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2013
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
OFFSHORE PETROLEUM AND GREENHOUSE GAS STORAGE
AMENDMENT (CASH BIDDING) BILL 2013
EXPLANATORY MEMORANDUM
(Circulated by authority of the Minister for Industry,
the Honourable Ian Macfarlane, MP)
OFFSHORE PETROLEUM AND GREENHOUSE GAS STORAGE
AMENDMENT (CASH BIDDING) BILL 2013
OUTLINE
The purpose of this Bill is to amend the Offshore Petroleum and Greenhouse Gas
Storage Act 2006 (the Act) to provide an optimised model for allocating cash bid
exploration permits in the offshore petroleum regulatory regime.
The Australian Government announced in November 2012 a decision to apply the
cash bidding title allocation method for select blocks as released in the 2014 Offshore
Petroleum Exploration Acreage Release. Inclusion of cash bidding as the method of
exploration permit allocation in mature areas or those known to contain petroleum
accumulations is intended to prevent over-exploration where none or little may be
required, and ensure that the release of these areas continues to be equitable,
economic and efficient.
An auction expert was engaged to provide advice and recommendations on the cash
bidding system design and the model which would be consistent with the current
provisions in the Act. The review and analysis identified a number of significant risks
to the success of the preferred auction model based on use of the current structure
provided for in the Act, with its key recommendation being that cash bidding should
not be implemented until the risks were addressed. Therefore the Bill will amend the
Act to implement the following key features:
1. Limiting the discretion to refuse an offer of a permit - to ensure that the
highest bidder is incentivised to accept the offer of a permit, thereby encouraging
genuine bidding to take place.
2. Reserve price - a reserve price will be set by the Joint Authority for each of the
areas being released, and will reflect an estimate of the value of the resources
available. The reserve price will be determined in advance of inviting applications
and will be either disclosed or undisclosed.
3. Separate pre-qualification and bidding processes - to allow for pre-
qualification assessment of the potential bidders to take place prior to placing cash
bids to ensure they are pre-determined as eligible. This will involve an assessment
of technical and financial capacity of an applicant to undertake exploration work
offshore, commensurate with being the holder of an exploration permit over the
blocks that are being released for cash bidding. As a consequence, bids can be
placed with confidence that if they are the highest bidder, they will be offered the
permit without delay.
4. Tie breaker - to specify a tie-breaker mechanism to deal with circumstances
where two or more cash bids are equal.
FINANCIAL IMPACT STATEMENT
The Bill is expected to have a positive financial impact if the amount paid for the
cash-bid exploration permit exceeds the reserve price. The amount paid will form part
of the Commonwealth Consolidated Revenue Fund.
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STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny)
Act 2011
This Bill is compatible with the human rights and freedoms recognised or declared in
the international instruments listed in section 3 of the Human Rights (Parliamentary
Scrutiny) Act 2011.
Overview of the Bill
The Bill makes amendments to the Offshore Petroleum and Greenhouse Gas Storage
Act 2006 (the Act) to provide an optimised `auction style' model for allocating cash
bid exploration permits in the offshore petroleum regulatory regime. These
amendments to the existing cash bid exploration permit allocation model in the Act
have the following key features:
1. Limiting the discretion to refuse an offer of a permit. This feature is designed
to ensure that the highest bidder is incentivised to accept the offer of a permit.
Where an eligible highest bidder is offered the exploration permit, should they
refuse the offer or not meet the permit acceptance requirements (full payment of
the balance of the cash bid amount within the specified 14 day timeframe) the
10% deposit which is payable upon placement of the cash bid is forfeited to the
Commonwealth. As a consequence the feature will encourage genuine bidding.
2. Reserve price. This element is required as the Government has a responsibility to
allocate the resource efficiently and to demand a fair price for a public resource.
The reserve price helps ensure that the Government does not sell the resource
below its public value. The reserve price will be set by the Joint Authority for
each of the areas being released, and will reflect an estimate of the value of the
resources available. The reserve price will be determined in advance of inviting
applications and will be disclosed or undisclosed.
3. Separation of pre-qualification assessment and cash bidding process. In the
existing provisions of the Act, applications for cash bid exploration permits
require provision of a range of information as well as the amount of the cash bid,
with the Joint Authority consequently given the power to reject any or all of the
applications. This Bill will allow for prequalification assessment of the potential
bidders to take place prior to applicants placing their cash bids. This feature is to
ensure they are pre-determined as eligible, through an assessment of technical and
financial capacity, to hold an exploration permit. As a consequence a bid can now
be placed by an eligible applicant with the confidence that if they are the highest
bidder, they will be offered the exploration permit without delay.
