Shell Energy Holdings Australia Limited v Commissioner of Taxation
[2021] FCA 496
•12 May 2021
FEDERAL COURT OF AUSTRALIA
Shell Energy Holdings Australia Limited v Commissioner of Taxation [2021] FCA 496
File number: WAD 391 of 2019 Judgment of: COLVIN J Date of judgment: 12 May 2021 Catchwords: TAXATION - appeal against objection decision of Commissioner of Taxation - where applicant party to joint venture agreements in relation to natural gas project - where participants in project held statutory titles which conferred authority to explore for petroleum - where applicant increased its proportional interest in each of statutory titles through purchase of additional proportional interest pursuant to Asset Exchange Agreement - whether applicant entitled to tax deduction under s 40-80 of Income Tax Assessment Act 1997 (Cth) for cost of acquiring additional proportional interest - consideration of nature of intangible assets comprising additional proportional interest - finding that deduction can be claimed in relation to additional proportional interest in some statutory titles
TAXATION - whether first use of additional proportional interest for exploration for petroleum - whether activities undertaken by applicant as part of project required use of authority to explore conferred by statutory titles - consideration of meaning of first use - consideration of meaning of exploration - finding that additional proportional interest was first used for exploration in relation to some statutory titles
TAXATION - consideration of when applicant first held additional proportional interest for purposes of Division 40 - consideration of provisions of Asset Exchange Agreement as to when dealing would take effect - whether provisions could operate retrospectively after dealings approved and registered
TAXATION - whether s 40-77 of Income Tax (Transitional Provisions) Act 1997 (Cth) disapplies Division 40 to the additional proportional interest - where s 40-77 disapplies Division 40 to mining, quarrying or prospecting right held before certain date - where s 40-77 disapplies Division 40 in circumstances where taxpayer held right before certain date and starts to hold new right after date which relates to same area - where offshore areas covered by statutory titles had been subject of earlier titles held by applicant - finding that Division 40 not disapplied by s 40-77
CONSTITUTIONAL LAW - whether rights and title vested in each State by Coastal Waters (State Title) Act 1980 (Cth) prohibit exploration or exploitation of natural resources - consideration of breadth of authority to explore conferred by statutory titles - consideration of extent of activities requiring permission from the Commonwealth or relevant State
Legislation: Coastal Waters (State Title) Act 1980 (Cth)
Income Tax (Transitional Provisions) Act 1997 (Cth) s 40‑77
Income Tax Assessment Act 1997 (Cth) ss 40, 40‑25, 40‑30, 40‑35, 40‑40, 40‑60, 40‑77, 40‑80, 40‑730, 995‑1, Division 40
Judiciary Act 1903 (Cth) s 78B
Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) ss 97, 193, 210, 252, 280, Schedule 6, cl 3
Seas and Submerged Lands Act 1973 (Cth) ss 6, 10A
Taxation Administration Act 1953 (Cth) s 14ZZ
Taxation Laws Amendment Act (No 4) 2003 (Cth)
Petroleum (Submerged Lands ) Act 1982 (WA) ss 19, 28, 38C
Cases cited: Akiba on behalf of the Torres Strait Islanders of the Regional Seas Claim Group v State of Queensland (No 2) [2010] FCA 643; (2010) 204 FCR 1
Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue [2009] HCA 41; (2009) 239 CLR 27
Bosanac v Commissioner of Taxation [2019] FCAFC 116; (2019) 267 FCR 169
Buzzacott v Minister for Sustainability, Environment, Water, Population and Communities [2013] FCAFC 111; (2013) 215 FCR 301
Certain Lloyd's Underwriters Subscribing to Contract No IH00AAQS v Cross [2012] HCA 56; (2012) 248 CLR 378
Chief Commissioner of State Revenue v Metricon Qld Pty Ltd [2017] NSWCA 11
Commissioner of Taxation v Glencore Investment Pty Ltd [2020] FCAFC 187
Commonwealth of Australia v Western Mining Corporation Resources Ltd (1998) 194 CLR 1
Commonwealth of Australia v Yarmirr [2001] HCA 56; (2001) 208 CLR 1
Council of the City of Newcastle v Royal Newcastle Hospital (1959) 100 CLR 1
Daniele v Shire of Swan (1998) 20 WAR 164
Dong v Monkiro Pty Ltd [2005] NSWSC 749
Federal Commissioner of Taxation v Broken Hill Pty Co Ltd (1969) 120 CLR 240
Federal Commissioner of Taxation v Thomas [2018] HCA 31; (2018) 264 CLR 382
Goldsworthy Mining Ltd v Federal Commissioner of Taxation (1975) 132 CLR 463
Howard v Commissioner of Taxation [2012] FCAFC 149; (2012) 206 FCR 329
Lacey v Attorney-General (Qld) [2011] HCA 10; (2011) 242 CLR 573
Lavender v Director of Fisheries Compliance, Department of Industry Skills and Regional Development [2018] NSWCA 174
Lloyd v Robinson (1962) 107 CLR 142
Minister for Employment and Workplace Relations v Gribbles Radiology Pty Ltd [2005] HCA 9; (2005) 222 CLR 194
Mitsui & Co (Australia) Ltd v Commissioner of Taxation [2011] FCA 1423
Mitsui & Co (Australia) Ltd v Commissioner of Taxation [2012] FCAFC 109; (2012) 205 FCR 523
Nominal Defendant v GLG Australia Pty Ltd [2006] HCA 11; (2006) 228 CLR 529
Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355
Shrimpton v Commonwealth (1945) 69 CLR 613
Swan Resources Ltd v Southern Pacific Hotel Corporation Energy Pty Ltd [1983] WAR 39
SZTAL v Minister for Immigration and Border Protection [2017] HCA 34; (2017) 262 CLR 362
Tameside Metropolitan Borough Council v Barlow Securities Group Services Ltd [2001] EWCA Civ 1
Taylor v The Owners - Strata Plan No 11564 [2014] HCA 9; (2014) 253 CLR 531
The Queen v A2 [2019] HCA 35
Trollope & Colls Limited v Atomic Power Constructions Limited [1963] 1 WLR 333
Water Conservation and Irrigation Commission (NSW) v Browning (1947) 74 CLR 492
Western Australia v Manado [2020] HCA 9
Westpac Securities Administration Ltd v Australian Securities and Investments Commission [2021] HCA 3
Division: General Division Registry: Western Australia National Practice Area: Taxation Number of paragraphs: 421 Date of last submissions: 13 April 2021 (Attorney-General for Western Australia)
30 April 2021 (Applicant)Date of hearing: 9-16 March 2021 Counsel for the Applicant: Mr J Hmelnitsky SC with Mr D Hume and Mr A Roe Solicitor for the Applicant: Allens Counsel for the Respondent: Mr A Musikanth SC with Ms CM Pierce and Ms A Hammond Solicitor for the Respondent: Minter Ellison Counsel for the Attorney-General for Western Australia: Mr JA Thomson SC with Ms S Teoh Solicitor for the Attorney-General for Western Australia: State Solicitor's Office
Table of Corrections 26 May 2021 [254](6) has been amended to correctly read: 'A, B, C, D, E and G'. ORDERS
WAD 391 of 2019 BETWEEN: SHELL ENERGY HOLDINGS AUSTRALIA LIMITED
Applicant
AND: COMMISSIONER OF TAXATION (CTH)
Respondent
ORDER MADE BY:
COLVIN J
DATE OF ORDER:
12 MAY 2021
THE COURT ORDERS THAT:
1.On or before 24 May 2021 the parties do file an agreed minute of orders to give effect to these reasons or, if agreement cannot be reached, competing minutes together with written submissions of no more than five pages as to why orders should be made in the terms proposed by the party.
2.The matter be listed for a further case management hearing at 10.15 am on 31 May 2021.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
COLVIN J:
In 2012, Shell Australia Pty Ltd (formerly Shell Development (Australia) Pty Ltd) (Shell) and Chevron Australia Pty Ltd (Chevron) were both participants, together with other parties, in a petroleum venture known as the Browse Project (Project). The Project relates to subsea areas that surround and include Scott Reef, a remote coral reef system located on Australia's continental shelf to the west of the Kimberley Region of Western Australia.
The participants in the Project were together the holders of an exploration permit and six retention leases issued under legislation regulating petroleum exploration in offshore areas (Statutory Titles). One retention lease was issued under State legislation and the remainder of the Statutory Titles were issued under Commonwealth legislation. Each of the Statutory Titles gave a permission or authority to the holders to explore for petroleum.
Some years before 2012, the participants in the Project had associated themselves into two joint ventures. One was in relation to an area known as East Browse and the other in relation to an area known as West Browse. Exploration activities were then undertaken over a number of years and, by 2012, three gas fields had been identified. They were named Torosa, Brecknock and Calliance.
The Project has not reached the stage of producing petroleum. The proper characterisation of the activities being undertaken as part of the Project in and after 2012 is contentious. The main issue that arises in that respect is whether the activities were properly described as exploration.
The joint venture agreements
The two joint ventures subsist on substantially the same agreed terms (save as to the extent of participating interests). They have a common operator (Operator) and for many years have been operated, in effect, as a single venture. The terms of the agreements between the joint venturers established a 'Venture Committee' for each venture.
