DEPARTMENT OF RESOURCES, ENERGY AND TOURISM
Resources Division
Interim
OFFSHORE PETROLEUM GUIDELINE FOR GRANT AND
ADMINISTRATION OF A RETENTION LEASE
This interim guideline is issued pending a current review of retention lease policy as part of the
Government’s Energy White Paper process.
Please note: as of 1 January 2012 the National Offshore Petroleum Titles Administrator
(NOPTA) is the first point of contact on all titles administration matters relating to offshore
petroleum and greenhouse gas storage.
Retention Lease Guidelines
Updated May 2012
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INDEX
1.
OBJECTIVE ....................................................................................................................................................... 3
2.
SCOPE .............................................................................................................................................................. 3
3.
DEFINITIONS AND TERMINOLOGY ............................................................................................................... 3
4.
KEY FEATURES ............................................................................................................................................... 4
5.
ASSESSING WHETHER A DISCOVERY MEETS THE CRITERIA FOR A LEASE ........................................ 4
6.
APPLICATION FOR A RETENTION LEASE .................................................................................................... 6
FIGURE 1: RETENTION LEASE APPROVAL PROCESS ............................................................................... 8
7.
ASSESSMENT OF APPLICATIONS................................................................................................................. 9
8.
RE-EVALUATION............................................................................................................................................ 11
9.
REVOCATION OF A RETENTION LEASE ..................................................................................................... 11
10.
VARIATION OF RETENTION LEASE CONDITIONS ..................................................................................... 12
11.
RENEWAL OF A LEASE ................................................................................................................................. 12
ATTACHMENT A: GUIDANCE NOTE ON RETENTION LEASES OVER PETROLEUM FIELDS........................... 14
ATTACHMENT B: DETAILS WHICH SHOULD BE INCLUDED IN AN APPLICATION FOR, OR RENEWAL OF, A
RETENTION LEASE ................................................................................................................................................. 16
FIGURE 2: SAMPLE SPREADSHEET ...................................................................................................................... 18
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1.
OBJECTIVE
1.1 The objective of this Guideline is to assist the petroleum industry to understand the
requirements, indicative timing and process leading to the determination (grant or refusal)
of a retention lease application under the Offshore Petroleum and Greenhouse Gas
Storage Act 2006 (OPGGSA).
1.2 A Retention Lease provides security of title for petroleum resources that are not currently
commercially viable but which have genuine development potential (i.e. development is
likely to be commercially viable within 15 years).
1.3 The OPGGSA, including the criteria in s142(b), has an objective to ensure exploration
acreage which may contain potentially commercial exploration targets is periodically
opened up to competitive exploration through the normal permit partial relinquishment
provisions and the work program bidding system. They also promote development of
commercial discoveries. Another objective of the lease provisions is to ensure the lessee
actively seeks to address those matters inhibiting the commercialisation of the discovery.
2.
SCOPE
2.1 The OPGGSA should be consulted in the first instance as the binding legislative
instrument encompassing the offshore petroleum retention lease regulatory framework.
2.2 This Guideline provides a company seeking a retention lease with an overview of the
relevant assessment and approval processes. It also outlines the roles of the applicant
and Government comprising the National Offshore Petroleum Titles Administrator
(NOPTA) and the relevant Commonwealth and state/Northern Territory (NT) members of
the Joint Authority and their respective departments.
2.3 This Guideline is designed to assist an applicant in applying for a Retention Lease, or
renewal of a Retention Lease, consistent with the requirements of the OPGGSA. The
Guideline also outlines the process for requests for re-evaluations of commerciality by the
Joint Authority and the circumstances that could lead to cancellation of a lease.
3.
DEFINITIONS AND TERMINOLOGY
3.1 Where possible, technical terms used in this Guideline are consistent with those defined in
the OPGGSA and a reference to a particular section (e.g. s142(b)) means a reference to a
specific section of the OPGGSA.
“ORB” means the General Manager, Offshore Resources Branch, Resources Division,
Commonwealth Department of Resources, Energy and Tourism who advises the
Commonwealth member of the Joint Authority;
“Government” as used in this Guideline means the Joint Authority, NOPTA and those
officials who directly or indirectly advise those authorities.
