How the oil and gas sector can help with understanding the Offshore Electricity Infrastructure Act 8 min read
In this Insight, we explore how offshore wind developers can understand the Offshore Electricity Infrastructure Act 2021 (Cth) (the OEI Act) regulatory regime through looking at the approach already taken by the offshore oil and gas sector. We compare approaches to merits criteria, regulators and maritime law, and analyse what can be learned, and what questions remain for this emerging sector.
- The OEI Act has significant regulatory parallels with the offshore oil and gas sector, which may be leveraged for insights into how this new regime will work.
- Existing relationships and expertise in Australia's offshore oil and gas industry will be useful in navigating the application and approvals process.
- Obtaining insights about regulatory experience will be key, as the National Offshore Petroleum Titles Administrator (NOPTA) and the National Offshore Petroleum Safety and Environmental Management Authority (NOPSEMA), the regulatory bodies for the offshore oil and gas industry, have also been appointed as regulators for the offshore wind sector.
Business development teams, legal teams and board members of offshore wind project developers; investors and key stakeholders who are interested in understanding potential regulatory approaches to the OEI Act.
The commencement of the OEI Act on 2 June 2022 has brought with it a number of questions about how it, and its supporting regulations, will work in practice. The offshore oil and gas industry shares significant regulatory parallels with the offshore wind industry, which provides some useful insights.
Below, we examine what the offshore wind industry can learn from how the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (OPGGSA) is implemented, regulated and works in practice.
As discussed in our last Insight, the commencement of the OEI Act has led to a number of key regulatory issues that developers will need to be mindful of, including the application assessment merit criteria, change in control restrictions and fees and cost recovery mechanisms. To date, there has been limited guidance beyond the regulations as to how the legislation will be implemented in practice, and the regulations do not have a comprehensive level of detail.
The OPGGSA, the legislation applicable to Australia's offshore oil and gas industry, provides an existing guide to understand how the OEI Act may work. These two pieces of legislation, while regulating different industries, share significant parallels (including being administered by the same regulatory bodies), and it is clear that certain elements of the OEI Act have been heavily borrowed from the OPGGSA.
Approach to merits criteria
A significant question for developers is how the Minister and the Offshore Infrastructure Regulator will consider the merits criteria for offshore wind project applications.1 The OEI Act and OPPGSA merits criteria have strong parallels, in terms of considering the applicant's standing and the viability of the business case, but diverge regarding the overriding national interest consideration and the broader impacts of the projects.
|Merit criteria under the:|
|OEI Act (Offshore wind)||OPGGSA (Oil and gas)|
|Technical and financial capability||Technical and financial capability|
|Viability||Exploration strategy/work program|
Looking first at the points of similarity, the criteria of technical and financial capability is almost identical to that in the OPGGSA. Understanding the OPGGSA regime may be useful for offshore wind developers, as the guidelines issued under the OPGGSA helpfully explain aspects of capability that may be considered by the regulator. These include work commitments, a summary of staffing and agreements with technical experts, and the capacity to decommission infrastructure.3 Proponents of offshore wind energy projects should look to the OPGGSA guidelines and seek further guidance from regulators when preparing applications for licences under the OEI Act.
Although the specific terminology used is different between the two regimes, it is clear that under both the OEI Act and the OPGGSA, a proposed project's potential for success will be examined by regulators considering applications for licences. While under the OEI Act, the guidance provided to date requires that the Minister consider the proposal's complexity, route-to-market, and estimated commercial returns,4 the OPGGSA guidelines suggest additional aspects that may be examined.
Under the OPGGSA regime, the decision maker will assess a proposal on a number of factors relating to viability, including through the preparation of a work program that sets out activities to be completed under the licence with estimated costs.5 Further, commerciality may be assessed by considering the project's internal rate of return (IRR) and key drivers that may impact viability.6
Justifications for minimum or hurdle rates of IRRs and other criteria used by the applicant to assess commerciality are examined against the project and its assumptions. The guidance provided by the regulators states that a mid-case nominal after-tax IRR of 12% or greater is considered commercially viable.7 Finally, when calculating net present value, the applicant's weighted cost of capital or, alternatively, the long-term bond rate plus 5% as the discount rate should be applied when preparing possible scenarios.8 It is not yet clear whether a similar approach will be taken under the OEI Act; however, the OPGGSA regime shows one possible mechanism for assessing viability that may be considered for offshore wind energy projects.
In considering an applicant's suitability to hold a licence under the OEI Act, the Minister will assess the applicant's 'past performance in offshore infrastructure projects in Australia or internationally'.9 The draft guidelines to the OEI Act state that 'past performance of the applicant, parent company where applicable and its directors may be considered during the assessment and decision-making process.'10 The OEI Act guidelines focus on understanding any compliance issues affecting the applicant over the past five years.
