Mothballing a resources project - Landowner issues and compensation

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24 February 2014

The decision to shut down a resources project, either temporarily or permanently, is never lightly made. While the decision itself is usually driven by economic and financial factors, implementing the closure requires compliance with a variety of legal measures.

As interested stakeholders in a resources project, owners and occupiers of land can be affected by changes to a project.  Managing relationships with owners and occupiers and charting a course through any legal obligations is essential for a tenement holder when permanently or temporarily closing a resources project.

The potential issues for landowner relations arising from temporary or permanent closure of a resources project include:

  • Obligations to consult or inform landowners of changes to activities;
  • Potential changes to compensation payable including where there has been a material change of circumstance; and
  • The impact of a mothballing a resources project on agreements with owners and occupiers relating to matters other than compensation.

These are discussed below.

Statutory Obligations to Consult and the Land Access Code

While there are no specific statutory obligations requiring holders of tenements to advise owners and occupiers of land about any scaling back of activities, there are general obligations under legislation to consult with landowners about activities.  For example, section 141A of the Mineral Resources Act 1989 in relation to exploration permits and section 74 of the Petroleum and Gas (Production and Safety) Act 2004 in relation to authorities to prospect.  These provisions would likely impose an obligation on the tenement holder to consult with or inform owners and occupiers of land about significant changes to the activities originally proposed to be carried out.  Any such consultations should also cover potential impacts to compensation.

The non-mandatory provisions of the Land Access Code also set out some general principles in relation to establishing and maintain good relations including that the resources company should liaise closely with the landholder in good faith and advise the landholder of the tenement holder’s intentions relating to authorised activities well in advance of them being undertaken.  These non-mandatory provisions of the Land Access Code also suggest that the resource tenement holder should maintain contact with the landowner throughout the work program.

So while there is no specific obligation to notify owners and occupiers of land about any temporary or permanent reduction in activities, the general legislative obligations would require that it be done.

In any event, informing owners and occupiers of land of any scaling back of activities is a prudent course of action to take in order to maintain a good relationship.

Compensation

Compensation will likely be a significant issue where there is a temporary or permanent closure of a resources project because such a change to activities may change the impact on the land which may affect the amount of compensation that is or should be payable.

These impacts around compensation could arise:

  • If the change to the project activates or affects a right to compensation under an existing contract; or
  • If the change triggers the material change of circumstances provisions of the relevant resources legislation enabling compensation to be reviewed.

Contracts dealing with compensation will likely set out what compensation is payable and the activities or impacts to which the compensation relates.  If the activities change, then the payment obligations under any agreement may be affected.  Accordingly, when temporarily or permanently closing a resources project, a resource project proponent will need to look at its current compensation obligations to determine whether they will be impacted by the change.  As discussed above, it is prudent for a project owner to advise owners and occupiers of any proposed change and to also discuss any potential changes to compensation.

If a change to the compensation is warranted but the parties are unable to agree on any change, then if either party feels that there has been a material change of circumstance, they are entitled to have that compensation reviewed in the Land Court.  (See below in relation to material change of circumstance.)

Any potential impact on the amount of compensation payable could affect the expectations of a party as to how much compensation could or should be paid which could in turn affect the relationship of the parties.

For example, a conduct and compensation agreement between a petroleum company and a landowner for a well program may provide for a specified amount of compensation to be paid each time a well pad is constructed.  If the anticipated well program was for 10 wells but the project proponent decides to halt the project at 6 wells, then the right of the landowner to receive compensation for the remaining 4 wells will not be activated and no compensation is payable for the 4 wells that remained undrilled, even though the landowner may have been expecting compensation for 10 wells.

Conversely, if the conduct and compensation agreement provided for an upfront payment of compensation for 10 wells but only 6 were drilled, then the resources company will have paid compensation for the impacts of 4 wells which were never created.  This could lead to a party seeking to have compensation reviewed (see below in relation to a material change of circumstance).

Material Change of Circumstance

The right to review compensation for a material change of circumstance exists regardless of whether the compensation was determined by agreement or by the Land Court in the first instance.