“Joint Authority” means the relevant Commonwealth Minister with responsibility for
offshore petroleum matters (or delegate under the Act) with the relevant State/NT Minister
(or delegate), where applicable;
“lease” refers to a Retention Lease;
“lessee” refers to a holder of a Retention Lease;
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NOPTA means the National Offshore Petroleum Titles Administrator, as the technical
adviser to the Joint Authority and administrator of petroleum and greenhouse gas storage
titles.
“Royalty Act” means the Offshore Petroleum (Royalty) Act 2006.
Technical report means an internal government working document which is prepared by
NOPTA in response to a retention lease application and provided to the Joint Authority to
guide and assist in the decision-making process on a retention lease application. The
technical report is not provided to the proponent.
4.
KEY FEATURES
4.1 Section 142 provides for the grant of a Retention Lease over a less than commercial
petroleum discovery. Section 148 also provides for the grant of a Retention Lease over
blocks, forming part of a Production Licence, in which recovery of petroleum has ceased,
provided petroleum remains in those blocks that is less than commercial. The licensee
has 5 years from the date of cessation of production to apply for a lease.
4.2 The initial term of the Lease is 5 years (s139). Leases can be renewed for further 5 year
periods if the tests provided by s142 continue to be met and previous lease conditions
have been met. Except in a s148 situation where a Production Licence reverts to a Lease,
the lease blocks are excised from the Exploration Permit. Importantly, the work program
commitments applicable to the residual permit will not be reduced after excision of lease
blocks.
4.3 Lessees are expected to actively seek to enhance the commerciality of a field in a lease
area. Conditions may be attached to the lease (s136) to address this and any other
matters, including environmental protection measures, specific to the lease area. The Act
also enable the Joint Authority to require the lessee to undertake a re-evaluation of the
commercial viability of a field in a lease area, within 3 months of the lessee receiving
written notice (see Section 8 below).
5.
ASSESSING WHETHER A DISCOVERY MEETS THE CRITERIA FOR A LEASE
5.1 The Joint Authority must be satisfied that the application meets the statutory criteria in
s142, namely that recovery of petroleum from the lease area:
a)
b)
Is not commercially viable at the time of the application, and;
Is likely to become commercially viable within 15 years of when the application is
submitted.
5.2 For the purposes of s142:
likely should be interpreted to convey the sense of a “substantial or real chance as distinct
from what is a mere possibility”;
commercially viable petroleum should be interpreted to mean that the petroleum could be
developed;
a)
b)
c)
Given existing knowledge of the field
Having regard to prevailing market conditions, and
Using proven technology readily available within the industry
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such that the commercial rates of return from recovery of the petroleum (including
recovery of all operating and capital costs and taxes, royalties and other charges) meet or
exceed the minimum return considered acceptable for the type of project under
consideration by a reasonable petroleum developer and by investors or lenders to the
industry (i.e. an acceptable rate of return). Existing knowledge of the field includes
mapping and resource estimates at proved, probable and possible probability levels.
5.3 A petroleum accumulation cannot be claimed to be not commercially viable because of the
inability or unwillingness of the titleholder to acquire or apply proven technology readily
available within the industry or because of the applicant’s lack of skilled personnel or
financial capability. Where commercial viability is dependent on combining a development
with other potential third party developments or access to third party facilities or
technology, the petroleum will not be considered commercially viable if the titleholder is
unable to complete an agreement to jointly develop or complete an access agreement for
use of facilities or technology which provides an acceptable rate of return.
5.4 In addressing market issues, including market access, prices, and timing of market
opportunities, it will be accepted that a potential market exists for crude oil, condensate or
LPG recoverable from a project and that the terms and conditions of supply will determine
the viability of the project. However, it is recognised that the market for natural gas is
often characterised by large, long term contracts, at specified rates over specified periods,
and specific quality. Therefore in some circumstances, the Joint Authority may agree that
an otherwise commercially viable gas project (assuming current prices) is not
commercially viable and may not proceed due to an inability to obtain a contract at
prevailing market terms and conditions, which would support development. Alternatively
the Joint Authority may accept that the level of resources, while substantial may be
insufficient to meet any currently available market opportunity (e.g. a LNG project).