We see this approach as being generally consistent with that taken under the OPGGSA. Under the OPGGSA, applicants are required to submit a disclosure and experience form that seeks information about any compliance issues – in particular, under offshore oil and gas legislation – as well as the Corporations Act 2001 (Cth), Crimes Act 1914 (Cth) and Criminal Code 1995 (Cth). Other areas considered under the OPGGSA that may be incorporated into the OEI Act process include:
The criteria of financial offers and national interest are included in the OEI Act but not the OPGGSA.12 Applicants will need to carefully consider their approaches to these issues. Financial offers will arise as an additional criteria for the Minister to consider if there are overlapping and otherwise equally meritorious offshore wind project applications.
However, the criterion of national interest will be applied in every case. This element examines the economic contribution of the project in combination with its potential impact on national security, and its complexity and potential conflicts (including measures proposed to mitigate such conflict). While there are no equivalent criteria in the offshore oil and gas sector, it is not dissimilar to the approach we have seen by the Foreign Investment Review Board (FIRB).
Under the FIRB regime, the Federal Treasurer may approve certain transactions if they consider that it would not be contrary to the national interest – a term that is not defined under the legislation but instead considered on a case-by-case basis. Typical considerations include: national security; competition; other Federal Government policies (including tax); impact on the economy and the community, as well as employees; and character of the investor. We consider the approach taken under the OEI Act imparts a similar level of discretion to the Minister to consider a variety of factors. For more information on FIRB, please see our earlier Insight.
Another significant overlap between the OEI Act and the OPGGSA is the entities that will regulate the industry. Under the OPGGSA, NOPTA functions as the titles administrator for the offshore petroleum industry, and NOPSEMA provides health and safety, as well as environmental, administration. Both NOPTA and NOPSEMA have had their roles expanded under the OEI Act, to provide similar functions to the offshore wind industry.13
In light of the similarities between the two pieces of legislation, maintaining consistent regulators will help to provide certainty of approach for proponents of offshore activities. This is particularly so for NOPTA, which, under the OEI Act, has a function of supporting the Minister as Offshore Infrastructure Regulator to assess applications and consider the merits criteria. Prior experience in dealing with these regulators will be useful for proponents making applications for licences under the OEI Act.
Change in control
Interestingly, while the change in control provisions between the two regimes are similar, in that regulatory approval is required where a person proposes to begin (or cease) to control 20% or more of a licence-holder, the new OPGGSA trailing liabilities regime has not been adopted. Under this reform, former title-holders and related entities in the offshore oil and gas industries may have liabilities as to decommissioning and rehabilitation despite having reduced, or completely disposed of, their interest in the licence. We expect that this regime was not adopted due to its potential to act as a disincentive to expansion and investment in the offshore wind industry.
One aspect of the offshore wind industry that is not addressed in detail in the legislative framework or other guidance is maritime law. How support vessels, barges, offshore substations and the floating/fixed turbines will be regulated – in particular, as to coastal trading – will be critical in understanding all relevant regulatory risks. Under the offshore oil and gas regime, there are certain exceptions to maritime law requirements in both state and federal legislation; however, this has not yet been considered for the offshore wind industry.
Australia's cabotage regime applies to commercial vessels that carry passengers or cargo from a port in one Australian state or territory to another Australian state or territory (also known as coastal trading). The Coastal Trading (Revitalising Australian Shipping) Act 2012 (Cth) (the CTA) and the OPGGSA exempt 'offshore industry vessels'.14 However, the term offshore industry vessels does not currently include vessels that would support the offshore wind power industry. Therefore, offshore wind power support vessels could be caught by the CTA if they engage in coastal trading.
Proponents of offshore wind projects should carefully consider the implications of this regime for their project. Regulators should consider whether further regulation is required to support the industry as works commence over the coming years.
- Seek to engage early with NOPTA, NOPSEMA and the Department of Climate Change, Energy, the Environment and Water (DCCEEW) to understand what will be considered in assessing applications for licences under the OEI Act.
- Consult with colleagues and industry contacts with experience in the offshore oil and gas sector to better understand the licensing regime under the OPGGSA and then apply these learnings to the offshore wind industry.
- Continue to monitor updates from DCCEEW and review new regulations on management plans when released in Q3/Q4 of 2022.
Sections 33(1)(e) and 154(a) OEI Act.
We note that there is the possibility of undertaking cash bidding on exploration permits under s110 of the OPGGSA. However, in practice this doesn't commonly occur.
See Guideline: Applicant Suitability, p11.
Section 85(2) Exposure Draft of the Offshore Electricity Infrastructure Regulations 2022 (Cth).
See Guideline: Retention leases, p12.
See Guideline: Retention leases, p13.
See Guideline: Retention leases, p13.
Section 85(3)(a) Exposure Draft of the Offshore Electricity Infrastructure Regulations 2022 (Cth).
Clause 4.6.19 Draft Guideline: Offshore Electricity Infrastructure Licensing Scheme.
Section 695YB(j) OPGGSA.
See footnote 2.
Sections 153(3) and 175 OEI Act.
Section 10(e) Coastal Trading (Revitalising Australian Shipping) Act 2012 (Cth).