Australia Pacific LNG Pty Limited v The Treasurer, Minister for Aboriginal and Torres Strait Islander Partnerships and Minister for Sport
[2019] QSC 124
•24 May 2019
SUPREME COURT OF QUEENSLAND
CITATION:
Australia Pacific LNG Pty Limited & Ors v The Treasurer, Minister for Aboriginal and Torres Strait Islander Partnerships and Minister for Sport [2019] QSC 124
PARTIES:
AUSTRALIA PACIFIC LNG PTY LIMITED
ACN 001 646 331
(first applicant)
AUSTRALIA PACIFIC LNG (CSG) PTY LIMITED
ACN 099 577 769
(second applicant)
AUSTRALIA PACIFIC LNG CSG MARKETING PTY LIMITED
ACN 008 750 945
(third applicant)
AUSTRALIA PACIFIC LNG (MOURA) PTY LIMITED
ACN 064 989 813
(fourth applicant)
v
THE TREASURER, MINISTER FOR ABORIGINAL AND TORRES STRAIT ISLANDER PARTNERSHIPS AND MINISTER FOR SPORT
(respondent)FILE NO/S:
SC No 1027 of 2016
DIVISION:
Trial Division
PROCEEDING:
Trial
DELIVERED ON:
24 May 2019
DELIVERED AT:
Brisbane
HEARING DATE:
19 November 2018; 20 November 2018; 21 November 2018; 22 November 2018
JUDGE:
Bond J
ORDER:
The orders of the Court are:
1. It is declared that the respondent’s petroleum royalty decision dated 16 December 2015 was invalid and of no effect.
2. The respondent’s petroleum royalty decision dated 16 December 2015 is set aside with effect from the date it was made.
3. The matter to which the respondent’s petroleum royalty decision dated 16 December 2015 relates is referred back to the respondent for further consideration and determination according to law.
4. I will hear the parties on the question of costs.
CATCHWORDS:
ADMINISTRATIVE LAW – JUDICIAL REVIEW – GROUNDS OF REVIEW – ERROR OF LAW – FAILURE TO OBSERVE STATUTORY PROCEDURE – where the applicants applied to the respondent for a petroleum royalty decision – where applicant provided expert reports in support of application which supported the adoption of the Residual Price Method as a methodology to determine the amount that the petroleum could reasonably be expected to realise if it were sold on a commercial basis – where the respondent obtained competing expert advice which supported the adoption of the Adopted Netback Method – where the respondent wholly accepted the advice of the expert who supported the Adopted Netback Method – where the applicants alleged the Adopted Netback Method was not capable of being used to determine the amount that the petroleum could reasonably be expected to realise if it were sold on a commercial basis – whether the respondent misapplied the statutory test under s 148(1)(a) of the Petroleum and Gas (Production and Safety) Regulation 2004 (Qld) in making a petroleum royalty decision
ADMINISTRATIVE LAW – JUDICIAL REVIEW – GROUNDS OF REVIEW – OTHER CASES – where the applicant’s applied to the respondent for a petroleum royalty decision – where the applicant’s contended that if the first ground of judicial review was made out then the Adopted Netback Method stipulated by the respondent to calculate the market value of the petroleum had no discernable relationship with the market value of petroleum produced and instead imposed a duty of excise – where the intervenor submitted that no constitutional point arose which was necessary to be determined – whether the petroleum royalty decision imposes a duty of excise or a tax on the production and sale of LNG
ADMINISTRATIVE LAW – JUDICIAL REVIEW – GROUNDS OF REVIEW – UNREASONABLENESS – where the applicants applied to the respondent for a petroleum royalty decision – where the applicants alleged that the merits of the choices and assumptions made in the expert report which the respondent wholly adopted in making the petroleum royalty decision were so poor that the decision must be regarded as being made outside the bounds of legal reasonableness – where the reasons for the decision given by the respondent suggested that the respondent had rationally engaged with the competing expert evidence, had expressed a preference for the methodology supported by one expert and had justified that choice in a coherent and intelligible way – whether the decision was made outside the bounds of legal reasonableness, having regard to the scope, purpose and objects of the statutory source of the power
ADMINISTRATIVE LAW – JUDICIAL REVIEW – GROUNDS OF REVIEW – IRRELEVANT CONSIDERATIONS – where the applicants applied to the respondent for a petroleum royalty decision – where the applicant alleged that the respondent, in making the decision, took into account the estimated revenue return to the State of the Adopted Netback Method as compared to the Residual Price Method – where the applicant alleged that the respondent, in making the decision, took into account material and comments received from an unrelated petroleum company – where it was alleged that the Office of State Revenue took the matters into account in preparing the report which was provided to, and relied upon by, the respondent – where it was admitted on the pleadings that the Office of State Revenue had taken those matters into account – where it was alleged that the consideration should be imputed to the respondent – whether the respondent took into account irrelevant considerations in exercising the statutory power to make the petroleum royalty decision
ADMINISTRATIVE LAW – JUDICIAL REVIEW – GROUNDS OF REVIEW – RELEVANT CONSIDERATIONS – where the applicants applied to the respondent for a petroleum royalty decision – where the applicant alleged that the respondent failed to take into account a report produced by QTC to calculate the appropriate rate of return for petroleum royalty – where the relevant matters concerning the QTC report were identified in other material which was before the respondent for consideration –– where the applicants allege that the respondent should have had regard to comparable LNG projects in Queensland and any petroleum royalty decision that applies to those projects – where it was admitted that the respondent did not have regard to comparable LNG projects – whether the respondent was bound to take into account the QTC report and the methods applied to other LNG projects in Queensland in making a petroleum royalty decision
ADMINISTRATIVE LAW – JUDICIAL REVIEW – GROUNDS OF REVIEW – UNCERTAIN EXERCISE OF POWER – where the applicants applied to the respondent for a petroleum royalty decision – where the respondent made a petroleum royalty decision which stipulated a formula for calculating the market value of petroleum produced using the Adopted Netback Method – where the formula provided contained variables for calculating each relevant component – where it was alleged that the decision was legally uncertain and invalid as several important variables in the formula were left open to subjective estimates, assessment, discretionary allocation and matters of judgment – whether the petroleum royalty decision was vitiated by failure of the condition that the requisite degree of certainty be achieved
ADMINISTRATIVE LAW – JUDICIAL REVIEW – GROUNDS OF REVIEW – PROCEDURAL FAIRNESS – GENERALLY – where the applicants applied to the respondent for a petroleum royalty decision – where the respondent obtained expert evidence in relation to the application – where the respondent afforded the applicant an opportunity to respond to that material – where the respondent subsequently obtained further expert evidence – where the respondent did not provide the applicant an opportunity to respond to the further expert evidence, the final form of the proposed formula and other material – where it was alleged that the respondent breached the rules of natural justice in failing to provide the applicant with an opportunity to be heard in relation to this material – whether the procedure adopted by the respondent was consistent with the procedure which a reasonable and fair repository of the statutory power would adopt in the circumstances
Constitution (Cth), s 90
Judiciary Act 1903 (Cth), s 78B
Judicial Review Act 1991 (Qld), s 20, s 23
Petroleum and Gas (Production and Safety) Act 2004 (Qld), s 10, s 590, s 594, s 599, s 599A, s 599B, s 599C, s 599D, s 599E, s 601, s 602, s 603
Petroleum and Gas (Production and Safety) Regulation 2004 (Qld), s 146A, s 147, s 147A, s 147B, s 147C, s 148, s 148A, s 148B, s 148C, s 148C, s 148D, s 148E, s 148F, s 148G, s 149, s 149B, s 149H, s 149I
Petroleum Resource Rent Tax Assessment Regulations 2005 (Cth)
Arnold v Minister Administering the Water Management Act 2000 (No 6) [2013] NSWLEC 73, considered
Australian Conservation Foundation Inc v Forestry Commission of Tasmania (1988) 19 FCR 127, cited
Australian Retailers Association v Reserve Bank of Australia (2005) 148 FCR 446, considered
Buzzacott v Minister for Sustainability, Environment, Water, Population and Communities (No 2) (2012) 187 LGERA 161, cited
Fraser Henleins Pty Ltd v Cody (1945) 70 CLR 100, cited
Jones v Dunkel (1959) 101 CLR 298, considered
King Gee Clothing Co Pty Ltd v the Commonwealth (1945) 71 CLR 184, considered
Kirk v Industrial Relations Commission of New South Wales (2010) 239 CLR 531, cited
McCormack v Deputy Commissioner of Taxation (2001) 114 FCR 574, considered
Minister for Aboriginal Affairs v Peko-Wallsend Limited (1986) 162 CLR 24, considered
Minister for Immigration and Border Protection v SZVFW (2018) 357 ALR 408, considered
Minister for Immigration and Border Protection v WZARH (2015) 256 CLR 326, cited
Minister for Immigration and Citizenship v Li (2013) 249 CLR 332, cited
Moolarben Coal Mines Pty Ltd v Director-General of the (former) Department of Industry and Investment NSW (Agriculture Division) [2011] NSWLEC 191, considered
Phosphate Resources Ltd v Minister for the Environment, Heritage and the Arts (No 2) (2008) 251 ALR 80, cited
Pollentine v Parole Board of Queensland [2018] QSC 243, cited
Sean Investments Pty Ltd v MacKellar (1981) 38 ALR 363, cited
TAB Ltd v Racing Victoria Ltd [2009] VSC 338, considered
Turner v Minister of Public Instruction (1956) 95 CLR 245, considered
Visa International Service Association v Reserve Bank of Australia [2003] FCA 977, considered
WB Rural Pty Ltd v Commissioner of State Revenue [2018] 1 Qd R 526, cited
COUNSEL:
L F Kelly QC, with M F Johnston, for the applicants
P Looney QC, with A D Scott, for the respondent
P Dunning QC, with D Quayle, for the intervenor
SOLICITORS:
Clayton Utz for the applicants
Crown Law for the respondent
Crown Law for the intervenor
Contents
Introduction
The regulatory framework
The petroleum royalty decision
Transfer pricing methodologies
The application
Steps taken after the application and before the decision
OSR obtains expert opinion evidence and gives the applicants opportunity to be heard
APLNG provides further expert opinion and further submissions
OSR provides Minister first briefing note in June 2015
OSR obtains further expert opinion but does not give the applicants opportunity to be heard about it
The OSR identifies revenue impact of the competing methodologies
OSR provides Minister second briefing note dated 27 November 2015
OSR provides Minister third and final briefing note dated 14 December 2015
The decision
The Minister’s jurisdiction
The value which was of concern for royalty purposes is an arms-length market valuation.
The Minister is authorised to choose the appropriate methodological solution
Ground 1: Misapplication of the statutory test
Discussion
The first “fundamental problem”
The second “fundamental problem”
The third “fundamental problem”
Conclusion as to ground 1
Ground 2: Unlawful imposition of tax
Ground 3: Unreasonableness
Relevant legal principles
Discussion
Conclusion as to ground 3
Ground 4: Taking into account irrelevant considerations
The pleaded case
Relevant legal principles
The first irrelevant consideration: the matters argued under ground 1
The second irrelevant consideration: the revenue outcome for the State
The third irrelevant consideration: the Tri-Star material
Conclusion as to ground 4
Ground 5: Failing to take into account relevant considerations
Relevant legal principles
The first relevant consideration: the QTC Report
The second relevant consideration: methods applied to other projects in Queensland
Conclusion as to ground 5
Ground 6: Uncertainty
Relevant legal principles
Discussion
Was the Minister’s power conditioned on achieving certainty of the nature suggested by the applicants?
Was the allegedly requisite degree of certainty not achieved?
Was the exercise of power improper under ss 20(2)(e) and 23(h) of the Judicial Review Act
Conclusion as to ground 6
Ground 7: Procedural fairness
Relevant legal principles
Discussion
The second and third Lonergan reports
The final form of the formula as proposed to be stated
Other material said to have been considered
Conclusion as to ground 7
Conclusion
Annexure A: The formula stated by the Ministeri
Annexure B: Objections to material not before the Minister
Introduction
Section 590(1) of the Petroleum and Gas (Production and Safety) Act 2004 (the Act) relevantly provides that a petroleum producer must pay a royalty for the petroleum that it produces. The royalty is payable “at the rate prescribed under a regulation on the value of the petroleum at the prescribed time”: s 590(2)(b). The value of the petroleum produced (and upon which the royalty is payable) is the value provided for under a regulation or worked out in the way prescribed under a regulation: s 590(3).
