Focus: Climate Change – May 2008

Federal Government releases greenhouse gas storage Bill

In brief: The Federal Government has released its long-awaited exposure draft of the Offshore Petroleum Amendments (Greenhouse Gas Storage) Bill 2008. The Bill's purpose is to establish the framework for access to offshore geological storage formations, and the creation of property rights for greenhouse gas injection and storage activities in Commonwealth offshore waters. The Federal Government has described the legislation as being 'world first', and its terms will be subject to international scrutiny. Partners Anna Collyer (view CV) and Scott Langford (view CV) and Lawyer Andrew Daly report.

• Nature of amendments
• Permit structure
• Process for obtaining greenhouse gas titles
• Interaction with existing petroleum titles
• Post-commencement petroleum titles
• Long-term liability and site closure
• Capture and transportation
• Way forward

How does it affect you? The draft Bill describes the processes by which proponents of greenhouse gas storage projects will be permitted to obtain access and property rights to geological storage formations located in offshore waters. Development of such a regulatory regime is one of the most significant issues to be resolved in relation to new projects that will involve the sequestration and storage of greenhouse gases. Although the draft Bill relates only to injection and storage of greenhouse gases in Commonwealth offshore waters, we expect that, once enacted, this framework will form the basis of legislative regimes adopted by the states and territories for onshore greenhouse gas storage activities. The exposure draft also proposes amendments to the existing petroleum tenement system, in the context of overlapping or conflicting greenhouse gas and petroleum access rights, and the respective rights of priority associated with any overlap or conflict. The House of Representatives Standing Committee on Primary Industries and Resources is currently conducting an inquiry into whether the draft Bill achieves the desired outcomes and is seeking written submissions from interested parties by 30 June 2008.

Nature of amendments

It is proposed that the Offshore Petroleum Amendments (Greenhouse Gas Storage) Bill 2008 (the draft Bill) will amend the Offshore Petroleum Act 2006 (Cth) (the OPA), by introducing a regime which is similar to the existing oil and gas permit regimes. The OPA, which itself is yet to be proclaimed, will replace the existing Petroleum (Submerged Lands) Act 1967 (Cth) as soon as the states and territories enact 'mirror' legislation. The draft Bill proposes to introduce a regime similar to the existing oil and gas permit regime. According to the Regulation Impact Statement issued by the Federal Government with the draft Bill, this is expected to occur during the first half of 2008.

The Government's reasons for selecting the OPA as the legislative model within which to implement the greenhouse gas injection and storage regime include:

• the existing legislation has been operating since 1967 and, in the Government's opinion, has proven to be effective and efficient; and
• most of the technologies, equipment and techniques used for greenhouse gas injection and storage will be very similar to those already in common usage in the petroleum industry.

An important point of difference, however, is that decisions relating to the proposed greenhouse gas injection and storage regime will by made by the responsible federal minister, and not by a joint authority comprised of the relevant state/territory and federal ministers (as is currently the case for the petroleum regime).

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Permit structure

Although the term 'carbon capture and storage' is commonly used to describe the processes addressed by the draft Bill, the proposed framework will apply to injection and storage of a 'greenhouse gas substance'. This is a broader concept that includes carbon dioxide, together with any substances incidentally derived from the capture or injection and storage processes. Project proponents may also be required to add certain chemical detection agents to the carbon dioxide before injection to assist in tracing the movement of the greenhouse gas substance during its storage.

The draft Bill will establish the following new titles, which will be similar to existing petroleum titles regulated by the OPA:

• a greenhouse gas assessment permit, which authorises exploration for a greenhouse gas storage formation and injection site for six years (and which may not be renewed);
• a greenhouse gas holding lease, which enables the holder of the lease to retain tenure over the acreage, if necessary, while a commercial source of greenhouse gas is located. It will enable a storage formation to be retained where a source of greenhouse gas will not be available to commence injection within five years of identifying an appropriate storage formation. A holding lease will remain in force for five years and may be renewed once;
• an injection licence, which allows injection and storage of greenhouse gas into natural geological formations. After identifying a suitable storage formation, the holder of an assessment permit may obtain an injection licence if a source of greenhouse gas will become available for injection within five years. An injection licence will remain in force until injection operations cease, the site closing work program is completed and the licence is surrendered; and
• certain ancillary titles, such as a greenhouse gas infrastructure licence, which may permit construction of the infrastructure necessary for injection.

