Tuesday, 11 February 2014

Submissions - The Australian Risk Policy Institute (ARPI)

Code of Practice for Land Access for coal seam gas and petroleum exploration

The NSW Government has called for feedback on a draft Code of Practice for Land Access for coal seam gas and petroleum exploration.  The Code purports to set out “a best practice framework for how explorers can negotiate access arrangements with landholders”.
Due: 5:00pm 13/1/14

The NSW Government has failed in its objective of providing a best practice framework for how explorers can negotiate access arrangements with landholders.  Because the proposed legislative scheme permits inappropriate contracting out of the Code, it cannot be said to establish a “best practice framework”.
ARPI recommends:
1.       Parties should not be able to contract out of the requirements set out in Part 3 of the Code of Practice unless the landholder:
a)      is a listed public company (or equivalent); or
b)      has provided the explorer with a certificate signed by a lawyer (with no relationship either past or present with or to the explorer) stating that the landholder is aware of their rights under Part 3 but has chosen to vary them as set out in the certificate.
2.       Provisions of the Act inconsistent with the proposed Code of Practice approach should be revised to ensure that the protections in the Code of Practice are not subject to technical attack, better integrate the Code of Practice with the arbitral process and to ensure consistency between the Code and general law compensatory principles.

ARPI encourages the NSW Trade & Investment, Resources & Energy Department to expressly consider risk policy during future drafting processes (see the Risk Policy Model at www.arpi.org.au).

The rapid expansion of on-shore exploration and extraction of CSG (coal seam gas and petroleum products) has become a highly contentious social and political issue, placing new challenges on legislators responsible for addressing social, economic and environmental impacts.    
While the present issue under consideration is relatively narrow (the shape of exploration access agreements), ARPI considers that the policy to be pursued in this instance must be consistent with that applicable to the entire exploration/extraction process.  In this regard, ARPI agrees that
In practical terms, it is important for all involved with CSG operations to understand the nature of the risks the industry poses. Society and economy depend on the ecological, hydrological and geochemical processes in the landscape. Their vulnerability to failures of CSG safeguards, not the calculated probability of failure, defines the level of risk. A new approach to risk management demotes the probability assessment, and promotes realisation of the importance of the consequences of events (ARPI & ScottCromwell 2013). This model of risk thinking is consistent with the new cumulative risk assessment approaches in use in the Namoi and Murray Catchment Management Authorities (MCMA 2012; Eco Logical Australia 2011, 2012, 2013). (BREE [Bureau of Resource and Energy Economics], Gas Market Report, October 2013, page 59)
ARPI agrees that, in relation to CSG, vulnerability defines the level of risk.  Accordingly, in considering this issue, ARPI has sought to understand the real risks and real consequences of exploration, in the first instance at the level of the landholder but equally looking at the upstream, downstream and knock-on effects of a failure to protect the vulnerabilities of all stakeholders (including an explorer or extractor) in the use of land.  For example, the unreported release of an environmental toxin by an explorer may not only have impacts on the present landholder, but possibly on a future mining extractor and the broader community.

In relation to the exploration phase, as in the extraction phase, a key vulnerability is the level of trust the community has in relation to the impact of CSG on land use.  During the exploration phase, this involves the immediate challenge of finding pragmatic ways of dealing with inconsistent land use and management. 
In NSW, the legislative response is set out in Part 4A of the NSW Petroleum (Onshore) Act 1991 which deals with access arrangements for prospecting titles.  The scheme provides that, in the exploration phase, explorers must not carry out prospecting operations for CSG on land, except in accordance with an access arrangement applying to that land.  Failure of the parties to come to an agreement will result in the issue being promoted to arbitration.   

Prior to recent amendments, the legislation provided little practical assistance in determining the shape of agreements (beyond suggesting possible subject matters, making limited provision about compensation and permitting the publication of non-mandatory template agreements). The approach in the original provisions – placing responsibility for settling the first instance agreement in the hands of those closest to the issues – seems good in theory, but is problematic because of the significant information dichotomy between explorer (who may have experience with many such agreements and who may seek to minimise the cost of downstream consultation or any liability for disruption to agricultural activities) and the landholder (who may have an imperfect understanding of the agreement process and may be motivated by a fear of the loss of part or all of their livelihood).  This scheme created a tool for the parties to deal with some of the vulnerabilities inherent in the agreement process – but did little to ensure that arrangements that actually addressed the vulnerabilities would be finalised. 