The applicable regulation is the Petroleum and Gas (Production and Safety) Regulation 2004 (Qld) (the Regulation). Under the Regulation, the royalty is payable at the rate of 10% of “the wellhead value” of the petroleum disposed of by the petroleum producer during a “royalty return period”: s 147C. Amongst other things, the Regulation authorises the respondent (the Minister), upon application by a petroleum producer, to state a method or formula to be used in working out one or more of the components of the “wellhead value”: s 148F.
Such a decision is referred to as a “petroleum royalty decision”.
The second, third and fourth applicants are the wholly owned subsidiaries of the first applicant (APLNG). Together, the four companies are involved as petroleum producers in a liquefied natural gas (LNG) project in Queensland. The project involves the construction and subsequent operation of the requisite infrastructure to permit the following operations to occur:
(a)extracting and processing coal seam gas (CSG) from reserves in central Queensland;
(b)collecting, treating and transporting the processed CSG (also referred to as feedstock gas or feedstock petroleum) through pipelines to a liquefaction facility on the coast near Gladstone;
(c)processing and converting the feedstock gas into LNG via two ‘trains’ at the liquefaction facility;
(d)storing the LNG in insulated tanks;
(e)marketing and selling the LNG to overseas buyers pursuant to various gas sale agreements; and
(f)loading the LNG for export at purpose built wharf facilities onto ships for transportation to foreign buyers pursuant to relevant gas sale agreements.
It was common ground before me that the CSG produced by the applicants fell within the definition of “petroleum” in s 10 of the Act. It was also common ground that the relevant “petroleum” to be valued for the purpose of calculation of the royalty under the Act was the feedstock gas transferred at what is known as the first point of disposal (namely the point where the feedstock gas exit the CSG processing plants and before it gets to the liquefaction facility). An important point of conceptual distinction is between companies and operations “upstream” of this point and companies and operations “downstream” of this point.
As a petroleum producer within the meaning of the Act and the Regulation, APLNG sought a petroleum royalty decision from the Minister in respect of how it should go about the calculation of one of the components of wellhead value of petroleum, namely the amount the feedstock gas “could reasonably be expected to realise if it were sold on a commercial basis” at the first point of disposal. That issue had a degree of complexity because the value chain in the project involved a number of transfers between related companies, in that the feedstock gas produced by the applicants was transferred to a related APLNG aggregator company, then transferred by the APLNG aggregator company to a related APLNG LNG processing/export marketing company at the entry point to the LNG liquefaction plant. Thereafter the APLNG export marketing company sold the LNG on a Free On Board basis to external unrelated buyers.[1]
[1] There were other related companies which provide services under contracts throughout the value chain, but it is unnecessary to summarise their position in any detail.
The Minister provided his decision (the decision) on 16 December 2015, in the form of a document which, amongst other things, purported to state a method or formula for deciding the amount that the feedstock petroleum could reasonably be expected to realise if it were sold on a commercial basis. The formula expressed in the decision is reproduced in Annexure A to these reasons. Effectively the decision favoured a methodology proposed by an expert retained by the relevant public service department (and supported by it), and rejected criticisms of that methodology and expert’s opinion made by APLNG and a raft of expert reports which APLNG had obtained and provided to the Minister, including a report by the expert economist, Professor Gray.
The applicants were aggrieved of the outcome and, by application for a statutory order of review of the decision pursuant to s 20 of the Judicial Review Act 1991 (Qld), they sought:
(a)a declaration that the decision is invalid and of no effect;
(b)a declaration that the method of determining the market value of petroleum which was adopted in the decision is not a method which is capable of answering the market value in the way required by the Regulation;
(c)an order quashing or alternatively setting aside the decision with effect from the date it was made; and
(d)an order referring the matter back to the Minister for further consideration and determination consistent with the reasons of the Court and according to law.
There were seven grounds upon which the applicants sought to impugn the decision. They were:
(a)ground 1: misapplication of the statutory test;
(b)ground 2: unlawful imposition of tax;
(c)ground 3: unreasonableness;
(d)ground 4: taking into account irrelevant considerations;
(e)ground 5: failing to take into account relevant considerations;
(f)ground 6: uncertainty; and
(g)ground 7: procedural fairness.
The Minister accepted that his petroleum royalty decision was a decision to which the Judicial Review Act applies, but submitted that the various grounds on which the applicants sought to impugn the decision should not be upheld. Amongst other things, the Minister submitted that many aspects of the applicants’ argument should be regarded as an attempt to have me embark upon the impermissible course of a review of the merits of the decision.
The expert reports and other material which were before the Minister were also in evidence before me. The applicants also sought to rely on some new evidence, which had not been placed before the Minister. Objection was taken to some of this new evidence. However ultimately the only objections which were pressed were those which addressed the manner by which the applicants sought to rely on a new expert report by Professor Gray, in support of grounds 1, 3, 6 and 7. It was common ground that I should receive the report subject to the objections and rule on the objections in the course of these reasons. For the reasons set out in Annexure B I have concluded that the expert report of Professor Gray should be admitted for limited purposes.
For reasons which follow, in my view the applicants have made out grounds 4, 6 and 7, with the result that I will make a declaration that the decision is invalid and of no effect and the ancillary orders which they seek.
The regulatory framework
Section 590 of the Act imposes a petroleum royalty on petroleum producers in these terms:
590 Imposition of petroleum royalty on petroleum producers
(1) A petroleum producer must pay the State petroleum royalty for petroleum that the producer produces […]
(2) The petroleum royalty—
(a) must be paid on or before the time prescribed under a regulation; and
(b) is payable at the rate prescribed under a regulation on the value of the petroleum at the prescribed time.
(3) The value of petroleum for the petroleum royalty is the value provided for under a regulation or worked out in the way prescribed under a regulation.
[…]
“Petroleum” is broadly defined by s 10 of the Act to include, amongst other things, any substance consisting of hydrocarbons that occur naturally in the earth’s crust; or a substance necessarily extracted or produced as a by-product of extracting or producing such hydrocarbons; or fluid extracted or produced from coal or oil shale which consists of or includes hydrocarbons. In ordinary parlance, the definition includes oil, shale oil and, importantly for present purposes, CSG and its by-product, LNG.
There follows in Chapter 6 of the Act a regime for the administration of the collection of royalties imposed by s 590. A proper understanding of the operation of the regime requires the Act to be read with the relevant parts of the Regulation. I make the following observations about the features of the regime relevant to the present case:
(a)Petroleum royalty payable by a petroleum producer is payable for the royalty return period in which the petroleum is “disposed of”: s 147(1)(a) of the Regulation.[2] As to this:
[2] Where, as here, the petroleum is produced under a petroleum tenure within the meaning of the Act, s 147(1)(a) applies. In other circumstances the royalty is payable for the royalty return period in which the petroleum is produced (as opposed to “disposed of”). It is not necessary further to consider those circumstances or that possibility.
(i) “Royalty return period” is the quarterly period for which a royalty return must be lodged: definition in Schedule 2 of the Act and s 146A of the Regulation.
(ii) A petroleum producer disposes of petroleum when it sells or otherwise transfers ownership of the petroleum to another person (or where it flares, vents or uses the petroleum): s 147(2) of the Regulation.
(b)The producer must, on or before the last business day of the month immediately following the royalty return period in which the petroleum was disposed of (referred to as the “ordinary due date”), lodge a written return, containing prescribed “royalty information”: s 594 of the Act.[3] The requisite information is specified in s 149 of the Regulation, namely:
[3] Sections 594(2) and (3) give the Minister the option of requiring the provision of the royalty return at some earlier date than the ordinary due date.
(i) the wellhead value of the petroleum disposed of by the petroleum producer during the royalty return period;
(ii) a breakdown of certain prescribed expenses and other deductions which the Regulation identifies as necessary to be made for working out the wellhead value; and
(iii) for each relevant petroleum product disposed of by the producer during the royalty return period, the volume of the product disposed of and the amount of any revenue earned by the producer in relation to the product.
(c)The Minister may, by notice, allow a producer to pay the petroleum royalty payable by the producer for a royalty return period on the day a royalty return must be lodged for the royalty return period: s 147(5) of the Regulation. Otherwise, the royalty is payable in three instalments: first by the last business day of the second month of the royalty return period; second by the last business day of the third month of the royalty return period; and third on the day a royalty return must be lodged for the royalty return period: s 147(3) of the Regulation. The first two instalments are calculated as ⅓ of the total amount paid for the previous royalty return period: s 147A(2) and (3) of the Regulation. It may be inferred that the final instalment must be the balance. There is provision for a producer to elect to pay on a monthly basis in certain circumstances: ss 147A and 147B of the Regulation.
(d)Provision is made for the payment of interest on late payments at the rate prescribed for unpaid tax under the Taxation Administration Act 2001 (Qld): s 602 of the Act and ss 149H and 149I of the Regulation.
(e)Whilst a petroleum producer owns petroleum for which a royalty is, or could be payable, the producer must also lodge an annual royalty return for each annual return period, stating the royalty information for that period: s 599 of the Act.
(f)The Minister must make an assessment of the amount of petroleum royalty for each royalty return and annual royalty return: ss 599B(1) and 599D of the Act. The Minister may make a default assessment if satisfied that an amount is payable but the producer has not lodged a return as required: ss 599B(2) and 599D of the Act. Provision is made for reassessment in appropriate circumstances (see s 599C of the Act) namely if the Minister is reasonably satisfied that the original assessment was not, or is no longer, correct.
(g)Having made an assessment or reassessment, the Minister must give the producer an assessment notice: s 599E of the Act. Amongst other things the notice must identify whether further monies are payable consequent upon the assessment or reassessment, and, if so, the amount, the due date, and the amount of penalty which might be payable: ss 599E and 601 of the Act. Penalties on reassessments of original assessments which result in an increased amount payable are 75% of the amount of the increase: s 601(2)(c) of the Act. In other circumstances penalties can amount to 75% of the amount assessed as payable: s 601(2)(a) of the Act.
(h)Unpaid royalty may be recovered as a debt: s 603 of the Act.
(i)There is a mechanism for the Minister to require a petroleum producer to provide a royalty estimate for the petroleum producer for a stated future period: s 599A of the Act and s 149B of the Regulation. This process simply formalises a long-standing administrative practice of collecting royalty revenue estimates for the State Budget and for year-end accrual purposes.[4] There is a separate mechanism for the Minister to estimate the royalty return where the petroleum producer has not lodged a royalty return for the previous royalty return period as required under the Act: ss 147A(5) and 147B(2) of the Regulation. In these circumstances, the petroleum royalty payable for the first and second instalments (see [15](c) above) is the estimated amount: s 147A(5)(b) of the Regulation.
[4] See Explanatory Note to the Mines and Energy Legislation Amendment Regulation (No 1) 2011 (Qld).
It is evident that the liability to pay a royalty only starts accruing once a petroleum producer is in a position to dispose of petroleum during a royalty return period, but that once that occurs there is a complicated regime which requires regular and accurate calculation of the amounts payable and payment on or before particular dates, if imposition of default interest and very significant penalties is to be avoided.
How does a producer go about the process of calculating royalties for the purpose of discharging its obligation to pay and avoiding the adverse financial imposts of default interest and royalty penalties?
As I have already mentioned, s 590(2)(b) and (3) of the Act identifies two variables:
(a)the rate prescribed under a regulation; and
(b)the value of the petroleum at the prescribed time, where the value is the value provided for under a regulation or worked out in the way prescribed under a regulation.
Section 147C of the Regulation identifies the rate, the value and the prescribed time. It provides:
Petroleum royalty payable by a petroleum producer is payable at the rate of 10% of the wellhead value of the petroleum disposed of […] by the petroleum producer during a royalty return period.[5]
[5] The words encompassed by the ellipsis are “or, if section 147(1)(b) applies, produced”. Where, as here, the petroleum is produced under a petroleum tenure within the meaning of the Act, s 147(1)(b) will not apply. It is not necessary further to consider that possibility.