5.5 In recognition that market considerations can stall an otherwise commercially viable ‘dry’
gas project, the Joint Authority will give favourable consideration to an application for a
lease if the applicant has demonstrated reasonable attempts in good faith to obtain gas
supply contracts which were unsuccessful. In such a case, the major test in assessing
whether the criteria have been met is likely to be assessing the applicant’s efforts in
obtaining a market for gas if the project can be demonstrated to be viable at prevailing
prices (i.e. otherwise passes the commerciality test). However in order to enhance the
marketability of a project, it might be reasonable to expect that the lessee better define the
resource if this would be necessary to demonstrate supply capability to potential buyers.
5.6 The most important aspect of processing a lease application is ensuring the application is
consistent with s142. The information provided by the applicant should be sufficient to
demonstrate that the discovery meets the criteria described in s142 (see 5.1). The
application should also identify the circumstances which would commercialise the
discovery and address their likelihood of occurrence.
5.7 An application should include an analysis of the commercial viability of a prospective
development including the assumptions, the methodology, and the conclusions reached
by the applicant. This analysis should provide sufficient information to demonstrate that
the assumptions and methodology are realistic and lead to a likely outcome (and if
appropriate, a range of outcomes). The impact of alternative reasonable assumptions
should also be identified and assessed. Government will analyse the extent to which
there are reasonable grounds for adopting alternative assumptions and methodologies.
The information submitted to support those parts of the application that are critical to
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convincing the Joint Authority that the tests implicit in s142 can be met, will need to be
more detailed.
5.8 In October 2007, a Retention Lease Guidance Note was released by the then Upstream
Petroleum and Geothermal Subcommittee of the Ministerial Council on Mineral and
Petroleum Resources to provide clarification and guidance on the Government’s approach
to assessing commercial viability of a Retention Lease. This Guidance Note is provided at
Attachment A.
6.
APPLICATION FOR A RETENTION LEASE
6.1 Applications lodged under s142 or s148 for the award, or s153 for renewal, of a Retention
Lease over a petroleum discovery should be submitted to NOPTA (three copies) who will
forward one copy to ORB and one copy to the relevant state/NT Department assisting
their member of the Joint Authority. Applicants are encouraged to lodge their application
in a timely manner. Attachment B specifies the details that should be submitted for a
lease or renewal application.
6.2 Government, apart from providing clear advice on information required to be submitted for
a Retention Lease, recognises the need to assist applicants by advising of relevant
information held by government. This can often be achieved by consulting with NOPTA
prior to the lodgement of the lease application. Government will respect any information
provided on a commercial-in-confidence basis. Timely consideration of all applications,
and any related request for additional information, is also an important consideration for
government. While each application needs to be treated on its merits, government will
make best endeavours to complete the assessment within the following timetable where
the applicant has provided all relevant advice:
a) Upon receipt of an application and relevant application fee, NOPTA will send the
applicant an acknowledgement and application reference number.
b) NOPTA will undertake a preliminary assessment of the application and identify any
issues that require additional information from the applicant. If further information is
required, NOPTA will within two weeks of receipt of the application, seek this
information by letter to the applicant (as per s258 of the OPGGSA).
c) NOPTA or the applicant may request a meeting to address fully the details contained in
the application and any issues arising from the preliminary assessment. This would
provide the applicant with an opportunity to present its case in an appropriate level of
detail on both the commercial viability and the work program. If meetings are held,
ORB and relevant state/NT Departments will have the opportunity to attend the
meeting. The meeting would also provide government an opportunity to provide
detailed feedback to the applicant on any issues that need to be assessed in greater
detail and to remedy any data deficiencies at an early stage. Alternatively, it may be
mutually agreed that a meeting is unnecessary if there are no outstanding matters that
cannot be otherwise resolved;
d) When sufficient information has been provided by an applicant, NOPTA will prepare a
technical report addressing the criteria in s142 of the OPGGSA and recommending
whether the retention lease should be granted or not. The report will also outline any
conditions proposed to be placed on the grant of a retention lease and the reasons for
those conditions.
e) Where NOPTA proposes to recommend that the JA reject an application for retention
lease or change an applicant’s proposed work program, the applicant must be advised
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and given the opportunity either to agree to the amended work program or to provide
written advice to the Joint Authority on the issue. Discussions should be completed
with the applicant, where relevant, on any amendments to the proposed work
conditions, and any other amendments to the proposed lease conditions, within four
and a half months from receipt of application, unless the applicant requires
additional time to consider the proposed work conditions;
f) Once discussions with the applicant on the report’s recommendations (and associated
work program) have been completed, the NOPTA assessment report can be finalised;
g) Within five months of receipt of an application containing sufficient information for
assessment, NOPTA will forward its report to the Joint Authority, through ORB and the
relevant state/NT Department. Where it has been necessary for NOPTA to seek
additional information from an applicant, the five month period will be extended by the
length of time taken by the applicant to provide the additional information.
