BHP Petroleum Pty Ltd v Balfour

[1987] HCA 22

HIGH COURT OF AUSTRALIA

MASON CJ, BRENNAN, DEANE, TOOHEY AND GAUDRON JJ

BHP PETROLEUM PTY. LIMITED AND ANOTHER v BALFOUR AND ANOTHER

(1994) 180 CLR 474

11 June 1987

Administrative Law

Administrative Law—Royalty agreement with Crown—Petroleum licence—Royalty fixed by reference to value of oil at well-head—Minister authorised to determine location of well-head—Determination—Validity—Petroleum (Submerged Lands) (Royalty) Act 1967 (Cth), ss. 5, 8, 9, 10—Petroleum (Submerged Lands) Act 1967 (Vict.), ss. 143 146, 147, 148—Petroleum (Submerged Lands) Act 1967 (Cth), s. 42.

Decision

MASON C.J., BRENNAN, DEANE, TOOHEY AND GAUDRON JJ.: This appeal concerns the functions of the "Designated Authority" under the Petroleum (Submerged Lands) (Royalty) Act 1967 (Cth) and under the Petroleum (Submerged Lands) Act 1967 (Vict.). As the Victorian legislation is in all relevant respects identical with the federal statute, it is sufficient to refer only to the former.

2. The Petroleum (Submerged Lands) (Royalty) Act, to which we shall refer as "the Royalty Act", is to be read with the Petroleum (Submerged Lands) Act 1967 (Cth), to which we shall refer as "the Submerged Lands Act".

3. The Submerged Lands Act provides for the grant of permits for exploration for petroleum and licences for its production. Section 5(1) of the Royalty Act makes the payment of a royalty a condition of a permit or licence and succeeding sub-sections refer to "the prescribed rate" payable in each of the circumstances there mentioned. In the present case the prescribed rate is governed by s.5(3) which reads:

" The prescribed rate in respect of petroleum recovered under a secondary licence is the percentage determined by the Designated Authority in pursuance of sub-section (1.) of section 42 of the Petroleum (Submerged Lands) Act 1967 in respect of petroleum so recovered."

4. It is unnecessary to set out s.42; it is enough to note that the prescribed rate is in respect of "the value at the well-head of that petroleum".

5. In the present case the value of petroleum at the well-head depends upon its market value and the costs of production associated with getting the petroleum from the well-head to Westernport where it is possible to assess the proportion derived from each well and so determine its market value. If the Royalty Act went no further than s.5, the amount of royalty payable by a permittee or licensee would be a matter to be ascertained objectively, having regard to the quantity of petroleum recovered and the value of that petroleum at the well-head. The determination of what was the well-head in a particular case would be a question of fact, to be decided by a court or by an arbitrator in the absence of agreement between the parties.

6. But the Royalty Act does go further and ss.8, 9 and 10 are in elaboration of s.5. It is, we think, necessary to set out those sections in full:

" 8. For the purposes of this Act, the well-head, in relation to any petroleum, is such valve station as is agreed between the permittee or licensee and the Designated Authority, or, in default of agreement within such period as the Designated Authority allows, is such valve station as is determined by the Designated Authority as being that well-head.

9. For the purposes of this Act, the value at the well-head of any petroleum is such amount as
is agreed between the permittee or licensee and the Designated Authority, or, in default of agreement within such period as the Designated Authority allows, is such amount as is determined by the Designated Authority as being that value.

10. For the purposes of this Act, the quantity of petroleum recovered by a permittee or licensee during a period shall be taken to be -

(a) the quantity measured during that period by a measuring device approved by the Designated Authority and installed at the well-head or at such other place as the Designated Authority approves; or

(b) where no such measuring device is so installed, or the Designated Authority is not satisfied that the quantity of petroleum recovered by the permittee or licensee has been properly or accurately measured by such a measuring device - the quantity determined by the Designated Authority as being the quantity recovered by the permittee or licensee during that period."

7. The Designated Authority made a determination of the royalty payable by the appellants. They successfully challenged that determination before Marks J. in the Supreme Court of Victoria, but an appeal against his Honour's judgment was allowed by the Full Court of the Supreme Court of Victoria (Murray, Nicholson and Brooking JJ.). Marks J. accepted that, having set aside the determination of the Designated Authority, the Court was not thereby empowered to substitute a determination of its own. However, in the particular circumstances and having regard to matters agreed between the parties, his Honour was able to assess the amount properly payable by the appellants and, there having been an overpayment, the amount which the appellants were entitled to be repaid.

