New financial assurance scheme for resource activities in Queensland set to commence on 1 April 2019

The Queensland Government has enacted a new financial provisioning scheme under the Mineral and Energy Resources (Financial Provisioning) Act 2018 (QLD) to manage the environmental impacts and potential risks of parties undertaking resource activities on State land, which is to come into effect on 1 April 2019.

Background

The Queensland Government has introduced substantial changes to environmental and financial assurance arrangements regulating mining and petroleum activities through the Mineral and Energy Resources Financial Provisioning Act 2018 (the Act).

The Act establishes a new financial provisioning scheme to manage the environmental impacts and potential risks of parties undertaking resource activities on State land. The new financial provisioning scheme is to come into effect on 1 April 2019 and will replace the existing financial assurance requirements under the under the Environmental Protection Act 1994 (Qld) (EP Act). The new financial provisioning scheme will establish a scheme fund and surety account to provide a source of funds to be used for the rehabilitation of land, as well as for remediation and research activities.

It is designed to improve the rehabilitation of mined land on a progressive basis rather than at the end of a mine’s life. In doing so, it is intended to reduce the financial risk to Government in the event that a holder of a resource authority or small scale mining tenure fails to meet their environmental and rehabilitation obligations.

Application of the scheme

The new assurance scheme applies to holders of an Environmental Authority (EA) for a resource activity (Authority Holders). This includes resource activities authorised under the Mineral Resources Act 1989 (Qld), Petroleum Act 1923 (Qld) and Petroleum and Gas (Production and Safety) Act 2004 (Qld) for which an EA is required.

Under the new scheme, Authority Holders may be required to make a financial contribution to the scheme fund and/or surety account, depending on the “risk allocation” of the particular project(s).

The scheme is to be managed by the “scheme manager” who is appointed by the Governor General in Council and is authorised to decide and review risk allocations, to manage the scheme and to approve payments out of the scheme fund.

The process

The Act provides the framework for the administration of the scheme, with the specific details contained in the Mineral and Energy Resources (Financial Provision) Regulation 2019 (Qld) (Regulation). In addition to the Regulation, the scheme manager may also develop and give consideration to guidelines relating to the operation of the scheme (Guidelines). Both the Regulation and draft Guidelines have been subject to public consultation.¹

The new assurance scheme involves the following steps:

1. The Authority Holder is required to make an application to the Department of Environment and Science (DES) for a decision about the estimated costs of rehabilitating the land upon which its proposed resource activities will be undertaken (the “Estimated Rehabilitation Cost” or “ERC”);
2. Where the decided ERC exceeds the “Prescribed ERC Amount” (currently $100,000.00 or as prescribed by the Regulation), the manager of the scheme fund is required to consider the category to which the resource activities will be allocated (Indicative Risk Allocation). The categories are: very low; low; moderate; or high;
3. The scheme manager will provide notice to the Authority Holder with:
   1. an “Indicative Risk Allocation”;
   2. the reasons for the allocation; and
   3. the contribution payable or surety that is required.
4. The Authority Holder will have 20 business days to make submissions or to accept the “Indicative Risk Allocation”:
   1. where the Authority Holder provides written submissions in response, the scheme manager will have 20 business days to consider the submissions and to make a final and binding “Initial Risk Allocation”^;2 and
   2. where no submissions are provided by the Authority Holder, the “Indicative Risk Allocation” will become the “Initial Risk Allocation” for the purposes of determining the contribution or surety required.
5. The “Initial Risk Allocation” is to be decided on the basis of a number of factors.³ These are set out in the Act and Guidelines, and include:
   1. the probability of the state incurring costs and expenses in relation to the authority;
   2. the submissions provided by the Authority Holder;
   3. the Guidelines developed by the DES;
   4. the financial soundness of the Authority Holder or its parent entity;⁴ and
   5. the resource project characteristics.⁵
      3.6 The contribution or surety is calculated by reference to the “Initial Risk Allocation” and ERC. This determination can be summarised in the table below:

6. The Initial Risk Allocation is to be reviewed annually by the scheme manager on the basis of the factors set out above.

A high-level overview of the process and timeline under the scheme is summarised in the diagram below:

Application of the new assurance scheme to joint venture parties

The Act provides for a mechanism in determining the risk allocation where there is more than one holder of a resource authority to which the EA relates. In this situation, the scheme manager has the discretion to assess the financial soundness of any of the holders of the Resource Authorities, and is required to allocate the EA to one of the holders of the Resource Authority.