h) Within two weeks of receiving the NOPTA technical report, ORB and the relevant
state/NT Department will oversight the report and forward it together with any relevant
policy advice to their respective member of the Joint Authority for decision. The JA
decision will be sought within a further two weeks. If necessary, the JA, ORB or the
relevant state/NT Department may seek additional information from NOPTA or
industry. A request for additional information will extend the period for the JA decision.
i) If a positive decision has been made by the Joint Authority, NOPTA will offer and grant
the lease. This process should occur within six months of receipt of application
but may be extended if additional information or consultation is required during
the process.
An outline of this process is contained in Figure 1.
An application for a Retention Lease can, at the discretion of the applicant be over some
or all of the blocks in a location. The OPGGSA s142 gives the Joint Authority discretion
on which of those blocks the Joint Authority is prepared to offer a lease.
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FIGURE 1
RETENTION LEASE APPROVAL PROCESS
Indicative time from
submittal of
application*
Applicant submits application to NOPTA
NOPTA conducts preliminary assessment and seeks any necessary
additional information from the applicant
Within 2 weeks
In requested, meeting of applicant, NOPTA, ORB, state/NT Department
Within 6 weeks
NOPTA undertakes assessment of application and any additional
information
Within 4 months
If rejection is recommended or
amended work program
If grant is recommended
Applicant given opportunity to comment on
proposed rejection and/or work program
conditions
NOPTA forwards assessment report to JA through ORB and relevant
state/NT Department
ORB and relevant state/NT Department overview of NOPTA
assessment and policy advice to JA
Consideration by Joint Authority
Offer of lease
Acceptance by proponent
Grant of lease
NB: Timelines may be extended if further information or consultation is required.
Within 5 months
Within 5 and a half
months
Within 6 months
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7.
ASSESSMENT OF APPLICATIONS
7.1 In assessing an application, government needs to first ensure that the application has
been made in accordance with the OPGGSA. This requires determining whether:
a)
b)
c)
d)
e)
The application has been made within the relevant application period;
The applicant is entitled to apply for a lease;
The blocks included by the application are currently covered by a location;
Sufficient information has been supplied to assess the application, and;
The relevant fee has been paid in accordance with the Offshore Petroleum and
Greenhouse Gas Storage (Resource Management and Administration) Regulations
2011 schedule 6 (currently $2,090).
7.2 Each application will be treated on its merits. Attachment B describes information that
should accompany an application for a Retention Lease. The level of detail provided on
any particular aspect should be commensurate with the impact that aspect has on
demonstrating that the tests explicit in the s142 criteria can be met. This detail can be
critical where it is not immediately clear that the application meets the tests explicit in
s142.
Proposed work program in the lease area
7.3 As one aim of a Retention Lease is to ensure the holders of the lease actively seek to
enhance the commerciality of the relevant discovery, government will assess whether the
applicant’s proposed work program (if any -see section 7.4 below) for the Retention Lease
is adequate:
a) Firstly, the work program should address those primary constraints to commercial
viability that have been identified by the assessment;
b) Secondly, the work program should address other important areas where suitable
information on which to base decisions is lacking. Hence, for example, further
environmental studies may be needed or further seismic definition, appraisal drilling or
other technical activity may be appropriate to better define the resource, and;
c) Thirdly, and most importantly, the test as to adequacy should be whether the work
program is consistent (in both a timing sense, the activities proposed and the level of
effort) with what a reasonable company could be expected to carry out in order to
commercialise the project.
7.4 In certain cases where the reason for lack of immediate commerciality is outside the
power of the lessee (e.g. related to the commodity price) and if there is little scope for
proving up additional potentially commercial resources within the lease area, there may be
no justification for any work program commitment, or the program may not involve any
activity to be undertaken other than, for example, studies to reduce costs.