Bearing in mind the definition of “disposed of” provided for in s 147(2) of the Regulation (referred to at [15](a)(ii) above) it can be noted that:
(a)the “rate prescribed” is 10%; and
(b)the value is wellhead value of petroleum sold, or the ownership of which is otherwise transferred to another person, used, or flared or vented; and
(c)the “prescribed time” is during a royalty return period.
The next critical step is working out what is the wellhead value of petroleum disposed of during a royalty return period. In this regard, s 148 of the Regulation provides (emphasis added):
148 Working out wellhead value of petroleum
(1) The wellhead value of petroleum disposed of […] by a petroleum producer in a royalty return period is—
(a) the amount that the petroleum could reasonably be expected to realise if it were sold on a commercial basis; less
(b) the sum of the following—
(i) the expenses for the royalty return period mentioned in subsection (2);
(ii) any negative wellhead value deducted under subsection (4).
(2) For subsection (1)(b)(i), the expenses are each of the following—
(a) a pipeline tariff or other charge paid or payable by the petroleum producer to a third party for transporting the petroleum through a pipeline to the point of its disposal, if the Minister reasonably believes the amount of the tariff is reasonable on a commercial basis;
(b) a processing plant toll or other charge paid or payable by the petroleum producer to a third party for processing the petroleum before it is disposed of, if the toll is calculated—
(i) on a commercial basis; or
(ii) if the Minister reasonably believes that use of the plant by other petroleum producers or for other purposes makes another basis for charging the most practicable basis—on the other basis;
(c) depreciation of capital expenditure by the petroleum producer on a petroleum facility or pipeline used for processing the petroleum or transporting it from the wellhead of the well in which it was produced to the point of its disposal, allocated over—
(i) 10 years; or
(ii) a shorter period decided by the Minister, if the Minister reasonably believes the shorter period is reasonable having regard to the expected potential for production of the natural underground reservoir from which the petroleum is produced;
(d) an operating cost incurred, or to be incurred, by the petroleum producer that directly relates to—
(i) treating, processing or refining the petroleum before it is disposed of; or
(ii) transporting the petroleum to the point of its disposal;
(e) another expense incurred, or to be incurred, by the petroleum producer in relation to the operation of the site at which the petroleum was produced that is approved by the Minister for the purpose of this subsection.
(3) [This subsection identifies certain expenses not to be included under subsection (2).]
(4) [This subsection permits of the possibility that if the calculation in one royalty return period gives rise to a negative wellhead value, that may be carried forward to be deducted in a later royalty return period in the same annual return period.]
(5) To remove doubt, it is declared that a petroleum producer is not entitled to receive any payment in relation to a negative wellhead value.
The evident goal of the calculation under s 148 of the Regulation is to establish a value for a product (namely petroleum) disposed of by sale or other ownership transfer during a particular period, for the purpose of the royalty calculation. At a conceptual level, the calculation is essentially a revenue figure less an expenses figure. Many, but not all, of the deductions are of expenses which are actually incurred or to be incurred for the royalty return period. However the revenue figure from which the expenses are deducted is not an actual revenue figure for the royalty return period. Rather, it is a hypothetical figure, namely “the amount that the petroleum could reasonably be expected to realise if it were sold on a commercial basis”. Identifying that figure requires some form of valuation process.
How does a producer go about the process of performing that valuation?
A producer might simply do a valuation on what it conceived was a correct first-principles basis for each quarterly royalty return and annual royalty return, and pay the amount of royalty based on those valuations. Such a course would involve accepting the financial consequences of getting the valuations wrong, in the sense that a different view might be taken on assessment or reassessment by the Minister, leading to potential interest and penalty consequences.
Chapter 6 Part 5 Division 4 Subdivision 2 of the Regulation specifies a means by which the producer may obtain guidance from the Minister.
Pursuant to s 148B(1)(b) of the Regulation one avenue by which the subdivision applies is if:
a petroleum producer applies to the Minister for a decision (a petroleum royalty decision) about how 1 or more of the components of the wellhead value of petroleum disposed of or produced by the petroleum producer must be worked out for a particular transaction or particular period.
The process of a petroleum producer applying for a petroleum royalty decision may also be initiated by the Minister. Section 148C of the Regulation empowers the Minister to ask the petroleum producer to apply for a petroleum royalty decision. If that occurs, the producer is obliged to comply with the request and thereafter the Minister responds as if the petroleum producer had applied for the decision without being asked to do so.
The term “component” to which reference is made in the definition of “petroleum royalty decision” is itself defined at s148A of the Regulation in a way which refers to the revenue and expenses elements referred to in s 148 of the Regulation, identified at [21] above. Section 148A provides as follows:
component, of the wellhead value of petroleum disposed of or produced by a petroleum producer in a royalty return period, means—
(a) an element used to work out the amount under section 148(1)(a) that the petroleum could reasonably be expected to realise; or
(b) an expense, or an amount contributing to an expense, under section 148(2)(a), (b), (d) or (e).
The contemplated application to the Minister for a decision about how one or more of the components of the wellhead value of petroleum must be worked out is enabled by s 148D of the Regulation, which provides:
148D Application by petroleum producer for petroleum royalty decision
(1) The petroleum producer may apply to the Minister for a petroleum royalty decision.
(2) The application must be made—
(a) before the petroleum is produced; or
(b) before, or as soon as practicable after, a material change of circumstances that may affect whether a component of the wellhead value of the petroleum is based on an arms-length transaction at market value.
The requirements for making the application are specified in s 148E of the Regulation. Amongst other things the application for a petroleum royalty decision must:
[…]
(c) state why the petroleum producer is seeking the petroleum royalty decision; and
(d) include a statement about how the petroleum producer proposes a component of the wellhead value of the petroleum should be worked out for a particular transaction or particular period; and
Examples—
• a fixed value with adjustments in particular circumstances
• a formula for deciding the market value
[…]
By s 148F(1) and (3) of the Regulation, the Minister is obliged to make a petroleum royalty decision if an application is made and is also obliged to notify the producer of the decision and the reasons for it. Section 148F(2) of the Regulation provides that the petroleum royalty decision may state:
(a) a method or formula—
(i) for deciding the market value of the petroleum; or
(ii) for working out particular tolls or tariffs paid or payable by the petroleum producer; or
(iii) for adjusting the market value of the petroleum or the tolls or tariffs in particular circumstances; or
(iv) to be used for working out any other component of the wellhead value of the petroleum; and
(b) the period for which the petroleum royalty decision applies; and
(c) when the petroleum royalty decision is to be reviewed.
Section 148G of the Regulation sets out an open-ended list of the criteria that the Minister may consider in making the petroleum royalty decision:
(a) the amount for which petroleum has been sold in similar circumstances;
(b) how the value of the petroleum can be adjusted to reflect changes to the market value of the petroleum;
(c) the expenses likely to be incurred by the petroleum producer in arms-length transactions at market value;
(d) the period for which the petroleum royalty decision, or aspects of the decision, will apply;
(e) the need for any future adjustment of the petroleum royalty decision or aspects of the decision;
(f) any submissions made to the Minister by the petroleum producer in relation to a component of the wellhead value of the petroleum;
(g) any other relevant matter.
The petroleum royalty decision
In this case what was sought and obtained, and what the applicants now seek to impugn, was a petroleum royalty decision of the Minister which stated a method or formula for working out only one of the components of wellhead value, namely a method or formula for deciding the market value of the petroleum concerned.
I turn now to record in broad outline the way in which the decision was sought and ultimately made.
Transfer pricing methodologies
The problem to be addressed by the petroleum royalty decision was relatively obvious. How do you state a method or formula for working out the market value of feedstock petroleum at the first point of disposal, where the transfer itself is between parties who are related and who, ex hypothesi, are not transferring the feedstock petroleum in consideration of the payment of an arm’s length market price?
The difficulties involved in establishing a valuation for taxation purposes where a commodity is being transferred between associated enterprises is a problem well-known in international trade. For decades now, the Organisation for Economic Co-operation and Development (OECD) has promulgated various iterations of its Transfer Pricing Guidelines for the purpose of providing guidance for OECD member countries in relation to such issues, both in relation to members’ domestic transfer pricing practices and in relation to proceedings inter se.
The guidelines became widely accepted. Indeed, in 2010 the Queensland government department then responsible for administering the petroleum royalty scheme, the Department of Employment, Economic Development and Innovation, had promulgated guidelines which suggested that the Minister might have regard to some of the principles enunciated in the OECD Transfer Pricing Guidelines 1995, because those principles were so regarded. However, it is apparent that even under those guidelines there was no “one size fits all” methodology or formula.
Material placed before the Minister for the purposes of the making of the decision identified and evaluated the appropriateness of a number of potentially applicable methodologies. At a conceptual level, they may be described in the following way:
(a)The “Comparable Uncontrolled Price Method”, which would ascertain market value of a commodity by comparing the price for a commodity transferred in a controlled transaction (i.e. a transaction between related entities) to the price charged for a commodity transferred in a comparable uncontrolled transaction in comparable circumstances. It will appear that this method had no application to feedstock gas because, at least at the relevant times, there were no comparable uncontrolled transactions.
(b)The “Netback Method”, in which the question of market value of the feedstock petroleum at the first point of disposal would be approached from the downstream side of the disposal. The method would identify the ascertainable market price of the LNG when sold externally and would deduct from that price an appropriate gross margin to reflect the amount which the seller would seek (1) to cover its selling and other operating expenses and (2) to make an appropriate return on its capital, taking into account the capital expenditure it had incurred and the risks it had assumed. The theory would be that such a calculation would derive the maximum price that the seller would be prepared to pay the upstream producer for the feedstock gas which it had sold externally.
(c)The “Costs Plus Method”, in which the question of market value of the feedstock petroleum at the first point of disposal would be approached from the upstream side of the disposal. The method would identify an appropriate gross-profit mark-up for the upstream producer, and then add the mark-up to the costs of producing the feedstock petroleum. The theory would be that such a calculation would derive the minimum price for which the upstream producer would be prepared to sell its feedstock petroleum.
(d)The “Residual Price Method” (also referred to as RPM, which was the methodology prescribed under the Petroleum Resource Rent Tax Assessment Regulations 2005 (Cth) (PRRT Regulation), and which was graphically depicted in one expert report by the diagram below[6]), in which market value of the feedstock petroleum would be ascertained by a combination of the Netback Method and the Costs Plus Method by –
[6] The diagram is taken from SFG Consulting report dated 30 January 2015 which was provided to OSR by APLNG in January 2015.
(i) making a cost plus calculation to determine the price for which a seller of feedstock gas at the first point of disposal would sell its gas for in order to cover its upstream costs;
(ii) making a netback calculation to determine the maximum price that would be paid for the feedstock gas by the buyer at that point to allow the buyer to cover its downstream costs taking into account the price which would be obtained for the sale of LNG; and
(iii) then assuming that the market value of the feedstock gas at the first point of disposal would be the point half way between those two figures, on the basis that profit would be allocated equally between the upstream and downstream points and the market value would be treated as the price so identified.
(e)The “Residual Profit Split Method” (which was a method identified in the OECD Transfer Pricing Guidelines), in which market value of the feedstock petroleum would be obtained in a manner similar to the Residual Price Method, but instead of the identification of market value based on an arbitrary 50:50 profit split, profit would be allocated to the upstream and downstream producers based on an analysis of their relative contributions to the overall supply chain profit. Such a method would involve two stages, namely:
(i) each party would be allocated sufficient profit to provide it with a basic return appropriate for the routine functions undertaken, assets utilised and risks assumed in relation to the transaction; and
(ii) any residual profit or loss would be allocated based on an analysis of the facts and circumstances that might indicate how the residual profit or loss would have been divided by independent companies.
The selection of the appropriate methodology was inevitably a matter of judgment. One expert report[7] put the issue in this way:
[7] Ernst & Young report of June 2011, submitted with APLNG’s application for a petroleum royalty decision.
