CSG explorer convicted and fined: The first prosecution for breaches of conditions of an exploration licence

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On 10 January 2014, the NSW Land and Environment Court convicted Santos NSW Pty Ltd (Santos) of four offences under section 136A(1) of the Petroleum (Onshore) Act 1991 (NSW) (PO Act) for failing, without reasonable excuse, to comply with conditions of its petroleum exploration licence.  Santos was fined $52,500 in total and ordered to pay the prosecutor’s costs in the amount of $110,000.  The judgment is important because it is the first time the Court has convicted a licence holder under section 136A(1) of the PO Act and recent amendments to the PO Act have now increased maximum penalty for a breach of this provision.

Legislative background

On 22 December 2000, the Mining and Petroleum Amendment Act 2000 (NSW) (MP Amendment Act) came into force.  Amongst other things, the Amendment Act inserted section 136A into the PO Act, creating a new offence for contravening or failing, without reasonable excuse, to comply with conditions of a petroleum title. 

In circumstances where a condition was identified as a condition related to environmental management and the offence was to be dealt with on indictment, the maximum penalty was $110,000.  In all other circumstances, the maximum penalty for breach of a condition was $22,000.

On 1 January 2013, the Petroleum (Onshore) Amendment (Royalties and Penalties) Act 2012 (NSW) (PO Amendment Act) came into force.  The PO Amendment Act has increased the maximum penalty for breach of a condition related to environmental management under section 136A(1) of the PO Act to $1.1 million (in the case of a corporation) and $220,000 (in the case of an individual).  The maximum penalty for a breach of a condition not related to environmental management was also increased from $22,000 to $220,000.    

The PO Amendment Act also inserted section 136A(3) into the PO Act which sets out factors which the Court will take into account in imposing a penalty, including:

  1. the extent of harm caused or likely to be caused to the environment;
  2. the practical measures that may be taken to prevent, control, abate or mitigate that harm;     
  3. the foreseeability of the harm caused or likely to be caused to the environment; and
  4. the offender’s control over the causes of the breach.

Despite the fact that the offence for breach of a condition of a petroleum title was introduced in December 2000, the recent decision of the Land and Environment Court in Connell v Santos NSW Pty Limited [2014] NSWLEC 1 (Santos case) is the first time that the Court has convicted a licence holder under section 136A(1) of the PO Act. 

Facts of the Santos case

Eastern Star Gas Ltd (ESG) was permitted to undertake drilling as part of its exploration for coal seam gas (CSG) in an area of land located south of Narrabri under Petroleum Exploration Licence 238 (Licence) and Petroleum Assessment Lease 2 (Lease).

The drilling activities undertaken by ESG produce water with elevated concentrations of salt (Formation Water) which was conveyed to a reverse osmosis water treatment plant (Plant) pursuant to the conditions of the Licence and Lease.  Once the Formation Water was treated at the Plant and salinity levels were reduced, it was discharged into a nearby waterway. 

On 25 June 2011, after multiple leaks and incidents had occurred at the Plant, approximately 7,000 litres of spilled Formation Water escaped from the Plant (Spill).    

On 3 November 2011, ESG provided a report to the Department of Primary Industries (Department) in response to the complaints about tree die back within close proximity to the Plant.  This report did not refer to the Spill.

On 17 November 2011, Santos purchased all shares in ESG (previously holding a non-controlling 19.9% shareholding) and, consequently, ESG became a wholly owned subsidiary.  After this time, operations became subject to the management and control of Santos and its operating procedures and environmental health and safety systems.  At the time of the Spill, Santos did not have any representation on the board or management of ESG and did not operate the Plant or undertake exploration activities under the Licence or Lease. 

On 6 January 2012, Santos sent the Department a copy of ESG’s environmental incident report in respect of the Spill.

On 22 February 2012, Santos issued a report setting out the findings of its review of ESG’s operations and plans to address environmental management deficiencies.  This report also made reference to the failure of ESG to accurately reference the total dissolved solids level of water discharged into a nearby waterway in Environmental Management Reports (EMRs) which, on at least 11 occasions, exceeded the total dissolved solids limit of 250ppm prescribed by ESG’s Petroleum Operations Plan (POP).  

The Charges

Santos pleaded guilty to four charges of committing offences under section 136A(1) of the PO Act, namely:

  1. one charge for failing to report the Spill, being an incident causing or threatening material harm to the environment (Failure to Report Offence); and
  2. three separate charges for lodging EMRs with the Director-General of the Department that did not accurately report against compliance with the POP (Inaccurate Reporting Offences).     

Decision

In sentencing for the offences, Preston CJ observed that the Court is required to consider the objective and subjective circumstances of the particular offences and offender, the factors set out in section 136A(3) of the PO Act, and other applicable provisions contained in the Crimes (Sentencing Procedure) Act 1999 (NSW) (CSP Act).

At the time of the offences, the maximum penalty for contraventions of conditions of title related to environmental management was $110,000.  The parties agreed that the increased maximum penalty introduced by PO Amendment Act did not apply to the four offences in this instance by reason of section 30 of the Interpretation Act 1989 (NSW).

In relation to the Failure to Report Offence, the Court held that a fine of $30,000 was appropriate.  In reaching this conclusion, Preston CJ observed that:

  1. Section 136A(3)(a) of the PO Act required the Court to consider the environmental harm caused by the Failure to Report Offence rather than the Spill itself.  As a consequence, only the environmental harm that occurred after the Spill should have been reported is relevant and, having regard to expert evidence, the Court found that the Failure to Report Offence was at the lower end of the scale of seriousness. 
  2. The circumstances were aggravated by the fact that in August and early November 2011, when officers of the Department investigated complaints of tree die back, ESG had the opportunity and failed to disclose the Spill.  Consequently, Preston CJ regarded ESG’s conduct in the commission of the offence as deliberate and intentionally carried out with knowledge that its actions were illegal, increasing the objective seriousness of the offence.  

The Court discounted the fine to $21,000 after taking into account the utilitarian value of the plea of guilty (25%) and Santos’ assistance to the authorities (5%).        

Although the Court accepted that the Inaccurate Reporting Offences had an indirect causal relationship to the environmental harm caused by the Spill, these breaches were also considered to be at the lower end of the scale of seriousness.  In the circumstances, Preston CJ held that a fine of $15,000 for each of the Inaccurate Reporting Offences was appropriate.  The fine was discounted to $10,500 for each of the Inaccurate Offences in light of the guilty pleas and Santos’ assistance to the authorities.  

Santos was also ordered to pay the Department’s costs of the proceedings in the sum of $110,000.    

Implications

The Santos case sends a clear warning to the CSG industry that the Department is willing to prosecute operators for breaches of conditions of petroleum titles.  Although the total fines imposed on Santos may appear insubstantial, in light of the tenfold increase in the maximum penalties which came into effect this month, it is likely that future prosecutions for similar offences will result in significantly higher penalties.


The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.


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Louise Camenzuli

Partner. Sydney
+61 2 9210 6621

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