The Venture Committee controls the business of the venture. It comprises a representative of each venturer. Matters for decision in the course of the business of the venture are required to be referred to the Venture Committee, except for matters that are within the authority of the Operator or are for the decision of individual venturers. Most resolutions of the Venture Committee require the support of not less than 83⅓% of the voting rights held by the participants, but certain matters require 100% support. Voting rights are to be exercised according to the extent of each participant's interest.
The Venture Committee is required to approve an annual programme and budget for the venture. The Operator is required to submit proposals for 'Joint Operations', being activities to be carried out by decision of the venturers entitled to vote and pursuant to an approved budget. The Operator is responsible for carrying out Joint Operations. Therefore, the provisions for approval of the programme and budget contemplate the approval by the venturers of the Joint Operations to which they relate.
In some circumstances, such as an emergency or a cost over-run within specified bounds, the Operator can undertake activities or incur costs without an approval of the venturers. The Operator also has other obligations such as the obligation to keep the Statutory Titles in good standing that might require steps to be taken without undertaking the formal approval process. However, generally speaking, the activities to be undertaken by the Operator on behalf of the venture relating to the Project are those approved Joint Operations that are the subject of an approved programme and budget.
It follows that in determining the activities to be undertaken by the Operator, each participant in the venture is entitled to vote to the extent of the participant's interest. Consequently, exploration and other activities by the participant venturers can only take place as Joint Operations undertaken in consequence of the exercise by each venturer of a vote to the extent of the participating interest of the venturer and with the support of venturers with a total interest of at least 83⅓% of the voting rights.
The Asset Exchange Agreement between Shell and Chevron
On 20 August 2012, Shell entered into an agreement with Chevron styled as an Asset Exchange Agreement (AEA) by which Shell agreed to purchase Chevron's participating interest in the Project. At that time, under the terms of the joint venture agreements, Shell's participating interest was 15% in the West Browse venture and 8.33% in the East Browse venture. The AEA provided for the terms on which Shell would acquire Chevron's participating interest in the Project and thereby increase its interest to 35% in West Browse and 25% in East Browse. The consideration moving from Shell under the terms of the AEA was both cash and an assignment of other petroleum interests held by Shell to Chevron.
Shell and Chevron attributed a value to the assigned interests and also agreed an apportionment of the total consideration as between each of the Statutory Titles. The total of the apportioned values was $2.3 billion.
Shell's claimed tax deduction
Shell claimed that it was entitled to a tax deduction under s 40-80 of Division 40 of the Income Tax Assessment Act 1997 (Cth) (ITAA) for the cost to it of acquiring the additional proportional interest in each of the Statutory Titles from Chevron under the terms of the AEA. The claim related to the 2012 and 2014 income years. The Commissioner of Taxation of the Commonwealth of Australia (Commissioner) assessed Shell on the basis that it is not entitled to a deduction of that character and an objection by Shell to that assessment has been disallowed.
Shell now brings an appeal under s 14ZZ of the Taxation Administration Act 1953 (Cth). In the appeal, Shell has the burden of proving that the assessments are excessive and the Court acts on the basis of the evidence adduced in the appeal proceedings (noting that the parties to such an appeal may together stipulate that some or all of the evidence received on the objection will be received as evidence in the appeal): Bosanac v Commissioner of Taxation [2019] FCAFC 116; (2019) 267 FCR 169 at [22]‑[48] (Greenwood, Burley and Colvin JJ). Each of Shell and the Commissioner has adduced evidence in the appeal and it is only that evidence upon which they rely.
In certain respects, the arguments for Shell were said by the Commissioner to exceed the bounds of the matters raised within the objection process. The Commissioner maintained that leave was required to raise those matters, but did not oppose leave. Having regard to the fact that the matters identified by the Commissioner were, in my view, refinements or developments of the broad position maintained by Shell in the objection process and that the Commissioner pointed to no prejudice, I gave leave.
At the commencement of the hearing, both parties proposed that the hearing should proceed on all matters save for issues relating to shortfall interest charges. An order to that effect has since been made. Therefore, the issue for determination in the appeal concerns whether Shell could deduct from its assessable income the whole of the cost to Shell of the additional proportional interest in each Statutory Title that it acquired from Chevron under the terms of the AEA.
During closing submissions an issue arose as to whether certain submissions advanced by Shell involved a matter arising under the Constitution. The submissions concerned the nature of the sovereign permission that may be required in order to undertake activities for the purposes of petroleum exploration and development in waters that formed the territorial sea (and the sea‑bed and subsoil beneath) and also in waters above the area of the continental shelf (comprising sea-bed and subsoil outside the territorial waters). Notices were issued to the Attorneys-General under s 78B of the Judiciary Act 1903 (Cth). The Attorney‑General for Western Australia sought to intervene and filed written submissions.
Depreciation of assets for income tax purposes
Under Division 40 of the ITAA, a tax deduction may be claimed for the decline in value of certain assets used to produce income.
Where an asset with a limited effective life is expected to decline in value over the time it is used, an amount representing the decline in value of the asset can be deducted from the assessable income of a taxpayer who both holds the asset in the income year and uses it for a taxable purpose. Producing assessable income, exploring or prospecting, mining site rehabilitation and environmental protection are each taxable purposes.
The three concepts of 'hold', 'use' and 'taxable purpose' are deployed in the extensive provisions of Division 40 to describe the circumstances in which an amount may be deducted by a taxpayer for a depreciating asset. The main provision in s 40-25(1) provides that a taxpayer can deduct an amount equal to the decline in value for an income year (as worked out under Division 40) of a depreciating asset 'held' for any time during the year. Division 40 defines in some detail the entity that holds particular types of assets: s 40-40.
The deduction must be reduced by the part of the decline in value 'attributable to your use of the asset, or your having it installed ready for use, for a purpose other than a taxable purpose': s 40-25(2). Thus, use (or installation ready for use) for a non‑taxable purpose is disentitling. Also, use (or installation ready for use) of the asset determines the 'start time' for the decline in value and hence the start of the deduction: s 40-60. There is no deduction for depreciation until use of the asset (or installation ready for use).
Only some intangible assets qualify as depreciating assets under Division 40. One qualifying category of intangible depreciating asset to which Division 40 applies is 'mining, quarrying or prospecting rights' that are not trading stock: s 40-30.
The term 'mining, quarrying or prospecting right' is defined in the following terms (s 995‑1):
(a)an authority, licence, permit or right under an Australian law to mine, quarry or prospect for minerals, petroleum or quarry materials; or
(b)a lease of land that allows the lessee to mine, quarry or prospect for minerals, petroleum or quarry materials on the land; or
(c)an interest in such an authority, licence, permit, right or lease; or
(d)any rights that:
(i)are in respect of buildings or other improvements (including anything covered by the definition of housing and welfare) that are on the land concerned or are used in connection with operations on it; and
(ii)are acquired with such an authority, licence, permit, right, lease or interest.
The definition produces the rather clumsy notion of 'an authority … to mine, quarry or prospect for … petroleum'. For present purposes, there is no dispute that the language used embraces a statutory authority or permission to explore for petroleum. It also includes a petroleum production licence: Mitsui & Co (Australia) Ltd v Commissioner of Taxation [2012] FCAFC 109; (2012) 205 FCR 523 at [58] (Mitsui Full Court).
In consequence, there are two types of rights that are described in the definition that assume significance in the present context, namely (a) an authority under an Australian law to explore for petroleum; and (b) an interest in any such authority.
The distinction between an interest in a joint venture and an interest in a statutory right to explore for petroleum
It is common practice for the holders of an authority under an Australian law to explore for petroleum to form themselves into a joint venture, as occurred in the circumstances of this case. It is to be expected that any agreement by which a joint venture is formed will specify the extent of participating interests in the venture, especially where, as is commonly the case, the authority itself does not differentiate between the holders of the authority and, in consequence, confers an undivided authority on all of them. If a joint venture is formed with specified participating interests, the dealing between the venturers will give rise to an interest in the authority to explore for petroleum, but that does not mean that the whole of the joint venture interest is a mining, quarrying or prospecting right within the terms of the statutory definition and therefore a depreciating asset for the purposes of Division 40. It is likely that other rights and interests beyond a specific proportional interest in the authority under Australian law to explore for petroleum will arise from the formation of the joint venture.
Therefore, where a joint venture has been formed as between the holders of an authority to explore for petroleum, it is important to differentiate between the proportionate participating interest in the whole joint venture and the specific proportional interest in the authority under an Australian law to explore for petroleum.
As has been noted, under Division 40, deductions for depreciation are calculated from the 'start time' of a depreciating asset, being specified to be when the asset was first used or installed ready for use by the taxpayer. In most cases, Division 40 operates such that one of two prescribed methods apply for determining the decline in value of a depreciating asset to be attributed to any particular income year. Each of those two methods spread the decline in value over the effective life of the asset.
However, there is a specific category of depreciating assets where the decline in value is the asset's cost. The result is that for assets in that category the whole of the cost of the asset may be deducted immediately. The category concerns depreciating assets where the first use of the asset by the taxpayer is 'for exploration or prospecting for minerals, or quarrying materials, obtainable by mining and quarrying operations': s 40-80(1)(a). Petroleum is a 'mineral' that is obtainable by mining and quarrying operations for the purposes of the provision: s 995‑1 (applying the definition in s 40-730). Therefore, the specific category applies where the first use of the asset is for exploration for petroleum.