The cases on this point indicate that for there to be a material change, the change event must have been material or pertinent (not necessarily substantial) and the change event must have altered the impact on the land.  Whether there has been a material change of circumstance may also depend on the terms of any agreement dealing with compensation.

Significantly reducing the scale or number of activities, for example, drilling a lower number of wells than originally anticipated or only open cut mining on a fraction of the area originally intended for mining or stopping activities altogether, could conceivably constitute a material change of circumstances which would allow compensation to be reviewed.

A review of compensation for a material change of circumstance arising from a temporary or permanent closure of a resources project could result in a determination by the Land Court that less compensation should be paid on the basis that there is going to be less impact on the land.  If compensation has already been paid, this could mean that some of those amounts may need to be repaid by the owner or occupier to the resources company.

For more information about a material change of circumstance, please refer Reviewing Compensation for Resources Tenures.

When temporarily or permanently closing a resources project, a project proponent will need to consider whether, if a variation to compensation can’t be agreed, the changes arising from the closure will amount to a material change of circumstance and whether a review of compensation should be sought through the Land Court.  Where the impacts will be significantly less than originally anticipated, and especially where large amounts of money are involved or have already been paid, then seeking a review may be a preferred course of action for a resources company.

Contractual Obligations other than Compensation

Resources project owners will regularly enter into various other contracts with owners and occupiers of land on which the project is being carried out, such as contracts allowing agistment of stock on the area of a resources project and for the supply of water by the project proponent to the owners and occupiers of the land (or vice versa).

Temporarily or permanently closing down a resources project may impact on such contracts and accordingly they will need to be considered and dealt with by project proponents.

For contracts allowing agistment of stock, mothballing a project may be beneficial to a landowner as it may allow more area to be available for grazing of stock.  Any changes to any existing agreement should be documented in writing and may need to address different scenarios, for example, if the closure is temporary, provisions for the cessation of the stock agistment and the recommencement of the project will need to be inserted.

Any supply agreements, such as for the supply of water where a landowner can take water from a dam or pipeline for stock purposes, will also need to be considered and may be more difficult to manage as part of a temporary or permanent closure depending on the terms of those contracts.  Agreements providing for supply on an “as available” basis may not cause much difficulty as the supply under such contracts can usually be varied or ceased without penalty.  However, if the obligation is for supply of a regular quantity at a regular period for a particular duration, then a resources company could potentially be in breach of such a contract by simply turning off the supply.  A project proponent will need to consider what avenues exist under the agreement to curtail supply.  It may be the case that force majeure clauses may not be available as a temporary or permanent closure may be at the election of the resources company rather than due to factors beyond their control.

There are any number of combinations and permutations that could exist in contracts with owners and occupiers of land.  Some contracts may be quite specialised to deal with specific concerns or issues that were negotiated at the time.  Some of these contracts may not have contemplated a temporary or permanent project closure so may not have terms to deal with such an event.  Nevertheless, a project owner will need to review any contracts with owners and occupiers in order to determine what rights and obligations exist around any project closure and about what opportunities may exist for both parties having regard to the individual contracts and the cumulative impact of all contracts between the parties.  (For example, it could be the case that allowing agistment on additional areas may be accepted in return for permitting a cessation of water supply without penalty.)

Summary

Keeping owners and occupiers of land informed about potential temporary or permanent project closures, whether or not a statutory obligation, is certainly a prudent course of action for resources project owners.

But the task for a project owner may be more than just informing owners and occupiers about these sorts of project changes.  A number of contracts may exist between owners and occupiers of land and project owners.  The rights and obligations of the parties under the various contracts will need to be considered as changes may impact on parties’ rights.

In particular, the amount of compensation to be paid or that has already been paid may require review to adjust it to a figure which better represents the impact of the resources activity on the land.  Parties are entitled to try to resolve any change to compensation through negotiation.  But if that avenue is not successful, where there has been a material change of circumstance, either party can seek a review of compensation in the Land Court.

A project proponent will need to ensure these are adequately addressed as part of any project closure.


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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