The choice of adopting an appropriate arm's length transfer pricing methodology and the way that methodology is able to be applied to demonstrate the arm's length nature of transfer prices will depend on the circumstances of each transaction. However, in accordance with the OECD and ATO guidelines the choice of the most appropriate methodology is to be based on a practical weighting of the evidence having regard to:
· the nature of the activities being examined;
· the availability, coverage and reliability of the data;
· the degree of comparability that exists between the controlled and uncontrolled dealings or between enterprises undertaking the dealings, including all the circumstances in which the dealings took place; and
· the nature and extent of any assumptions.
Further, in assessing the degree of comparability that exists between the controlled and uncontrolled dealings, the ATO and the OECD list the following five factors which need to be considered:
· characteristics of the property or services;
· functions performed, assets contributed and the risk assumed by each party;
· contractual terms, e.g. duration, rights, payments;
· business strategies, e.g. market positioning and strategic direction; and
· economic and market circumstances.
Whilst there is no formal hierarchy of transfer pricing methodologies, the OECD and the ATO will generally seek to use the transfer pricing method that is best suited or most appropriate to the circumstances of the particular case.
The application
By application dated 8 September 2011, APLNG applied to the Minister for Employment, Skills and Mining, and then on 10 February 2012 applied to the Minister for a petroleum royalty decision pursuant to s 148D of the Regulation. It advised the Minister that the integrated nature of the APLNG Project, with common ownership of the companies involved across the gas chain, meant that there would not be an arm's-length value of gas negotiated in respect of the feedstock petroleum. Accordingly, it sought a petroleum royalty decision in respect of how it should go about the calculation for the purposes of s 148(1)(a) of the Regulation of the amount that the feedstock petroleum could reasonably be expected to realise if it were sold on a commercial basis.[8]
[8] The application was limited to the revenue side (i.e. s 148(1)(a)) of the overall wellhead value calculation and explicitly did not relate to the calculation of the expenses required to be deducted by s 148(1)(b).
The relevant parts of the application were:
(a)an executive summary;
(b)a summary of the applicant’s submissions by reference to the criteria referred to in s 148G of the Regulation;
(c)sections entitled “Background” and “Overview of the APLNG project”, which explained the way in which the project was structured, differentiated between upstream and downstream operations, and explained how the LNG ultimately produced by the project would be sold;
(d)sections entitled “Application for petroleum royalty decision”, “Proposed method for deciding the market value of petroleum” and “Example RPM calculation”, which contained material which dealt with the requirements of s 148E of the Regulation and which also continued to present the arguments in favour of the applicant’s proposed methodology; and
(e)various appendices, including the report of an independent expert (namely Ernst & Young).
It is convenient to start with the latter document. The following observations may be made about the report.
First, the question which it addressed was the appropriate transfer pricing methodology to be used in determining the amount that the feedstock petroleum could reasonably be expected to realise if it were sold on a commercial basis at the first point of disposal.
Second, it posited as an evaluative framework the discussion I have quoted at [39] above, concluding with the following observation:
Accordingly, whichever transfer pricing method is chosen as the most appropriate for determining the wellhead value of the CSG, it must have regard to the functions, assets and risks that are present across the upstream and downstream operations, including the valuable intangible assets present in the downstream operations. Should a particular transfer pricing method not have regard to this, that transfer pricing methodology would not be considered an appropriate transfer pricing methodology in accordance with the OECD and ATO guidelines.
Third, it identified and evaluated the methodologies which I have identified at [38] above, ultimately concluding that –
(a)the Comparable Uncontrolled Price Method would be the most appropriate methodology, if appropriate data existed;
(b)in the absence of data which permitted the use of the Comparable Uncontrolled Price Method, the Residual Profit Split Method would be appropriate as it specifically took into consideration and attributed value to the respective key functions performed, intangible assets utilised and risks borne by both the upstream and downstream operators; and
(c)the Residual Price Method could be used as a more simplified version of the Residual Profit Split Method.
Based on the information contained in the Ernst & Young report, APLNG contended that the only appropriate methodology for working out the amount that the feedstock petroleum could reasonably be expected to realise if it were sold on a commercial basis was the Residual Price Method. Amongst other things, APLNG contended in its application for a petroleum royalty decision:
(a)Appropriate data did not exist to permit the utilisation of the Comparable Uncontrolled Price Method.
(b)The Residual Price Method would –
(i) calculate a price that returns capital plus a set return for each field comprised within the APLNG Project;
(ii) give a single price for the integrated operations downstream of the transfer point that returns capital plus an equivalent set return; and
(iii) take the midpoint to evenly split the profit and determine a price for each field.
(c)The Residual Price Method incorporated what was suggested to be the main OECD accepted principle, namely that of profit-split. It also incorporated elements of “the two other OECD approved transfer pricing principles, being ‘cost plus’ and ‘netback’ calculations”.
(d)On the other hand, a simple Netback Method, based on the integrated downstream operations receiving solely a set return on investment, was not an appropriate methodology for the APLNG Project as a means to approximate an arm’s length transaction because it failed to:
(i) reflect from the perspective of the downstream party its significant investment/commercial risks;
(ii) recognise the technical contributions made by the downstream party;
(iii) reflect the intangible assets developed and utilised by the downstream operator; and
(iv) recognise the market access opportunities and international global knowledge that would be provided by the downstream entity.
(e)In summary, it contended that the Residual Price Method would, in accordance with the Act and the Regulation and having regard to the particular features and circumstances of the APLNG Project, deliver the best approximation of the commercial or arm's-length value that would be reached if there was an independent transaction between unrelated parties, each acting in their own self-interest and neither with undue influence. It contended that other approaches did not have sufficient regard to the circumstances of an integrated gas-to-liquid project and, if they were to be adopted, would not reflect the amount that the petroleum could reasonably be expected to realise if it were sold on a commercial basis.
The specific decision sought was that the method or formula be that which is described as “the RPM on a field by field basis” and in which the operation and mechanics of the Residual Price Method would be as prescribed under the existing method contained in the PRRT Regulation and calculated by applying 5 specified components as follows:
1. That the LNG “free on board” export price will set the starting value for the Netback price formula. Where sales are “delivered at terminal”, the DAT [Delivered at Terminal] export price will be netted back to the FOB price which will then be used to set the starting value for the Netback price formula.
2. The upstream formula as prescribed in the RPM for PRRT purposes will be applied on a field by field basis, to determine the aggregate minimum return that each upstream operation would receive as consideration for gas sales which occur at the outlet of each gas processing facility.
3. The downstream price formula as prescribed in the RPM for PRRT purposes will be applied to determine the minimum return of the downstream operations post the outlet of each gas processing facility.
4. The transfer price for the purposes of section 148(1)(a) of the […] Regulation on the sale of the gas to the Aggregator Company will be determined by using an equal split of the combined value of the Netback and Cost Plus prices. Where the Cost Plus price is greater than the Netback price (i.e. a notional economic loss situation for the project overall), the transfer price for the purposes of section 148(1)(a) of the … Regulation will be equal to the Netback price.
5. A separate transfer price will be calculated for each field based on a field specific Cost Plus calculation and the common facility downstream Netback calculation.
The applicant requested that the decision apply for the life of the project such that it would not need to be reviewed during the life of the project.
Steps taken after the application and before the decision
The Commissioner of State Revenue has responsibility for the administration and enforcement of certain revenue laws in Queensland, including having delegated authority from the Minister for the administration and enforcement of petroleum royalties under the Act and the Regulation. She acts through the Office of State Revenue (OSR). OSR is a business unit within Queensland Treasury, which is the public service department for whom the Minister has portfolio responsibility.
OSR obtains expert opinion evidence and gives the applicants opportunity to be heard
OSR commissioned a report from Lonergan Edwards & Associates Limited (Lonergan) for the purpose of obtaining that firms’ advice on determining a method or formula to assess the market value of the feedstock gas at the first point of disposal. Lonergan’s report dated 23 September 2014 (the first Lonergan Report) addressed that question.
By letter dated 8 October 2014, OSR provided to the applicants a draft report (the draft OSR report) prepared by OSR and invited the first applicant to make any submissions on the draft report before it was finalised and submitted to the Minster. A copy of the first Lonergan report was annexed the OSR draft report.
The relevant parts of the executive summary in the draft OSR report summarised the advice which OSR proposed to give the Minister:
6. OSR has obtained advice on your behalf from [Lonergan], valuation experts. Lonergan [sic] advice is that:
a. a formula based on a netback method (netback) is the appropriate basis in the circumstances to determine the value of APLNG feedstock gas at the first points of disposal;
b. certain value inputs used in calculating the notional tolls that form part of the netback formula should be determined as part of your decision; and
c. your decision should be reviewed every 5 years from the commencement of commercial production of LNG feedstock gas (or earlier in certain circumstances) […]
7 APLNG, supported by a report by Ernst & Young (E&Y), submits that the Residual Pricing Method […] as set out in the [PRRT Regulation], is the only appropriate method you should adopt in your decision. Further that your decision should apply for a 21 year period subject to review only upon material changes occurring, as permitted under the Regulation. Lonergan advise that the RPM is not an appropriate method in the circumstances and would likely understate the market value of the APLNG feedstock gas. Further, that there are technical flaws in the proposed RPM.
8. OSR recommends that, consistent with the Lonergan advice, you decide to adopt the netback formula and certain value inputs in calculating the notional tolls in the netback formula for the APLNG application. Further that your decision be reviewed every 5 years or earlier in certain circumstances.
The draft OSR report summarised and expressed support for the formula supported in the first Lonergan report (the Adopted Netback Method) in this way:
Conceptual framework
35. The method/formula to establish the market value of APLNG feedstock gas should be derived in a context where the expected positive value created from the entire value chain needs to be hypothetically apportioned between the upstream segment and the downstream segment, given the relative risks involved and the alternative uses of the gas.
36. The appropriate point in time at which a hypothetical arm's length developer of the upstream assets and a hypothetical arm's length developer of the downstream assets would negotiate on the method/formula to establish the value of the LNG feedstock gas would be at, or as at the time just before, the final joint development decision, because this is a relevant and important consideration for both parties before making their final decision on the hypothetical joint development.
37. In this setting, the netback method/formula under which the price of LNG feedstock gas at the first point of disposal is set based on deducting the correctly calculated downstream costs from the ascertainable market value of LNG (eg. free-on-board [FOB] basis), is the method/formula that would be acceptable to both parties in the absence of material adverse circumstances (eg. material changes in LNG export prices and/or foreign exchange [FX] rates or in upstream gas reserves and resources, with consequential adverse changes in the expected economic life of the upstream and downstream assets).
38. If material adverse circumstances arise, both the netback method/formula and the upstream cost plus benchmark (reflecting the upstream costs of extracting and delivering the feedstock gas to the first point of disposal) should be considered, mirroring rational commercial negotiations between two arm's length knowledgeable parties, which endeavour to maintain a long-term symbiotic relationship.
Consistently with that description of the conceptual framework of the first Lonergan report, the draft OSR report summarised and expressed support for the following criticism expressed in the first Lonergan report of the Residual Price Method:
82. Lonergan advise that the RPM proposed by APLNG is conceptually not an appropriate method to value APLNG feedstock gas in the circumstances.
83. The RPM is effectively based on the midpoint of a calculated incremental upstream cost plus based price (as a floor price) and a calculated netback based price (as a ceiling price). Thus, the RPM produces an outcome which is inherently lower than the netback based price.
84. As at the date of a hypothetical joint development decision, the RPM would not be an appropriate method to establish the market value of LNG feedstock gas at the first point of disposal for the following reasons.
a. At the time of the joint development decision, a hypothetical knowledgeable arm's length developer of the upstream assets would not accept a method that produces a price for the feedstock gas at the first point of disposal, which is lower than the price based on the netback method. This is because the netback price is what the hypothetical developer of the upstream assets would obtain in developing the downstream facilities themselves, or by negotiating with a potential downstream owner B, C, etc., rather than the potential downstream owner in the proposed joint development.
b. Under the RPM the upstream cost plus based price is calculated with reference to the incremental upstream cost plus, rather than the inherently higher (and theoretically correct) absolute upstream cost plus benchmark. The absolute upstream cost plus benchmark reflects not only the incremental upstream cost plus, but also the value of the economic developable CSG resource base (ie. the value of the production rights and mining information) at the time of the joint development decision.
c. Due to the floor price under the RPM proposed by APLNG being inherently understated, the midpoint price under RPM is effectively shifted downwards and further away from the netback based price. The gravitation away from the netback based price is further exacerbated by under-estimation of the incremental cost plus benchmark caused, for example, by the failure to allow for the return of capital element with respect to the upstream capex.
d. RPM effectively transfers value downstream for no apparent capital investment or accepting any material additional risks and costs over and above what the hypothetical owners of the downstream assets are already being compensated for under the 'building block' approach.