8. Some description of the appellants' activities is necessary to appreciate how the issues between the parties arose. The appellants hold a production licence issued pursuant to the Submerged Lands Act and the comparable Victorian legislation, authorizing them to carry on operations for the recovery of petroleum in an area designated as Block 2140. The area is in Bass Strait; within it is the appellants' Cobia No. 2 well from which the appellants have been recovering petroleum since 1979. Cobia No. 2 is a subsea completion well and is located about four kilometres from the appellants' Mackerel A platform. The well itself is a "26-inch" diameter hole drilled through the seabed to the petroleum reservoir or pool. The definition of "well" in s.5(1) of the Submerged Lands Act dictates that it is the hole rather than the casing or equipment that answers the description "well". The term is defined to mean:

" ... a hole in the sea-bed or subsoil made by drilling, boring or any other means in connexion with exploration for petroleum or operations for the recovery of petroleum ...".

9. At the top of the well casing is equipment, including outlets and valves, designed to control production of petroleum. This equipment is known in the industry as a "Christmas tree", an expression which is defined in the American Petroleum Institute's specification for well-head equipment as "an assembly of valves and fittings used for production control, and includes all equipment down to the tubing-head top flange". The standards adopted by the American Petroleum Institute appear to be the accepted standards within the industry in this country.

10. In the case of the Cobia No. 2 well, the Christmas tree is located on the seabed immediately above the well. In those situations where a fixed platform is in place above the well, the Christmas tree is usually located on the lower level of the platform above the surface of the sea. We borrow the following description of the Christmas tree from the judgment of Nicholson J. in the Full Court:

" The Christmas tree in the present case consists of two lower master valves which are manually operated and were in fact left open when the Christmas tree was fitted, and two upper master valves which can be operated hydraulically either from the Mackerel platform or from the shore. Further up at the top of the Christmas tree are two crown or swab valves, and at the side of the tree are two wing valves, all of which are hydraulically operated. It seems that the most commonly used valves are the wing valves which are used daily to shut off the flow to enable the pipelines to be cleaned."

11. Pipelines or flowlines then run from the Christmas tree for about four kilometres when they rise from the ocean floor to the Mackerel A platform. Again, borrowing from the judgment of Nicholson J.:

" On the platform, before the oil from the Cobia 2 well co-mingles with oil from other wells, it passes through two further valves and it is these valves which were designated by the first-named appellant as the well-head for the purposes of the Royalty Act.

It appears that these valves were safety valves which enabled the platform to be isolated, but that they were normally left in the open position."

12. The Designated Authority selected U.V.6192 and U.V.6204, the safety valves on the platform, as the well-head. From what was said by counsel in argument, it seems that the Designated Authority chose that point so as to establish a basis by reference to which the actual cost of exploration and production would be appropriately proportioned. Be that as it may, the Designated Authority purported to act in pursuance of s.8 of the Royalty Act. Neither the Submerged Lands Act nor the Royalty Act defines "well-head", except in so far as s.8 of the Royalty Act identifies it as a valve station. But, as Marks J. found and as was not disputed, the term is well understood in the petroleum industry to refer to the top of the well casing, or the Christmas tree, or both. Section 5(1) of the Submerged Lands Act defines "valve station" to mean "equipment for regulating the flow of petroleum and includes any structure associated with that equipment". The appellants' argument is that "well-head" has an accepted meaning in the petroleum industry and that, on no view of the matter, can valves at the platform be described as the well-head. They concede that, within the Christmas tree, there may be some scope for selecting one valve rather than another, but say that the well-head cannot be found other than at the top of the well.

13. The respondents' answer is essentially that the legislation is its own dictionary. They point to s.8 of the Royalty Act whereby the well-head is referred to, "For the purposes of this Act", as a valve station. They then point to the definition of valve station in s.5(1) of the Submerged Lands Act and contend that any equipment regulating the flow of petroleum, including any structure associated with that equipment, is a well-head and as such may be determined by the Designated Authority as the well-head for the purposes of s.8 of the Royalty Act.

