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To frack or not to frack

To frack or not to frack

By Andrew Komesaroff and Christopher Langton

Environment 

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New legislation will have significant implications for companies exploring for and extracting gas and petroleum in Victoria.

Snapshot:

  • Nearly five years since the first governmental intervention into fracking, Victorian legislation now permanently bans fracking and coal seam gas exploration and production.
  • Onshore petroleum exploration and production is subject to a legislated moratorium until 30 June 2020.
  • Liability of the Victorian government for its policies with respect to fracking and petroleum exploration and production is precluded with retrospective operation.

Hydraulic fracturing (fracking) is a technique used to stimulate and enhance the production of gas and petroleum located in underground rock formations called reservoirs. The process involves injecting liquid and sand at high pressure into the reservoir to stimulate the underground rock formation and extract the gas or petroleum contained therein. Generally, this method is used to enhance production, particularly for reservoirs where the rock properties are such that the reservoir would not produce commercially feasible quantities of gas or petroleum without stimulation.

In March 2017, the Victorian parliament passed laws amending the Mineral Resources (Sustainable Development) Act 1990 (Vic) (MRSDA) and the Petroleum Act 1998 (Vic) (Petroleum Act) to introduce bans on fracking. The legislation brought to an end five years of policy development on fracking implemented through ministerial announcements.1

Background

Concerns around fracking developed during the 2000s, gaining significant attention in the United States following the release of documentaries and movies like Gasland in 2010 and Promised Land in 2012. The primary concern is that fracking detrimentally affects the environment, particularly the water table. Community concerns in Australia developed simultaneously with those in the United States.

With community concern building, in August 2012 the Victorian government announced a policy which effectively placed an immediate hold on certain government approvals necessary to undertake fracking in Victoria (2012 Fracking Moratorium).2 Then, in January 2013, the government established the Gas Market Taskforce (Taskforce) to examine issues and make recommendations with respect to Victoria's gas supply. Authored by Peter Reith, the Taskforce report (Report) was released on 21 November 2013 and was broadly encouraging of the practice of fracking.3 Ultimately, the Report recommended the reversal of the 2012 Fracking Moratorium, conditional upon the adoption of a package of reforms which included “leading practice regulation, community engagement, information and science to underpin the management of the onshore gas industry in Victoria”.4 Reflecting the Taskforce's finding that “there is a lot of exaggeration about fracking”, the Report identified that “local communities must be properly consulted and engaged, and industry and governments must address community concerns to create a 'social licence’ to operate”.5

On the same day as the Report's release, the government announced an extension to the 2012 Fracking Moratorium until at least July 2015 (Fracking Moratorium Extension)6 in order to obtain community views through a consultation process, and to undertake a study on the potential impact of fracking on the water table and aquifers. The potential impacts on the state's water resources were said to be “key factors at the forefront of the government's consideration of issues surrounding onshore gas”.7 In this respect, the government noted that it “would not support onshore gas production in Victoria unless and until all of the scientific facts [were] known and clear evidence [had] shown that such an industry would not risk the state's assets”.8 In a further policy announced in May 2014, the government put a hold on the exploration for, and production of, all onshore gas, regardless of whether fracking was to be used as part of the exploration or production of the gas (2014 Onshore Gas Ban).9

In August 2016, the Victorian government announced another policy (August 2016 Policy) which put in place a permanent ban on the exploration and development of all Victorian onshore unconventional gas.10 Additionally, the existing moratorium on the exploration and development of conventional gas was further extended until 2020.

Conventional gas refers to gas contained in naturally porous reservoir formations which, when intercepted by a well, do not require a pump to extract the gas. In contrast, unconventional gas is contained in more complex geological formations which typically require horizontal drilling or hydraulic fracturing in order to extract the gas.11

In October 2016, subsidiaries of Lakes Oil NL (Lakes) issued proceedings in the Victorian Supreme Court seeking judicial review of the policies and their application by the relevant government Minister to their respective mining and petroleum interests in Victoria. In further proceedings issued in December 2016, those Lakes subsidiaries also asserted that they had suffered loss and damage as a result of the government's allegedly unlawful decisions.12 The amount claimed by Lakes for this loss and damage exceeded $2 billion.

The August 2016 Policy was the final policy regarding fracking announced by the Victorian government prior to the introduction of the Resources Legislation Amendment (Fracking Ban) Bill 2016 (Vic) (Bill) into the Victorian parliament on 22 November 2016. The Bill passed both houses of parliament (ultimately with bipartisan support) and received royal assent on 15 March 2017.