In consequence, if the first use of an intangible asset that is an authority under an Australian law to mine, quarry or prospect for petroleum (or an interest in such authority) is for exploration for petroleum then the whole of the cost of the asset may be deducted. There are certain other requirements that must be met (see s 40-80(1)(b) and (c)), but in the present instance it is accepted that they are satisfied.
Therefore, having regard to the terms of Division 40 that have been outlined, it is fundamental to Shell's claim in the present appeals that the precise asset that is said to be the depreciating asset is identified, that the characteristics of that asset are understood (particularly as to the respects in which the asset might be used for the taxable purpose of exploration or prospecting) and that the first use of the intangible asset is also identified.
The claim by Shell is to the effect that the depreciating asset is the additional proportional interest in each of the Statutory Titles that it acquired from Chevron under the terms of the AEA and that the asset was first used when it was held ready for use or when certain activities (said to be exploration for petroleum) were undertaken. It will be necessary in due course to give close consideration to the way in which Shell claims that a proportional interest in the Statutory Titles might be used for exploration by holding it ready for use or by the joint venture undertaking particular activities. It will also be necessary to consider the activities said to have been the first use of the additional proportional interest and whether they amount to exploration for petroleum.
The nature of the transaction effected by the AEA
The AEA provided for the assignment of assets by Chevron to Shell on the 'Completion Date' as defined in the AEA. The assets assigned by Chevron were defined as the 'Browse Interest'. The Browse Interest as defined comprised a number of assets. They included (a) Chevron's percentage interest in the Statutory Titles; (b) Chevron's interest as a participant in the joint ventures; (c) Chevron's interest in a particular joint development studies agreement; (d) Chevron's interest in common with other joint venturers 'in relation to the joint development of the gas fields within [the Statutory Titles]'; and (e) Chevron's share of the cash balances for the joint ventures.
The AEA provided expressly that each provision of the agreement which is a dealing as defined in the legislation governing the Statutory Titles 'is of no force until it has been approved and registered', but that all other provisions of the AEA take effect from the date of execution. Shell was to assume all risks in connection with the ownership and operation of the Browse Interest from the Completion Date.
At Completion 'and with effect from the Effective Date', Shell was to be liable for all claims and obligations relating to the Browse Interest.
The AEA also provided:
Each provision of this Agreement which is a dealing or transfer, as defined in the Petroleum Legislation, is of no force in respect of a Title until it has been approved by the Relevant Authority pursuant to the Petroleum Legislation and an entry has been made against that Title in the register by the Relevant Authority. Once so approved and registered, each such provision of this Agreement and the documents submitted for approval under this Agreement will relate back to and take effect in accordance with its provisions. … all other provisions of this Agreement will take effect on the Signature Date.
At Completion, Chevron was required to deliver, amongst other things: (a) instruments to effect a transfer of Chevron's interest in the Statutory Titles; and (b) Deeds of Assignment and Assumption to effect a transfer of the joint venture interests.
The provision for separate dealings in respect of Chevron's interest in the Statutory Titles (on the one hand) and the assignment and assumption of the interests, rights and obligations arising from the terms of the joint venture agreements (on the other hand) reflects the nature and extent of the joint ventures. The Statutory Titles were not property brought into existence by the terms or activities of the joint ventures. They were not joint venture property. Rather, they were rights which each of the participants brought to the ventures and which each agreed to exercise and commercialise by associating themselves on the agreed terms of the joint ventures.
The agreed terms of the joint ventures then conferred rights which may be exercised by each venturer as against the other in respect of the Statutory Titles. So, for example, each venturer submitted the exercise of its undivided statutory right to explore for petroleum (which it could exercise with others as the registered holders of the Statutory Titles) to the decisions made by the Venture Committee. By entering into the joint ventures, the participants created rights in favour of each other as to their respective interests as joint holders of the Statutory Titles. Those rights, which might be described as proportionate participating interests in the joint venture, became the source of proportional interests of each of the venturers in the Statutory Titles.
The additional proportional interest in the statutory authority to explore for petroleum
Both Shell and the Commissioner framed the inquiry in the present appeal in terms that identified the additional proportional interest in the Statutory Titles that Shell acquired from Chevron as the potential depreciating asset. The Commissioner did not contend that there was some other characterisation that was appropriate. Therefore, the issues that arise for determination concern the use by Shell of that additional proportional interest.
The nature of any asset confines the uses to which it may be put. A piano cannot be used to explore for or produce petroleum. In the case of an intangible asset, the nature and extent of the uses to which it may be put is determined by a proper understanding of the character of rights which constitute the intangible asset.
In the present case, the Statutory Titles conferred statutory authority upon the holders of those interests under the relevant legislation to explore for petroleum in a specified area. The joint venture agreements conferred no such authority. However, by reason of the terms of the agreements between the venturers, the exercise of the statutory authority held by the venturers (as well as any other activities relating to the business of the joint ventures) required the approval of the Venture Committee. Further, to the extent of the participating interest of each venturer, there was an ability on the part of each venturer to affect whether there was exploration pursuant to the statutory permission conferred by the Statutory Titles and the nature and extent of any such exploration. It was that ability that gave rise to an interest in the Statutory Titles on the part of each participant in the joint venture.
By committing to the terms of the joint ventures, the participants adopted a form of association or commercial structure to their dealings in respect of the Statutory Titles which required a resolution of the Venture Committee before the permission to explore conferred by the Statutory Titles could be exercised and a continuation of that permission whilst the authority or permission to explore was being exercised. The participants in the venture also subjected the future exercise of rights that depended upon holding the Statutory Titles, such as seeking a renewal or extension, to the processes set out in the joint venture agreements.
It may be noted that being the holder of a Statutory Title (an exploration permit or a retention lease) also qualified the holder, in certain circumstances, to apply for a petroleum production licence in respect of an area declared to be a 'location' under the relevant legislation. A right of that kind attendant to Statutory Titles where petroleum had been discovered might be expected to have a considerable effect upon the value to an assignee of an interest in any such exploration permit or a retention lease. Indeed, in the present circumstances where, by the time of the AEA, three petroleum fields had been discovered within the area covered by the Statutory Titles you might have thought that aspect was a significant factor in determining the consideration provided by Shell to Chevron for its participating interest. However, no significance was afforded to that aspect of the statutory regime by the parties for the purposes of the present appeal.
As will be seen, Commonwealth and State legislation regulated the creation or assignment of interests in the Statutory Titles such that any such dealing was of no force and effect until it had been approved and registered. It will be necessary in due course to consider the effect of those provisions in order to make a determination as to when Shell came to hold Chevron's participating interest in the Statutory Titles. What is significant at this point is that the legislation recognised that there could be an interest in the Statutory Titles and it regulated the creation or assignment of any such interest.
There were rights other than an ability to influence if, when and the manner in which the authority to explore conferred by the Statutory Titles might be exercised that were brought into existence by the joint venture agreements. For example, the agreements contemplated that 'Joint Property' (being property other than statutory permits and licences) might be acquired on behalf of the venturers. The interest in such property may or may not have any connection to the activity of exploration for petroleum such that it might be said to be an asset that could be or was used for exploration for petroleum. So to illustrate, and without expressing any view as to the issue at this point, information gathered from a geological survey which was Joint Property might be said to have been used for exploration because it was brought to bear in determining where to drill an exploration well. On the other hand, a lease of premises to store that information might be said to lack any such connection.
Likewise, the joint venture agreements also governed the possibility that the venturers might seek a permit to produce petroleum from within the area the subject of the Project. However, those further intangible rights associated with the participating interest of a venturer could not be exercised in a manner that might affect whether and when the authority to explore for petroleum might be exercised.
Of course, an interest in an authority to 'mine … petroleum' would itself be a 'mining, quarrying or prospecting right' and therefore an intangible asset of a kind that might be depreciated under Division 40. Its cost could be depreciated over time using one of the two specified methods. But when it came to the depreciation of an asset's cost as a whole, it was only an asset that could be and was first used for 'exploration or prospecting for' petroleum (being the language in s 40-80) that could be depreciated in that manner. Therefore, it is the additional interest in the Statutory Titles, not the additional interest in the joint ventures, that is claimed to be such an asset.
All of which is to expose that it is necessary to distinguish between the use of the overall participating interest in the joint venture from the use of what the parties described as the 'additional proportional interest' in the Statutory Titles.
The nature of the competing cases as to use of the additional proportional interest
It is well now to set out the key provision in full, being s 40-80(1). It states:
The decline in value of a depreciating asset you hold is the asset's cost if:
(a)you first use the asset for exploration or prospecting for minerals, or quarry materials, obtainable by mining and quarrying operations; and
(b)when you first use the asset, you do not use it for:
(i)development drilling for petroleum; or
(ii)operations in the course of working a mining property, quarrying property or petroleum field; and
(c) you satisfy one or more of these subparagraphs at the asset's start time:
(i)you carry on mining operations;
(ii)it would be reasonable to conclude you proposed to carry on such operations;
(iii)you carry on a business of, or a business that included, exploration or prospecting for minerals or quarry materials obtainable by such operations, and expenditure on the asset was necessarily incurred in carrying on that business.