The ‘building block’ approach last referred to was a reference to the manner by which the downstream costs were calculated for the Adopted Netback Method. The costs were regarded effectively as particular tolls charged for the use of the downstream assets. The tolls were calculated based on the revenue which it was calculated the downstream operator would require for a period, which revenue was in turn calculated as the sum of the following components:
(a)return on capital;
(b)return of capital;
(c)operating costs; and
(d)cost of tax.
The draft OSR report summarised the other key aspects of the first Lonergan report, and the Adopted Netback Method. The netback formula was summarised in this way:
39. For each royalty period and each of the first points of disposal (as gas exits the processing facilities), the netback formula produces a value in A$ per GJ of gas. It is this per GJ value that is applied to the volume of gas sold by the APLNG producers to the APLNG aggregator to calculate the amount upon which (after allowing for statutory deductions) royalty is calculated. The formula derives the per GJ value by:
• multiplying the volume of LNG exported in a royalty period by the export price of the LNG;
• from that amount, deducting notional transport, processing and loading tolls; and then
• dividing the resulting amount by the volume of gas exiting the processing facilities in the royalty period.
The formula itself and other salient details for its operation were set out in appendices E, F and G to the draft OSR report. The appendices do not seem to have been reproduced in the material before me.
APLNG provides further expert opinion and further submissions
By a document dated 30 January 2015 APLNG responded to the invitation from OSR to make further submissions. The response was contained in a detailed covering written submission which attached the following six expert reports:
(a)a further Ernst & Young report dated January 2015;
(b)a Deloitte Tax Services Pty Ltd report dated 30 January 2015;
(c)an SFG Consulting report dated 30 January 2015;
(d)a Competition Economist Group report dated January 2015;
(e)a Poten & Partners report dated January 2015; and
(f)a Frontier Economics report dated January 2015.
The six expert reports each maintained that the Residual Price Method was the preferred method and were critical of various aspects of the first Lonergan report. It is not presently necessary to delve into the detailed arguments presented against the Adopted Netback Method and in favour of the Residual Price Method. Together with the expert reports, the APLNG submission comprised more than 430 pages of detailed criticism of the Lonergan approach from the point of view of economic theory and in relation to the factual assumptions underpinning the approach. Sufficient idea of the factual and theoretical critique of the first Lonergan report advanced by APLNG may be gleaned by noting that it was advanced under the following 14 headings:
(a)Lonergan fails to recognise the history and structure of the APLNG Project;
(b)Lonergan fails to recognise the range of project risks that are borne by the downstream operator;
(c)Lonergan fails to recognise the intangible assets that are contributed by the downstream operator;
(d)Lonergan incorrectly concludes that an integrated CSG to LNG project has the same project risks as a coal/iron ore project;
(e)The Lonergan conclusion that a downstream operator would accept a regulated return is inappropriate and incorrect;
(f)The Lonergan conclusion that an upstream operator would have a range of viable commercial alternatives is inappropriate and incorrect;
(g)The Lonergan rates of return are inappropriate and incorrect;
(h)The building block methodology proposed by Lonergan contains a number of material errors;
(i)The Lonergan methodology is uncertain when the netback price falls below the cost-plus price;
(j)Lonergan's recommendation for a five year review period is inappropriate;
(k)Lonergan inappropriately and incorrectly dismisses the RPM;
(l)Lonergan does not give sufficient consideration to the OECD guidelines on transfer pricing;
(m)Lonergan has given insufficient consideration to the APLNG Application; and
(n)Evidence provided by Lonergan has previously been the subject of criticism.
It suffices to conclude that the APLNG submission maintained the views earlier expressed that –
(a)the Adopted Netback Method was not an appropriate method and that the Residual Price Method should be adopted;
(b)inputs to the Adopted Netback Method recommended by Lonergan were flawed; and
(c)the Residual Price Method should apply for 21 years and not be subject to review after 5 years as had been recommended by Lonergan.
The APLNG submission made minor amendments to the APLNG application in relation to the details of the specific determination which APLNG submitted that the Minister should make. Rather than having the netback calculation be regarded as market value in the event that it fell below the costs plus calculation, APLNG proposed altered wording, the practical effect of which was that the market value price would be determined on a simple average of the upstream cost-plus and downstream netback prices irrespective of any crossovers between the two prices.
OSR provides Minister first briefing note in June 2015
On 12 June 2015, OSR provided the Minister with a first briefing note, together with certain attachments. The note also dealt with applications regarding other LNG projects than the project with which the present applicants were involved. As to the application by APLNG the briefing note merely advised of the fact of the application; the fact of the provision to APLNG of a draft report and of the first Lonergan report; and the fact of the APLNG response and further six expert reports.
The briefing note advised the Minister:
OSR is currently reviewing the APLNG submission with its valuation expert and Queens Counsel, and expects to have this review finalised by mid-May. A final decision on the APLNG application is not required until mid-2015 i.e. about the time APLNG become liable for royalty on its LNG feedstock gas.
At that time the briefing note merely asked the Minister to note the status of the applications.
OSR obtains further expert opinion but does not give the applicants opportunity to be heard about it
OSR obtained further detailed advice from Lonergan in response to the expert opinion evidence provided by APLNG in January 2015 in the form of –
(a)a second report from Lonergan dated 11 August 2015 (the second Lonergan report); and
(b)a third report from Lonergan dated 26 November 2015 (the third Lonergan report).
The second Lonergan report recorded that OSR had requested Lonergan –
(a)to provide written advice in relation to the APLNG submission in the form of responses to submissions in the APLNG submission about specific issues; and
(b)where appropriate, to include advice about the content of the expert reports insofar as such content has, or appears to have, been relied on by APLNG and relates to the particular issue.
There followed over 80 pages of detailed refutation by Lonergan of the criticisms advanced in the APLNG submission and the APLNG expert reports. The refutation was formulated by reference to the following 16 issues which, as will be apparent, largely replicated the headings (recorded at [59] above) by which APLNG’s written submissions had formulated APLNG’s critique of the first Lonergan report):
(a) the risks borne and the returns that will be sought by a hypothetical upstream operator and a hypothetical downstream operator (Issue 1)
(b) that we do not recognise the history and structure of the APLNG Project (Issue 2)
(c) that we do not recognise the range of project risks that are borne by the downstream operator (Issue 3)
(d) that we do not recognise the intangible assets that are contributed by the downstream operator (Issue 4)
(e) that we incorrectly conclude that an integrated CSG to LNG project has the same project risks as a coal / iron ore project (Issue 5)
(f) that we incorrectly conclude that a downstream operator would accept a regulated return (Issue 6)
(g) that we incorrectly conclude that an upstream operator would have a range of viable commercial alternatives (Issue 7)
(h) that our assessed rates of return are inappropriate and incorrect (Issue 8)
(i) that the building block methodology adopted by us contains a number of material errors (Issue 9)
(j) that our methodology is uncertain when the netback price falls below the cost-plus price (Issue 10)
(k) that our recommendation for a five-year review is inappropriate (Issue 11)
(1) that we inappropriately and incorrectly dismiss the RPM (Issue 12)
(m) that we do not give sufficient consideration to the OECD guidelines on transfer prices (Issue 13)
(n) that we have given insufficient consideration to the APLNG Application (Issue 14)
(o) that APLNG's claim that the RPM is the most appropriate method to determine the commercial value of petroleum is flawed (Issue 15)
(p) APLNG's amendments of its original application (Issue 16).
The third Lonergan report recorded the matters which it addressed in the following terms:
4 The APLNG Submission, particularly the SFG Consulting report and the CEG report contain comments on, inter alia, our assessment of the pre- and post-production required rates of return for the downstream infrastructure assets and the upstream assets of the APLNG Project as at 29 October 2013 in the [first Lonergan report].
5 In response to your request, we provided [the second Lonergan report]. In [the second Lonergan report], we considered and responded to various issues raised in the APLNG Submission, including those in relation to our assessment of the pre- and post-production required rates of return as at 29 October 2013.
6 There has been a significant time lapse between this date and the date on which the PRD is to be issued by the Minister. Thus, you have requested that we provide a supplementary report setting out our opinion as to:
(a) the pre- and post-production required rates of return for the downstream infrastructure assets of the APLNG Project which would be used as direct value inputs to the formula included in the PRD to be issued by the Minister
(b) the pre- and post-production required rates of return for the upstream assets, which are used in calculating the incremental cost plus benchmark to cross-check the reasonableness of the assessed netback value of gas at the first point of disposal and monitor the movement of the assessed netback value relative to the incremental cost plus benchmark over time.
As part of its discussion of the background to the issues with which it dealt, the third Lonergan report summarised the opinions which had been presented in the previous two reports in this way:
10 In [the first Lonergan report] and [the second Lonergan report] we opine that:
(a) the basis upon which the method / formula to determine the market value of LNG feedstock gas at the first point of disposal should be derived is one where a hypothetical arm's length owner / developer of the upstream assets and a hypothetical arm's length owner / developer of the downstream assets enter into commercial negotiations on the joint development of the upstream and downstream segments of an integrated LNG project whose overall economic viability is underpinned by long-term LNG export agreements with LNG buyers
(b) the method / formula should be determined at the time just before the final joint development decision (practically at FID1, being July 2011)
(c) the appropriate method / formula to determine the market value of the LNG feedstock gas at the first point of disposal is the netback method / formula under which the market value of the LNG feedstock gas at the first point of disposal is determined by deducting from the ascertainable market value of LNG on a free on board basis the correctly calculated downstream costs including capital costs (comprising return on and return of capital), operating costs and costs of tax.
In cases where the continued use of the netback method / formula may cause the hypothetical owner / developer of the upstream assets to cease operation, jeopardising the symbiotic relationship between the hypothetical upstream owner / developer and the hypothetical downstream owner / developer, the netback method is subject to review, mirroring a commercial re-negotiation to maintain the symbiotic relationship
(d) the appropriate arm's length risk-sharing arrangement between the hypothetical upstream owner / developer and hypothetical downstream owner / developer is one where volume risk, price risk and foreign exchange (FX) risk are passed upstream. Under this adopted arm's length risk-sharing arrangement, the hypothetical owner / developer of the downstream infrastructure assets is shielded against volume risk, price risk and FX risk, which are borne by the hypothetical owner / developer of the upstream assets.
The report noted that a key value input to the Adopted Netback Method was the pre- and post-production required rates of return for the downstream infrastructure assets. It then stated that, having considered the APLNG submission, it had determined to alter two value inputs (which, upon analysis, reveals that Lonergan accepted at least some parts of criticisms which had been advanced in two of the APLNG expert reports[9]) and then presented revised pre- and post-production required rates of return for the upstream assets and the downstream infrastructure assets.
[9] The third Lonergan report at [13] et seq reflects adoption of the SFG Consulting report dated 30 January 2015 at [177] and the Competition Economist Group report dated January 2015 at [149].
The applicants were not afforded an opportunity to be heard with respect to either the second Lonergan report or the third Lonergan report.
The OSR identifies revenue impact of the competing methodologies
Although it was common ground that the question of which method would maximise revenue to the state was a consideration which was irrelevant, the evidence before me demonstrates that the OSR specifically considered that issue shortly before presenting its final report to the Minister. In fact, as will appear in my consideration of ground 4, it had been a specific purpose of OSR’s advisory panel since at least July 2012 that OSR would look at the comparable revenue impacts of the methods under consideration.
On 23 October 2015, the under-Treasurer (who is a public servant within the Minister’s department) requested the OSR to provide him with some royalty revenue estimates.