Overview of the legislation

The Resources Legislation Amendment (Fracking Ban) Act 2017 (Vic) (Act) has several express purposes,13 being to:

  • ban hydraulic fracturing
  • prevent exploration for and mining of coal seam gas (CSG)
  • impose a moratorium on onshore petroleum exploration and production
  • authorise the Minister to pay for the surrender of relevant authorities granted under the MRSDA and the Petroleum Act.

To achieve these purposes, the Act amends the MRSDA and the Petroleum Act.

 

Banning fracking

The ban on fracking is achieved by inserting the following definition of “hydraulic fracturing” into both the MRSDA and the Petroleum Act:14

“Hydraulic fracturing means the injection of a substance or substances into a bore under pressure for the purposes of stimulating a geological formation”.

The Act then makes it an offence to carry out “hydraulic fracturing” under both the MRSDA and the Petroleum Act.15 With respect to the MRSDA, the ban is applicable to exploration, mining or retention licence holders when undertaken in the course of carrying out any exploration or mining under their licence. With respect to the Petroleum Act, hydraulic fracturing is banned when undertaken in the course of carrying out any “petroleum operation”. The term '”petroleum operation” has a very broad definition under the Petroleum Act and, consequently, the fracking ban imposed under the new legislation has a similarly broad ambit.

Preventing CSG exploration and mining

The Act inserts a new section into the MRSDA which makes it an offence to carry out any exploration for, or mining of, CSG.16 An exemption from this offence is afforded to a licence holder who incidentally discovers CSG when exploring for minerals other than CSG, provided that the discovery is reported to the Minister.17 Further, applications for licences granted under the MRSDA are deemed ineffective to the extent they relate to CSG, and the relevant Minister is not authorised to accept any application for a licence relevant to CSG.18

Petroleum exploration and production moratorium

The moratorium on petroleum exploration and production has been inserted into the Petroleum Act. With some exceptions 19 the moratorium provision in effect prohibits any petroleum exploration or production until 30 June 2020, even where such exploration or production is otherwise authorised under an authority granted under the Petroleum Act.20Additionally, the relevant Minister is not authorised to grant any authority for the carrying out of petroleum exploration or production during the moratorium.21

Surrender of authorities

The Act expressly authorises the Minister to pay for the surrender of relevant authorities granted under the MRSDA and the Petroleum Act.22

Other provisions have been inserted into both the MRSDA and the Petroleum Act which preclude any form of government liability for loss or damage suffered as a result of the amendments made by the Act or arising from any of the policies implemented since the first policy in August 2012.23

Legal commentary

In 2015, petroleum exploration company Metgasco Limited (Metgasco) issued legal proceedings against the NSW government in relation to two decisions of the Minister's delegate to suspend Metgasco's authority to conduct petroleum exploration activities.24 The decisions of the delegate were overturned by the NSW Supreme Court on administrative law grounds and, subsequently, Metgasco initiated a secondary action against the government to recover the loss allegedly suffered as a consequence of the Minister's decisions. The NSW government paid Metgasco approximately $25 million to settle the secondary action.25

While not expressly identified as a purpose of the Act, it is assumed that the provisions precluding any state liability arising out of the policies and legislation are intended to protect the Victorian government from liability such as that which the NSW government faced in the Metgasco proceedings. The provisions included in the Act operate retrospectively to prevent any liability of the State for the policies implemented by the government from the date of the announcement of the 2012 Fracking Moratorium (24 August 2012).

By virtue of the principle of parliamentary sovereignty26 and a plethora of constitutional case law,27 it is clear that the state parliament has the capacity to enact legislation which affects rights or liabilities retrospectively. While there is a presumption against such legislation operating retrospectively, the presumption is “at best . . . a weak presumption”, rebuttable by clear and express words indicating the intent for the retrospective operation of the legislation.28 Such words are inserted into both the MRSDA and the Petroleum Act by ss7 and 11 of the Act:

“Despite any Act . . . or law to the contrary, the State is not liable in any way for any loss, damage or injury of any kind resulting directly or indirectly from or arising out of" (among other things) the amendments made to the MRSDA and the Petroleum Act or the policies implemented by the Victorian government from 24 August 2012 onwards.29

That preclusion of state liability applies whether the loss, damage or injury was incurred “before, on or after the commencement” of the Act.30 Further, the Victorian parliament has power to make laws in and for Victoria “in all cases whatsoever” and is not constrained by the constitutional limitations applicable to the power of the federal parliament.31

 

Conclusion

The Act is a salutary reminder of the sovereignty of the Victorian parliament. However, with concern growing in relation to electricity prices and the ongoing political debate about domestic gas supply, the story of fracking in Victoria may not be fully concluded. Despite the bipartisan support for the Act, there is no doubt room for a Victorian government to enliven the recommendations of the Taskforce. Perhaps with the pressure on the federal and Victorian governments to intervene in the domestic gas market there will be a renewed impetus to obtain the “social licence” to undertake fracking in the future, subject to suitable checks, balances and limitations. In the meantime, the Victorian government has given itself time to carry out what it calls a “comprehensive program of geoscientific research”, examining the prospectivity and “potential risks, benefits and impacts of onshore conventional gas and development”.32

 

Andrew Komesaroff is a partner and heads the corporate and commercial team in the Melbourne office of Colin Biggers & Paisley. He has extensive experience in advising clients on all aspects of commercial activities, with a particular focus on the mining, oil and gas, manufacturing and forestry industries.