4. Tie breaker. This feature is designed to specify an automatic tie-breaker
mechanism to deal with circumstances where two or more cash bids are equal.
Currently in the event of tied cash bid applications, the Joint Authority makes a
discretionary decision to allocate the exploration permit. As a result of
amendments in the Bill, in the event of two or more equal cash bids, further cash
bids will be invited from the tied applicants with the highest cash bid resulting in
the offer of the exploration permit. Should a further tie occur, then the permit will
be offered to the cash bid first received by the Joint Authority.
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Human rights implications
This Bill does not engage any of the applicable rights or freedoms.
Conclusion
This Bill is compatible with human rights as it does not raise any human rights issues.
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OFFSHORE PETROLEUM AND GREENHOUSE GAS STORAGE
AMENDMENT (CASH BIDDING) BILL 2013
NOTES ON CLAUSES
Clause 1: Short title
Clause 1 is a formal provision specifying the short title of the Act.
Clause 2: Commencement
The Act will commence on the day after this Act receives the Royal Assent.
Clause 3: Schedule(s)
This clause gives effect to the provisions in the Schedule to this Act.
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Schedule 1 - Cash-bid petroleum exploration permits
The amendments in this Schedule will revise the existing cash bid exploration permit
application and allocation provisions in the Act to implement the following key
features:
1. Limiting the discretion to refuse an offer of a permit - to ensure that the
highest bidder is incentivised to accept the offer of a permit. As a consequence it
will encourage genuine bidding.
2. Reserve price - a reserve price will be set by the Joint Authority for each of the
areas being released, and will reflect an estimate of the value of the resources
available. The reserve price will be determined in advance of inviting applications
and will be either disclosed or undisclosed.
3. Separate pre-qualification and bidding processes - to allow for prequalification
assessment of the potential bidders to take place prior to placing cash bids to
ensure they are pre-determined as eligible, through an assessment of technical and
financial capacity to hold an exploration permit. As a consequence bids can be
placed with confidence that if they are the highest bidder, they will be offered the
permit without delay.
4. Tie breaker - to specify a tie-breaker mechanism to deal with circumstances
where two or more cash bids are equal.
An independent expert review and analysis conducted of the Act identified
deficiencies in the current model that posed risks to implementation of an effective
`auction style' model. The introduction of the abovementioned features into the Act
will therefore ensure that the cash bidding model is optimised to ensure the process is
as efficient as possible.
Item 1: Section 110 (heading)
Item 1 replaces the heading with the new heading `Cash-bid petroleum exploration
permit - application'.
Item 2: Paragraph 110(1)(a)
This item amends the wording of the Gazette notice to clarify that the invitation for
applications is for the grant of a permit by way of cash-bidding. There are two stages
to the new granting process - the pre-qualification round and the bidding round. This
is the first relevant amendment to allow for a clear delineation between two separate
and inherently different processes: pre-qualification (which is an administrative
decision by the Joint Authority) and then a purely monetary cash bidding stage.
Item 3: Paragraph 110(3)
This item repeals previous paragraph 110(3) to provide notification of the basis for
the pre-qualification stage of the application process. The new paragraph requires the
Gazette notice, which is published to invite applications by way of cash bidding for
the grant of a petroleum exploration permit, to specify the matters that the Joint
Authority will take into account in determining the applicant's eligibility to be invited
to submit a cash bid. The purpose of the pre-qualification process is to determine
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whether the applicant has the technical and financial capacity to viably hold an
exploration permit, which is consistent with the Government's objective to foster
exploration and the development of acreage in Commonwealth waters. Cash bidding
will be used to allocate offshore petroleum acreage in mature areas and in areas
containing known petroleum accumulations. It is therefore appropriate to confine
access to this acreage to applicants who are capable of carrying out further
exploration work, so that the blocks may be progressed to the development stage.
Item 4: After subsection 110(3)
This item introduces the feature of the reserve price. This element is required as the
Government has a responsibility to allocate the acreage efficiently and to demand a
fair price for access to a public resource. The reserve price helps ensure that the
Government does not sell the resource below its public value. The reserve price will
be set by the Joint Authority for each of the areas being released, and will reflect an
estimate of the value of the resources available.
