Chapter 2

Australia's upstream petroleum and gas sector

Background

2.1        Australia's oil and natural gas reserves represent about 0.3 per cent and 1.7 per cent of the world's total reserves respectively.[1] The majority of Australia's oil and gas reserves are located in a number of basins off the coast of Western Australia. Other significant offshore reserves can be found in the Bonaparte Basin (off the coast of Western Australia and the Northern Territory), in the Bass Strait between Victoria and Tasmania, in the Otway Basin (off the coast of South Australia, Victoria and Tasmania) and in the Gippsland Basin (Victoria).

Figure 2.1: Australia's gas facilities

Source: Geoscience Australia, http://www.ga.gov.au/energy/petroleum-resources/gas.html (accessed 9 June 2011).

2.2        Oil and gas extraction represent a significant component of the Australian economy, with both onshore and offshore activities contributing $22.6 billion to Australia's gross domestic product in 2009-10.[2] Projects associated with these activities are often very large—the Gorgon liquefied natural gas joint venture off the Western Australian coast involves an estimated capital expenditure of $43 billion, making it the largest single resource project to be undertaken in Australia.[3]

Current regulatory arrangements

Jurisdiction

2.3        The current regulatory arrangements reflect the characteristics of Australia's federal system, and have been clarified in a key decision made by the High Court in New South Wales v Commonwealth [1975] HCA 58 (the Seas and Submerged Lands Case). This decision arose after the Commonwealth passed legislation[4] which asserted its sovereign rights over the territorial sea and the continental shelf (that is, all offshore waters). Importantly, the High Court determined that the Commonwealth had sovereign rights over the territorial sea.

2.4        This decision led to the 1979 Offshore Constitutional Settlement (OCS) agreement between the Commonwealth, the States and the Northern Territory. In this agreement, formalised by legislation, the Commonwealth gave certain legislative powers and other rights to the States. The result of the OCS was that, in general, the States have responsibility for coastal waters.[5]

2.5        With respect to the jurisdiction of offshore petroleum issues, the OCS established that:

• State and Territory petroleum legislation applies in coastal waters and is administered by State and Territory authorities; and
• Commonwealth legislation alone applies in Commonwealth waters. However, the Australian Government shares joint regulatory authority with the relevant State or Territory in the adjacent areas of Commonwealth waters.[6]

2.6        The Productivity Commission explained the current definitions of Commonwealth waters, which 'extend from the outer limit of coastal waters to the outer limit of the continental shelf', and the definition of coastal waters which arose from the OCS:

...and has two elements. The first element is that area between the territorial sea baseline and the line that is three nautical miles seaward of the territorial sea baseline. The second element (where relevant) consists of any waters landward of the territorial sea baseline but outside the limits of the State and Territory.[7]

2.7        The Productivity Commission also suggests that it is necessary to consider the concept of internal waters, to fully understand the division of responsibilities between the Commonwealth and the States and Territories:

For the purposes of international law, internal waters are landward of the territorial sea baseline. These are divided into internal waters of the States and the Northern Territory and internal waters of the Commonwealth. Internal waters of a State or Territory are waters that are within the limits of the State or Territory, that is, they fall within their constitutional boundaries. The relevant constitutional boundaries were determined by the Letters Patent issued to State Governors at the date of Federation in 1901. Commonwealth internal waters are then all other internal waters — for the purposes of upstream petroleum regulation, these waters are treated as coastal waters. Identifying some State and Territory internal waters (for example, rivers and creeks) is relatively straightforward. There are others that are classified as internal given the Letters Patent, but are off the coastline and so might otherwise be seen as part of coastal waters.[8]

Figure 2.2: Areas of Commonwealth, State and Northern Territory marine petroleum jurisdiction

Source: Department of Resources, Energy and Tourism, Submission 1, Attachment B, p. 2.

Designated and Joint Authorities

2.8        To administer the joint regulatory authority arrangements in the cases of adjacent areas of Commonwealth waters, two entities currently exist:

• Designated Authority—the responsible Minister from the State or Territory, supported by their relevant department; and
• Joint Authority—the responsible Minister from the State or Territory and the responsible Commonwealth Minister.

