Oil & Gas State Agreements

Oil & Gas State Agreements





Gary Borgan

with assistance from Rupert Baker

Overview

• Introduction

• Use of State Agreements in the oil and gas sector

• Use of State Agreements to deliver State policy drivers

– Domestic Gas Reservation

– Infrastructure Sharing

– Local Content

• Use of State Agreements where legislation is deficient -

Carbon Capture & Storage

• What benefits can a proponent expect from an oil and gas

State Agreement?

• Final word – the future of oil and gas State Agreements

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Use of State Agreements

• Oil & Gas State Agreements are uncommon

– Kwinana Oil Refinery: Oil Refinery (Kwinana) Agreement Act 1952

– North West Shelf Project: North West Shelf Development (Woodside)

Agreement Act 1979

– Gorgon Project: Barrow Island Act 2003

– Goldfields Gas Pipeline (Energy State Agreement)

• Is a State Agreement always used?

– Domestic gas facilities vs export LNG facilities

– Why the inconsistency?

• No WA State Agreement if gas doesn’t come ashore WA

– Floating LNG

– piping gas to the Northern Territory







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Domestic Gas Reservation

• WA policy: to secure domestic gas commitments up to the

equivalent of 15% of LNG production from each export gas

project

• Why?

– WA’s energy dependent economy (gas provides 55-60% of WA’s energy

requirements compared to a level of 20-25% in Australia as a whole. WA

is responsible for 40% of Australia’s gas consumption)

– increased overseas demand for WA gas

– security of supply and price – protection against long-term and high-

volume export LNG contracts tying up reserves

• Domestic gas reservations in State Agreements

– NWS/Gorgon

– State Agreements are not necessary to implement policy



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Domestic Gas Reservation

• Quantity reserved

– State Agreements expected to move away from reserving fixed quantities

to imposing a percentage based reservation

• Obligation to supply subject to a “Commercially Viable” test

– Means that a domestic gas reservation may never be called upon

– Gorgon: "Commercially Viable", in relation to a Domgas Project means

that a Domgas Project could be established in conjunction with an LNG or

other gas processing facility … such that the commercial rates of return

(including recovery of all capital and operating costs, taxes, royalties and

other charges associated with the delivery of domestic gas) meet or

exceed the minimum return considered acceptable for this type of project

by a reasonable petroleum developer or by investors or lenders to this

type of project.

– Gorgon State Agreement contains controls against the Gorgon JV

declaring that domestic gas isn’t commercially viable

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Domestic Gas Reservation

• Timing of domestic supply

– State desire = commence when LNG first lifted

– Importance of this point is dependent upon the market at the time

(e.g. whether State has a projected undersupply or oversupply)





• Flexibility in meeting obligations

– Alternatives to delivering through the facilities that are the subject

of the State Agreement

– Benefit to remote projects

– Drafting - ensure flexibility both in the drafting of the obligation and

in the manner in which the domestic gas obligation may be varied

in the future



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Infrastructure Sharing

• Types of Sharing

– Capacity access regimes – e.g. Goldfields Gas Pipeline being

subject to the ERA’s Access Agreement

– Access to specific infrastructure – e.g. ports

– Tolling gas through facilities

– Multi-user sites/precincts

• State focus on infrastructure sharing

• Industry interest in infrastructure sharing









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Infrastructure Sharing

• Tolling

– Gorgon example specific to a Class A Reserve but may be

reflective of current thinking

– “the Joint Venturers shall, if so requested by the Minister or by

another existing or prospective occupant of Barrow Island, enter

into negotiations for the sharing or supply, in both cases on

reasonable commercial terms and subject to there being spare

capacity available, of the Joint Venturers’ services, facilities and

infrastructure on Barrow Island”

– Third party rights

– Right to negotiate only









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Infrastructure Sharing

• Multi-user precincts

– A foundation project can manage risks associated with the

construction and operation of incoming projects if the incoming

project requires land or permissions from the foundation proponent

– This is not necessarily the case in State created multi-user

precincts where the introduction of an additional project may be

outside the control of the foundation proponent

– Infrastructure sharing as a strategy to engage the incoming project

in order to settle liability regimes between the projects?

– Could controls on the incoming project be included in a State

Agreement?







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Local Content

• A recently controversial issue attracting an

opposition Bill (Skilled Local Jobs Bill 2011)

• Focus on LNG Plants (40-50% local content rates)

• Gorgon State Agreement example:

– labour - “except in those cases where the Joint Venturers can

demonstrate it is not reasonable and economically practicable so

to do”

– “as far as it is reasonable and economically practicable so to do” -

use of engineers surveyors architects and other professional

consultants experts and specialists, project managers,

manufacturers, suppliers and contractors





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Local Content

– “except where it is impracticable so to do, use or be based upon

Australian Standards and Codes”

– “suitably qualified Western Australian and Australian suppliers

manufacturers and contractors are given fair and reasonable

opportunity to tender or quote”

– “give proper consideration and where possible

preference”…“where price quality delivery and service are equal to

or better than that obtainable elsewhere” – suppliers,

manufacturers and contractors

– “give proper consideration and where possible preference to

tenders arrangements or proposals that include Australian

participation where price, quality, delivery and service are

otherwise equal or better”





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Local Content

– contracts with third party suppliers to contain same obligations

– reporting obligations to Minister regarding compliance and reasons for

obtaining content from outside Australia

• Wording cannot go much further without imposing

firm quotas

• Issue is likely to be around monitoring and

enforcement rather than imposing obligations that

are additional to those seen above









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Carbon Capture & Storage

• Capturing and storage of reservoir carbon dioxide

• Alternative is to vent – storage assists emissions targets

• Use in connection with fields with high carbon dioxide content (e.g.

Gorgon)

• Barrow Island Act provided a legislative basis for the Gorgon CCS

proposal

– Australia’s first, and still WA’s only, legislative basis for CCS

– amendment to Petroleum Pipelines Act 1969

– requirement on proponent to include a CCS proposal in project

proposals

– Minister may impose conditions

– Left a lot to be determined e.g. indemnity for long-term liability





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Benefit to Producer?

• Are benefits during approvals worth the obligations thereafter?

– Trend = fewer concessions received by proponents (stamp duty, rating, no

resumption)

– Trend = increased obligations and regulation on proponents

• Possible benefits

– Approvals ‘One Stop Shop’ (though consider native title and environmental

protection) – is this any better than the co-ordination role the DSD offers

for large projects?

– Certainty – e.g. tenure

– ‘Protect’ matters that are important - e.g. Gorgon expressly protecting the

right to store carbon dioxide

– Potential ‘insulation’ against later more onerous government policy - e.g.

Gorgon regarding domestic gas reservation

– Comfort ahead of FEED and LNG marketing

– Infrastructure for remote projects

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Final word

• Future of oil and gas State Agreements









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