14. The effect of acceptance of the respondents' argument would be to vest in the Designated Authority an arbitrary power of determination, qualified only by the need to identify a particular valve station. The qualification would not be a significant one since, on the argument, such a valve station need bear no relation to the point at which petroleum leaves the well. In the present case, for instance, it could mean equipment for regulating the flow of petroleum located between the Mackerel platform and the shore or, for that matter, on the shore itself. The question arises whether a legislative intent to impose such an arbitrary basis for the assessment of tax can be discerned in the legislation. Careful analysis of the relevant legislative provisions has led us to conclude that it cannot. We turn to explain our reasons for that conclusion.

15. Section 5(2) of the Royalty Act determines the royalty rate payable and it does so by reference to petroleum recovered, being a percentage of the value of that petroleum at the well-head. That approach is consistent with the general understanding of royalty: see Stanton v. Federal Commissioner of Taxation (1955) 92 CLR 630, at pp 641- 642. Expressed in this way, the royalty is something capable of being and is to be determined objectively. Section 5 does not refer to an opinion of the Designated Authority and ss.8, 9 and 10 do not convert the objective ascertainment of the value of petroleum at the well-head into an exercise of discretion by the Designated Authority. The purpose of these sections is clear enough. It is to permit agreement if such can be reached and, in the absence of agreement, to provide the means whereby the components of s.5(2) can be determined without the need for litigation or arbitration. The task of the Designated Authority is to determine the relevant fact, that is, to fix upon a valve station which fairly accords with the description of well- head. That task is not performed if the Designated Authority fixes upon a valve station which, though it does not fairly accord with the description of well-head, yields what is thought to be an appropriate component for calculation of royalty. To approach the task in that way is to misunderstand the question which s.8 requires the Designated Authority to answer. The approach to be adopted can be expressed by using the words of Lord Diplock in In re Racal Communications Ltd. (1981) AC 374, at pp 382-383 where after referring to Anisminic Ltd. v. Foreign Compensation Commission (1969) 2 AC 147, his Lordship said:

" It proceeds on the presumption that where Parliament confers on an administrative tribunal or authority, as distinct from a court of law, power to decide particular questions defined by the Act conferring the power, Parliament intends to confine that power to answering the question as it has been so defined ... So if the administrative tribunal or authority have asked themselves the wrong question and answered that, they have done something that the Act does not empower them to do ...."

16. None of this is to say that there may not be more than one valve station, as that term is defined, according with the description of well-head. The appellants accept that, within the Christmas tree, there may be more than one valve station that can be so described. But they say that, on no view of the matter, can a valve station at the Mackerel platform some four kilometres from the well answer the relevant description. We agree. The Designated Authority did not ask himself the right question which was: "Which valve station (or valve stations) may fairly be said to be the well-head at which the petroleum from Cobia No. 2 well is recovered?" A valve station at the Mackerel platform could not provide the answer to that question.

17. The relevant determination by the Designated Authority was made on 7 June 1980 in these terms:

" I, James Charles Murray Balfour, the Designated Authority in respect of the area specified as being adjacent to the State of Victoria, hereby determine that, in default of an agreement as to the location of the Cobia-2 wellhead for the purposes of the Act, in relation to petroleum recovered from the Cobia-2 subsea completion well located in block 2140, the subject of Production Licence for Petroleum VIC/L5 of which Hematite Petroleum Proprietary Limited and Esso Exploration and Production Australia Inc are the registered holders, the wellhead is the valve station comprised of valves designated UV 6192 and UV 6204 and located on the Mackerel A platform."

18. For the reasons already given, valves U.V.6192 and U.V.6204 could not constitute the well-head. In these circumstances it would ordinarily be appropriate to set aside the determination of the Designated Authority and remit the matter to him for further consideration. However, having regard to the way in which the matter was argued before Marks J. and what was said on the hearing of this appeal, it is clear that no valves could properly have been selected as the relevant valve station other than those on the Christmas tree. As between those valves, the financial implications are minimal.

19. In the circumstances, the proper course is to allow the appeal from the Full Court of the Supreme Court of Victoria and to dismiss the appeal to that Court from the judgment of Marks J. The effect of doing so is to uphold the decision of Marks J. giving judgment for the appellants for the overpayment made by them, together with interest on that amount.

Orders

Appeal allowed with costs.

Order that the order of the Full Court of the Supreme

Court of Victoria dated 8 April 1986 be set aside and in lieu thereof order that the appeal to that Court be dismissed with costs. And further order that the order of Marks J. dated 8 February 1985 be restored.