New Zealand's oil and gas industry continues to go through a period of transition, with changes made to the Crown Minerals Act 1991 (Act) in 2021 and proposed further amendments to the Act currently going through the select committee process. In this update we drill down into some of the regulatory details worth considering for parties applying for exploration permits or with existing permits (noting we think some of these same policy considerations underpinning the Act changes will apply also to the New Zealand Government's proposed statutory regime for offshore renewables).
Block Offer 2020
Block Offer 2020 (consulted on in 2020 and named so accordingly) officially opened on 28 March 2023. It invites tenders from applicants for petroleum exploration permits granted by the New Zealand Government in respect of a 1,565.5 km2 area in the onshore Taranaki region.
This is the third and final block offer which the Government committed to in 2018. The Government has since stated that it will not make any decision in relation to the offer of any further blocks until after the 2023 election, so Block Offer 2020 may well be the last.
The tender period closes at 5pm (New Zealand Standard Time) on 26 July 2023. Permits granted will be governed by the Act.
Act changes and implications
When considering whether to apply for a permit, note that the Act was amended in late 2021 to (among other things):
Introduce an express statutory obligation on all current and future petroleum permit and licence holders to carry out decommissioning activities.
Hold permit and licence holders liable for decommissioning costs even if they have transferred the permit or licence to another party if the new holder fails to carry out decommissioning.
Give the Minister the power to impose or vary conditions of a permit or licence in relation to decommissioning, at the grant of the permit or licence or when giving consent to a permit or licence transfer.
Empower the Minister to carry out more effective monitoring of a permit or licence holder’s financial position and plans for field development.
Require permit and licence holders to hold and maintain financial security in respect of their obligations.
Introduce civil pecuniary penalties (up to $500,000 for an individual or $10 million for a body corporate) and criminal penalties (imprisonment for a term not exceeding two years or a fine not exceeding $1 million for individuals or the greater of a fine not exceeding $10 million or a fine not exceeding three times the cost of decommissioning for a body corporate).
We do not expect these Act changes to affect interest in new permits and the increased scarcity of new permits may assist in this regard.
However, we shared our musings on the above Act changes when they were first proposed – see here. Our views remain the same, which we reiterate (with some updates) below:
A transferee (or purchaser) of permits and licences will have to factor in and provide upfront security for decommissioning costs. Notably, existing financial security provided by the transferor (or vendor) may not be sufficient to meet the Minister's requirements.
Directors of a transferor have personal criminal liability (to the level noted above) if they are a director of a body corporate at the time when the body corporate breaches decommission obligations, if the body corporate or director did not take all reasonable steps to meet the decommissioning obligations (unless the director could not reasonably have been expected to take such steps).
Parties should work closely with New Zealand Petroleum and Minerals on understanding and quantifying likely decommissioning costs.
These Act changes are consistent with the approach to decommissioning liability in other jurisdictions including Australia, where permit holders (and related bodies corporate or persons) are subject to "trailing liability" for decommissioning. For example, in Australia (and as a last resort), remediation directions are able to be issued to previous permit holders (and related bodies corporate or persons) where the current permit holder has failed to decommission, or decommissioning issues are identified.
We suspect that some of the learnings in relation to accountabilities for decommissioning will be brought across to the New Zealand Government's proposed statutory regime for offshore renewables. Topic for another Energy Blog post in the future. See here for our last post on offshore renewables in New Zealand.
More Act changes in the wind
Ministerial consent is required before a permit can be transferred. Relevant considerations include that the transferee:
Has the financial capability to meet its obligations under the permit (including decommissioning).
Is highly likely to comply with, and give proper effect to, the work programme for the permit.
Is highly likely to comply with the relevant obligations under the Act or the regulations in respect of reporting and the payment of fees and royalties.
Has the capability to meet applicable health and safety requirements.
However, the Crown Minerals Amendment Bill currently in progress at the select committee stage (consultation ended on 23 January 2023) would add to these requirements by requiring the Minister to be satisfied that the transferee is highly likely to satisfy their decommissioning and post-decommissioning obligations under the Act.
This is also likely to affect the type and quantum of security required by the Minister to be provided under the Act (and therefore the cost to permit holders of providing such security).
While the industry continues to go through a period of transition, we expect the 2021 changes to the Act (and proposed further amendments) can be navigated by committed and reputable applicants/transferees with a strong balance sheet. Given the regulatory landscape, and the untested changes, we suggest early and considered engagement with New Zealand Petroleum and Minerals and the Minister, to allow sufficient time and open dialogue to work through the above issues, and to ensure a successful and timely outcome of any transactions.
This article is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of the partners listed below.