7.5 If the blocks included in the application contain other prospective reservoirs, including
potentially drillable prospects, then the application should also contain a strategy for
assessing the area including any proposed exploration activity in the lease area. This is to
ensure that those parts of the lease area beyond the identified field are adequately
explored as if they were part of an Exploration Permit.
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Additional conditions
7.6 Government needs to determine whether any additional conditions should be included in
the title. For example, these conditions may ensure impacts of exploration or appraisal
activity in the lease area on other users are minimised.
Environmental and other impacts
7.7 To ensure compliance with the OPGGSA and other legislation, the likely impacts arising
from the award of a retention lease on other users of the sea need to be assessed. These
impacts generally will be no different from those which could occur from activities
undertaken during the term of an Exploration Permit (drilling wells, seismic etc) and any
assessment will not seek additional environmental studies over and above those normally
provided for similar operations conducted in a permit.
7.8 As with Exploration Permits, government needs to be aware whether petroleum operations
are likely to impact on other users of the area so that third party concerns can be
addressed in title conditions and/or so that the company can incorporate the views of such
users in its future operational plans. The impacts of any prospective developments (i.e.
proposals to exploit petroleum resources) would need to be addressed at the time of
consideration of a Production Licence application.
7.9 Government will also assess an application to determine the environmental significance of
any decision of the Joint Authority to grant a Retention Lease in view of its statutory
obligations under the Environmental Protection and Biodiversity Conservation Act 1999
and the Australian Heritage Commission Act 1975.
7.10 The applicant should also identify likely impacts on other users of the sea and any
consultations they have undertaken with users to minimise potential adverse impacts from
those activities that may be carried out during the term of the lease. Any issues raised by
other users that may affect the grant of the title, and/or the associated conditions, should
be brought to the attention of the Joint Authority.
7.11 Commonwealth agencies that may need to be consulted by the lessee include the
Australian Fisheries Management Authority, the Australian Maritime Safety Authority,
Telstra, the Commonwealth Departments of Defence, and Sustainability, Environment,
Water, Populations and Community as well as the National Native Title Tribunal and
relevant Land Councils. Other State/NT agencies also may need to be consulted. Early
informal advice from the applicant will assist in determining which government agencies
will need to be consulted.
Refusal to grant a Retention Lease
7.12 If the Joint Authority is satisfied that the criteria specified in s142 are not met, or
information requested by the Joint Authority has not been submitted within the specified
time (s141), the Joint Authority shall advise the applicant in writing that it refuses to grant a
retention lease in accordance with s143.
7.13 Where the Joint Authority refuses to grant a retention lease, the applicant has 12 months
to apply for a Production Licence from the date the Joint Authority’s instrument of refusal
was served (s169). If the Joint Authority considers that the recovery of petroleum from the
lease area is unlikely to become commercially viable within 15 years, the declaration of a
location over the blocks covering the potential lease area is revoked and those blocks
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revert to the original permit (s132), in the case of a work program permit. In the case of a
cash bid permit beyond its normal expiry date, the permit expires upon revocation of the
blocks.
7.14 Where an application for a Production Licence by a lessee lapses (i.e. is not made) the
blocks covered by the location revert to the Commonwealth (i.e. the rights of the titleholder
to those blocks lapse).
8.
RE-EVALUATION
8.1 During the term of a Retention Lease, the Joint Authority may have reason to believe that
the conditions applying at the time of the grant of the lease have changed and that the
development of petroleum resources in the lease area may have become commercially
viable, or unlikely to become viable within 15 years. In such circumstances, the Joint
Authority may request the lessee (s136) to undertake a re-evaluation of the commercial
viability of the field and report the results of that study to the Joint Authority within a
specified period. This re-evaluation may require work to be carried out additional to that
required by the lease conditions. This additional work could involve work in, as well as
outside the lease area, including seismic surveying, re-interpretation of existing data,
simulations, cost or marketing analyses but cannot involve the drilling of a well.
8.2 The re-evaluation should be submitted in writing within 3 months, unless NOPTA has
approved an additional period. The Joint Authority is entitled by the Act to require one reevaluation per lease term. Some activities that the Joint Authority could require to be
undertaken as part of a re-evaluation, such as seismic surveying, may not be able to be
undertaken and evaluated within 3 months. In such cases, the Joint Authority would, after
discussions with the lessee, provide sufficient time to undertake and evaluate the work
before requiring submittal of the results.