As has been noted, the reference to 'the asset's start time' is a reference to 'when you first use it, or have it installed ready for use, for any purpose': s 40-60(2). As has also been noted, the Commissioner accepted that both (b) and (c) were met in the circumstances of this case.
Both Shell and the Commissioner framed the issue in terms of whether the cost to Shell of the additional proportional interest in each of the Statutory Titles could be depreciated under s 40‑80. They disagreed as to the proper characterisation of that asset and when and how it was used, but they both approached the appeal on the basis that the additional proportional interest in the Statutory Titles was the asset in question.
Implicit in this approach was an acceptance that there was an identifiable cost that could be allocated to such proportional interests. Chevron and Shell had agreed such an allocation in the AEA. It was that allocation that was claimed. No argument was addressed to the quantification of the deduction. In particular, the Commissioner did not dispute the amount allocated on the basis that the AEA dealt with proportionate interests in the joint venture that were broader in character than the proportional interests in the Statutory Titles and might encompass the value associated with the right to seek a permit to produce petroleum from the fields that had been discovered. Rather, the issue between the parties concerned whether the cost of the additional proportional interest in the Statutory Titles acquired by Shell from Chevron under the AEA (being the cost as allocated to the Statutory Titles under the terms of the AEA) was of a kind that could be written off under s 40-80. All turned on whether there had been a first use of that additional proportional interest for exploration.
When it came to first use of the asset, the question for consideration did not concern the first use to which Shell put its additional participating interest in the joint venture. Rather, the question to be asked concerned the first use to which Shell put its additional proportional interest in the Statutory Titles and whether that first use was for exploration for petroleum.
It is important to recognise that the additional proportional interest in the Statutory Titles was not the source of Shell's authority to explore. That authority came from the Statutory Titles themselves, a matter that has already been noted and is considered in more detail below.
Shell was the holder together with the other holders of the statutory authority to explore for petroleum in the areas the subject of each of the Statutory Titles. It had associated itself in a joint venture with the other holders to explore and evaluate the areas the subject of the Statutory Titles. In doing so, it subjected its interest in the Statutory Titles to the agreed terms, but it remained the holder (with other holders) of the undivided interest in each of those statutory authorities. By the joint ventures, Shell had agreed an allocation of the participating interests. Those participating interests governed the manner in which decisions could be made to exercise the statutory rights which each venturer still held in its own right (albeit that each had joined the association that comprised the joint venture). However, the participating interests were not themselves the source of the authority to explore for petroleum.
Further, the AEA dealt separately with the Statutory Titles on the one hand and the proportional interest in them on the other. As to the Statutory Titles, there was a transfer from the existing holders (including Chevron) to the existing holders (excluding Chevron). Shell's status as one of the group of holders of the exploration permit and the retention leases remained. Therefore, Shell continued to hold the undivided shared statutory permission to explore. The means by which that outcome was achieved was by a transfer from one group of holders to another group. There was not a relinquishment or a removal of Chevron from the Statutory Titles. The transfers of the Statutory Titles meant that Shell came to hold the permission to explore with others that did not include Chevron. Therefore, it acquired no new status in that regard through the terms of the AEA. Nevertheless, after completion of the performance of the terms of the AEA, the holders of the Statutory Titles (now excluding Chevron) were still bound by the terms of the joint ventures. The terms of those joint ventures were the source of agreed proportional interests in respect of the exercise of the permissions afforded by the Statutory Titles and in the Joint Property.
Accordingly, the intangible asset comprising Shell's additional proportional interest in the Statutory Titles derived from the joint venture agreements. One thing that the proportionate joint venture interest could be used to do was to influence or affect whether the authority to explore conferred by the Statutory Titles was exercised. It could vote to the extent of that additional participating interest when approving exploration that formed part of Joint Operations and in approving the programme and budget in respect of that exploration.
There was a further layer of approval that was required under the terms of the joint ventures. It required the approval of an authorisation for expenditure (or AFE) to be affirmatively decided by the Venture Committee before the Operator could incur obligations or expenses included in an approved budget. The evidence of Mr Craig Feakes, a general manager at Shell, was to the effect that before particular activities were undertaken to give effect to an approved programme and budget, the approval by the venturers to an AFE was required.
Further, as the additional proportional interest (together with other proportional interests) could be exercised to decide not to proceed with activities that required the use of the authority or permission to explore conferred by the Statutory Titles, the proportional interest was also used when those activities were undertaken. It was used by withholding the exercise of the decision-making power of the Venture Committee and thereby proceeding with the use of the authority or permission conferred by the Statutory Titles.
In that regard, because Chevron's proportional interest in certain of the titles was 20%, the acquisition of that interest meant that Chevron's ability to block a particular activity in relation to the overall Project was removed. However, even if that dimension had not been present, because of the terms of the joint ventures, the holders of the Statutory Titles could not undertake any activities in the exercise of rights conferred by the Statutory Titles without the exercise of the proportionate interests of the venturers in considering and approving Joint Operations (and thereafter not revoking or withdrawing that approval).
Therefore, the joint ventures gave rise to proportional interests on the part of each of the holders of the Statutory Titles. The character of those proportional interests included an ability to influence and possibly determine when the permission conferred by the Statutory Titles would be deployed to explore for petroleum because, after the formation of the joint ventures, those activities could only be undertaken with the approval of venturers with a total of 83⅓% of the participating interests in the joint venture. Further, the ongoing support of the proportional interest was needed to undertake exploration activities in the exercise of the authority or permission to explore conferred by the Statutory Titles once a decision to do so had been taken by the Venture Committee.
The above description may not capture the full extent of the nature of the proportional interest in the Statutory Titles. As has already been alluded to, the joint venture agreement also had provisions that concerned the process whereby the Statutory Titles may be utilised as the basis upon which a permit to produce petroleum might be obtained. They too may be said to form part of the proportional interest in the Statutory Titles. There may be other respects in which the proportional interest has significance. However, the above description does express the respect in which a proportional interest in the Statutory Titles may be used for exploration for petroleum for the purposes of s 40-80.
The Commissioner did not claim that there could be a use of the additional proportional interest in the Statutory Titles for some purpose other than exploration. Indeed, it was part of the Commissioner's case that the additional proportional interest could only be used for exploration of the kind that was permitted by the Statutory Titles. Rather, the Commissioner's case was that from the time that Shell became the holder of that interest there was no such use of the Statutory Titles. The Commissioner said that the activities undertaken as part of the Project that were relied upon by Shell (at least to the extent that they occurred after the point in time when, on the Commissioner's case, Shell became the holder of the interest) were all activities that did not require the permission afforded by the Statutory Titles.
As a result, when it came to evaluating the way the additional proportional interest was used, both Shell and the Commissioner focussed upon the activities undertaken as part of the Project to determine whether those activities might be characterised as exploration that used the proportional interest (noting that Shell also had alternative contentions to the effect that the interest was used before those activities were undertaken, particularly when a decision was taken by the Venture Committee to undertake them).
In closing submissions, the Commissioner advanced a submission to the effect that Shell had not discharged its onus to demonstrate that those activities had occurred by the exercise of Shell's proportional interest in the Statutory Titles. It was suggested that certain evidence indicated that steps might be taken by the Operator and, for that reason, the possibility that it was the use by the Operator of authority conferred by the joint venture agreements and not the use by Shell (and other participants) of their proportional interests in the Statutory Titles that resulted in the activities. It was also submitted that if the Commissioner's contentions were not accepted, Shell had not discharged its onus on its own case as to how the additional proportional interest might be used to explore for petroleum by demonstrating how in fact it had been so used. I do not accept these submissions. On the basis of the terms of the joint venture agreements, decisions by the Venture Committee are required in order to undertake exploration activities.
Otherwise, the Commissioner, like Shell, focussed upon characterising the activities undertaken as part of the Project on the basis that the answer to the question whether s 40-80 applies to the additional proportional interest was to be found in considering whether any of the activities relied upon by Shell were undertaken for exploration for petroleum. In effect, it was recognised that it was the authority of the proportional interest that was required in order to exercise the permission to carry out exploration that was conferred by the Statutory Titles. Therefore, on the Commissioner's case that authority was first used when any such exploration activities were undertaken. As has been noted, the Commissioner advanced no case to the effect that there was some other activity that was the first use of the additional proportional interest in the Statutory Titles.
On the issue of what might amount to the first use of the additional proportional interest in the Statutory Titles the parties joined issue in a manner that, in many respects, gave significance to the activities that were undertaken by the Project at the relevant time. Shell put its case in the following way in its written opening (para 8(c)):
When does one 'first use' an intangible asset, such as a proportionate equitable tenancy in common in statutory petroleum titles?
One first uses an intangible asset when one starts to hold it and has the capacity to exercise the rights which constitute it (which the parties have called a Capacity Use), or, alternatively, when one first engages in conduct which in all the circumstances can be characterised as a use of the rights (which these submissions call an Equitable Interest Use). Alternatively, such an asset is first used when one first engages in conduct which is authorised by the relevant title (which these submissions call an Activity Use).