Recently the Act was amended by the Petroleum (Onshore) Amendment Bill 2013 to include a new s69DB, providing for a better mechanism to achieves fair first instance agreement between the parties.  The new provision provides:
69DB Access code
(1) The regulations may prescribe a code (an access code) containing provisions relating to access to land by the holder of a prospecting title and the carrying out of activities on that land by the holder.
(2) The regulations may designate any or all of the provisions of an access code as mandatory provisions.

ARPI considers that these legislative changes are a significant improvement on the existing arrangements, but notes that the success will depend on the appropriate implementation of mandatory provisions in any future access code.

The proposed Code of Practice released for public comment is to be made under these provisions.  The scheme in the Code differs from the former arrangements where a NSW Department could publish templates for standard arrangements, the use of which was not mandatory (s69D(1A)).  Instead, the proposed Code of Practice provides for “mandatory provisions”, intended to be binding on each party.

The Code proceeds on the basis that an explorer is required to minimise any loss and keep the landholder informed of and indemnified against any loss.  These provisions are supplemented by other provisions in the Act dealing with impacts on residential areas and infrastructure.

The inclusion of these principles in the Code is an important way in which risk can be minimised across the entire sector – a systemic approach to risk management.  Active exploration can have an immediate and significant impact on farm operations, the value of the property (including the capacity of a landholder to seek loans using the property as security) and future farm planning.  The inclusion of these provisions in access agreements is a sensible initiative.

From a general law perspective, the mandatory provisions themselves are unexceptional – and proceed on the basis that an explorer must indemnify the landholder against any loss.  Importantly, the explorer is required to notify the landholder of any loss – that is, the explorer has an obligation to act in good faith – similar to obligations placed on actors in other general law indemnity or insurance arrangements. 

However, the value of the scheme is negated by an apparent intention to allow the parties to “contract out” of these protections.  This intention is disclosed in a note at p. ix of the Code:
“Note: This Part of the Code sets out the mandatory provisions, as prescribed under the Regulation. The mandatory provisions must be included in all access arrangements, unless the access arrangement excludes them or varies them…”  (emphasis added).

In other civil schemes making similar provision for contracting out, where the parties have significantly different bargaining power/information, this has led to contracting out becoming the standard practice, defeating the underlying statutory intention to provide a basic level of protection. 

In general, parties should not be able to contract out of the types of requirements set out in Part 3 of the Code of Practice.  Systemically, a Code cast in this form, as an expression of Risk Policy, fails to protect the vulnerability of the landholder to an adverse outcome where there is significant information dichotomy in play.  The Code of Practice protects the legitimate interests of the landholder by incorporating existing legal principles.  Further, contracting out can leave the legal positions of the parties in significant doubt – occasioning the risk of litigation and further loss.  In the present circumstances, contracting out may expose a landholder to non-compensable loss, sometimes in direct breach of mortgage arrangements and to the detriment of innocent third parties.

Nevertheless, ARPI recognised that, in some circumstances, it would not be contrary to public policy to allow parties to contract out of civil obligations.  In the present circumstances, these circumstances should be restricted to cases where those negotiating are objectively or reasonably capable of negotiating on an equal footing (ie, where the information dichotomy has been addressed).  In relation to mining explorers, this would include circumstances where the landholder:
a.       is a listed public company  (or equivalent); or
b.      is a properly advised landholder (e.g., the landholder has provides the explorer with a certificate signed by a lawyer with no past or present relationship with or to the explorer stating that the landholder is aware of Part 3 but has chosen to vary the application of Part 3 as set out in the certificate).

Without these protections, the Code of Practice will fail to meet its objective of providing a best practice framework for how explorers can negotiate access arrangements with landholders.
Further, in reviewing the NSW Act, ARPI notes that the Code of Practice scheme has been “bolted onto” the Act, and that there are a number of provisions in the Act that might enable technical attacks to be made on the Code. 
It is recommended that the inconsistent provisions in the Act should be reviewed in the light of the development of the Code to ensure consistency between the Code and general law compensatory principles.  Further, downstream arbitrations provided for under the might be required to have regard to the Code of Practice as representing best practice.

It is noted that the obligations in the Code of Practice are not mutual – most obligations are expressly placed on an explorer.  However, it is noted that an explorer would have recourse to the general law for loss occasioned through negligence or deliberate action of a landholder.  Accordingly, no comment is addressed about the lack of mutuality.

It is noted that the Regulation has not been published for public comment.  In the circumstances, it would have been more appropriate for the NSW Government to release both the Regulation and Code for comment. 

The failure to publish both documents (and the provisions of s69DB outlined above, which has not yet been published in consolidated versions of the NSW Act) means that a casual observer would not have access to the entire scheme and may not have been aware of the risks of contracting out.

January 2014

Note that this submission reflects input from other ARPI members.

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