remedial action should she be persuaded that fracking presents risks which are not adequately provided for under the current regulatory framework. The Government can accept or reject her recommendations.

Her findings will be important – whether acted on by the Government or not – because a number of local authorities are looking to the Commissioner for guidance in relation to their own fracking policies.

A positive report, or even a neutral one, will assist the industry's efforts to promote science over sentiment on this issue. A negative report, however, will give momentum to the Greens' campaign, which is currently benefitting from a sympathetic media.

The Sunday Star Times, for example, in a story on 22 July about the Greens' call for a national moratorium reported that fracking was "being banned around the world" but failed to reference research by the Royal Society and the Royal Academy of Engineering, released two days earlier, that fracking can be managed effectively in the UK with "very low" risk of groundwater contamination or increased seismicity—provided operational best practice is enforced through regulation.

Investigation into commercial use of the conservation estate

The Commissioner is also investigating the conditions on the use of public conservation land by commercial operators, including mining companies. She has consistently stated that mining companies are paying too little for access to the conservation estate—a view the industry disputes. Her findings are due before the end of this year.

A tougher overseas investment regime

Although a bid by Chinese investors to buy 16 New Zealand dairy farms (known as the Crafar farms) was approved by the Government, the outcome of a legal challenge by a New Zealand rival bidder to the consenting process is that foreigners now face a more rigorous test when seeking to buy sensitive land in New Zealand.

Previously Ministers and the Overseas Investment Office had applied a 'before and after' assessment to the "substantial and identifiable" benefits to New Zealand which the overseas buyer must establish will result from the purchase.

However the Court has now confirmed that this may not be enough. Instead, the applicant needs to be able to demonstrate that the benefits conferred would not arise in the absence of the overseas investment—i.e. a "with or without" test.

Once satisfied that the statutory tests have been met, including the good character requirement, and that the necessary incremental benefits will result, the Ministers must approve the transaction.

A win for mining in the Buller Coal case

The High Court has upheld an Environment Court ruling that the climate change impacts from burning coal are outside the ambit of the RMA consenting process and therefore should not be taken into account by RMA decision-makers when considering an application for land use consents for mining.

Buller Coal and Solid Energy, both of which have applications in train for proposed coal mines on the West Coast, had sought the Environment Court declaration after West Coast ENT and Forest & Bird appealed a consent granted to Buller Coal by the Buller District and West Coast Regional Councils.

Forest & Bird and West Coast ENT then took their appeal to the High Court.

The High Court agreed with the Environment Court that the "unambiguous policy" behind the 2004 RMA Amendments was to secure coherent regulation by specifically removing the power from regional councils to consider the effects on climate change of greenhouse gas emissions, except in accordance with a national environmental standard established by central government.

Both Courts considered that the intended division of responsibility was that regional government deal with the consequential effects of climate change (such as a potential increase in flood risk or sea level rise) but not the causative effects of particular activities on climate change, which are matters for national policy.

Pike River Royal Commission

The Commission is due to report by March next year. Its terms of reference are wide-ranging and include mine safety and regulation. The establishment of the High Hazards Unit within the Department of Labour has addressed some of the organisational issues arising from the tragedy but the Commission may consider that legislation is needed to reinforce the inspectorate's functions.

Block offer tender process

The transfer to a "block offer" annual competitive tender process to allocate oil and gas exploration permits will enable the Government to take more control over when and where areas are opened up for prospecting and will provide more certainty for industry. The initial offering (of 23 blocks) was opened for bidding in June and will close in October. Permits are expected to be awarded before the end of this year.

Nominations have now also opened for next year's block offer. Proposals for exploration areas to be included in the 2013 tender are due by 21 September.

Evaluation criteria include an obligation to engage with iwi both for oil and gas exploration permits and, for successful applicants, during the exploration process.

Northland minerals tender

On completion of an aeromagnetic survey of Northland for minerals prospectivity, a competitive tender was opened to explore for metallic Crown (Government)-owned minerals. Bids close on 7 December, with permits due to be awarded in early April 2013.

Footnote

¹ [2012] NZHC 1422

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.