In response, the Commissioner put his position in the following terms by way of written opening (para 17):
[T]he Commissioner contends that whether [the additional proportional interests in the Statutory Titles] were 'used' depends on whether any of the activities relied upon by Shell were for 'exploration for petroleum' within both the meaning and for the purpose of the petroleum legislation, rather than for 'exploration or prosecting' within the meaning of Division 40 of the ITAA …
For the purposes of that contention, the Commissioner distinguished between two concepts. First, those activities which involved the use of the authority to explore conferred by the Statutory Titles. Second, those activities which might fall within the term 'exploration or prospecting' as used in the ITAA and deployed in s 40-80 to describe the nature of the first use of the depreciating asset that was required in order for the asset's cost to be the amount that could be claimed as a deduction.
As to the first, exploration was said to have its natural meaning determined in the context of the statutory provisions dealing with the Statutory Titles, being the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (Commonwealth Act) and the Petroleum (Submerged Lands ) Act 1982 (WA) (State Act) (together the Petroleum Acts).
As to the second, exploration was said to have its natural meaning as affected by the following inclusive definition stated in s 40-730(4) of the ITAA (see s 995-1):
Exploration or prospecting includes:
(a) for mining in general, and quarrying:
(i)geological mapping, geophysical surveys, systematic search for areas containing *minerals (except *petroleum) or quarry materials, and search by drilling or other means for such minerals or materials within those areas; and
(ii)search for ore within, or near, an ore-body or search for quarry materials by drives, shafts, cross-cuts, winzes, rises and drilling; and
(b) for petroleum mining:
(i) geological, geophysical and geochemical surveys; and
(ii) exploration drilling and appraisal drilling; and
(c)feasibility studies to evaluate the economic feasibility of mining minerals or quarry materials once they have been discovered; and
(d)obtaining *mining, quarrying or prospecting information associated with the search for, and evaluation of, areas containing minerals or quarry materials.
It was the first type of use that the Commissioner said was the relevant first use that had to be demonstrated. Only use of that kind was a use of the proportional interest in the Statutory Titles of the joint venturers.
In the alternative to claiming that the additional proportional interest in the Statutory Titles had been first used to undertake exploration within both definitions, Shell submitted that the relevant first use was when the Venture Committee approved a programme and budget to undertake Joint Operations of a kind that would require the use of the permission conferred by the Statutory Titles or otherwise joined in a decision to authorise the exercise of a right conferred by the Statutory Titles. Shell also claimed more generally that conduct in connection with its interest in the Statutory Titles would be a use of its additional proportional interest. It described these alternatives as 'equitable interest use'. It claimed that they all involved a use of the Statutory Titles for exploration.
Other aspects of the appeal
The Commissioner said that even if Shell's case as to first use was accepted, Division 40 does not apply to the acquisition of the additional participating interests because of the terms of certain transitional provisions that continue to apply capital gains tax provisions rather than the depreciating asset provisions to certain assets. Reliance was placed by the Commissioner upon s 40-77 of the Income Tax (Transitional Provisions) Act 1997 (Cth) (Transitional Provisions).
There was also a dispute between the parties as to when Shell came to hold the Statutory Titles for the purposes of the depreciation provisions in Division 40. Three possibilities were advanced, namely (a) the effective date for the operation of the AEA, being 1 June 2012; (b) the date on which settlement under the AEA was effected by each of the venturers delivering the Deed of Assignment and Assumption transferring Chevron's interest to Shell, being 31 October 2012; and (c) the date of registration of the dealings in respect of each of the Statutory Titles, in early November 2012.
Again, as has been noted, the Commissioner did not contend that the additional proportional interest in the Statutory Titles was first used in respect of some activity which was not exploration which meant that exploration was not the first use of the intangible asset. In particular, it was not claimed that if activities nominated by Shell were found not to be exploration then subsequent activities would not be the first use. Rather, the Commissioner's case was, in effect, that the additional participating interest in the Statutory Titles could only be used for exploration. Therefore, so it was submitted, there was no use of Shell's additional proportional interest in the Statutory Titles unless and until there was exploration. As a result, the Commissioner submitted that whether there was the requisite first use of the asset as claimed by Shell depended on whether 'any of the activities relied upon by Shell were for "exploration or prospecting" within the ordinary meaning of that phrase or the extended meaning in s 40-730(4)'.
Put another way, it was the Commissioner's contention that because the intangible asset was claimed by Shell to be the participating interest in the Statutory Titles, any activities that did not depend upon the use of the particular authority conferred by the Statutory Titles could not be a first use of that asset. On the Commissioner's case, the activities that were undertaken did not depend upon the use of the asset at all.
Issues for determination
With that extended introduction, it is now possible to state the nature of the issues for determination. They are:
(1)Precisely what is the nature of the intangible assets that Shell claims are depreciating assets in respect of which it is entitled to a deduction in the amount of the asset's cost under s 40-80?
(2)When did Shell first hold those intangible assets for the purposes of Division 40?
(3)How could Shell use those intangible assets for exploration for petroleum for the purposes of s 40-80?
(4)What kinds of activities could amount to use of those intangible assets by Shell for exploration for petroleum for the purposes of s 40-80? It is this issue and Shell's contention in relation to it that has caused the Attorney‑General for Western Australia to intervene.
(5)Has Shell used those intangible assets for exploration for petroleum since it came to hold them?
(6)What is the relevant 'asset's cost' for each of the intangible assets that may be claimed by Shell as the decline in value in the relevant year of income?
(7)Do the Transitional Provisions disapply Division 40 to the intangible assets?
Most of the issues give rise to questions of statutory construction. The principles to be applied in undertaking that task are well known. They were not in contest. They were summarised in the following way by Kiefel CJ, Nettle and Gordon JJ in SZTAL v Minister for Immigration and Border Protection [2017] HCA 34; (2017) 262 CLR 362 at [14]:
The starting point for the ascertainment of the meaning of a statutory provision is the text of the statute whilst, at the same time, regard is had to its context and purpose. Context should be regarded at this first stage and not at some later stage and it should be regarded in its widest sense. This is not to deny the importance of the natural and ordinary meaning of a word, namely how it is ordinarily understood in discourse, to the process of construction. Considerations of context and purpose simply recognise that, understood in its statutory, historical or other context, some other meaning of a word may be suggested, and so too, if its ordinary meaning is not consistent with the statutory purpose, that meaning must be rejected.
(footnotes omitted)
Recently in Westpac Securities Administration Ltd v Australian Securities and Investments Commission [2021] HCA 3 at [54] Gordon J emphasised the importance of considering the whole of the relevant provisions, not isolated words, in stating:
[the provision in issue] is to be read as a whole and given its ordinary meaning, in light of its context and purpose. It is not to be dissected into separate words or phrases, the meanings of which are then amalgamated into some composite meaning.
The nature of the task, and the importance of understanding the way in which context may be deployed in construing statutory language, is well exposed by the following passage from the joint reasons of Gageler and Keane JJ in Taylor v The Owners - Strata Plan No 11564 [2014] HCA 9; (2014) 253 CLR 531 at [65]‑[66]:
Statutory construction involves attribution of legal meaning to statutory text, read in context. 'Ordinarily, that meaning (the legal meaning) will correspond with the grammatical meaning ... But not always.' Context sometimes favours an ungrammatical legal meaning. Ungrammatical legal meaning sometimes involves reading statutory text as containing implicit words. Implicit words are sometimes words of limitation. They are sometimes words of extension. But they are always words of explanation. The constructional task remains throughout to expound the meaning of the statutory text, not to divine unexpressed legislative intention or to remedy perceived legislative inattention. Construction is not speculation, and it is not repair.
Context more often reveals statutory text to be capable of a range of potential meanings, some of which may be less immediately obvious or more awkward than others, but none of which is wholly ungrammatical or unnatural. The choice between alternative meanings then turns less on linguistic fit than on evaluation of the relative coherence of the alternatives with identified statutory objects or policies.
(footnotes omitted)
Issue (1): What is the nature of the intangible assets that Shell claims can be deducted at cost?
Each of the Statutory Titles is a sui generis statutory right that is proprietary in character: Commonwealth of Australia v Western Mining Corporation Resources Ltd (1998) 194 CLR 1 at [14] (Brennan CJ). Each is granted and renewed on application and may be granted or renewed subject to conditions. A register is required to be kept of the existing titles. A transfer of a title must be approved and registered and has no force until that occurs. The same position applies to specified dealings in respect of a title.
For reasons already given, when the then holders of the predecessor interests to the Statutory Titles entered into the joint venture agreements they created an interest in each of those titles that would be an intangible asset for the holder of the interest. The interest arose from the terms of the joint venture, not from the relevant legislation. The nature and extent of the interest was determined by the terms of the joint venture agreements. However, the dealing by which that interest was created only took effect upon being approved and registered. The same interest came into existence in respect of each of the Statutory Titles when they were granted upon the transfer (pursuant to the terms of the AEA) to the group of holders that did not include Chevron.
The relevant interest was not a proportional interest in the Statutory Titles. The statutory proprietary rights conferred upon the holders of the Statutory Titles remained undivided. The joint venture was merely an association that governed how those undivided rights would be exercised by the holders, not who would hold them. The character of the statutory right was an undivided interest and the parties could not alter that character by allocating percentages or proportions to those undivided statutory interests.