8.3 On the basis of the results of the re-evaluation, the Joint Authority may form the view that
the recovery of petroleum is commercially viable. In that case, the Joint Authority may
revoke the lease (see 9 below) unless the lessee applies for a Production Licence.
9.
REVOCATION OF A RETENTION LEASE
9.1 If the Joint Authority is of the opinion it should revoke the lease it must:
a) Notify the lessee, and any other parties that it thinks appropriate (e.g. the operator), of
its intention; and;
b) Give the lessee, and other notified interested parties, at least one month within which
to make a submission on the proposed revocation (s177).
9.2 If the Joint Authority after considering any submissions, then decides to revoke the lease,
it must serve on the lessee a notice of revocation of the lease. This action would allow the
lessee 12 months to apply for a Production Licence. Revocation will take effect:
a) Where the lessee does not apply for a Production Licence - within 12 months after the
date of service of the notice of revocation; or
b) Where the lessee does apply for a Production Licence - on a day when the Joint
Authority grants, or refuses to grant, the Production Licence, or when the application
for the Production Licence lapses (s158).
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9.3 Where the revocation takes effect and no Production Licence has been granted, the
blocks making up the Retention Lease revert to the Commonwealth. Where a Production
Licence is granted over some of the blocks in the Retention Lease, those blocks not taken
up in the licence revert to the Commonwealth.
10. VARIATION OF RETENTION LEASE CONDITIONS
10.1 If a lessee considers there are valid reasons to request a change to any conditions
attached to a lease, the lessee may request that the Joint Authority vary those conditions
(s264).
10.2 Applications should be submitted to NOPTA in triplicate. Applicants are encouraged to
lodge their application in a timely manner. The time taken to consider the application will
depend primarily on the complexity of the variation proposed and the information provided
by the company in support of the application.
11. RENEWAL OF A LEASE
11.1 An application for renewal of a lease must be made not less than 6 months nor more
than 12 months before the day on which the lease ceases to be in force (s153).
However, NOPTA may allow the lodgement of a renewal application less than 6 months
before the expiry date of the lease, but not in any case after the day on which the lease
ceases to be in force. A renewal application should address all those matters required for
an application for an original lease and a similar process will be followed (see sections 6
and 7).
11.2 At the time of considering the renewal of a Retention Lease, the Joint Authority will
determine whether the applicant has met all the conditions included in the previous
retention lease term as well as other provisions of the OPGGSA, regulations and any
Directions issued under the OPGGSA relevant to the lease. If all lease conditions and
legislative provisions have not been met; information requested by NOPTA under s258
has not been furnished; or the criteria in s154 can no longer be met, the Joint Authority will
refuse to grant the renewal (s155).
11.3 Where the criteria in s154 can be met and information requested by NOPTA has been
furnished, but all lease conditions and provisions of the OPGGSA have not been met, the
Joint Authority may renew the lease if it is satisfied that special circumstances exist which
would justify the grant (s154).
11.4 If the Joint Authority forms the view that it would not renew a lease, it will notify the lessee
and other persons it thinks appropriate, in writing, of its intention to refuse to grant the
renewal of the lease. In the notice of intention, the Joint Authority will provide particulars of
the reasons for its intention and specify a date by which the lessee or other notified
persons may advise the Joint Authority of matters that the lessee wishes to be considered
by the Joint Authority. The lessee, and other notified persons, will be given at least one
month within which to make a submission on the Joint Authority's intention not to renew
the lease.
11.5 Where the Joint Authority refuses to grant a renewal of a Retention Lease on the grounds
that the recovery of petroleum from the lease area is commercially viable at the time of the
application (s155), the applicant has 12 months to apply for a Production Licence from the
date the Joint Authority’s instrument of refusal was served, via:
- s170 (where the Royalty Act does not apply - most permits), and;
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- Schedule 4, Clause 4 (where the Royalty Act applies - areas originally part of
Exploration Permits WA-1-P and WA -28-P).
11.6 Upon grant of a Production Licence over blocks that form part of a lease, the lease will
expire (s158). Where an application for a Production Licence is not made, or is
unsuccessful, the lease will expire and the blocks covered by the location revert to the
Commonwealth. Blocks in the lease not taken up in a Production Licence will also revert
to the Commonwealth.