2.9        The Joint Authority makes the major decisions under the OPGGS Act such as determining areas to be open for applications for permits, the granting of exploration permits and production licences, the imposition of title conditions and the cancelling of titles, as well as core decisions about resource management and resource security. In the event of disagreement between the Commonwealth and State Minister within a Joint Authority, the Commonwealth Minister has the final say due to the Commonwealth having the ultimate constitutional power.[9]

2.10      The Designated Authority is responsible for the day-to-day administration of petroleum activities—their functions and powers are provided by the OPGGS Act and may be delegated to their department. The Designated Authority acts as the first point of contact for matters relating to exploration permits, and its functions and powers include:

• receiving reports and applications;
• advising titleholders of decisions made under the OPGGS Act;
• collecting fees;
• declaring safety zones;
• granting Access and Special Prospecting Authorities; and
• approving transfers and dealings.[10]

National Offshore Petroleum Safety Authority

2.11      The National Offshore Petroleum Safety Authority (NOPSA) began operations on 1 January 2005 with its head office in Perth. NOPSA was established following the 2001 Australian Government report Future Arrangements for the Regulation of Offshore Petroleum Safety, which identified a number of issues with the legislative and administrative structures related to Australia's offshore petroleum safety management.

2.12      NOPSA's responsibilities in administering the occupational health and safety regime for petroleum and greenhouse gas activities at facilities (including pipelines) located in Commonwealth waters are outlined in Schedule 3 to the OPGGS Act. These responsibilities include:

Duties of Care—Specific categories of persons (operators, employers, etc) who are involved in offshore activities at facilities are required to "take all reasonably practicable steps" to protect the health and safety of the facility workforce and of any other persons who may be affected.

Consultation Provisions—Mechanisms are set out that will enable effective consultation between each facility operator, relevant employers and the workforce regarding occupational health and safety.

Powers of inspectors—NOPSA's OHS inspectors are granted powers to enter offshore facilities or other relevant premises, conduct inspections, interview people, seize evidence and otherwise take action to ensure compliance by parties with legal obligations.[11]

2.13      NOPSA has been conferred equivalent responsibilities in coastal waters under State and Territory occupational health and safety laws in WA, Victoria, SA and the NT. The laws mirror the Commonwealth provisions. The mirror laws of jurisdictions with lower levels of offshore petroleum activity—Tasmania, Queensland and New South Wales—are not yet fully in place.[12]

2.14      In accordance with the government's Cost Recovery Guidelines for Regulatory Agencies, which are apply to agencies covered by the Financial Management and Accountability Act 1997, NOPSA is currently funded on a full cost-recovery basis with levies raised from the offshore petroleum industry.

2.15      From 29 April 2011, NOPSA's responsibilities were extended to include the regulation of well operations management plans and approval of well activities.

2.16      Constituted separately from NOPSA under the OPGGS Act is the NOPSA Advisory Board. The Board:

...provides advice to the Commonwealth Minister and State and North Territory Ministers on policy and strategic matters relating to occupational health and safety of offshore petroleum operations. It also gives advice and recommendations to the Chief Executive Officer (CEO) of NOPSA about operational policies to be followed by the Authority.[13]

Issues with the current framework

2.17      As noted by the Productivity Commission, the locations of the oil and gas reserves do not necessary fit neatly with the boundaries of Australia's states and territories, or the definition of Commonwealth waters:

Basins often cross more than one jurisdiction, particularly where they extend more than three nautical miles offshore. Moreover, the Bonaparte Basin straddles both Western Australia and the Northern Territory, as well as Commonwealth waters and the Joint Petroleum Development Area with East Timor...Similarly, some onshore basins (such as the Cooper Basin) also straddle more than one jurisdiction.[14]

2.18      The regulatory arrangements currently in place for Australia's upstream petroleum industry have come under scrutiny as a result of in-principle inter‑government agreements to explore ways to reduce regulatory overlap and increase efficiencies in a number of sectors of the economy, as well as specific safety incidents relating to oil and gas extraction.

