Bounty decision and notes for industry 29 June, 2006
Background
Bounty Oil & Gas NL (Bounty Oil) and other companies were granted an exploration permit for
five years from 23 August 2001.
The permit holders elected to acquire new data (funded by a farm-in partner) and obtained an
extension to their year 2 obligation. A seismic survey was conducted but the surveyor was not
paid and the data was never provided to the permit holders. They also failed to drill an
exploration well.
In late 2005 the Crown issued notices of revocation in respect of the obligation to acquire
data and to drill an exploration well. Bounty Oil appealed the revocation on many grounds
which can be summarised as being that: · There were technical errors in the process Crown Minerals followed in revoking the permit; · Both the failure to acquire the data and the failure to drill were due to circumstances
beyond the permit holders' control; · The permit holder made reasonable efforts to remedy the non-compliance.
The judgment
The High Court found against Bounty Oil on all grounds. The matters of most general interest
for the industry are summarised below.
Default by farm-in partner: The court rejected the argument that default by a farm-in partner
was a cause beyond the control of a permit holder. It ruled that "The obligation to acquire
the data, and necessarily to pay for that acquisition, rested on the permit holders. They
could not relieve themselves of that obligation by transferring that responsibility to [the
farm-in partner]."
Financial position: Inability to fund work commitments "cannot be regarded" as reasonable
cause for non-compliance or matters beyond a permit holder's control.
Obligations could still be met during life of permit: Even if the outstanding conditions
(such as a year 3 drilling obligation) could still be met within the full term of the permit
that did not excuse non-compliance.
Difficult conditions: Limited windows of opportunity for operations, and difficult weather
and sea conditions ought to have been known and were not force majeure events.
Difficulties sourcing a rig: Efforts to locate drilling rigs should have been initiated well
before the new data was available, so that commencing efforts to obtain a rig in April 2004
when the drilling obligation fell due in August 2004 was not reasonable.
Lessons from the case
Importance of obligations: The Bounty case highlights the importance of adhering to permit
obligations. Failure to comply with obligations can lead to severe consequences. The judge
noted Bounty Oil's emphasis that permits are property rights and commented that "Revocation
for non-compliance with the work programme needs to be viewed in the light that the permit
holder has not performed the obligations which constitute the consideration for the
acquisition of the property right."
Plan ahead, allowing suitable time to overcome difficulties: Lack of planning is an important
aspect of the case. Permit holders should plan operations so that delays do not prevent them
complying with the work programme, which provides the minimum work required by permit
holders. The judge held that attempts to locate a drilling rig commencing six months before
the drilling obligation fell due were "too little, too late" and rejected the submission that
a sequential staged approach to exploration justified making a late approach to rig owners.
Early approach to Crown Minerals: Where permit holders anticipate difficulties in complying
with conditions it is advisable to make an early approach to Crown Minerals, so that matters
can be discussed well before obligations are breached. Early discussions may allow increased
scope to vary a compliant permit, where that is consistent with the regime, or allow the
permit holder the opportunity to surrender the permit without the need for revocation
proceedings, and before expending additional funds that may end up being wasted.
Recording attempts to comply: Permit holders must make sufficient attempts to comply with
permit obligations. Those efforts will be relevant when the Crown has to determine whether
non-compliance is a result of causes beyond the permit holder's control, or whether
non-compliance should be excused. It is therefore important that permit holders keep adequate
records to demonstrate the efforts made to comply, such as correspondence with rig owners.
Who can appeal? Although not argued in this case, the judge took the view that the right of
appeal lies with the "permit holder" as defined in the Act, so that where there is more than
one permit holder, all parties to the permit must either be parties to the appeal, or
formally consent to the appeal being brought on their behalf.
(20min delay)