Nevertheless, a proportional interest in those undivided rights could arise, and did arise, from the conferral of proportionate rights upon each of the venturers including by submitting the exercise of the rights associated with the Statutory Titles to decisions of the Venture Committee under each of the joint ventures. In consequence, each of the venturers came to hold a proportional interest in the Statutory Titles, such interest being an intangible asset. It was that proportional interest (not the whole of the proportionate interest in the joint venture) that was the relevant intangible asset for present purposes.
At this point, I note that the Commissioner did not contend that a right of that kind would not be an interest in the Statutory Titles for the purposes of the definition of 'mining, quarrying or prospecting rights' included in the list of intangible assets in s 40-30. Rather, the Commissioner's case was that the Statutory Titles could not be disaggregated or separated in any way.
Significantly for present purposes, after the joint venture agreements had been concluded, in order for exploration to be undertaken in the exercise of the authority conferred by the Statutory Titles (or their statutory predecessors), it was first necessary for the holders of the statutory rights to take the steps required by the terms of the relevant joint venture, including by voting in accordance with their proportionate interests whether to undertake the particular exploration activities. In consequence, when those approved activities were undertaken they involved the exercise of the permission or authority to explore that was conferred by the Statutory Titles which was an activity that required a permission conferred by the exercise of the proportional interest in those Statutory Titles that was brought into existence by the terms of the joint ventures. Further, the ongoing support of the exercise of the proportional interests was required for those activities to be commenced and continue to be undertaken.
Other activities of the joint venture may also require a decision of the Venture Committee in accordance with the agreed procedure whereby the required percentage of the proportionate interest of the venturers must support the activity. However, the right to influence whether those other activities were undertaken was not the intangible asset that was in issue.
Complexities arise in the present case because some of the activities relied upon by Shell as a use of the intangible asset (being the proportional interest in the Statutory Titles arising from the terms of the joint ventures) were undertaken by the joint venture subsequent to the parties entering into the AEA but before the dealings in respect of the Statutory Titles were approved and registered. Other complexities arise because of a dispute as to whether the particular activities, when undertaken, were relevantly exploration.
Issue (2): When did Shell first hold the intangible assets for the purposes of Division 40?
The additional proportional interest in each of the Statutory Titles came to be held by Shell by the parties to the AEA giving effect to its terms. There were a number of steps in that process. First, the parties entered into the AEA. Certain of its obligations were expressed to take effect upon the date of execution. Second, Completion occurred under the AEA at which time the signed transfers of the Statutory Titles as well as the Deeds of Assignment and Assumption were delivered. Certain rights accrued at Completion. Third, there were the transfers of the Statutory Titles and the dealings by which Chevron's proportional interest in the Statutory Titles were assigned and then approved and registered.
It is common ground that the transfer of the proportional interest in the Statutory Titles effected by the AEA was a dealing that had an effect of a kind that meant it could have no force under the Petroleum Acts until approved and entered in the register. Also, as has been noted, the AEA provided that such a dealing or transfer was of no force until approved and entered in the register. However, the AEA (but not the Petroleum Acts) provided that the AEA and each document to be entered into to give effect to its terms would 'relate back and take effect in accordance with its provisions'.
It was the Deed of Assignment and Assumption by which the relevant dealing occurred. Therefore, it is the provisions of that instrument to which there must be regard in determining the agreement between the parties as to when the dealing would take effect. By cl 2 the assignment of Chevron's venture interest under each of the joint ventures occurred 'with effect on and from the Effective Date'. The Effective Date was 1 June 2012. By cl 3, Shell assumed the obligations and liabilities of Chevron in respect of the joint ventures whether incurred prior to, on or after the Effective Date. A consent and release under cl 4 operated in the same manner. Clause 9 of the instrument then provided:
Approval and registration
[(a)] Any Dealing evidenced by this Deed is of no force until Registered.
(b)Unless otherwise expressly provided, all provisions of this Deed which are not of the nature of a Dealing come into effect immediately.
(c)Transferee must, as soon as practicable after execution of this Deed, apply for any Dealing evidenced by this Deed to be Registered.
(d)From the date that this Deed is Registered, the assignment of the [joint venture interests and other interests] will relate back and be deemed to have occurred on and from the Effective Date.
It is well established that the parties to a contract may agree that its provisions will operate retrospectively and confer contractual rights in respect of events that have already occurred by the time the parties enter into the agreement: Trollope & Colls Limited v Atomic Power Constructions Limited [1963] 1 WLR 333 at 339‑340; Dong v Monkiro Pty Ltd [2005] NSWSC 749 at [61]‑[67]; and Tameside Metropolitan Borough Council v Barlow Securities Group Services Ltd [2001] EWCA Civ 1 at [46].
By analogy, the parties to a contract may agree that the operation of their agreement will be deferred until a future event, but will then operate retrospectively.
Therefore, the terms of the Deed of Assignment and Assumption could operate contractually in the manner expressed in cl 9. The question is whether they could do so for statutory purposes having regard to the terms of the Petroleum Acts which provide that a dealing which created or assigned an interest in an existing Statutory Title was of no force until it had been approved and registered.
Shell contended that once the dealings were registered, the Deed of Assignment and Assumption operated retrospectively as if the terms had been agreed on 1 June 2012. Further, Shell contended that for the purposes of Division 40, it held the additional proportional interest in the Statutory Titles from that date and from its first use thereafter of that intangible asset for exploration for petroleum it could deduct the asset's cost (noting that on one of its contentions its first use was coincident with when it commenced holding the asset).
Shell relied upon the decision in Swan Resources Ltd v Southern Pacific Hotel Corporation Energy Pty Ltd [1983] WAR 39, a case concerned with the application of a Western Australian statutory precursor to the Petroleum Acts, to support its contentions. In that case, Swan Resources held an exploration permit. Southern Pacific had agreed to undertake certain work in the area the subject of the permit on the basis that upon completion of the work an application would be made by Swan Resources to the Minister to transfer a specified interest in the exploration permit to Southern Pacific. There was a further option thereafter to undertake further work in which case there would be a further application by Swan Resources to increase the interest of Southern Pacific. After committing to these arrangements, Swan Resources took steps to sell the exploration permit. Southern Pacific sought and obtained an injunction restraining Swan Resources from dealing with its interest in the exploration permit.
Swan Resources brought an appeal. It relied upon the fact that the instrument between Swan Resources and Southern Pacific had not been approved by the Minister and the existence in the relevant legislation of a provision to the effect that an instrument creating or assigning a legal or equitable interest in or affecting a permit was of no force until it had been approved by the Minister and an entry had been made in the register. The injunction had been granted on the basis that the legislative prohibition did not operate inter partes.
On the appeal by Swan Resources, Burt CJ found that an instrument that created an equitable interest in the permit was within the terms of the relevant section and was of no force until the instrument had been approved. However, the Chief Justice went on to express the following view as to what would occur on registration (at 42):
When so approved and when registered then the instrument will be of force to do what in its terms it does and as in its terms it is an instrument by which an equitable interest in a permit is created, then it will operate or 'be of force' to produce that result. The instrument once approved and registered would have 'a kind of retroactive effect making the instrument effective as from its date': Brown v Heifer (1967) 116 CLR 344, per Windeyer J at 352.
By that reasoning, the Chief Justice allowed the appeal. The statement quoted above was part of the reasoning as to the construction of the relevant legislative provision, but dealt with a matter that was not in issue because the instrument had not been registered and therefore there was no question in issue on the facts as to whether it would then operate.
Wickham J dissented. The third member of the Court, Kennedy J, expressed 'general agreement' with the Chief Justice. His Honour gave short concurring reasons. They began (at 46) as follows:
The conclusion that, until an instrument is approved by the Minister, it is 'of no force', either inter partes or as against the Minister, appears to me to follow from reading [the statutory provisions].
His Honour went on to describe the construction of the relevant provisions in a manner which concurred with the views of Burt CJ. Significantly, despite dealing with those provisions, Kennedy J did not specifically address the question whether the instrument would have retrospective effect if and when registered. It might be expected that having stated his view as to the construction, Kennedy J would have dealt with the retrospectivity point if his Honour intended to concur with that aspect also. His Honour then concluded his short reasons with an express qualification on a different point, namely whether provisions of the instrument that did not deal with matters required by the legislation to be in writing would also be of 'no force' pending approval and registration of the instrument.
Therefore, in my view, the decision in Swan Resources does not determine in a binding way the question whether the Deed of Assignment and Assumption once approved and registered operated retrospectively.
Nevertheless, it seems to me that there is much to commend the approach of Burt CJ as to what occurs when the dealing is approved and registered. If the Minister (or Titles Administrator, as the case may be) considers that the agreement should not be approved because it will operate as between the parties with retrospective effect, then the approval could be withheld. The evident purpose of ensuring that the dealing has no operative effect unless and until it is approved and registered would not be compromised by such an approach. There is no provision in the Petroleum Acts to contrary effect. Under the Petroleum Acts, the period within which an application for approval of a dealing must be sought once an instrument has been executed is regulated by the legislation. Allowance for the possibility of retrospective operation once approved and registered would not lead to an open-ended period of time in which the possibility may arise. In any event, the statutory liabilities and responsibilities of those who had approved interests would continue until there was an approval and registration of a transfer (or the creation of a new interest). Anyone resorting to the register would know the current position in relation to interests. Legal principles that depend upon notice of an interest would still apply with effect from the date of registration.