The OSR advised the under-Treasurer in the following terms by a note dated 26 October 2015 (emphasis added):
On 23 October 2015, you requested the Office of State Revenue (OSR) provide a comparison of petroleum royalty revenue estimates (estimates) for the APLNG project under different methodologies to be considered by the Treasurer in making a petroleum royalty decision […]
The OSR valuation expert has recommended the Treasurer adopt a Netback formula for the decision, while APLNG has requested the Treasurer adopt the Residual Pricing Method (RPM).
[…]
OSR and its valuation expert have developed comprehensive spreadsheets for the Netback formula, which can be used for estimates and sensitivity analysis purposes. However, it is difficult to determine equivalent estimates using APLNG’s RPM method, primarily because information and inputs provided by APLNG for the RPM are either unreliable and/or dated.
[The note referred to an attached table which showed some illustrative royalty revenue figures.]
[…]
The figures show that, other things being equal, Netback will produce a higher revenue outcome than RPM.
[…]
The note attached a table of “illustrative revenue” for the years 2015 to 2018 which showed Netback producing revenue $85 million higher than RPM for that three-year period based on certain assumptions and variables.[10]
[10] The precise figures presented in the illustrative table have been made the subject of a confidentiality order, but the proposition I have recorded was particularised by the applicants and admitted by the Minister.
The note recommended that the under-Treasurer note that more reliable estimates for the APLNG project under RPM for comparison with Netback should be available by 30 October 2015.
As had been foreshadowed, further information was provided to the under-Treasurer by a further note dated 30 October 2015. That information replaced the illustrative royalty revenue information provided with the 26 October 2015 note, but confirmed the proposition earlier advised that Netback would provide a higher revenue outcome than RPM. In particular, it suggested that for the three-year period of 2016 to 2018 revenue would be in the range of $143.5 million to $232 million higher under Netback than under RPM.[11]
[11]The precise figures presented in the information provided have been made the subject of a confidentiality order, but the proposition I have recorded was particularised by the applicants and admitted by the Minister.
OSR provides Minister second briefing note dated 27 November 2015
The Commissioner approved that a second briefing note be provided to the Minister on about 26 November 2015. OSR then submitted a second briefing note to the Minister dated 27 November 2015. That briefing note requested the Minister to consider an attached OSR report (the final OSR report) and the attachments to it and, after considering that material, to approve OSR preparing for the Minister’s consideration a draft formal decision on the application. The applicants were not afforded an opportunity to be heard with respect to the final OSR report.
Amongst other things, the attachments to the final OSR report which was provided to the Minister with the second briefing note included:[12]
(a)the APLNG application (see [40] et seq above);
(b)the first Lonergan report (see [50] et seq above);
(c)the APLNG submission and the six APLNG expert reports which it had contained (see [58] above);
(d)the second Lonergan report (see [66] to [67] above); and
(e)the third Lonergan report (see [68] to [70] above).
[12] See affidavit of Goli sworn 24 September 2018 at [17].
The final OSR report was a development of the draft OSR report in light of the further expert opinion evidence which had been received since the draft OSR report had been prepared. It continued to express support for the Adopted Netback Method and for the methodological approach explained in the first Lonergan report and the second Lonergan reports. It embraced the Lonergan approach for the reasons Lonergan gave.
The conclusion to the final OSR report was expressed in these terms (emphasis added):
102. This matter involves considerable complexity with differing experts' views regarding the appropriate valuation methodology — RPM as advocated by APLNG and its advisers or netback as advised by Lonergan. Also, regarding some value inputs to the netback methodology and the periods for review, with APLNG advocating that you should approve a methodology that would apply for 21 years or effectively the life of the project and Lonergan recommending five yearly reviews.
103. In respect of the methodology, OSR respectfully prefer netback for the reasons advised by Lonergan. In particular, that there is objective evidence to support the hypothesis that arm's length parties would use netback to determine arm's length pricing of LNG feedstock gas in these circumstances. Further, that RPM does not properly recognise the highly valuable CSG reserves owned by the hypothetical upstream owner/operator, effectively sharing 50 percent of the value with the hypothetical downstream operator without any corresponding value provided or risk assumed by the downstream operator.
104. A useful summary of Lonergan's advice in relation to netback and RPM is provided in Appendix S under APLNG issue 5.1 - Why the RPM is the most appropriate method to determine the commercial value of petroleum.
105. In respect of the value inputs, the differing experts' opinions reflect their underlying difference of views on risk-sharing, which, inter alia, inform the approaches of the experts to the question of whether RPM or netback is the appropriate method. Accordingly, it is not surprising that there are different opinions on the [Weighted Average Cost of Capital (WACC)] inputs that should be adopted. Nevertheless, Lonergan has adjusted some inputs to its WACC after consideration of the APLNG submission.
106. In relation to review periods, OSR considers that five years strikes a reasonable and appropriate balance between the desirability of certainty while recognising, […] arrangements more broadly in similar industries, and the dynamic nature of the LNG and gas markets.
I have earlier mentioned that the OSR had advised the under-Treasurer on 30 October 2015 that royalty revenue would be in the range of $143.5 million to $232 million higher under Netback than under RPM. As to this:
(a)The information given to the under-Treasurer was not replicated in the material given to the Minister.
(b)It may be noted, however, that the first and second Lonergan reports had specifically stated that RPM would produce an outcome which was inherently lower than the Netback Method price. However that factual observation did not form any part of the reasons Lonergan gave for favouring the Adopted Netback Method and rejecting RPM.
(c)That said, it would have been clear to an intelligent reader of the Lonergan reports that the Adopted Netback Method would produce more royalty revenue than RPM.
(d)The final OSR report specifically dealt with the matter by advising the Minister that royalty revenue outcomes were irrelevant and should not be taken into account:
46. In making your decision there is the potential risk of administrative law error. For example, if you were to take into account an irrelevant consideration, or not take into account a relevant consideration, in making your decision. In particular, the royalty revenue outcomes for the State from application of a particular valuation method is not a relevant consideration and should not be taken into account in making your decision.
(e)The Minister’s reasons recorded that the Minister adopted Lonergan’s advice for the reasons expressed by Lonergan, and that the Minister preferred and adopted the Lonergan and OSR advice in full. That fact does not provide an evidentiary basis for the conclusion that revenue outcomes were influential in the Minister’s thinking. There is nothing in the Minister’s reasons which supports any inference that the Minister did not follow OSR’s advice that revenue outcomes should not be taken into account in making the decision. As will appear in my consideration of ground 4, it does not form part of the applicants’ pleaded case that the Minister’s personal decision making was affected by the irrelevant consideration of the royalty revenue outcomes. The applicants’ case is that it was the OSR which took into account the irrelevant consideration of revenue outcome and that the Minister’s decision may be impugned because the OSR’s error may be imputed to him.
Inputs to Formula
Notional tolls
For each Relevant Period the notional pipeline, processing and loading tolls are to be worked out using the following formula. The inputs to the formula vary, depending on the notional toll being calculated.
Notes:
Quarterly required revenue.
Quarterly volume is comprised of equity gas volume plus contracted third party volume that passes through the entry point of the relevant downstream infrastructure asset, not reduced on account of any gas losses through the corresponding downstream part of the APLNG value chain. Depending on the downstream infrastructure asset, the gas losses may include, for example, gas used to generate electricity in transporting, processing, loading or storing the gas/LNG, or gas that is flared.
For the first Relevant Period, opening downstream asset base value is equal to the starting downstream asset base value (starting downstream capex) times a utilisation factor for the first Relevant Period. The starting downstream asset base value is the actual pre-production capex (including capitalised opex) incurred in relation to LNG Trains 1 and 2, converted, where applicable, into Australian dollars at exchange rates that reasonably reflect the relevant exchange rates prevailing at the time they were incurred and rolled forward to the date of production commencement at the relevant pre-production post-tax nominal weighted average cost of capital (WACC).
A utilisation factor for a Relevant Period is calculated as the lower of the ratio of the actual volume of gas that passes through the entry point of the relevant downstream infrastructure asset during that Relevant Period (expressed as a percentage) to the steady state volume of gas in relation to LNG trains 1 and 2 through the same entry point, and 100 percent. The steady state volume in relation to LNG Trains 1 and 2 for a Relevant Period is calculated as a quarter of the sum of what would be the annual take or pay contract volumes (before downward quantity tolerances) when such annual take or pay contract volumes under the respective SPAs have become constant. The portion of the starting downstream capex, which is equal to the starting downstream capex times (1 – utilisation factor for the first Relevant Period), is rolled forward at the relevant post‑production post-tax nomination WACC and progressively incorporated into the opening downstream asset base value when the actual volume of gas progressively reached the steady state volume of gas over time. Subsequent to the first Relevant Period and prior to the steady state volume being achieved, the share of the rolled forward portion of the staring downstream capex which is incorporated into the opening downstream asset base value for a particular Relevant Period is calculated based on the incremental increase in the utilisation factor for that period (i.e. the difference between the utilisation factor for that period and the utilisation factor for the immediately preceding Relevant Period). For that period, the opening downstream asset base value is equal to the closing asset base value for the immediately preceding Relevant Period plus, the share of the rolled forward starting downstream capex which is incorporated into the downstream asset base value. The closing asset base value for the immediately preceding Relevant Period is equal to the opening downstream asset base of that period plus, where applicable, the incremental downstream apex incurred less the return of capital during that period.
When the steady state volume of gas has not been achieved for the immediately preceding Relevant Period, the incremental downstream capex incurred during that period is not incorporated into the closing downstream asset base value, but rolled forward at the relevant post-production post-tax nominal WACC and incorporated into the opening asset base value of the Relevant Period in which the steady state volume of gas has been achieved.
Current period incremental downstream capex is assumed to be incurred in the middle of the Relevant Period. A return on capital is calculated in respect of current period incremental downstream capex for the Relevant Period if the actual volume of gas has reached or exceeded the steady state volume of gas. If not, current period incremental downstream capex is rolled forward at the relevant post-production post-tax nominal WACC and incorporated into the opening downstream asset base value of the Relevant Period in which the steady state volume of gas has been achieved.
Underutilisation adjusted starting capex is equal to the starting capex in relation to LNG Trains 1 and 2 times the utilisation factor for the first Relevant Period.
Expected economic life of the relevant downstream infrastructure asset is not necessarily the same as its allowable tax depreciation life.
For a Relevant Period, rolled forward starting downstream capex is comprised of a portion or portions of the starting downstream capex which have been rolled forward at the relevant post-production post-tax nominal WACC and incorporated into the opening asset base value for the Relevant Period, in respect of which a return of capital is calculated.
Being the time lapse from the period in which the relevant portion of the rolled forward starting capex is incorporated into the opening asset base value to the end of the expected economic life of the relevant downstream infrastructure asset. For a given Relevant Period, the opening asset base value can include different portions of the rolled forward starting capex with different time lapses to the end of the expected economic life of the relevant downstream infrastructure asset.
Being, were applicable, incremental downstream capex incurred in one or more Relevant Periods prior to the Relevant Period in question. When the actual volume of gas for the preceding Relevant Period has not achieved the steady state volume of gas, the incremental downstream capex incurred during each of those periods is not incorporated into the closing asset base value n respect of which return of capital is calculated, but rolled forward at the relevant post-production post-tax nominal WACC and incorporated into the opening asset base value of the Relevant Period in which the steady state volume of gas is achieved.
Being, where applicable, the time lapse from when each corresponding previous period incremental downstream capex is incurred to the end of the expected economic life of the relevant downstream infrastructure asset.
A return of capital is calculated in respect of current period incremental downstream capex for the Relevant Period if the steady state volume of gas has been achieved. In such cases, the time lapse to end of expected economic life is the time lapse from when the current Relevant Period capex is incurred to the end of the expected economic life of the relevant downstream infrastructure asset. If the steady state volume of gas has not been achieved for the Relevant Period, current period incremental downstream capex is rolled forward and incorporated into the opening downstream asset base value of the Relevant Period in which the steady state volume of gas has been achieved.
Allowable tax depreciation is one quarter of the amount calculated in accordance with relevant Australian tax laws. If the allowable tax depreciation is not known, a reasonable estimate may be used to calculate the toll for the quarterly return period and the actual allowable tax depreciation for that period (when the amount is subsequently known) is to be taken into account in the next annual royalty return.