The draft Guideline “Forming the Scheme Manager’s Opinion” provides further guidance as to how this discretion can be exercised:

1. The general rule is that the scheme manager will select the operator¹⁰ of the resource project (in assessing the risk category), unless the operator’s interest in the resource tenure to which the EA relates is less than 20%;
2. Where the operator’s interest in the resource tenure is less than 20%, the scheme manager will look to a holder with a share greater than 20%; and
3. In the event there are multiple parties, all with shares less than 20%, the scheme manager has the discretion to assess any of the holders (taking into consideration “ownership structure for the authority” and the financial soundness of any parent company of the holders).

What is the effect of the legislation to current and future authority holders?

Current authority holders

Under the transitional provisions of the Act, holders of an EA who have provided financial assurance under the EP Act will be regarded as having provided a surety under the new regime.

An Initial Risk Allocation is not required to be made for EA holder who has provided assurance under the old regime until a transition notice has been provided by the scheme manager. This transition notice must be provided within three years of commencement of the new regime (being 1 April 2019).

Future authority holders

The new financial assurance scheme under the Act is to commence on 1 April 2019. Prospective authority holders should be aware of their obligations under the new regime and should give consideration to the Regulations and draft Guidelines.

Most importantly, the Act amends the EP Act  and provides that, as a condition of the EA, an Authority Holder must not carry out (or allow a person to carry out) a resource activity unless an ERC decision is in effect for the resource activity and the Authority Holder has paid a contribution to the scheme fund or has provided a surety as required.

Authority Holders should also be aware of their continuing obligations under the scheme, which may include providing a further contribution or surety following the annual review of the Initial Risk Allocation.

Where an Authority Holder (or a person under their authority) fails to comply with their obligations under the new scheme, the Authority Holder may be in breach of the conditions of the EA and potentially subject to penalties and other criminal sanctions. In the event of a wilful non-compliance, this could attract a maximum penalty of 5 years imprisonment or a penalty of approximately $4 million where the breach is committed by a Corporation.

This article was written by Andrew Bruton, Partner and Graham Johnson, Law Graduate.

¹ https://www.treasury.qld.gov.au/growing-queensland/improving-rehabilitation-financial-assurance-outcomes-resources-sector/.  A current version of the the Regulation and draft Guidelines can be accessed here: https://www.treasury.qld.gov.au/resource/financial-provisioning-scheme/#heading–2. After appointment, the scheme manager will finalise the scheme guidelines and processes around the operation of the scheme.
² The authority holder maintains judicial review rights in the Supreme Court of Queensland where a jurisdictional error has been made in a decision of the scheme manager.
³ These factors are set out in more detail in sections 27(2)-(5) and in the draft Guidelines. In deciding the risk allocation, the Scheme Manager also has a broad discretion to consider any other matter the scheme manager considers to be relevant to their decision.
⁴ See: Mineral and Energy Resources (Financial Provisioning) Act 2018 Scheme Manager Guideline (Forming the Scheme Manager’s Opinion) (draft) at 2.1 on page 3. The rule is that the scheme manager is not required to consider other financial information relating to an entity where the entity has a credit rating from a credit rating agency approved by Queensland Treasury that is a “long term public credit rating” or a “private credit rating not more than 12 months old”. However, where an entity does not have a credit rating, the scheme manager should consider financial soundness having regard to three years of audited financial statements and “any other factors of a kind that would ordinarily be considered by a credit rating agency such as the relevant industry sector and the domicile of the entity.” If an entity does not provide three years of audited financial statements, then it is open to the scheme manager to draw an inference in relation to the entity’s financial soundness.
⁵ See: Mineral and Energy Resources (Financial Provisioning) Act 2018 Scheme Manager Guideline (Forming the Scheme Manager’s Opinion) (draft) at 2.2 on page 4. These characteristics include the “Project Strength” including matters such as the “remaining economic life based on reserves and current rate of production” and “off-take agreements”. The characteristics include a consideration of the “outstanding rehabilitation and site management obligations for the project and certainty of success for proposed rehabilitation and management activities”. They also include a consideration of “material compliance issues relevant to the authority or the resource tenure or tenures to which this authority relates.”
⁶ The surety can be in the form of a bank guarantee, insurance bond or cash payment.
⁷ These percentages are prescribed in the Regulation.
⁸ Where the ERC exceeds the fund threshold of $450,000,000, the Authority Holder is required to make a contribution to the scheme fund and provide a surety. The contribution is to be calculated as the fund threshold ($450,000,000) multiplied by the prescribed contribution percentage for the risk allocation as set out in the table above. The surety is to be equal to the difference between the ERC and the fund threshold.
⁹ The Act provides that the Regulation may prescribe a particular administration fee for a surety provided in relation to a high risk project or Small Scale Mining Tenure.
¹⁰ “Operator” under the EP Act means an entity which has been registered as a suitable operator for the carrying out of an environmentally relevant activity (i.e., mining or petroleum activity).