Roundtable: Oil & Gas 2011
The International Who's Who of Oil & Gas Lawyers has brought together two of the leading practitioners in the world to discuss key issues facing lawyers today.
Participants
MARTIN KLAPPER
HopgoodGanim
Australia
TRANSACTIONS
Who’s Who Legal: Most of the lawyers we spoke to noted a steady rise in transactional work over the past year in line with soaring demand for resources in both developed and emerging markets. How busy is the transactional market where you are? What kinds of transactions are clients pursuing? And are current activity levels sustainable?
Brad Roach: We have noticed a steady stream of work in the upstream sector in South East Asia, and have been particularly active in Indonesia. The government of Indonesia has had several recent bid rounds, and we have been advising clients on joint study and bidding agreements and joint operating agreements, as the work commitments on frontier deepwater blocks are substantial so it is common for consortiums to be formed. We assisted Medco Energi, Indonesia’s largest listed E&P company, in connection with the US$2.8 billion Donggi-Senoro LNG project, which took FID earlier this year, and will be the fourth LNG project in Indonesia.
Martin Klapper: From an Australian east coast, onshore perspective, most transaction work has been driven by coal seam gas. A great deal of that activity has focused on Queensland, although a strong industry is emerging in New South Wales and to a lesser extent in western Australia. With four significant consortia having made commitments to CSG-based LNG export projects in Queensland and a number of other projects still under consideration, transactional activity has been high with a significant number of acquisitions and mergers over the last few years. The level of activity is declining as those consortia are now focusing on resource exploration, and resource and infrastructure development. Exploration for both conventional and coal seam gas resources, as well as for shale gas continues apace, largely in Queensland, South Australia and the Northern Territory. The Australian Commonwealth government’s plans to introduce a mining resource rent tax and carbon price and State government intervention, notably (recently) the New South Wales government’s moratorium on the grant of new tenures for coal seam gas and the Queensland government’s introduction of additional regulatory hurdles such as the recently announced strategic cropping policy, present explorers with an increasingly uncertain and onerous regulatory environment.
THE FUTURE OF THE INDUSTRY?
Who’s Who Legal: With major players in world leading jurisdictions like China and the US setting high shale gas production targets to what extent is shale, in the words of one source, “the future of the industry”?
Martin Klapper: It is too early to say to what extent shale gas will play a major role in Australia’s energy future, though the likely presence of vast reserves of shale gas in areas of Australia is well-known. Significant players include Santos, Beach Energy and the recently formed Amour Energy, which is targeting resources in Queensland and a new gas province in the Northern Territory in Australia. An interesting space to watch over the next few years.
Brad Roach: It is fair to say that shale gas has the potential to transform China’s demand for energy, as its reserves have been estimated to exceed those of the US by 40 per cent, and there have been a number of major investments by Chinese NOCs in the US shale industry to access technology and experience. China needs to reduce its dependence on coal for geopolitical and environmental reasons, and so shale gas may have a major impact on China’s demand for coal and LNG. When you also take into account the potential reserves available for production from coal seam/shale and other tight gas formations in Australia, it will be interesting to see if LNG prices in Asia will continue to be able to command the oil-indexed premium they have enjoyed. As US LNG re-gasification terminals are undergoing conversions to allow LNG exports, and domestic shale gas production depresses US natural gas prices, there is likely to be a rise in LNG seeking Asian markets. What this augurs for pricing and demand patterns is very difficult to predict, but in the short-term, we have seen Asian LNG buyers attaching great importance to periodic price review provisions, which will allow the parties to review prices over the life of a long-term contract. I think it will be a very interesting period in the next five to 10 years, when these price reviews are triggered, as if the developments in the US are a guide, a lot can happen in a relatively short space of time.
ENVIRONMENTAL CONCERNS
Who’s Who Legal: With high levels of demand and investment into resource-rich developing countries, a number of lawyers we spoke to said their practices were becoming more heavily tied up in environmental regulatory advice, particularly with regard to oil exploration in indigenous communities. Is this true of your own practice? To what extent can traditional oil and gas expertise “stand alone” under evermore stringent environmental regulations?
Brad Roach: The extent of environmental regulation varies tremendously from jurisdiction to jurisdiction. Speaking from an Asian perspective, one could contrast the regulatory regime of developing South East Asian countries with those heavily regulated countries such as Australia and Japan. Obviously, host governments are far more attuned to the potential catastrophic impact of environmental pollution following the Macondo incident in the Gulf of Mexico, but in many cases the regulatory framework has not developed to address these concerns. This legislative void is resulting in affected local communities in some countries in South East Asia feeling frustrated and taking direct actions to impede the conduct of seismic surveying onshore and oil production. The situation can be further exacerbated in countries where there are multiple tiers of government, federal and national, state, regional and local, each of which have their own expectations of environmental standards or stewardship. E&P companies are increasingly realising that while they may comply with the standards required under applicable law or the production sharing contract, if local communities consider that operations are damaging their environment, the most likely outcome is interference with the conduct of operations. As a result, environmental issues are being addressed ‘in the field’ with local communities and education and community forums are required to ensure local communities are kept involved from the early stages of a project’s life.
Martin Klapper: Australia’s legal regime in terms of interaction with indigenous communities can be broadly categorised into native title and cultural heritage. Australia has a national regime that deals with native title (which focuses on customary rights to or concerning land), with a federal Native Title Act supported by complementary State and Territory legislation. Conversely, cultural heritage (which focuses on matters concerning heritage connection with land, and objects and sites of cultural significance) is regulated purely on a state or provincial basis, and consequently laws differ widely between the various Australian provincial jurisdictions. Whilst it is fair to say that compliance with these laws and rules impose a significant administrative cost and time burden on companies, in particularly explorers at the junior end of the market, the rules are well-known and are not generally regarded as an insurmountable obstacle to petroleum exploration and development. In Australia, environmental regulations stands apart from the regulation of matters relating to native title and cultural heritage, and different regimes exist for that purpose. Environmental regulation is an integral part of any oil and gas project, onshore and offshore, and companies’ social licence to operate in Australia is intimately associated not only with their environmental performance but the perception of environmental performance.
COUNTRIES TO WATCH
Who’s Who Legal: Which jurisdictions will be the ones to watch for oil and gas activity over the next year?
Martin Klapper: In onshore Australia, its ‘watch this space’ for LNG from CSG - a world’s first for large-sized LNG production from coal and gas resources that even less than two decades ago were regarded as a nuisance and a danger in underground coal mining. Shale gas is the sleeper and well worth watching.