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Process for obtaining greenhouse gas titles

Greenhouse gas assessment acreage will be released by the relevant federal minister in a similar manner to the release of exploration acreage in the petroleum context. That is, interested proponents will have the opportunity to submit an application for assessment acreage setting out the proposed work and expenditure to be conducted in the relevant permit area. The assessment permit will be awarded to the 'most deserving' applicant, as measured against publicly available criteria. Alternatively, the minister may nominate cash bidding as the method of determining the grant of a greenhouse gas assessment permit, in which case the minister will offer the assessment permit to the highest bidder.

After the grant of an assessment permit, the holder will be able to conduct exploration activities within the permit area. However, certain 'key greenhouse gas operations' (such as drilling exploration wells, injecting and storing substances on an appraisal basis or conducting seismic surveys) will also require the minister's approval before being carried out.

Significantly, if an explorer for greenhouse gas storage sites discovers petroleum, the explorer will be permitted to produce that petroleum only for the purpose of appraising the commerciality of the petroleum discovery, and any petroleum recovered will not become the property of the explorer.

If a storage formation is discovered, the holder of the permit will be able to apply to the minister for the declaration of an 'identified greenhouse gas storage formation'. Declaration must occur before a proponent will be granted a holding lease or injection licence.

Before an injection licence may be granted, the applicant must submit a site plan for approval. The site plan will form the basis for the interaction between the injection licensee and the regulator (a delegate of the federal minister) with regard to:

• the geological attributes or features of the storage formation;
• current and proposed injection and storage operations;
• the monitoring and verification techniques to be implemented by the licensee;
• systems for managing risks; and
• predictions as to the short-, medium- and long-term behaviour of the stored substances.

An applicant for any greenhouse gas title may be required to lodge security before the title is granted.

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Interaction with existing petroleum titles

In recognition of the fact that greenhouse gas titles may 'overlap' with traditional petroleum titles, the draft Bill sets out the factors to be considered, and tests to be applied, by the minister in granting greenhouse gas titles which may impact on existing petroleum titles.

In deciding whether to grant an injection licence or approve 'key greenhouse gas operations', the minister will be required to take into account certain matters and apply certain tests. The specific matters to be considered and tests to be applied by the minister will depend in part on whether the petroleum title was granted prior to commencement of the draft Bill, and whether the petroleum title existed at the time the proponent applied for the injection licence.

In general, however, the minister will be required to consider whether:

• there is a significant risk that operations under the relevant greenhouse gas title will have a significant adverse impact on petroleum exploration or recovery operations under any existing and future petroleum titles;
• the holder of an existing petroleum title has agreed to the grant of the injection licence and whether the terms of that agreement have been approved for registration under the OPA;
• there is an agreement between an existing petroleum titleholder and the holder of the greenhouse gas title as to how the overlapping operations are to be conducted. Despite this requirement, the holders of these titles will not be under any obligation to reach an agreement;
• granting the injection licence is in the public interest; and
• there is a significant risk of a significant adverse impact on the recovery of commercially viable petroleum.

If the minister refuses to grant an injection licence because it would have a significant adverse impact on existing petroleum operations, it will be possible for the minister to grant a special holding lease that will allow the applicant to retain tenure over the area in which an identified storage formation is located until the conflicting petroleum operations have ceased, at which time the holder of the lease will be able to obtain the injection licence.

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Post-commencement petroleum titles

To accommodate the existence of future greenhouse gas titles, the draft Bill creates a distinction between petroleum titles that are already in force when the draft Bill commences and petroleum titles which are granted after the commencement of the draft Bill.

In the context of exploration permits that are granted after the draft Bill commences, similar provisions will apply to those described above in relation to injection licences and 'key greenhouse gas operations'. The minister will have the ability to declare that there is a significant risk that any of the 'key petroleum operations' (which include drilling a well, injecting a substance, conducting seismic surveys, monitoring the behaviour of stored substances and taking samples) that could be carried on under the exploration permit, will have a significant adverse impact on injection and storage operations that are being, or could be, carried on under an existing greenhouse gas title or a future greenhouse gas title.

