On 29 October 2012 the Petroleum (Onshore) Amendment (Royalties and Penalties) Act 2012 (Amendment Act) was assented to and amends the Petroleum (Onshore) Act 1991 (NSW) and the Mining Act 1992 (NSW).
Background
To encourage initial investment in the petroleum industry, the Petroleum (Onshore) Act and ancillary regulations established a royalty holiday for production companies followed by an introductory sliding scale of royalty payments. This meant that petroleum producers did not have to pay a royalty on petroleum for the first five years of production.
Over the next five years, the royalty amount would increase incrementally by 1% per year from a base of 6% in the sixth year after commencement of production, up to 10% of the value of the petroleum produced in the 10th year after production.
Removal of royalty holiday
The Amendment Act now removes this royalty holiday so that royalty payments will commence when petroleum production starts at a flat rate of royalty of 10% of the value at the well-head of petroleum. This will apply to all current and future production leases from 1 January 2013.
The NSW Government has noted that given current estimates of potential NSW coal seam gas resources are larger than the existing total natural gas reserves for Australia, there is a massive potential for coal seam gas production revenue in NSW to exceed A$1 billion annually by 2025 and in such circumstances, a royalty holiday is no longer necessary or appropriate.
The NSW Government has also stated that such increased royalty revenue will support the establishment of regional community funds to channel royalties from coal seam gas production into projects to benefit local communities. The revenue will also go towards funding an enhanced enforcement and compliance framework under the Petroleum (Onshore) Act and the Mining Act, particularly in respect of environmental management.
Increased penalties
This enhanced enforcement and compliance framework is supported by substantially increased penalties for certain offences under both the Petroleum (Onshore) Act and the Mining Act. The Amendment Act significantly increases the maximum penalty for several offences such as mining without an authority, failure to comply with a direction and a breach of a condition. The maximum penalties for these offences have mostly increased to A$1.1 million for a corporation or A$220,000 for individuals.
This represents a substantial increase to earlier penalties which were not considered to be an effective deterrent to non-compliance.
Valuation of production
Importantly, the Amendment Act also removes the ability for petroleum title holders to make agreements with the Minister as to the value of the petroleum produced at the well-head which will be the base for the royalty calculation. Now, such value must be determined by the Minister in all cases. This is consistent with the approach taken with respect to coal under the Mining Act.
Jurisdiction of Land and Environment Court vs Local Court
The Amendment Act also confers jurisdiction on the Land and Environment Court to hear proceedings under the Petroleum (Onshore) Act and establishes a maximum penalty limit for offences that can be dealt with by the Local Court. These changes are designed to expedite any offences under the Petroleum (Onshore) Act and make it consistent with the approach taken under the Mining Act.
Conclusion
The Amendment Act represents yet another example of governments looking to take advantage of the growing size and number of energy and resources projects, increase regulatory oversight, and spread the benefits throughout the community. Explorers and producers should increase their emphasis on compliance with these amendments.
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