Christopher Langton is a solicitor in the corporate and dispute resolution team in the Melbourne office of Colin Biggers & Paisley. He provides legal advice on transactional and litigious matters of a commercial nature for clients across the energy, mining and resources, agribusiness, hospitality and manufacturing industries.

The authors gratefully acknowledge the advice and assistance of Ian Freckelton QC in the preparation of this article.

 

1. Steve Chambers wrote an article in the August 2015 LIJ summarising the policy developments in Victoria with respect to fracking. At the time, a parliamentary inquiry was underway with a broad remit to inquire into matters relating to a potential unconventional gas industry in Victoria. This article follows on from that article.

2. Michael O’Brien MP, Minister for Energy & Resources, “Reforms to strengthen Victoria’s coal seam gas regulation and protect communities” (Media release, Victorian government, 24 August 2012).

3. Gas Market Taskforce, Final Report and Recommendations, October 2013.

4. Note 3 above, p1.

5. Note 3 above, p17.

6. Denis Napthine MP, Premier of Victoria, “Gas Market Taskforce paper open for public consultation” (Press release, Victorian government, 21 November 2013).

7. Note 6 above.

8. Note 6 above.

9. Russell Northe MP, Minister for Energy & Resources and Minister for Small Business, “Onshore gas exploration on hold as consultation continues” (Press release, Victorian government, 28 May 2014).

10. Daniel Andrews MP, Premier of Victoria, “Victoria bans fracking to protect farmers” (Press release, Victorian government, 30 August 2016).

11. See: Department of Industry, Innovation and Science, "Unconventional Gas", https://industry.gov.au/resource/UpstreamPetroleum/Pages/UnconventionalGas.aspx.

12. Mirboo Ridge Pty Ltd & Anor v Minister for Resources & Anor, Originating Motion for Judicial Review, Victorian Supreme Court, 27 October 2016 (SCI 2016 04381); Mirboo Ridge Pty Ltd & Ors v Minister for Resources & Anor, Originating Process – RedCrest, Victorian Supreme Court, 6 December 2016 (S ECI 2016 001288).

13. Resources Legislation Amendment (Fracking Ban) Act 2017 (Vic) (Act), s1.

14. Mineral Resources (Sustainable Development) Act 1990 (Vic) (MRSDA), s3; Petroleum Act 1990 (Vic) (Petroleum Act), s8.

15. MRSDA, s8AD; Petroleum Act, s16A.

16. Act, s4, MRSDA, s8AC.

17. MRSDA, s8AC(2).

18. MRSDA, s15(1BAA).

19. Petroleum Act, s17A(3) provides that s17A(1) does not affect the authorisation of petroleum exploration or petroleum production during the moratorium period from Production Licences 1, 2, 3, 11 and 13 or the authorisation under a production licence of petroleum storage that is carried out in accordance with a storage development plan approved under Division 7 of Part 5 that applies to the production licence.

20. Petroleum Act, s17A(1).

21. Petroleum Act, s17A(4).

22. MRSDA, s121B; Petroleum Act, s251B.

23. MRSDA, s121A; Petroleum Act, s251A.

24. Metgasco Limited v Minister for Resources and Energy [2015] NSWSC 453.

25. ASX Media Release, Metgasco Limited (MEL) Settlement/buy-back proposal, 2 November 2015.

26. Constitution Act 1975 (Vic), s16.

27. See, for example, Polyukhovich v Commonwealth (1991) 172 CLR 501; George Hudson Ltd v Australian Timber Workers' Union (1923) 32 CLR 413; Maxwell v Murphy (1957) 96 CLR 261; R v Kidman (1915) 20 CLR 425.

28. Polyukhovich v Commonwealth (1991) 172 CLR 501, 642 [23].

29. Act, s7; MRSDA, s121A; Petroleum Act, s251A.

30. Note 28 above.

31. Note 25 above.

32. Wade Noonan MP, Minister for Resources, “Fracking Banned in Victoria, Giving Certainty to Farmers” (Press release, Victorian government, 7 March 2017).

 


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