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ATTACHMENT A
GUIDANCE NOTE ON RETENTION LEASES OVER PETROLEUM FIELDS
Issues surrounding retention leases covering gas fields have attracted considerable attention
over the years with some parties recommending action to bring forward domestic gas
developments. In view of this, the Upstream Petroleum & Geothermal Subcommittee of the
Ministerial Council on Mineral & Petroleum Resources has prepared this guidance note. This
note does not replace the comments on commercial viability found in the Guidelines for Grant
and Administration of a Retention Lease, but it provides additional comments to clarify the
Government's approach.
The Petroleum (Submerged lands Act) 1967 and when it comes into force, the Offshore
Petroleum Act 2006, require that the relevant Joint Authority assess the commercial viability of
the field(s) in each retention lease application both for new applications or renewal applications.
This assessment will include assessing all reasonable development options, not just the
particular option the applicant favours. In order to facilitate this assessment for gas fields,
applicants should thoroughly address the economics of a domestic gas development in addition
to consideration of LNG and GTL developments.
In assessing commercial viability, the relevant Joint Authority will use a petroleum price
appropriate to the life of the field and will not necessarily accept the price used by the applicant
in its assessment. The Joint Authority will take note of third party claims that particular fields
are commercially viable but the assumptions used by the third party will be tested in the same
way that an applicant's claim is tested. Claims and assumptions used by applicants or third
parties will not be accepted if found to be unreasonable.
The Joint Authority will usually base calculations on petroleum price projections by reputable
Government bodies such as ABARE, IEA or US Department of Energy. Recoverable petroleum
volumes will usually be based on P50 estimates although P90 might be acceptable for a small
company totally reliant on bank finance. The discount rate used in calculations should reflect
the expected cost of capital needed to fund the investment. The Joint Authority will usually
consider projects which have an IRR of 12% or more as commercially viable.
Every retention lease will have a work program including marketing or technical studies relevant
to addressing the commercial obstacles to the development of the field. Where there is
considerable doubt about the commercial viability of a field because of uncertainty about its size
or reservoir properties, the Joint Authority will expect the work program to also include field
work such as drilling or seismic surveys or seismic reprocessing designed to reduce such
uncertainties and move the field closer to production. Joint Authorities take work programs
seriously and a renewal application may be rejected if the operator has not carried out the work
program in the previous term.
The Joint Authority is obliged to reject any application where it is not satisfied the relevant field
is not commercially viable at the time of the application. Applications will also be rejected
where the Joint Authority is not satisfied that the field will be commercially viable within 15
years. Several applications have been rejected on commerciality grounds in the past 10 years.
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Where an application is rejected on the grounds of being currently commercially viable, the
applicant has 12 months to apply for a production licence.
Upstream Petroleum & Geothermal Subcommittee
Ministerial Council on Mineral & Petroleum Resources
October 2007
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ATTACHMENT B
DETAILS WHICH SHOULD BE INCLUDED IN AN APPLICATION FOR, OR RENEWAL OF, A
RETENTION LEASE
1
Name of applicant
2
Description of blocks to be included in the Retention Lease
A fee for lodging the application is payable to the ’Department of Resources, Energy and
Tourism’ through an Australian bank or bank cheque (the amount is set out in Offshore
Petroleum and Greenhouse Gas Storage (Resource Management and Administration)
Regulations 2011).
3
In the case of a renewal of a lease, a description of the work program carried out in the
previous term of the lease
To justify grant of Lease
4
A brief description of the development options considered and the detailed technical and
economic assumptions used in the evaluation of commercial viability. All realistic
development options should be identified.