Regulatory burden

2.19      In February 2006, the Council of Australian Governments (COAG) announced a National Reform Agenda which included a regulatory reform stream. As part of this COAG outcome, it was agreed that reviews would take place of existing regulation to identify priority areas where regulatory reform would provide significant net benefits to business and the community, and further reforms that enhance regulatory consistency across jurisdictions or reduce duplication and overlap in regulation and in the role and operation of regulatory bodies would be identified.[15]

2.20      In response to an earlier Productivity Commission review, in 2007 the Australian Petroleum Production and Exploration Association (APPEA) released a report which suggested that significant regulatory burdens exist in the sector. APPEA stated:

More than 90 per cent of Australia’s oil and gas resources are found in Commonwealth waters and are usually brought onshore for processing in a state or the Northern Territory via pipelines crossing Commonwealth then state waters. In many cases there are different requirements for a given activity for each of the respective jurisdictions (Commonwealth waters, state waters and onshore). Although development of the extensive approval requirements in each jurisdiction in isolation might have been appropriate at the time, the multi-jurisdictional nature of oil and gas projects leads to potentially hundreds of approvals being required and therefore hundreds of opportunities for a development proposal to be delayed.[16]

2.21      To illustrate the complexity, APPEA provided the following example:

A very recent small oil production facility in Western Australia required some 163 approvals from 22 separate authorities. There were 61 approvals (25 onshore, 18 state waters and 18 Commonwealth waters) required just for the construction and installation of a pipeline to bring the resource found in Commonwealth waters to an onshore processing facility. It should be borne in mind that all these 61 approvals were for a pipeline constructed and installed to the same standards, made of the same material, and transporting the same product.[17]

2.22      On 10 April 2008, the Assistant Treasurer asked the Productivity Commission to undertake a study of regulatory burdens on the upstream petroleum (oil and gas) sector. The Productivity Commission reported in April 2009.

2.23      In its report, the Productivity Commission considered that there is:

...solid evidence that the current regulatory framework imposes a significant burden on the upstream petroleum sector. Although compliance costs are large (sometimes amounting to millions of dollars for a project), they are typically modest relative to the total project cost. Delays impose far more significant burdens, because they can increase project costs, reduce flexibility in responding to market conditions, impede financing of projects, and defer production and revenues.[18]

2.24      Further:

Currently, duplication and overlap, and inconsistent administration of the 22 petroleum and pipeline laws and more than 150 statutes governing upstream petroleum activities impose significant unnecessary burdens on the sector. Project approvals are taking longer than a streamlined approval process would allow, potentially diminishing the present value of petroleum resource extraction in Australia by billions of dollars each year.[19]

2.25      The Productivity Commission's overall assessment of the burdens considered to be unnecessary were as follows:

• A lack of clear and certain administrative timelines contained in laws or regulations—where timelines do exist for regulators there is a lack of compliance or enforcement mechanisms, and in many cases poor transparency and reporting of regulators’ performance against legislative timelines.
• Duplication of administrative requirements, particularly where projects are cross-jurisdictional or where there is overlap of regulatory responsibilities—for example, environmental approvals are potentially required from both the Designated Authority (DA) under the Commonwealth’s Offshore Petroleum and Greenhouse Gas Storage Act 2006 and the Australian Government Environment Minister under the Commonwealth’s Environment Protection and Biodiversity Conservation Act 1999 and often under other State and Territory Acts.
• The current approval process can be complex and generally involves multiple regulators—for example, production in Commonwealth waters will generally require separate approvals from the Joint Authority (JA), the DA and NOPSA.
• Regulatory agencies may be under-resourced and have difficulty retaining necessary expertise—multiple agencies undertaking similar functions can result in competition for scarce resources and technical expertise.
• A lack of consistency in regulatory requirements and decision making over time and across jurisdictions or agencies—onshore legislative frameworks differ and there are also inconsistencies in decision making, even where legislative requirements are the same...Some decisions by the regulator (particularly in the case of resource management) are inherently judgemental. Examples include approval of field development plans and meeting the government’s desire to maximise (within limits of what is judged commercial) overall recovery of the resource.
• There are examples where businesses have lost significant time and resources due to changes in government policy and a lack of timely information made available on environmental and other risks.[20]

