Mothballing a resources project - Regulatory approvals and overlapping tenure issues

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28 November 2013

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.

It isn’t a case of the company simply announcing “down tools” and expecting all to be well. Project owners need to manage statutory and contractual obligations as well as a range of environmental, employment and safety issues.

Complying with Approval Terms and Conditions

The lease, licence, permit or authority (tenement) which grants the right to explore for, or extract, the resource sets out the terms and conditions on which the project must be operated.    Non-compliance with the terms and conditions of a tenement can lead to the imposition of a penalty or could result in the cancellation of the tenement.

To avoid such an outcome, project owners must check the terms and conditions of their tenements (as they may vary considerably from one tenement to the next) to understand any requirements that need to be followed if exploration or production is to be curtailed. 

Certain actions may need to be taken or there may be an obligation to leave the site in a particular state in order to effect the mothballing or closure.  Where compliance with the tenement’s conditions is not possible, an application to amend the conditions may need to be made.

For example, an exploration permit may have a condition setting out minimum expenditure commitments in particular years.  If the exploration program is to be closed down temporarily, the holder may need to seek Ministerial approval to reduce the expenditure obligations during the period where the project will be on hold.

Generally, conditions of a tenement will not prevent a project from closing down but may require that certain steps be taken or certain outcomes be achieved when doing so.

Amending Development Plans

In Queensland, every mining lease for coal or oil shale and every petroleum lease is required to both have, and comply with, a development plan for their project.  In broad terms, a development plan contains a general outline of the whole project as well as a detailed description of the activities to be carried out in the next five years.

If a project is to be cut short or changed as a result of a temporary or permanent closure, then the project owner will need to amend the development plan to reflect the changes to the project.

A new development plan must be submitted as soon as practicable after the holder of the mining lease or petroleum lease proposes or becomes aware of a significant change to the nature and extent of the authorised activities for that lease that is not already dealt with under the current development plan for the lease. 

The new development plan must be approved by the Minister and will need to outline the activities proposed to be carried out for the remaining term of the lease as well as include a more detailed description of the activities in each of the first five years of the new plan.

Where operations are going to be temporarily mothballed, an estimated duration of the closure will effectively need to be given as it will be necessary to indicate when activities are expected to resume.  For an early permanent closure of a project, the amended plan may simply be to remove the future extractive operations and to update details of rehabilitation and infrastructure removal through to the end of the lease.

Progressing Current Applications

An applicant who has applied for further tenements as a brownfields expansion of a project and who subsequently decides to mothball the project prior to the applications being decided will face some issues about continuing their applications.

Any application for any tenement requires the applicant to outline the activities proposed to be undertaken, whether in a work program or development plan or similar document.  The application needs to be accurate, so the document containing the outline of the activities would need to reflect the proposed mothballing (or would need to be amended to show that mothballing is now intended).

The nature and extent of the activities proposed to be carried out is a factor that will be taken into account when the grant decision is being made.  If a project is to be mothballed while an application is still in progress, the decision maker could decide that it is not appropriate to grant that tenement if it will not be used for a considerable period.  This is to avoid what is often referred to as “land banking”.

Also, if the details of the application were not amended to show the proposed mothballing prior to grant, but it was subsequently revealed that the operations would be significantly scaled back, the applicant could run the risk of a penalty or cancellation of the tenement for failing to comply with its conditions. 

A regulator may also be reluctant to allow a change to the tenement conditions to reflect the changed activities so soon after a grant.  In addition, failure to disclose a proposed change in the nature and scale of activities during an application process may reflect on the applicant’s credibility if future tenements are sought.

Overlapping Tenure Issues

Where an agreement has been reached between the holders of two overlapping tenures, that agreement will frequently contain an operational plan setting out how each party intends to develop their resource (co-development plan).  If one party is going to stop operations for a period (or permanently), then the co-development plan may no longer reflect the actual plans or future intent.

A proposed change to the co-development plan may trigger obligations in the agreement to notify the other party of the proposed change and require the parties to negotiate changes to the co-development plan.  Even if there is no obligation to do so, such a course may be beneficial for commercial, operational and safety purposes.

Co-development plans are often intricate documents as the activities of one tenure holder will impact on the activities of the other.  A change to the activities of one tenure holder may restrict the activities of the other or may provide opportunities for the other. 

It could also mean that activities that have already been carried out may have been wasted if a change means those activities were no longer necessary (for example, abandoning wells in anticipation of open cut mining in an area when the open cut mining will no longer be occurring).  Re-negotiating a co-development plan will require consideration of all of these factors.

Changing a plan may also give rise to rights to compensation if the agreement provides for compensation arising from impacts of changing co-development plans.

Summary

Just as the decision to close down a resources project is not an easy one, managing the legal effects are not as simple as merely flicking a switch.  A number of actions need to be taken and issues considered.  These include ensuring the conditions of the tenements are complied with, any development plans are updated as required, the information submitted with any still current application is updated and that any overlapping tenure situations are resolved.

Mothballing or closing a project also  has impacts on workforces, safety, environmental issues and landowner issues.  A project proponent will need to ensure these are adequately addressed as part of any project shut down.


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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