5
Evidence that development of the discovery is not currently commercially viable but is
likely to become commercially viable within 15 years, including details of:
a) Estimated recoverable and in-situ resources (especially the 50% and 90% probability
levels or other appropriate information) with more detail if these are critical to
determining whether the criteria are met;
b) Estimated annual capital costs (including appraisal and production drilling, facilities
costs etc), if the project were to proceed;
c) Estimated annual operating costs, if the project were to proceed;
d) Estimated annual production volumes, product prices and estimated annual revenues
from sales of product, if the project were to proceed;
e) Estimated annual resource taxation payable (PRRT or excise/royalty);
f) Inflation rates, exchange rates, bond rates used for PRRT assessment, depreciation
and company tax provisions used in the financial analyses;
g) All numbers clearly identified as either in nominal or real $;
h) Estimated pre- and post -company tax internal rate of return (IRR) for the project and
justification of minimum (or hurdle) rates of return or other criteria used to assess
commerciality, including whether they reflect the level of risk for such a project and the
degree of confidence (‘optimism’ or ‘pessimism’) associated with the other
assumptions (see figure 2 - sample flow chart);
i) Where that rate of return is sufficient for the project to proceed under prevailing market
conditions, evidence that there are other factors preventing commercial development
of the discovery (e.g. market issues);
j) Identification of all relevant environmental and other factors that may impact on
commerciality;
17
k) The treatment of secondary taxes(including PRRT excise/ royalty and income tax) in
the commercial assessments;
l) Any other matter which the applicant considers is relevant to the current commercial
viability of the development of the discovery; and;
m) Ensuring that the basis of any model and assumptions used by the applicant to assess
the commercial viability can be justified and, where relevant, ensuring the impacts of
reasonable alternative assumptions and methodologies on the conclusions are
assessed.
6
Where, for reasons of commercial propriety, it is not possible for a consortium to provide
commonly agreed estimates of, for example, project revenues and rates of return, the
project operator may provide its estimates, on an in-confidence basis, or separate data
may be provided by individual members of a joint venture, also on an in-confidence basis.
7
An application should identify the circumstances which would make the relevant discovery
commercially viable and address their likelihood of occurrence. The details should
include:
a) Particulars of expected changes to the details provided above which are likely to make
development of the discovery commercially viable within 15 years;
b) Such other matters or information the applicant wishes to be taken into account in the
application, including research and development of relevant technology; and;
c) Evidence that such changes would be sufficient to make the project viable.
Proposed work program
8
Lessees are expected to actively seek to enhance the commerciality of a discovery in a
lease. Therefore, the application should also include details of the applicant's work plans
to continue to assess the commercial viability of the field, including those factors currently
inhibiting the commercial development of the resource. The work plans may include, for
example:
a) Project feasibility reports;
b) Reports of reviews of exploration data, and;
c) Proposals to undertake seismic surveys and drill wells.
9
Details should include estimates of expenditure in nominal dollars.
10
In general, the years in which such work program activities are proposed to be completed
will not need to be specified. However, the lease conditions should specify that the work
program (including for example any seismic interpretation, well analyses etc) must be
completed and results analysed prior to the submission of any application for renewal of
the lease.
18
FIGURE 2
SAMPLE SPREADSHEET
The Hopeful gas field (all prices and costs are in nominal Australian dollars)
Financial
year
ending
30 June
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Totals
Gas
price
($/GJ)
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.85
2.9
2.9
2.9
2.9
2.9
37.0
Production
rate (PJ)
23
23
23
23
23
23
23
161.0
Revenue
($M)
64.4
65.6
66.7
66.7
66.7
66.7
66.7
463.5
Appraisal
costs ($M)
11.1
11.1
Capital
expenditure
($M)
68.9
156.9
225.8
Abandonment
costs ($M)
12.8
12.8
Operating
expenditure
($M)
2.5
2.6
2.7
2.7
2.8
2.9
3.0
19.2
Depreciation
($M)
29.3
29.3
29.3
29.3
29.3
29.3
29.3
205.1
PRRT
($M)
13.7
-5.1
8.6
Company
Tax
11.7
12.1
12.5
12.5
12.4
12.4
7.4
0
81.0
Net Cash
Flow ($M)
-11.1
-68.9
-156.9
50.2
56.1
51.5
51.5
51.5
51.4
42.6
-7.7
110.2
Nominal IRR (after company tax and PRRT): 9.0%
Assumptions
Inflation rate for all costs and revenues
Total recoverable reserves
Depreciation:
Company tax rate
PRRT
IRR
3.00% pa
161 PJ at the 50% probability level
13% Prime Cost Method
36%
Exploration was compounded forward at the long-term bond rate of 7.63% plus 15%
Capital expenditure was compounded forward at the long-term bond rate of 7.63% plus 5%
A bench mark IRR of 12% nominal after company tax and PRRT is considered by the titleholder to be an appropriate
hurdle rate of return for the Hopeful field, based on the assumptions used in this analysis
Note: The assumptions used in this Figure are for illustration purposes only and do not imply acceptance of an application based on them