Difficulties in forcing operators to fulfill exploration commitments

Australia's Cornea agreement example

In May 1999, disappointing results in the Cornea field, located in the Browse Basin off Western Australia, encouraged the operators to apply for cancellation of exploration permits covering the area. The settlement between the Australian Commonwealth and Western Australia's provincial government and the joint venturers - Shell Development (Australia) (50%), Chevron Asiatic (25%), and Cultus Group (25%) - bring into sharp focus the difficulties government faces in enforcing the spending commitments of successful bidders for permits.

The exploration area is 400 km north of Derby in Western Australia. At the time a request for cancellation was submitted, the joint venturers had A$60million of work, consisting of 35 wells, remaining to complete in accordance with the work program. Under Australian offshore petroleum legislation, the work permit bidding system requires companies to bid for the grant of permits outlining the work program, which each bidder is prepared to commit to in relation to the relevant permits. Permits are then granted on the basis of a ranking of the submitted bids.

Compromise agreement

Toward the end of 1999, the Minister for Industry, Science, and Resources announced that Shell had agreed with the Australian Commonwealth government and the Western Australian government to spend A$30million on exploration work in areas not taken up in recent acreage releases, equivalent to Shell's 50% share of the cost of drilling the outstanding commitment wells. The remaining joint venturers were not a part of this deal, although they may be planning to voluntarily redirect funds to worthwhile prospects.

The government indicated it felt that the arrangements would maintain the integrity of the work program bidding system. However, there has been comment in the industry that the situation raised many questions as to whether the system can be maintained.

There have been suggestions that the system should be amended. The minister indicated that the system does require fine tuning. The stated principles outlined below upon which the arrangements with Shell were based may be seen as the government's first step in undertaking such fine tuning.

  1. The defaulting company must satisfy government that it has made a "significant attempt" to assess the petroleum potential of the permit area (requiring at least the completion of seismic surveying commitments). Government may also refer to whether the defaulting company has completed work in excess of the second highest bid for the area.
  2. The defaulting company may maintain good standing by undertaking to spend an amount equal to the monetary value of the outstanding work commitments (as agreed by the government and defaulting company) on new seismic surveying and/or drilling exploration activities in areas that were not bid for in recent acreage releases.
  3. The defaulting company must make a public statement about its undertaking at the time of cancellation.
  4. Defaulting companies seeking to maintain "good standing" may be able to bid for re-released areas, but in order to maintain their "good standing," they must spend the full amount of the agreed value in the minimum guaranteed period of the new permits.
  5. Any amounts remaining outstanding after three years (and these would be expected to be very small amounts) would have to be spent on studies of the offshore Australian region for the benefit of the wider petroleum exploration industry (as determined in consultation with government and industry).

Flexibility

Currently proposed amendments to the system before the Australian Commonwealth Parliament do not deal with issues such as those presented by the Cornea situation, but relate only to allowing for the ranking of bids for exploration permits (based on the order in which they are considered deserving and excluding undeserving bids from the ranking). They relate also to the introduction of a supplementary bid system for equally-ranked bids as a further basis for selection of the successful applicant.

Further, the Joint Authority may revisit applicants if a permit offer is not taken up or a successful applicant withdraws an application. Previously the Joint Authority would have had to issue a new public invitation for applicants and recommence the entire process.

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