Termination of PDL
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- INTRODUCTION
The issue to be addressed in this paper is whether the Government is entitled to terminate the Petroleum Development Licence (PDL) issued to the LNG project operator on the basis of the latter’s delay. Related to this are the rights of the LNG project operator (“licensee”) and the consequences of terminating a licence.
To sufficiently address these issues, this paper shall explore the applicable local statutory provisions as well as statutory provisions of selected Commonwealth countries on the issues. Heavy reliance shall also be placed on interpretative local and foreign jurisprudence, mainly case law.
- AN ANALYSIS OF THE APPLICABLE PROVISIONS ON PDL TERMINATION
Division 7 of the Oil and Gas Act deals with Petroleum Development Licence. Under Section 59 of the Act, a PDL confers certain rights to the licensee, including exploration of oil and other related operations. However, the rights conferred under a PDL are not absolute; they are subject to conditions specified thereunder. Therefore, although a licensee is entitled to hold a licence for a continuous period of twenty-five (25) years commencing the effective date, the Minister may, on behalf of the Government, revoke such a licence if the licensee does not comply with the governing conditions.
Among the conditions specified under Section 63 is that the licensee must carry out the proposals approved by the Minister the basis on which the licence is granted. This means that the licensee must, without undue delay, proceed to the recovery of oil in the specified blocks and utilize oil resources well, in the best interests of the State.
Section 36 empowers the Minister to revoke a petroleum prospecting licence by way of a notice published in the National Gazette, under certain circumstances, mainly, lapse of a period of two years. It, therefore, follows that the discretion to extend the period within which oil and gas production should commence lies with the Minister, and not the licensee. As such, the Minister acted within the law by revoking the PDL in this case, in view of the licensee’s failure to comply with the conditions enumerated under the licence and the governing statute. As to the procedure applicable, it emerges that unless the contract entered between the licensee and the Government specified otherwise, no procedure other than publication of the revocation notice would apply in this case.
While the extensive investment made by the licensee in drilling, well appraisal and independent reservoir certification are not in dispute, the Statute does not make a provision for reimbursement where a licence has been terminated due to the licensee’s fault. This is because costs incurred by a developer are usually reimbursed from the State’s share of return. In cases such as the instant one, where no development occurs, the entire risk is borne by the licensee, implying that the State is not liable to make a reimbursement for any of the itemized costs. This position notwithstanding, parties (the Government and licensee) could also negotiate their own terms of the licence, in which case the default provisions spelled out under the Statute would not apply in a strict manner.
- COMPARATIVE ANALYSIS ON PDL TERMINATION
- United Kingdom
The Petroleum Licensing Regulations enacted pursuant to the Petroleum Act govern the licensing of oil production and exploration. Among the prescribed model clauses for petroleum development and exploration licences relate to revocation. Clause 41, for instance, permits revocation of a licence by the Government upon the occurrence of certain specified events among them being any form of breach or failure to observe the terms and conditions on which the licence has been granted.
However, as the wording of the clause suggests, termination of a licence deprives the licensee of the rights thereby granted but without prejudice to obligations and or liabilities already incurred by the licensee.
The recent decision of the UK Administrative Court in the case of Benjamin Dean v. The Secretary of State for Business, Energy, and Industrial Strategy is instructive as to the nature of licences issued under the UK Petroleum Act. The Court, while declining to interfere with a deed of variation issued by the UK Government in respect to a Petroleum Exploration and Development Licence, pronounced itself as follows:
“petroleum licences are grants of property rights, analogous to private law property transactions authorised under other statutory regimes. Essentially the 1998 Act provides a mechanism by which the Crown may divest itself of the exclusive rights to search for and get petroleum to third parties.” [Emphasis supplied]
The import of the Court’s findings in Benjamin Dean (supra) is that a licence issued in relation to petroleum development is revocable, upon the terms agreed upon by the Government and the licensee. On that basis, questions as to revocation, policy considerations, independent arbitration, among others are guided by the terms and conditions of the contract. This position is also supported by, among others, the Halsbury’s Laws of England, 5th Edition.
Even though an oil production licence is governed by contractual principles, the UK Court of Appeal determined in the leading case of Inland Revenue Commissioners V Mobil North Sea Ltd that such licenses are highly regulated by the law. In an attempt to determine the special character of oil production licences, two celebrated scholars, T.C Daintith and G.D.M Willoughby, have postulated as follows:
“At first sight, the licence appears to be mixed in character. It is contractual in form, being executed as a deed by the Minister on one side and the licensee on the other. It displays certain elements of a commercial transaction; that is to say, the assignment or transfer by the Crown, over a defined period, of certain valuable rights, in return for annual payments, royalties on the produce of those rights, and, in the case of some licences, premium payments also. At the same time, the licence arrangements retain a strongly regulatory flavor, both by reason of the formal rules for the issues of licences laid down at instigation of Parliament, and by reason of the content of licences themselves, which must normally accord with the model clauses regulating such matters as working methods, safety, pollution and training, and reserving to the Minister considerable powers of direction of the licensee’s activity”
- Australia
Pursuant to Section 140 of the Australian Offshore Petroleum Act, the Joint Authority may cancel an oil production licence if a licensee has not carried out the recovery operations for a period of five years or more. The proviso demands that, before the cancellation, the Joint Agency must give the licensee a notice of a period of thirty (30) days and take into account submissions made by the licensee following the issuance of the notice.