New subsection 110(3A) requires that the Joint Authority determine a reserve price
for the block(s) that constitute the exploration permit. This determination will be
recorded in writing.
New subsection 110(3B) allows for the discretionary decision by the Joint Authority
to publish (disclose) the reserve price by way of inclusion in the Gazette notice
inviting applications for the permit. It is not required that the reserve price is disclosed
- there is the ability for the Joint Authority to determine a reserve price but not
disclose the amount.
New subsection 110(3C) is included to assist readers, as such a determination is not a
legislative instrument within the meaning of section 5 of the Legislative Instruments
Act 2003. It is made for the purposes of a particular administrative process (the
granting of a particular permit) and not for a general situation.
Items 5 and 6: Subsection 110(6); Sections 111, 112, 112A, 112B
These items repeal the existing subsections and sections which contain the existing
single-stage process which is being replaced.
The new subsections inserted by these items provide for two separate stages -
1. a pre-qualification assessment resulting in the selection of eligible applicants;
and
2. invitation extended to eligible applicants with a corresponding receipt of cash
bids and the offer of a permit made based on non-discretionary rules (amount
of the cash bid, with timing of the bid taken into account in the event of a tie).
New subsection 110(6) provides the parameters for the pre-qualification stage of the
application process, by specifying the information about the applicant that is required
for the application. These are in fact the same as for a work-bid exploration permit.
The assessment of this information under new section 111, in accordance with the
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criteria set out in the Gazette notice under section 10(3)(c), leads to a suitably
qualified applicant becoming what is termed an `eligible applicant'.
Subsection 111(1) requires the Joint Authority to write to every applicant either
notifying them that they are an eligible applicant and inviting them to submit a cash
bid within a specified time period, or that their application has been rejected (ie that
they have failed the pre-qualification stage).
Subsection 111(2) sets out the requirements that an eligible applicant must comply
with to make a qualifying cash bid. If a cash bid is not made in accordance with
subsection 111(2), the application lapses by virtue of subsection 111(3). A cash bid
must set out the amount that the eligible applicant is prepared to pay for the grant of
the permit. The notice to the Joint Authority containing the cash bid must be made
within the specified time period as stated in the subsection 111(1) invitation, and must
be accompanied by a deposit payment of 10% of the cash bid.
New section 112 applies only to applicants whose cash bids are less than the reserve
price. Subsection 112(2) provides that, generally, cash bids that are less than the
reserve price must be rejected by the Joint Authority. There is, however, an exception
provided in subsection 112(2) where the reserve price was not disclosed in the notice
under subsection 110(1) and the applicant's bid is the only sub-reserve bid or the
highest, or equal highest, sub-reserve bid. These highest sub-reserve bids cannot be
rejected until after all bidders equal to or over the reserve decline offers, thereby
ensuring that the Joint Authority can still offer the permit to the highest sub-reserve
bidder. Subsection 112(3) applies where the reserve price is not specified in the
notice under subsection 110(1) and the only cash bids are less than the reserve. In this
case, the Joint Authority may give an offer document to the highest sub-reserve
bidder, stating that the Joint Authority is prepared to grant the permit to the applicant
for a price equal to the reserve price. Tied highest bids are to be resolved on a first-
received basis. . Subsection 112(4) requires that the Joint Authority must have regard
to the difference between the applicant's cash bid and the reserve price in making a
decision to make a reserve price offer to the higher sub-reserve bidder - in other
words if the margin between the reserve price and the cash bid made is considered too
great, then a reserve price offer will not be made.
Subsection 112(5) provides that, where the Joint Authority rejects a below-reserve
cash bid under this section, the 10% deposit is refunded by the Titles Administrator.
New sections 112A and 112B outline the methodology for the treatment of the
qualifying cash bids that are equal to or higher than the reserve price. As explained
above, a qualifying cash bid is a term used to describe a cash bid which is received
from an eligible applicant which also meets all the necessary requirements as outlined
in section 111.
New section 112A contains a table set out under subsection 112A(2) which specifies
the treatment of the qualifying cash bids as first received, whereby if:
there is a qualifying cash bid that is by itself the highest in value, the Joint
Authority offers the permit to that eligible applicant; or
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there are 2 or more qualifying cash bids which are both the highest and equal
in value, the Joint Authority must invite a higher cash bid within a specified
period of time from all highest and equal tied applicants.
