Announcement of implementation of volume-based model

On Monday 8 June 2020, the Queensland Government announced a new petroleum royalty regime which provides greater certainty in relation to the royalty payable by petroleum producers.

How did we get here?

This announcement comes after a review of the royalty regime was initiated in November 2019 and from which, a variety of recommendations were put forward by the Petroleum Royalty Review Working Group (Group). This Group was established as a result of producers in the gas sector rallying together to raise concerns about the complicated and burdensome nature of the existing royalty regime. Following the Group’s review in late 2019, it was recommended that the following three royalty models be evaluated prior to the implementation of a new royalty regime:

1.  Volume Model;
2.  Industry Model; and
3.  Legislated Netback Model.

The Industry Model was submitted by APPEA and its overarching principle was that petroleum royalties should be payable to the State based on what APPEA refer to as the true wellhead value of petroleum sold.

The Legislated Netback Model involved a legislated formula for netting back from the ultimate sale price of LNG to a deemed arm’s length price in the field but the Group ultimately found that it ‘was not suitable for the existing configuration of the Queensland gas industry’.

The Volume Model was ultimately selected by the Government as the preferred scheme and is explained further below. 

The new regime – Volume Model

As a result of the review, the Government has announced that a volume-based model has been selected as the appropriate method for calculating royalties in the petroleum sector moving forward.  In particular, the Treasurer and Minister for Infrastructure and Planning, Cameron Dick, said that ‘the new volume-based model would support affordable supply for domestic customers, appropriate returns for Queenslanders and fairness for gas producers.’

Liable classes of petroleum

Under the volume-based model, royalties will be calculated on the volume of petroleum produced multiplied by the benchmark price per GJ multiplied by a percentage rate on a sliding scale.  The relevant benchmark price will depend on the petroleum type, with the following four classes of petroleum being established:

1.  gas produced by an LNG project that is not domestic gas (export LNG);
2.  gas supplied by a producer that is not a member of an LNG project to an LNG project (feedstock gas);
3.  domestic gas; or
4.  petroleum in liquid form (including crude oil and condensate).

For each different class of petroleum, the benchmark price will be determined using one of a number of different mechanisms:

1.  first – the sales prices per GJ of petroleum sold by the producer directly, or indirectly through a related entity, if the person purchasing the petroleum is not a related entity for either the producer or the producer’s related entity reseller; or
2.  alternatively – the benchmark price to be prescribed in the Petroleum and Gas Royalty Regulation (which will be based on market indicators for that type of petroleum) where:

(a) the person purchasing the petroleum is a related entity for either the producer or the producer’s related entity reseller;
(b) information required for determining the royalty rate is not available for a producers when the royalty return is lodged; or
(c) a benchmark price decision applies (i.e. where the Commissioner or the Producer elect to use a benchmark price rather than actual sales price).

Royalty rates

It has not yet been determined what the royalty rates will be for each class of petroleum, however we expect to receive confirmation on these rates following completion by the Queensland Treasury of its ‘Petroleum Royalty Review – Implementation Consultation’ (Consultation Paper) released 10 June 2020. The Consultation Paper invites industry to comment on issues arising in the implementation of the new regime, including what issues should be considered in framing guidelines for measuring the volume of liable petroleum for each of the four classes of petroleum. Written submissions to the consultation process must be made by 24 June 2020.

Once they have been set, it has been confirmed that percentage royalty rates will be locked in for the first five years.

Arrangements for non-tenure holders

In response to requests from industry, the reforms will allow non-tenure holders to lodge royalty returns and pay royalty, as if they are the petroleum producer, for their commercial share of petroleum produced from the tenure. This means that commercially sensitive sales information would not need to be provided by the non-holder to the tenure holder to enable a royalty to be calculated.

Implications on commercial arrangements

Whilst the new royalty regime is generally seen as a win for industry in terms of certainty and simplicity, the changes may have inadvertent outcomes. This includes impacts on existing contractual arrangements, such as:

  • private royalties, which often reference government royalty regime legislative concepts,
  • farm-out or deferred payment arrangements, or
  • other contractual dealings with reversionary rights.

In its Consultation Paper, the Government suggested that this type of flow on issue is a matter for the parties as to how the new legislative concepts are given effect, verified and enforced.

Next steps

It is important that petroleum producers get on the front foot to mitigate the commercial and legal impacts of these changes, which may include:

  • breach of contract,
  • frustration of contract,
  • default, or
  • potential dispute.

Our industry leading resources team is on hand to support you in understanding how the Queensland Petroleum Royalty regime will impact your projects, and to identify practical next steps to reduce your commercial and legal risk. 

Please click here if you would like to discuss this, or reach out to a member of McCullough Robertson’s specialist team (listed below).