Post tax nominal WACC
The following pre-production and post-production post tax nominal WACC rates are to be used as return on capital inputs for the notional transport toll, notional processing toll and notional loading toll in the Formula.
Pre-production post tax nominal WACC % per annum
Post-production post tax nominal WACC % per annum
Post-production post tax nominal WACC % per quarter[63]
Downstream infrastructure assets:
- Pipelines
9.9
6.94
1.69
- Liquefaction plant
6.86
8.223
1.99
- Port loading facility
6.86
6.94
1.69
[63] Post tax nominal quarterly WACC = (1+ post tax nominal annual WACC)1/4-1
Allowable/Non-allowable expenditure
Following are the principles to be applied in classifying allowable and non-allowable capital expenditure (capex) and operating expenditure (opex) under the Formula.
a.No capex or opex to the extent that it is associated with, or is designed to facilitate the optimising of, operating capacity beyond LNG Train 1 and LNG Train 2, is allowed.
b.If any incremental capex is incurred that relates to further LNG Trains or increasing capacity, only that expenditure to the extent that it relates to LNG Trains 1 and 2 is allowed (i.e. not costs associated with scalability for further LNG Trains).
c.Only capex or opex to the extent that it relates to export of LNG is allowed e.g. any opex or capex to the extent it is related to domestic gas sales is not permitted.
d.Capex is not to include profit margin elements or capitalised interest (which are already reflected in the rate of return component that has bene used in rolling forward the relevant costs).
e.Any non-arm’s length opex is to be at cost, excluding profit.
f.Only opex and capex to the extent that it is relates to the downstream post-First Points of Disposal is allowed.
g.Where costs are incurred in relation to both upstream and downstream, they are to be allocated between upstream and downstream on a reasonable and equitable basis.
h.No provisions for end-of-life, environmental and site rehabilitation expenses or costs or similar are allowed.
Pre-paid expenses are to be apportioned consistently and in accordance with normal accounting requirements.
j.The starting base capex comprises actual capex and capitalised opex rolled forward at the stated pre-production rate of return (not on an alternative basis for valuing the assets). For the avoidance of doubt, only actual capex and capitalised opex to the extent that such expenses were incurred in constructing, operating and maintaining infrastructure related to LNG Train 1 and LNG Train 2 are allowable e.g. only the actual costs or expenses of contingent events that have crystallised at the start of production are allowed.
k.Capex and opex to the extent they are shared with another entity are to be apportioned on a reasonable basis.
l.Only capex and opex to the extent that they are related to the downstream (i.e. post-First Points of Disposal) transportation, processing of coal seam gas (CSG) to LNG Trains 1 and 2, and storage and loading of LNG are allowed e.g. capex and opex relating to produced water/associated water treatment is not allowed.
m.Where capex or opex was or is incurred in a currency other than A$, such expenditure is to be converted to A$ on a consistent basis that reasonably reflects exchange rates prevailing at the relevant time.
n.Overheads are to be apportioned on a reasonable basis.
End notes to Annexure A
i The footnotes (but not the endnotes) in this annexure reproduce the footnotes which were contained in the footnotes in the text of schedule 2 to the Minister’s decision. Text which has been redacted in the body of the annexure and in the footnotes was not redacted in schedule 2 to the Minister’s decision but was redacted consequent upon Court order to maintain commercial confidentiality.
ii “Relevant Period” was defined in the Minister’s decision as each quarterly royalty return period as defined in the Regulation.
Annexure B: Objections to material not before the Minister
As I mentioned in the body of my reasons, the expert reports and other material which were before the Minister were also in evidence before me. The applicants sought to rely on some new evidence, which had not been placed before the Minister.
Objection was initially taken by the Minister to the following evidence upon which the applicants sought to rely:
(a)the entirety of the report of Will Pulsford dated 22 June 2018;
(b)the entirety of the report of Professor Stephen Gray dated 16 July 2018 other than paragraphs 194 to196;
(c)paragraphs 38, 39 and 45 to 48 inclusive of the affidavit of Daniel Clancy dated 16 July 2018; and
(d)paragraphs 20 to 24 inclusive of the affidavit of Mark McCabe dated 16 July 2018.
Ultimately the only objections which were pressed were those which addressed the manner by which the applicants sought to rely on a further expert report by Professor Gray, in support of grounds 1, 3, 6 and 7.
For reasons which follow, I have concluded that the expert report of Professor Gray should be admitted for limited purposes.
It was not disputed that insofar as the report contained material elucidating the technical concepts of economic theory and modelling and valuation that were in fact dealt with in the material before the Minister, the report was admissible.[64] I think that concession was appropriate. Accordingly I rule that the report may generally be relied on for the purpose of elucidating the technical concepts of economic theory and modelling and valuation that were in fact dealt with in the material before the Minister.
[64] cf Visa International Service Association v Reserve Bank of Australia [2003] FCA 977 per Tamberlin J at [661].
As to the way in which the applicants placed reliance on the report in support of ground 6:
(a)Objection was taken to [200(b)] and [200(d)] of the report, which were relied on in the applicants’ written submissions at [240] and [243].
(b)In principle, especially in a case like the present, expert opinion may be admissible to demonstrate by explanation of technical matters the significance of which might otherwise not be capable of being understood by a judge: why a certainty problem in an exercise of administrative power might be thought to exist.
(c)However, in my view the paragraphs to which objection was taken were merely argumentative assertions on matters for which no expert explanation was necessary.
(d)I uphold the objections.
As to the way in which the applicants placed reliance on the report in support of ground 7:
(a)Objection was taken to [202] to [220] of the report, which were relied on in the applicants’ written submissions at [274], [277] to [280] and [282] and in the applicants written submissions in reply at [137].
(b)I have identified in the body of my reasons that the Minister obtained the second and third Lonergan reports but denied APLNG an opportunity to advance submissions in relation to the second and third Lonergan reports, even though the Minister relied on them in making his decision.
(c)The impugned paragraphs of Professor Gray’s report are paragraphs which explain the significance of the material in the second and third Lonergan reports, including by identifying changes made in those reports to the thinking revealed by the Lonergan report which was provided to APLNG.
(d)In my view an appreciation of the significance of the economic theory and modelling and valuation concepts dealt with in the second and third Lonergan reports was a subject on which expert opinion was required.
(e)I dismiss the objections.
The applicants also sought to rely on Professor Gray’s report in support of grounds 1 and 3. It follows from what I have written at [5] of Annexure B above, that the report could be relied on in relation to grounds 1 and 3 for the limited purpose there identified. However the Minister submitted (and the applicants disputed) that subject to that exception, material which was not before the administrative decision-maker was not relevant or admissible on those grounds.
I should say that although no objection was pressed in relation to the report of Mr Pulsford, what I have to say below applies equally to that report. Although it was admitted without objection, if I formed the view that it was inadmissible for the purposes upon which it was relied, I would not use it for those purposes.
It is appropriate first to identify relevant legal principles.
First, ordinarily, material not before the decision-maker at the time of the making of the decision will not be admissible in proceedings for judicial review: Australian Retailers Association v Reserve Bank of Australia (2005) 148 FCR 446 per Weinberg J at [454].
Second, but, in principle, the admissibility of evidence not before the decision-maker depends upon the grounds of review on which the applicant relies before the Court: Attorney-General for the Northern Territory v Minister for Aboriginal Affairs (1989) 23 FCR 536 per Lockhart J at 539 – 540; McCormack v Deputy Commissioner of Taxation (2001) 114 FCR 574 per Sackville J at [38] – [40]; Australian Retailers Association v Reserve Bank of Australia (2005) 148 FCR 446 per Weinberg J at [454] – [458]; Chandra v Webber (2010) 270 ALR 393 at [40] – [45]; and Origin Energy Electricity Ltd v Queensland Competition Authority [2014] 1 Qd R 216 per Jackson J at [6].
Third, accordingly, some grounds of review permit evidence not before the decision-maker to be adduced. For example –
(a)proof that an applicant was denied procedural fairness: see Percerep v Minister for Immigration and Multicultural Affairs (1998) 86 FCR 483, cited with approval in McCormack, Australian Retailers Association and Chandra;
(b)where jurisdiction depended upon the existence of an actual state of facts, proof that the state of facts did not exist: see Queensland v Wyvill (1989) 25 FCR per Pincus J at 512 at 519 – 520, cited with approval in McCormack, Australian Retailers Association and Chandra;
(c)where the decision-maker based the finding on a particular fact, proof that the particular fact did not exist: see Curragh Queensland Mining Ltd v Daniel (1992) 34 FCR 212 per Black CJ at 224 cited with approval in McCormack, Australian Retailers Association and Chandra;
(d)proof of bias or fraud: see R v Northumberland Compensation Tribunal, ex parte Shaw [1952] 1 KB 338 per Denning LJ at 352, cited with approval in Chandra.
Fourth, so far as the ground of review which alleges improper exercise of power on the grounds of legal unreasonableness, the position is less clear.
This ground of review would generally lead to the evidence consisting primarily of the material before the decision-maker: Attorney-General for the Northern Territory v Minister for Aboriginal Affairs Lockhart J at [11], cited with approval in Australian Retailers Association.
The authorities are not entirely clear as to the circumstances in which evidence not before the decision-maker in relation to this ground of review in particular circumstances.
In Australian Retailers Association v Reserve Bank of Australia Weinberg J dealt with an application for judicial review of a decision by the Reserve Bank of Australia to “designate” the EFTPOS system, a decision which had the consequence of then empowering the RBA to make standards which must be complied with by participants in the system. His Honour observed at [457] to [460] (emphasis added):
It should be noted that neither Lockhart J nor Sackville J considered whether it would be open to a party seeking to affirm a decision impugned on the basis of Wednesbury unreasonableness to rely upon expert evidence, tendered to show that the decision was in fact entirely reasonable. In principle, albeit with some reluctance (having regard to the additional time and costs taken up with such evidence), I can see no reason why, in an appropriate case, such evidence should not be admitted.
Wednesbury unreasonableness is, in some respects, simply a variant of the ground that a decision-maker lacked jurisdiction to make the decision because jurisdiction was dependent on an actual state of facts that did not exist, or that the decision-maker based the decision on a finding of a particular fact that did not exist. If additional evidence is available, in cases reliant upon such grounds, there is no reason in principle why such evidence should not also be admissible where the ground is couched in terms of unreasonableness.
That is not to say that the tender of such evidence should be encouraged. Nor is there any basis for a conclusion that it can be admitted as of right. As Sackville J correctly observed, everything depends upon the grounds of review, and the circumstances of the case.
When it is put that a body, such as the RBA, acted irrationally, and not in accordance with sound economic principles, the fact that experts in “payment systems” and regulatory theory say that they would have arrived at the same decision must be probative, at least as regards that issue. What is “sauce for the goose, is sauce for the gander”. It follows that evidence by experts that the decision to designate was taken in disregard of fundamental, and quite basic economic principles, must equally be admissible as bearing upon the same issue. I therefore reject the RBA’s general objections to the evidence of Mr Gove and Dr Williams.
On the other hand, in Moolarben Coal Mines Pty Ltd v Director-General of the (former) Department of Industry and Investment NSW (Agriculture Division) [2011] NSWLEC 191 Moore AJ held:
[68]The principal plank of Moolarben's attack on the Determination on the grounds of Wednesbury unreasonableness was the evidence of three experts referred to earlier in these reasons. Ultimately the plank centrally became the joint opinion of all experts (including Ulan's expert, Mr Lane) advancing the view, with some limited qualifications, that none of the land the subject of the Determination was “agricultural land” for the purposes of Schedule 2 the Act.
[69]However a fundamental question arises as to whether this evidence can be called in aid of this ground. That is, can the question of whether a decision can be impugned on the ground of Wednesbury unreasonableness be determined by reference to evidence or material which had not been before the decision-maker. One view, supported by some authority, is that the ground can only considered by reference to the evidence or material before the decision-maker: McCormack v Commissioner of Taxation (2001) 114 FCR 574 at [88]. The other view, again supported by some authority, is that recourse can be had to evidence led in the judicial review proceedings in which the challenge is made: Australian Retailers Association v Reserve Bank of Australia (2005) 148 FCR 446 at [457].