New section 112B deals with the tie-breaker circumstances, where the Joint Authority
has given an invitation under section 112A to tied applicants to submit a further,
higher cash bid than their original qualifying cash bid.
There are 3 possible situations dealt with as follows:
1. there is a further cash bid that is by itself the highest in value of the tied
applicants' further cash bids, in which case the Joint Authority offers the
permit to that applicant; or
2. another tie occurs, in which case the Joint Authority offers the permit to the
tied applicant whose further cash bid is received first in time; or
3. no further cash bids are submitted, in which case the Joint Authority offers the
permit to the applicant whose original qualifying but tied cash bid was
received first in time.
Item 9: Paragraph 113(1)(c)
This item makes an amendment to require that if the balance of the cash bid is paid
(together with the other current requirements under this section) then the Joint
Authority must grant the permit to the applicant.
Item 10: Subsection 113(2)
This item specifies that once a permit is granted, all remaining applications are
rejected and the deposits held from these applicants are refunded. As the notes
describe, in effect this means that it only applies to those applications remaining
before the operation of this subsection, in that in some other deposits have already
been refunded or forfeited to the Commonwealth by way of operation of other
sections.
Items 12 and 13: After subsection 255(1) and Subsection 255(2)
This item requires both the application and cash bid(s) to be made in an approved
manner as specified by NOPTA.
Item 14: Paragraphs 259(3)(a) and (b)
This item amends section 259 which outlines procedures and requirements relating to
offer documents, and to this end requires the cash-bid petroleum exploration permit
offer document to specify the permit price, the balance of the permit price payable to
the Commonwealth once the deposit already paid is taken into account, and the fact
that if the applicant fails to pay the balance to the Commonwealth within the statutory
timeframe of 14 days under section 260 - the consequence is that the application
lapses and the 10% deposit is forfeited to the Commonwealth. New subsection
259(3)(c) provides an exception to the forfeit of the 10% deposit in relation to offers
made under section 112.
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Permit price is defined in this section as either the cash bid amount as specified by the
eligible applicant or, in the case of an offer made under section 112, the reserve price.
Item 15: Subsection 260(1)(table item 2)
The previous timeframe for acceptance of offer by the applicant has been lowered
from 30 days to 14 days. This is a policy decision to reduce timeframes in response to
a preference from industry for the `auction' to run as efficiently as possible.
Item 18: After section 260
One of the key recommendations of the independent review was, in keeping with the
auction model, to deter `faux bidding' by requiring that the `winning' bidder must
accept the offer of the permit. The policy response to this recommendation is
somewhat more measured and in keeping with similar existing cash-bidding models
(special exploration permits and cash-bid production licences) that already exist
within the OPGGS Act that use a 10% deposit that may be forfeited under certain
circumstances. At the time of submitting a cash bid, it must be accompanied by a
deposit of 10% of the amount that the applicant has specified they are prepared to pay
for the permit. By operation of new section 260A as inserted by this item, this deposit
is non-refundable in the event that an applicant effectively refuses a permit offer, by
failing to make a request for the grant of the permit together with paying the amount
specified in the offer document as the balance of the amount that the applicant must
pay for the permit within 14 days from the time the offer is made by the Joint
Authority. This is intended to drive genuine bidding for the permit in that the highest
bidder is heavily incentivised to accept the offer of a permit. New subsection
260A(2)(b) provides an exception to the forfeit of the 10% deposit in relation to offers
made under section 112 which are subsequently declined.
Section 260A goes on to provide for circumstances where the original permit offer is
not accepted. In these circumstances, section 112A or 112B (for tied applicants)
applies in relation to any remaining qualifying cash bids as if the applicant whose
application has lapsed, had never made a cash bid. This cascading down of offers to
the highest bidder includes a further offer under section 112 to be made to the highest
bidder under the reserve in the event of an undisclosed reserve where the lapsed
qualifying cash bid(s) had been above the reserve.
This principle and approach includes not only an offer of the permit but also the
consequential treatment of deposits of those applicants, in that they too will be
forfeited in the event of an offer of the permit made and consequentially declined
(except the exception of the offer made under section 112).
Items 23-26: Section 695K
These items collectively make the necessary amendments to enable money paid into
the NOPTA Special Account to be transferred into general Commonwealth
Consolidated Revenue Fund as appropriate: forfeited deposits as well as the cash bid
amount paid by the applicant who is granted the petroleum exploration permit.
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