Australia’s foreign investment policies clarified for oil and gas sector

By Michael Sheng and James Bruining, Ashurst

The Australian government’s foreign investment policy has been updated to help clarify the “national interest” test for foreign investment proposals and the circumstances in which investments by state-owned entities will require Foreign Investment Review Board (FIRB) approval.

Change is also on the way in the state of Queensland, with the introduction of a Prospective Gas Production Land Reservation Policy and proposed amendments to address issues in respect of overlapping coal seam gas and coal production tenements.

In 2010, the Australian government updated its foreign investment policy to clarify the way foreign investment proposals are assessed. The policy now requires “foreign governments and their related entities” to seek foreign investment clearance prior to making a direct investment in Australia, regardless of the investment value. A “direct investment” is an investment with the objective of establishing a lasting interest in, and a strategic long-term relationship with, the target enterprise. This change removes the former blanket requirement for foreign investment clearance that applied to all investments by state-owned entities, irrespective of size.

“Foreign governments and their related entities” are defined in the new policy as bodies politic of foreign countries, entities controlled by foreign governments, or entities in which foreign governments have a 15% or greater interest.

Michael Sheng Blake Dawson
Michael Sheng
Blake Dawson

National interest

The overarching test applied in assessing foreign investment proposals is whether the investment is in Australia’s national interest. Previously, the policy lacked clear guidance on this test, providing principles that only applied to assessing proposals by state-owned entities. These have now been replaced with the following five “national interest considerations” that will apply to all foreign investment proposals: (1) National security; (2) Competition; (3) Impact on the economy and community; (4) Character of the investor; (5) Impact on other Australian government policies, such as taxation and environmental protection

Where the investor is a state-owned entity, the extent of control exercised by a foreign government over the investor will influence whether the investment is considered to be in Australia’s national interest. In particular, a foreign government’s control will weigh negatively against Australia’s national interest if the investment appears to be politically motivated rather than an arm’s length decision by the investor made on a commercial basis.

James Bruining
James Bruining

Petroleum and mining tenements

The policy clarifies that “Australian urban land” includes all seabeds within Australia’s exclusive economic zone and will include interests in a petroleum tenement within that offshore area if the tenement provides: the right to occupy the area for a term of more than five years; or an interest in an arrangement involving the sharing of profits or income from the use of, or dealings in, Australian urban land.

In January 2011, Queensland’s government announced its proposal to amend existing laws on overlapping petroleum and mining tenements, principally to address issues associated with overlapping coal seam gas (CSG) and coal mining tenements. These amendments were released in a draft Bill and accompanying consultation paper.

The introduction of a Retention Declaration is intended to become the primary mechanism for a CSG project proponent to retain access to CSG reserves for delayed development – a common feature in CSG-LNG (liquefied natural gas) projects, which source gas from multiple tenements and involve staggered production timeframes. Petroleum leases that allow for delayed production are widely used to achieve this objective. However, this has been viewed as prejudicing coal exploration, as a mining exploration tenement holder must obtain the consent of the overlapping petroleum tenement holder to undertake exploration. This requirement is removed under a Retention Declaration.

A Retention Declaration may only be granted to a petroleum exploration tenement holder if the holder can demonstrate there are proven reserves and resources in the relevant area, and that they underpin a long-term contrac to supply CSG for processing into LNG for export.

To encourage the use of Retention Declarations in preference to petroleum leases, overlapping petroleum leases that allow for delayed production can no longer be granted unless agreement is reached between the overlapping holders by joint application, written consent or a co-ordination agreement, or a ministerial preference decision is given to grant the lease.

State your reasons

The amendments will also require a petroleum production tenement holder to provide a mining exploration tenement holder with a statement of reasons for declining consent to authorise exploration activities on the overlapping tenement (and vice-versa for mining production tenement holders). This change addresses concerns from explorers that production tenement holders are not genuinely considering exploration proposals on areas subject to the overlapping production tenement.

An applicant for a production tenement that partially overlaps an existing tenement of the other resource (not held by the same party) currently requires two separate applications – one in respect to the overlapping area and another in respect to the non-overlapping area. The amendments will remove this requirement. Accordingly, the decision to grant or refuse the application will depend on resolving all overlapping tenement concerns.

Land reservation policy

In May 2011, the Petroleum Gas (Production and Safety) Act 2004 (Qld) was amended to introduce a Prospective Gas Production Land Reservation Policy to secure Queensland’s future domestic gas requirements.

As a result of the amendments, a future call for tenders for petroleum exploration acreage may stipulate that the tenement is subject to an “Australian market supply condition”. This is a condition that gas produced from a resulting production tenement must be supplied exclusively to the domestic market. There are certain exemptions to the domestic supply requirement, including if market analysis indicates that sufficient gas may be produced from existing and proposed Queensland petroleum tenements to supply both domestic market and export demand. The changes have been welcomed by Queensland’s energy and resources sector.

Michael Sheng is a partner in the Shanghai office of Blake Dason and James Bruining is a partner in Ashurst’s energy and resources group in Perth

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