2.26      One of the recommendations of the Productivity Commission was that the Australian Government should establish a new national offshore petroleum regulator in Commonwealth waters, with regulatory responsibility for resource management, pipelines and environmental approvals and compliance. NOPSA, however, should remain a separate agency.[21]

The Varanus incident

2.27      On the afternoon of 3 June 2008 a series of explosions followed by fires occurred at gas production facilities on Varanus Island, 100 kilometres west of Karratha and Dampier. There were no injuries or fatalities as a result of the explosions and fires, but approximately 30 per cent of Western Australia's gas supply (~350 terajoules per day) was lost.

2.28      A report from NOPSA to the Western Australian Government found that the cause of the explosions was the rupture of a corroded pipe.[22] The Senate Economics Committee conducted an inquiry into the economic impact and government response subsequent to the explosions, however, the terms of reference did not extend to the cause of the explosions or the effectiveness of the regulatory regime.[23] However, the Department of Resources, Energy and Tourism (DRET) considers that the Varanus explosion 'highlighted inadequacies in the Australian offshore petroleum regulatory regime. These inadequacies largely stem from risks of regulatory gaps arising from regulation of safety separate from regulation of integrity, environment and day-to-day operations'.[24]

The Montara incident

2.29      On 21 August 2009, the Montara platform in the Timor Sea suffered a well head accident, resulting in the uncontrolled discharge of oil and gas. The discharge of oil and gas was stopped on 3 November 2009.

2.30      A Commission of Inquiry was announced on 5 November 2009. The Inquiry's report was released by the government in November 2010.

2.31      The Montara Commission was highly critical of the performance of the Northern Territory Department of Resources as a regulator. The Inquiry concluded:

...the existing legislative regime is largely sufficient to allow effective monitoring and enforcement by regulators of offshore petroleum‐related operations – the inadequacies identified by the Inquiry relate primarily to the implementation of this legislation.[25]

2.32      For instance, the Montara Commission considered that in assessing the applications for suspension and/or drilling activities lodged by PTTEP Australasia (PTTEPAA), the owner of the Montara platform, the NT Department of Resources 'conducted little more than a ‘tick and flick’ exercise' and 'was not otherwise sufficiently diligent in ensuring that principles of good oilfield practice were followed by PTTEPAA'.[26]

2.33      Accordingly, the Montara Commission recommended that, 'based on its examination of what has occurred with respect to the regulatory regime that applied at the Montara Oilfield', the Productivity Commission's recommendation to establish a national offshore petroleum regulator should be pursued 'as a minimum'.[27]

Government response

2.34      When the government released the Report of the Montara Commission of Inquiry, the draft government response was also published for consultation.

2.35      In its submission to the government's draft response, APPEA considered:

A compelling case has also been made for the establishment of a single integrated, independent, offshore regulatory authority to manage these critical operational areas. It is important, however, that the reform delivers tangible, demonstrable and measurable improvements including inter- and intra-jurisdictional consistency, substantially improved efficiency, less decision points and the removal of duplication.[28]

2.36      ExxonMobil submitted that it supports 'the NOPSA concept in which a single regulator provides national coverage and the onus is placed on each enterprise to develop and implement processes that meet regulatory requirements'.[29]

2.37      The Northern Territory Government submitted that it 'supports the principle of moving to a single national regulator to improve consistency of regulation', although:

That support is qualified by the observation that there is value in using the combined knowledge and experience of current regulators in developing a proposed regulatory regime for the new body.[30]

2.38      The government's final response was released on 25 May 2011 (the same day these bills were introduced).

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