Further, an inability to make agreements that would operate with retrospective effect once approved could be productive of commercial difficulty of a kind that is not necessary in order to ensure that dealings require approval and registration. For example, in the case of royalty interests, profit interests, off-take entitlements and the like there would be commercial uncertainty if a transfer of the rights could only take effect upon an uncertain future date when approved. There could be no royalty or similar interest that could be created with effect from an agreed date if that date had passed by the time of the approval and registration of the dealing in respect of that interest.
The statutory provisions are to the effect that the relevant dealings are of 'no force … until' approved and registered. They do not address the manner in which they take effect once they are 'of force'.
In those circumstances, there is much to commend a construction that once approved and registered, the relevant instrument by which the dealing was effected takes effect according to its terms, including with retrospective effect where the instrument so provides.
However, it is one thing for the dealing to have retrospective effect to the extent that rights can be adjusted back to a particular date once the dealing is approved and registered. It is a very different thing if the dealing purports to authorise or control actions by a third party pending such approval and registration that could not be undertaken unless the person has an interest in the relevant statutory title. A dealing of that character would not operate retrospectively. It would purport to operate immediately in anticipation of subsequent approval and registration. An instrument of that kind would purport to confer a form of immediate authority upon a third party and thereby give force to the agreement even though the dealing had not been approved and registered.
In my view, it would be contrary to the statutory provisions if a dealing purported to allow a party in its own right to undertake activities in its own name at a time when the dealing was yet to have force and effect. Therefore, the retrospective effect that may arise once there has been approval and registration must be limited in character. It must take the form of an adjustment or change made after approval and registration not of the character where some form of authority is given to past acts that could only be undertaken if the dealing had force at the time of those acts (which it could not until approved and registered).
The distinction has significance for present purposes to the extent that activities undertaken before approval and registration are claimed by Shell to have been activities that involved a use by it of its proportional interest in the Statutory Titles at a point in time when the dealing conferring the proportional interest could have no force. In my view, a retrospective operation of that kind would be contrary to the Petroleum Acts. It would mean that Shell could act as if it had the proportional interest in the Statutory Titles even when it did not. That is an outcome that would undermine the evident purpose of the provisions requiring approval and registration. It would lead to third parties who lacked the requisite approval being able to influence or undertake activities that required the authority or permission conferred by the legislation in circumstances where those third parties lacked the requisite approval at the time of undertaking those activities.
The above distinction produces a problem for Shell's claim that it used its proportional interest prior to the approval and registration of the Deed of Assignment and Assumption. The problem arises because of the terms of Division 40.
As has been noted, the provisions of Division 40 deploy the concepts of holding an asset and using an asset as distinct terms with important consequences. There can be no deduction of a decline in value of a depreciating asset unless it is both held and used. It is the person who is the holder of the depreciating asset who can claim the deduction. As to joint interests in an asset, the holder of an interest in a depreciating asset can only depreciate that interest (as if it was the asset): s 40-35. The deduction is only allowed from when the asset starts to decline in value. The 'start time' is determined by when the holder first uses the asset (or has it installed ready for use) for any purpose: s 40-60. Until then, the holder of a depreciating asset cannot claim a deduction. Further, if at any time after the start time the asset is used for a purpose that is not a taxable purpose then the deduction must be reduced to allow for the decline in value attributable to that use of the asset which is not for a taxable purpose: s 40-25(2).
Of course, a person may hold an asset and commence immediately to use that asset, but the two concepts are distinct and the structure of Division 40 reflects the likelihood that a person may hold an asset for a time before commencing to use it for any purpose and it is that latter date that establishes the point in time from which the decline in value of a depreciating expense may be claimed as a tax deduction.
For reasons that have already been given, before the dealing by which Shell acquired its additional proportional interest in the Statutory Titles was approved and registered, Shell could not hold or use that interest. To do so would be to give force to the dealing contrary to the statutory provision requiring approval and registration before the dealing was of any force. Once the dealing was approved and registered Shell became entitled to rights which could operate with retrospective effect in the sense that Shell's rights and obligations in respect of past events would be determined by reference to the instrument. It may have to meet financial obligations on such a retrospective basis. However, it would not confer permission or authority to undertake past events that depended upon the validity of the dealing before it had been approved and registered. These conclusions follow as a matter of construction of the provisions of the Petroleum Acts that state that dealings are of no effect until approved and registered.
The Commissioner contended for the above outcome because tax laws are said to operate on the basis of 'taxable facts'. In Federal Commissioner of Taxation v Thomas [2018] HCA 31; (2018) 264 CLR 382 at [84], Gageler J described that expression as referring to 'the combination of events that have occurred and legal consequences of events that have occurred on which a taxing statute fixes to impose a taxation liability or to confer a taxation benefit'. The terminology recognises a particular aspect of taxation laws. They impose a liability to pay taxation based upon specified events. Therefore, in the ordinary course, taxing statutes operate upon the state of affairs (factual and legal) that exists at the time that the taxation liability is imposed. Consequently, subsequent alteration (or correction by judicial determination) of that state of affairs does not alter the taxation position.
In the present case, incongruities would arise if the operation of Division 40 could be altered after the event by a retrospective change to the identity of who held and used an asset. If that were the case then one party may hold and use an asset for a period and claim a deduction equal to the decline in value. Thereafter, a contract may be made by which the parties agreed retrospectively that the asset was to be treated as if it had been held and used by another party. On the facts in this case, if Chevron was depreciating under Division 40 part or all of the assets comprising the proportional interest in the Statutory Titles during the period up until the approval and registration of the dealing on the basis that it was holding and using its proportional interest, what is the taxation position? The necessary structure of Division 40 is that it deals with who holds and uses a depreciating asset at a particular point in time and does not provide for retrospective adjustment.
For reasons that have been given, it was always the state of affairs that when it came to exploration activities undertaken prior to the approval and registration of the dealing effecting the transfer of the additional proportional interest in the Statutory Titles, there was no use of that interest by Shell until after the approval and registration. From that point, certain liabilities such as the obligation to meet the costs of exploration activities were adjusted with retrospective effect. However, as the provisions of the Petroleum Acts did not confer retrospective authority to influence the exercise of the authority or permission to explore, Division 40 applied upon the event of approval and registration and not retrospectively.
As has been noted, in the case of the Commonwealth Act, the holder of an exploration permit or a retention lease was authorised to explore for petroleum or recover petroleum on an appraisal basis and to carry on such operations as are necessary for those purposes. Therefore, to the extent that there is a distinction between exploration and appraisal, the language used in the Commonwealth Act indicates that both activities were authorised by the Statutory Titles. The State Act does not refer expressly to appraisal activities.
Mr Brown went on to describe the third phase of development as involving the design and installation of facilities for the production of hydrocarbons. He explained that development involved a number of stages separated by key decision points as to whether to proceed to the next stage. He said the main development stages were:
a. Concept Selection.
b. Basis of Design (BOD).
c. Front End Engineering and Design (FEED).
d.A formal Final Investment Decision (FID), made before entering the Execution Stage.
e. Execution (Engineering, Procurement, Construction, Installation).
f. Commissioning & Start-up.
There was extensive evidence from other witnesses that broadly indicated that stages of the kind described by Mr Brown had been followed in relation to the Project. They begin with selection of what is considered to be the optimum development concept.
Mr Brown was then asked to consider what was involved in each of the eight activities relied upon by Shell to demonstrate the first use of the additional proportional interest in the Statutory Titles. Mr Brown was asked to state what, in his opinion, was the purpose for each of the activities undertaken and then say whether in his opinion any of the activities was exploration for petroleum or necessary for the purpose of exploration for petroleum. He was asked to express other more specific opinions concerning matters that might bear upon whether particular activities were undertaken for exploration or recovery of petroleum 'on an appraisal basis'. As to the latter expression, Mr Brown observed that the phrase was one with which he was not familiar and to his knowledge was not used in the industry. He interpreted the phrase to mean recovery of hydrocarbons for appraisal purposes.
The opinions that Mr Brown reached concerning each of the activities were a function of his views as to what was meant by exploration, appraisal and development. The descriptions of the activities that were undertaken broadly reflected the evidence of Shell witnesses and is evidence that has already been addressed.
Shell objected to the whole of the report of Mr Brown on the grounds of relevance. The objection was advanced on the basis (as was the case) that no party contended that the relevant statutory provisions in referring to 'explore' or 'exploration' adopted a trade or technical meaning. Further, so it was submitted, the evaluation of whether particular activities were undertaken for the purpose of exploring for petroleum was an ultimate matter in issue and required a judicial decision based upon the available evidence. An opinion on the part of Mr Brown as to whether the activities were exploration could not assist.
I accepted the force of those submissions. I upheld the objection to the extent that the evidence of Mr Brown purported to articulate the existence of an accepted industry meaning of the terms explore or exploration.