[70]A starting point in considering this question is the content of the ground. There is ongoing debate about where Wednesbury unreasonableness fits in the panoply of grounds of judicial review (and the content of the ground) probably most recently evidenced by the reasons of the various Justices of the High Court in Minister for Immigration and Citizenship v SZMDS [2010] HCA 16. Fundamentally, however, the ground is concerned with rectifying the abuse of power. A convenient statement of the ground can be found in the joint judgment of Gleeson CJ and McHugh J in Minister for Immigration and Multicultural Affairs v Eshetu [1999] 197 CLR 611 at [39] namely that the decision “was so unreasonable that no reasonable [decision-maker], acting within jurisdiction and according to law, would have come to such a conclusion”.
[71]There is an immediate and obvious tension between ascertaining whether the ground is made out, focusing as it does on whether a reasonable decision-maker would have come to the same decision, and having recourse to material that was not before the decision-maker who is said to have made the perverse or manifestly unreasonable decision. The yardstick for testing the reasonableness of the decision could change dimensions, potentially significantly, by the introduction and consideration of fresh material in the judicial review proceedings.
[…]
[76]Ultimately the specific question for determination is whether the evidence of the experts is relevant and therefore admissible to make good the ground of Wednesbury unreasonableness. I am not aware of any binding authority requiring me to either admit it or reject it. There is persuasive authority supporting both approaches. I prefer the approach that the evidence is irrelevant. Accordingly I reject the tender of the evidence of the experts in so far as it is relied on to make good the ground of Wednesbury unreasonableness.
The most detailed consideration of the question which I have found is that by Biscoe J in Arnold v Minister Administering the Water Management Act 2000 (No 6) [2013] NSWLEC 73 at [119] to [139]. In the course of a very long discussion, Biscoe J –
(a)made these very broad observations (at [124], emphasis added):
Judicial review cannot survive if it tolerates all expert evidence; it does not follow, however, that it will collapse if it tolerates some. In principle and on the authorities, expert evidence can be tolerated in some circumstances, including at the edge of judicial review, at the high and usually insurmountable barrier of the ground of manifest unreasonableness, if it is relevant to the proposition that, on the material before the decision-maker, the decision was manifestly unreasonable. No violence is done to the general principle that judicial review grounds (other than jurisdictional fact) are determined by reference to the material before the decision-maker if it is acknowledged that expert evidence may be required to show that that material was fallacious and operated to produce an absurd result that no reasonable decision-maker could have reached. The precise limit of the admissibility of expert evidence for this purpose is not a bright line. But expert evidence is likely to be admissible where, for example, the technical nature of the material before the decision-maker requiring review is such that it may not be fully understood by the court without expert evidence. The admissibility of expert evidence for this purpose is a different question to whether, at the end of the day, the court is satisfied that the hard to prove ground of manifest unreasonableness has been established. It is insufficient to establish mere factual error.
(b)noted some more particular circumstances in which material not before the decision-maker might be admitted (at [128] – [129]):
Expert evidence not before the decision-maker may be admitted where it is relevant to a ground of denial of procedural fairness, or a ground of absence of jurisdictional fact, or a ground that the decision was based on a finding of a particular fact which did not exist, or where the decision-maker had information that should have caused her to make further inquiries: McCormack. Expert opinion evidence may be admitted as to the meaning of technical terms in material before the decision-maker: Australian Retailers Association v Reserve Bank of Australia [2005] FCA 1707, (2005) 148 FCR 446 at [467] (Weinberg J).
Expert and other evidence not before the decision-maker may be admitted to show that it is obvious that there was material readily available to the decision-maker which was likely to be of critical importance in relation to a central issue for determination. Such evidence may be regarded as relevant to a ground of manifest unreasonableness: Prasad v Minister for Immigration and Ethnic Affairs [1985] FCA 46, (1985) 6 FCR 155 at [33] (Wilcox J); followed in Luu v Renevier (1989) 91 ALR 39 at 50 (FCA/FC), Tickner v Bropho (1993) 40 FCR 183,199 (Black CJ) and Minister for Immigration and Ethnic Affairs v Teoh [1995] HCA 20, (1995) 183 CLR 273, 290 (Mason CJ and Deane J). Or it may be regarded as relevant to a ground of jurisdictional error by constructive failure to exercise jurisdiction: Minister for Immigration and Citizenship v SZIAI [2009] HCA 39, (2009) 259 ALR 429 at [25]; Minister for Immigration and Citizenship v SZGUR [2011] HCA 1, (2011) 241 CLR 594 at [74] - [78] per Gummow J (Heydon and Crennan JJ agreeing). Or it may be regarded as relevant where it is alleged that there was a breach of a duty to make inquiries: SZGUR at [22] per French CJ and Kiefel JJ (Heydon and Crennan JJ agreeing); King v Great Lakes Shire Council (1986) 58 LGRA 366, 371, 376, 383 (Cripps CJ); Caldera Environment Centre Inc v Tweed Shire Council [1993] NSWLEC 102 (Talbot J). The cases to which I have referred in this paragraph were considered by me in more detail in Friends of King Edward Park Inc v Newcastle City Council [2012] NSWLEC 113 at [77] - [83]. See also Fullerton Cove Residents Action Group Incorporated v Dart Energy Ltd (No 2) [2013] NSWLEC 38 at [42] - [45] (Pepper J).
(c)(at [134] to [138]) considered and expressed doubt as to the observations as to admissibility made by Moore AJ in Moolarben.
In Changshu Longte Grinding Ball Co., Ltd v Parliamentary Secretary to the Minister for Industry, Innovation and Science (No 1) [2017] FCA 1114 Griffiths J followed Australian Retailers Association to admit expert opinion on the question whether the decision-maker acted unreasonably or irrationally.
For my part:
(a)I think that Moore AJ was right to suggest that the starting point in any analysis of admissibility must be the juridical basis of the unreasonableness ground.
(b)There is, of course, now no on-going debate about where Wednesbury unreasonableness fits in the panoply of grounds of judicial review: see my discussion of Minister for Immigration and Border Protection v SZVFW (2018) 357 ALR 408 at [156] – [161] above. That juridical basis is not consistent with the statement made by Weinberg J in Australian Retailers Association in the passage quoted above.
(c)As Gageler observed in Minister for Immigration and Citizenship v Li (2013) 249 CLR 332 at [105], cited with approval by Nettle and Gordon JJ in SZVFW, “[r]eview by a court of the reasonableness of a decision made by another repository of power “is concerned mostly with the existence of justification, transparency and intelligibility within the decision-making process” but also with “whether the decision falls within a range of possible, acceptable outcomes which are defensible in respect of the facts and law””.
(d)The joint judgment of Hayne, Kiefel and Bell JJ stated in Minister for Immigration and Citizenship v Li stated at [66] “[t]he courts are conscious of not exceeding their supervisory role by undertaking a review of the merits of an exercise of discretionary power. Properly applied, a standard of legal reasonableness does not involve substituting a court's view as to how a discretion should be exercised for that of a decision-maker.”
(e)I am unable to accept the breadth of the statement by Biscoe J which I have recorded at [19](a) above. I do not think that as a general proposition it can be correct to advance the apparently absolute statement that expert evidence is admissible on judicial review for legal unreasonableness to demonstrate that material before the decision-maker was fallacious and operated to produce an absurd result that no reasonable decision-maker could have reached.
(f)Taken literally, that statement would permit a party aggrieved of an exercise of power which required the repository of power to make a decision by reference to facts, expert opinion evidence and submissions made in relation thereto (including that by reference to arguments some of the opinion evidence was fallacious), to re-litigate the issues before a judge on a judicial review, under the guise of placing new evidence before the judge in order to demonstrate the truth of the proposition(s) rejected by the repository of power in the first place.
(g)I do not mean to suggest that there are no circumstances in which new evidence might be permitted on an application for judicial review on the grounds of legal unreasonableness. However my view is that wherever the line to which Biscoe J referred is to be drawn, it is not to be drawn in a way which would permit the course to which I have referred in the preceding subparagraph. To proceed in that way would be to permit the aggrieved person to invite the Court to substitute for the view of the decision-maker its own view of the acceptability of the evidence which was before the repository of power, and to do so based on evidence which was not before the repository of power.
In this case, APLNG had developed a detailed argument against the merits of the Lonergan opinion. Amongst the 6 expert reports on which APLNG relied in response to the first Lonergan report was an earlier report by Professor Gray (who had been the author of the SFG report (see [58] and [59] above). Examination of the reports which APLNG in fact placed before the Minister, reveals that they contained similar criticisms to those now sought to be re-canvassed by the reliance on the reports of Professor Gray and Mr Pulsford. For example:
(a)I observe that the applicants rely on both reports to demonstrate that characteristics of real life commercial structures for LNG projects were inconsistent with Lonergan’s hypothesis: see applications written submissions at [31], [142] to [148] in support of a submission that there was no relevant industry precedent for Lonergan’s hypothesis. They contend at [146]:
Accordingly, there is not a single precedent in industry practice in the history of LNG projects which replicates the hypothetical commercial structure relied upon by Lonergan (as adopted in full by the Minister), whereby a utility or infrastructure provider accepts a mere toll payment for access and takes ownership of feedstock gas and then takes on the burden, risks and effort associated with all of the downstream activities including sourcing customers and selling the LNG. In circumstances where the hypothetical transaction relied upon by the Minister is inconsistent with real-life industry structures, the appropriate conclusion is that the Decision is so unreasonable that no reasonable person could so exercise the power.
(b)But this very point was made in at least one of the reports which were before the Minister: see Deloitte Tax Services Pty Ltd report dated 30 January 2015 under the headings “Tolling”[65] and “Examples in the industry”.[66]
[65] Affidavit of Perrett sworn 29 January 2016, Exhibit RGP-1, at pp 475 – 6.
[66] Affidavit of Perrett sworn 29 January 2016, Exhibit RGP-1, at p 478.
(c)Professor Gray’s report which was before the Minister[67] criticised as unrealistic (for reasons which he then develops) the proposition that the downstream operator would require only a tolling-like return. In the new report which the applicants seek to rely upon Professor Gray says that the assumption is “absurd” for reasons which he also develops.[68]
[67] Affidavit of Perrett sworn 29 January 2016, Exhibit RGP-1, at pp 530.
[68] Report of Professor Stephen Gray dated 16 July 2018 at [10].
Lonergan had developed a detailed refutation of APLNG’s arguments and the criticisms made by the various experts retained by APLNG, including Professor Gray (see [67] above), and the final OSR report had, by Appendix S, summarised the competing views (see [84] above). The Minister’s reasons reveal that he considered and rejected the criticisms of the Lonergan opinions (see [95] to [100] above).
To my mind the attempt by the applicants to rely on the reports of Mr Pulsford and Professor Gray is an attempt to have me simply reconsider the merits of some of the very decisions which the Minister made in order to reach the decision which he had been clothed with power to make, namely the decisions to reject the criticism of Lonergan’s assumptions and the validity of his hypothesis. I do not think that course is permissible on an application for judicial review. Indeed, it would not even be permissible on an appeal by way of rehearing without an exercise of discretion which considered the distinction between new and fresh evidence.[69]
[69] cf R v Spina [2012] QCA 179 at [32] – [34].
As to the way in which the applicants placed reliance on those reports in support of grounds 1 and 3:
(a)Objection was taken to [10(a)], [12(a)], [37], [49], [84], [87(a)] – [87(b)], [89] – [140], [148(b)], [149] – [150] and [167] of Professor Gray’s report. Those paragraphs were variously relied on in the applicants’ written submissions at [71], [78] – [79], [85], [87] – [88], [109] – [113], [115], [118] – [124], [141], [143], [153].
(b)I uphold those objections for the reasons I have articulated.
(c)But quite apart from objections (and as I have said, no objection was pressed in relation to the report of Mr Pulsford) I think it would be erroneous to rely on those reports in support of grounds 1 and 3 for any reason other than as aids in understanding the evidence which was in fact before the Minister.
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