A look back over oil and gas litigation in 2006

In this article Bell Gully senior associate David Coull reviews three recent cases involving New Zealand's oil and gas legislative regime each of which provide important lessons for lawyers and industry participants.

Since the re-determination of the Maui Field, the increase in the price of oil and gas has been matched by a proportionate increase in the level of oil and gas litigation.  While it is fair to say that much of this litigation has related to disputes between Todd and Shell in relation to, among other things, pipeline access issues and the interpretation of their joint venture arrangements, the oil and gas legislative regime has also come under more scrutiny than ever before.  Three cases decided in 2006 shed light on the operation of the Crown Minerals Act 1991 (Act) and the Minerals Programme for Petroleum (Minerals Programme) and indicate how the courts are likely to interpret the Act and the Minerals Programme. 

Tap (NZ) Pty Ltd v Attorney-General

This case considered the rules relating to "priority in time" (PIT) applications for exploration permits.  This method of application was introduced in the 2005 Minerals Programme to allow for competitive bids on a priority in time basis, by providing for a five working day period in which a subsequent application could be made following the initial application and then evaluating both applications in competition.

Tap filed a PIT application and Crown Minerals published details of the application on its website.  Within the five working day period, Origin filed a PIT application in respect of the same area.  Crown Minerals considered the applications on a competitive basis and awarded the permit to Origin.  Tap sought judicial review of that decision but was unsuccessful in the High Court and the Court of Appeal.

The case turned on the interpretation of various provisions of the Minerals Programme.  Three points in particular are noteworthy.  First, both courts considered that the Minerals Programme's general intent is to encourage competitive bidding for permits.  In that context, despite understanding Tap's grievance, the court interpreted the relevant provisions in light of the Minerals Programme's overall intent and held that Crown Minerals was entitled to treat the applications on a competitive basis.

Secondly, in light of the Tap decision, industry participants would be well advised to maintain a close watch on the Crown Minerals' website in respect of any acreage in which they may have an interest given the evidence presented by Crown Minerals that it has a policy of publishing details of PIT applications on its website. 

Thirdly, the Court of Appeal commented that Tap should have applied for injunctive relief immediately upon discovering that Crown Minerals was going to consider Origin's application in competition with Tap's application.  The Court of Appeal noted that Tap should not have awaited the outcome of that decision and in particular, should not have waited for Origin to incur significant expense before filing proceedings.  Such an approach "essentially put the risk of the litigation on Origin's shoulders". 

The Court of Appeal indicated that it would have denied discretionary relief in Tap's favour even if it had been successful in relation to the substantive legal issue.  This is an important point in the context of an industry where decisions of third parties and regulators can lead to significant expenditure. 

In light of the Tap decision, it now appears that prompt action by lawyers and industry participants is likely to be necessary in order to ensure that any judicial discretion does not weigh against granting the relief they may seek.

Bounty Oil & Gas NL v Attorney-General

Bounty held an exploration permit for offshore acreage in the Great South Basin.  The permit's work programme required Bounty to, among other things, acquire certain seismic data.  Bounty farmed out part of its permit interest to a third party (Electro) who then contracted with Fugro to perform the seismic work.  Fugro obtained the data but Electro did not pay.  Fugro subsequently terminated the contract (and sold the data to Exxon).  Crown Minerals revoked the permit on the basis that Bounty had not complied with its permit obligations.  Bounty applied for judicial review of the revocation. 

The key issue was whether Bounty could excuse its failure to perform the work programme.  Bounty pointed to Electro's default as a circumstance beyond its control and argued that third parties were responsible for any default and the overall circumstances showed that Bounty had made a reasonable effort to ensure it complied with the work programme as it was required to do. 

The court held that it was the permit holder's responsibility to ensure that any third party contractors (and any parties with whom those contractors had relationships) performed their contractual obligations so as to enable the permit holders to comply with their permit obligations.  The court noted there was no evidence that Bounty could not itself pay Fugro nor any evidence of any serious efforts by Bounty to do so.  The court emphasised that the contractual arrangements Bounty made for performing its obligation under the permit were entirely within its control.  Electro's failure to pay Fugro was, therefore, irrelevant and the permit revocation was "fully justified".

The court also made an interesting observation as to who constitutes a "permit holder" for the purposes of the Act.  The court commented that the term "permit holder" refers to the permit holders collectively (if there is more than one party with an interest in the permit) and not one of several permit holders individually.  For example, the right of appeal against revocation belongs to "a permit holder".  Notwithstanding that Bounty was not the only party which held an interest in the permit, the proceeding was brought by Bounty as sole plaintiff.  However, given the lack of objection by the Crown, the court was happy to proceed on the basis that the appeal was brought by all permit holders (even though Bounty was the only person named as an applicant).

Greymouth Petroleum v Todd Taranaki Limited

This litigation concerned three main issues:

• Todd's right to use a deviated well crossing a permit boundary;
  
  
• rights to plug and abandon a suspended well; and
  
  
• rights to a lease for exploration and mining.

By way of background, PPL 38705 was issued in 1988 under the Petroleum Act 1937.  It gradually reduced in size and passed through various hands and, in 2002, was transferred to Todd.  Todd also held the adjacent Mangahewa mining permit.  PPL 38705 expired in 2003 and Greymouth was subsequently issued a permit for that acreage.

The award of the vacant acreage to Greymouth awoke various dormant issues.  In 2002, when the Mangahewa mining permit was carved out of PPL 38705, the Ohanga-2 well, an unsuccessful well drilled in 1998 to test the northern extent of the Mangahewa-2 discovery, was bisected by the permit boundary so as to leave its top portion and well head within Greymouth's permit and its bottom hole location within Todd's permit. 

Greymouth argued, successfully, that Todd was not entitled to use Ohanga-2 (insofar as the well was within Greymouth's permit area) as such would involve exploration and mining in an area for which Todd did not have a permit.  This was because the Act regulated both the location of exploration and mining activities and the location of minerals (and not just the latter) and also because the regulated activity occurred throughout the well bore and at the well head (and not just at the interface between the well and the reservoir).

In some senses, the judgment in Greymouth raises as many issues as it solves.  It highlighted the need for agreement between adjacent permit holders in order for a well which crosses a permit boundary to be used for exploration or mining.  Without the express authorisation of the servient permit holder, any exploration or mining in an area for which a person does not have the exclusive permit will amount to a breach of the Act.  This would be the case even if the acreage was not subject to any minerals permit. 

In respect of the abandonment of wells, the decision highlights Crown Minerals' policy of not including in exploration permits any well abandonment obligations (in contrast to their standard inclusion in mining permits).  Explorers should be aware that it is currently the case that they may be under no obligation to plug and abandon a well unless an abandonment obligation is included in the work programme which forms part of the permit.

Conclusion

These cases are interesting for the lessons discussed above and also to note that the Crown continues to enjoy a discretion in relation to the regulation of the exploration and exploitation of its mineral estate.  The Crown was successful in Bounty and in Tap and its evidence as to its interpretation of the Act played some part in the outcome of the Greymouth case.  This all serves to reinforce the importance for industry participants of a positive working relationship with Crown Minerals.

Enquiries and information

For more information on any of the cases, articles and features in Commercial Quarterly, please email Diane Graham or call her on 64 9 916 8849.