Australian Courts generally show deference have to decisions of administrative such as the Petroleum Joint Authority, only where they are manifestly unfair and unreasonable. It was so held by the Court in Minister for Aboriginal Affairs v. Peko-Wallsend Ltd wherein the exceptional cases in which such decisions may be interfered with were set out.
Scholars have argued that the agreement between Government authorities and a licensee are imperative in determining what rights and entitlements exist at the point of termination. Therefore, although the Joint Authority is entitled to revoke a production licence, a licensee has recourse under the terms of the contract under which the licence is issued.
- Canada
The Oil and Gas Regulations, issued under Canada’s Petroleum and Natural Gas Act, the relevant Minister may terminate a licence, permit or lease in respect of oil and gas exploration. When such happens, the licensee shall be liable to pay any outstanding royalties or other levies owing to the Government and to compensate for any destruction of property arising from its operations. A cancellation of a licence only takes effect on issuance of a ninety days’ notice to the licensee which must set out the reason for the intended cancellation. Thereupon, the licensee is entitled to remedy the reasons given and at that point, the Minister may cancel the intended revocation.
As to the rights conferred by a licence regarding termination, a number of Canadian court decisions are instructive. In Canpar Holdings Ltd v. Petrobank Energy and Resources Ltd, the issue that arose was the nature of a contract relating to exploration. The Court of Appeal of Alberta, Canada considered the terms of the exploration contract at issue and held that since the same was terminated because of the lessee’s fault, the lessor would be entitled to compensatory damages. This approach, it would emerge, may be applicable in contracts under which an exploration lease is issued.
- New Zealand
In New Zealand, the relevant Ministry may terminate a licence if it appears that a licensee has failed to make reasonable efforts towards meeting the stipulated terms and conditions. The Ministry has to serve the licensee with a notice specifying the alleged default and requiring the licensee to remedy it within a period of ninety (90) days. In case the licensee fails to comply with the notice, the Ministry shall then require the licensee to appear before a Stipendiary Magistrate, and show cause why there should not be a cancellation of the licence.
In the case of Ward Equipment v. Markus Johannes Preston, the Court of Appeal of New Zealand considered the nature of licence contracts and the circumstances under which the same could be legally terminated by the parties. In the Court’s view, a licence contract could not be terminable without cause, unless parties expressly agreed so.
- Malaysia
Under the Petroleum Mining Act, the Malaysian Petroleum Authority may revoke a licence where a licensee has failed to observe the terms and conditions specified under the licence, among other grounds.
The Malaysian Act, however, expressly provides for arbitration of disputes arising out of an oil production licence, as between the Government and the licensee. The Act states that such a dispute shall be referred to a single arbitrator, in accordance with the Arbitration Act, 2005.
REFERENCES
STATUTES
Oil and Gas Act, United Kingdom
Offshore Petroleum Act, Australia
Petroleum Act, New Zealand
Petroleum Mining Act, Malaysia
The Petroleum Licensing (Exploration and Production) (Landward Areas) Regulations, No. 1686 of 2014.
BOOKS
Ansari AH, Energy Law in Malaysia (Kluwer Law International 2011).
Bunter MAG, The Promotion, and Licensing of Petroleum Prospective Acreage (Kluwer Law Internat 2002) 313.
Daintith T and Willoughby GDM, Manual of United Kingdom Oil and Gas Law (Sweet & Maxwell 1984)
Halsbury HSG of, Jones S and Mackay of Clashfern, James Peter Hymers, Halsbury’s Laws of England, 5th Ed (LexisNexis 2011)
Kuwimb, Mako John. “An Examination of Papua New Guinea’s Petroleum Law and Policy.” University of Wollongong, Research Online, 1997, 199.
Publications UIB, United Kingdom Mining Laws and Regulations Handbook (Intl Business Pubns USA 2008) 185.
PWC, From promise to performance Africa oil & gas review, (Report on current developments in the oil and gas industry in Africa 2013) 12.
CASE LAW
Benjamin Dean v. The Secretary of State for Business, Energy and Industrial Strategy, Case No: CO/4951/2016 [2017] EWHC 1998 (Admin).
Inland Revenue Commissioners V Mobil North Sea Ltd (1986) 1WLR 296.
Minister for Aboriginal Affairs v. Peko-Wallsend Ltd, [1986] 162 CLR 24 at 42.
Canpar Holdings Ltd v. Petrobank Energy and Resources Ltd (9 October 2009), Calgary 0601-05052.
Ward Equipment v. Markus Johannes Preston, CA145/2017 [2017] NZCA 444.
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