If the minister makes such a declaration, the holder of the 'declared petroleum exploration permit' will have to obtain the approval of the minister before it may carry out any of the 'key petroleum operations'. In granting approval, the minister will be required to consider the possible impacts that the 'key petroleum operations' could have on an existing and future greenhouse gas title and have regard to the terms of any agreement between the greenhouse title holder and the petroleum exploration permittee, as well as to the public interest. These matters will be similar to those that the minister must consider before the grant of a greenhouse gas title where a 'pre-commencement' petroleum title exists.

In addition, if the holder of the 'declared petroleum exploration permit' discovers commercially viable petroleum and applies for a production licence, the minister will apply an 'impacts test' in determining whether the production licence should be granted.

The draft Bill seeks to establish a similar regime for petroleum retention leases and production licences granted after the draft Bill commences.

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Long-term liability and site closure

When injection operations cease permanently, the injection licensee will be required to carry out a program of decommissioning work (involving extensive monitoring, measurement and verification of the behaviour of the injected substance) and apply for a site closing certificate, which itself will be required to be issued by the minister before a licensee may surrender the title and leave the site.

The application for a site closing certificate will be required to set out, among other things, the applicant's assessment of the short- and long-term behaviour and migration of the injected substance, as well as the applicant's suggestions for the approach to be taken by the Commonwealth in monitoring the behaviour of the injected substance after the site closing certificate has been issued.

Accordingly, individual project proponents will be required to take responsibility for developing a monitoring and verification plan for their injection site, based on the predicted behaviour of the stored substance.

When offering the site closing certificate to the licensee, the minister will be required to notify the licensee of the program of post-closing monitoring and verification that the Commonwealth proposes to carry out in future years, and the estimated costs of that program, which will be borne by the licensee.

The minister will not be authorised to issue the site closing certificate unless:

• the licensee has provided security for the payment of the Commonwealth's costs for post-closing monitoring and verification program; and
• the minister is confident about the future behaviour of the injected substances.

In addition, the minister will be entitled to refuse to issue the site closing certificate if:

• the injected substance is not behaving as predicted in the site plan relating to injection operations; or
• there is a 'significant' risk of a 'significant' adverse impact on:
  • the conservation or exploitation of natural resources;
  • the geotechnical integrity of a geological formation;
  • the environment; or
  • human health or safety.

The Federal Government has indicated that it may take many months or years after injection operations cease before the site closing certificate will be issued. Interestingly, the draft Bill is silent on the question of long-term liability for the injected gases after a site closing certificate has been issued.

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Capture and transportation

The draft Bill proposes to amend the OPA so that it will regulate the construction and operation of pipelines for conveying greenhouse gas substances, in addition to pipelines for conveying petroleum.

Pipeline licences granted under the OPA, however, will only relate to the transportation of greenhouse gas substances in Commonwealth offshore waters. Since it is likely that most greenhouse gas substances will be captured onshore and then transported to the offshore storage formation, project proponents will have to obtain the relevant pipeline licences under state legislation in addition to those granted under the OPA.

The proposed legislation will not regulate the capture of greenhouse gas substances at their source (whether this occurs onshore or in Commonwealth offshore waters) – it is designed to deal only with access and property rights relating to the injection and storage phases of any greenhouse gas storage project that will operate in offshore waters.

A related issue that will need to be addressed is the extent to which greenhouse gas storage activities will be acknowledged by the proposed emissions trading scheme.

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Way forward

The draft legislation has been referred to the House of Representatives Standing Committee on Primary Industries and Resources, which is due to issue its report by mid-August 2008. The Committee is seeking written submissions on the exposure draft by 30 June 2008.

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For further information, please contact:

Scott Langford Partner, Melbourne Ph: +61 3 9613 8926 Scott.Langford@aar.com.au		Anna Collyer Partner, Melbourne Ph: +61 9613 8650 Anna.Collyer@aar.com.au
Grant Anderson Partner, Melbourne Ph: +61 3 9613 8928 Grant.Anderson@aar.com.au		John Greig Partner, Brisbane Ph: +61 7 3334 3358 John.Greig@aar.com.au
Ben Zillmann Partner, Brisbane Ph: +61 7 3334 3538 Ben.Zillmann@aar.com.au		Andrew Mansour Partner, Sydney Ph: +61 2 9230 4552 Andrew.Mansour@aar.com.au
Darren Murphy Partner, Perth Ph: +61 8 9488 3768 Darren.Murphy@aar.com.au		Campbell Davidson International Partner, Shanghai Ph: +86 21 6841 2828 Campbell.Davidson@aar.com.au

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