However, I declined to uphold the objection to the relevance of the entirety of the evidence of Mr Brown at that time. The reason for doing so was that comprehending certain aspects of the activities and the purpose for which they were undertaken (short of characterising them as not being undertaken as part of exploration for petroleum) may be aided by an expert understanding of the reasons why the activities may be undertaken. If there was any dispute between the parties as to the reason why the particular activities were undertaken then the expert explanation of what was being done and why may be relevant to resolving any such dispute. To that extent, an expert technical understanding of what was being done and why may be relevant to the resolution of the issues.
In the result, there was no real contest as to those matters. The parties adopted a common position as to what had been done and why. Broadly speaking, the relevant dispute between them was as to the proper construction of the relevant provisions and was twofold. First, whether as a matter of statutory construction, the term explore when used in the Petroleum Acts was confined to activities undertaken with the purpose of assessing whether or not there is petroleum (and the extent of any discovered field) or whether it included activities undertaken to obtain information to assist in appraising the recoverability of that petroleum. Second, whether as a matter of statutory construction activities undertaken after a development concept had been selected (and on that basis for the purpose of undertaking more detailed design of the infrastructure that may be constructed) could be characterised as exploration. This aspect of the case advanced for the Commissioner required the adoption of a construction as to the activities that were permitted by the Statutory Titles that depended upon the stage that had been reached in the commercial decision-making process being undertaken by the parties holding the authority or permission to explore for petroleum rather than the direct purpose of the activity. If this aspect of the case advanced by the Commissioner had been accepted it may have been relevant to consider the evidence of Mr Brown. However, for reasons that have been given, I do not accept that submission.
Therefore, to the extent that the report of Mr Brown might have been relevant, its contents need not be addressed in any further detail.
The expert evidence of Mr Peacock
Mr Peacock is a technical director with GaffneyCline. He served for three years as a member of the SPE Oil and Gas Reserves Committee which is the body responsible for writing and maintaining the Petroleum Resources Management System. His experience in petroleum exploration and development was not challenged. However, his expertise to express opinions as to the character of particular activities that were in dispute was challenged. Mr Peacock accepted that as to activities other than the Rafter Survey and the Rosebud Survey, the activities were outside his area of expertise.
Mr Peacock gave unchallenged evidence as to whether in his opinion, in the period between 2012 and 2014 there was uncertainty as to the resource constituted by the Brecknock, Calliance and Torosa Fields. He explained the different classifications of the levels of certainty associated with the reserves of petroleum that may be identified for a particular petroleum field. He explained that his particular experience and expertise was with performing economic feasibility assessments through evaluation of subsurface information at the pre-discovery and appraisal phases. He concluded as follows concerning the level of uncertainty throughout the period 2012 to 2014:
Based on my experience and judgement, there was uncertainty in the resources at the Brecknock, Calliance and Torosa Fields. The nature of the uncertainty related to the in-place volumes within the fields and to the proportion of those volumes which could be recovered … My opinion is based on several documents which describe the uncertainty within the fields and my experience in performing similar assessments. It is perfectly normal for there to be uncertainty in resources volumes. The nature and extent of the uncertainty at Brecknock, Calliance and Torosa is consistent with what I might expect from such a project i.e. a fully appraised, large, offshore gas project, which had not yet been fully committed for development.
Mr Peacock's evidence was relied upon by the Commissioner to support the contention that the activities that were being undertaken in respect of the Project in 2012 to 2014 were concerned with the way the fields might be developed rather than seeking to discover and appraise the extent of the discovered resource with sufficient certainty to be able to undertake consideration of the economic feasibility of development of the fields.
Mr Peacock was then asked to answer a series of questions directed towards obtaining his opinion concerning the reasons for engaging in the eight activities relied upon by Shell as being a first use of the additional proportional interest in the Statutory Titles. He was asked whether any of the activities were undertaken to resolve or reduce uncertainty as to the extent of the resource constituted by the three fields. He was then asked to state whether there was an accepted industry meaning of 'exploration'. He was asked to identify what the activities involved including when, where and how they were undertaken and to give his opinion as to the purpose of the activity. He was asked specifically to express an opinion as to whether the activities were exploration for petroleum (and to answer some related questions to adduce opinions as to whether particular aspects of the activities were exploration for petroleum). The opinions expressed in response to these questions were objected to by Shell on the same basis as the objection raised concerning the evidence of Mr Brown.
I ruled on that objection in the same manner as I ruled on the objection to the evidence of Mr Brown. The result was that the expert opinion evidence of Mr Peacock that described what the activities involved and their purpose was received into evidence, but his conclusions as to whether there was an accepted meaning of exploration and whether the activities as described by him conformed to that definition or some other definition of exploration were not received into evidence.
As was the case with the evidence of Mr Brown, in the result, it is not necessary to consider the evidence of Mr Peacock because there was no material dispute between the parties as to what the activities involved and why they were undertaken. Had it been relevant to consider that evidence, it would be necessary to consider the extent to which his opinions could be relied upon given the concession made by Mr Peacock as to the limits of his expertise.
In any event, the only real dispute that remained at the end of the hearing was whether particular activities had been undertaken at a time when the Project might be properly described as being in the 'development' phase when the Operator on behalf of the venturers was evaluating the economic feasibility of producing the petroleum using an identified development concept.
It was common ground that at one stage the development concept involved a production platform with a pipeline to the coast of Western Australia at JPP and that at a later stage, the development concept being evaluated was the FLNG concept. However, for reasons already given, as a matter of proper construction of the Petroleum Acts, the extent of the authority or permission conferred by the Statutory Titles did not depend upon whether the Project had reached the 'development' phase or whether the activities could be shown to be directed to discovering and then identifying the extent of the discovered resource.
In the result, the parties really did not take issue with the matters the subject of the report by Mr Peacock. Rather, the competing contentions were as to the proper construction of the statutory provisions. Shell's contentions did not depend upon contesting the Commissioner's characterisation of what the evidence showed to be the stage that had been reached in the Project, which involved undertaking extensive evaluation of the feasibility of proceeding with the development of the fields. Rather, Shell's case was that the activities that were undertaken were exploration (or, more accurately, activities that required the authority or permission conferred by the Statutory Titles and therefore involved using the additional proportional interest in the Statutory Titles that it had acquired from Chevron).
The evidence of other witnesses
I accept the evidence of each of the other witnesses in the proceedings. I was not urged to make any adverse findings as to credibility. To the extent that the evidence was ultimately relevant it has already been addressed.
Other factual findings
As I have indicated, part of the Commissioner's case was to the effect that findings as to the stage that the Project had reached in relation to offshore development of the fields the subject of the Statutory Titles was relevant to determining whether Shell was entitled to a deduction in the amounts that it had paid under the AEA. For reasons I have given, I do not accept that contention. However, in case the matter goes further and I am found to have been in error, I make the following findings of fact concerning the evidence as to the phases of offshore development.
Within the petroleum industry it is common practice to identify phases or stages for the commercial process of deciding whether to undertake the development of a petroleum field. Once a field has been discovered, further steps are undertaken to appraise the extent and characteristics of the resource. This is done to reduce the uncertainty in key properties of the resource and to improve the confidence that can be maintained in the forecast production life. The primary objective of undertaking further appraisal activities is to establish whether to undertake further evaluation or development of the discovered resource.
Appraisal includes undertaking studies to determine the optimum method for recovery of petroleum. It will involve preliminary assessment of development concepts and costs. It involves undertaking studies of the feasibility of different options as to development. Appraisal can include identification of engineering contractors and preliminary market inquiries. The more complex the scale and complexity of the subsurface conditions the more seismic and drilling activities that may need to be undertaken. The focus is upon selecting a concept for further evaluation.
If and when a concept is selected it is then progressed through a staged process of evaluation, the precise characteristics of which depend upon the process adopted by the particular industry participant. At any stage the view may be taken that the selected concept is not technically or economically viable or that there is an uncertainty that needs to be resolved before proceeding further, at which point the evaluation may come to an end or it may return to an earlier stage. Therefore, the evaluation is iterative. It is also complex, with many variables. It is directed towards securing greater certainty by removing risks and unknowns.
The iterative nature of the process of evaluation means that the fact that a project has reached a particular stage at one point in time does not mean that it cannot return to an earlier stage at a later point in time. In the present case, that occurred at least when a decision was made by the venturers not to proceed with the JPP development concept and instead to commence evaluating the FLNG concept.
In his evidence, Mr Feakes used the phrase 'design and feasibility process'. As he accepted when cross‑examined as to his use of the phrase it was terminology that was his own characterisation. His evidence as to whether a particular activity was undertaken as part of a feasibility process should be considered in that context. In the evidence the term feasibility is used to refer to different things, including whether a particular engineering approach is a feasible way to deal with an identified problem or whether a final investment decision should be made. These usages of the term 'feasible' are to be distinguished from an evaluation as to whether the feasibility of a petroleum resource in a particular discovered field has been demonstrated with sufficient certainty to proceed to consider and evaluate how development of the resource may be evaluated through a series of phases and ultimately a decision might be made to commit to investment in the production of the petroleum from the field.
On 10 February 2010, the Operator announced that the Project 'has now entered the Basis of Design phase'. It said that: 'The Basis of Design phase determines the major design parameters which would enable the optimal development of the offshore gas fields and the onshore facilities south of James Price Point'.
In 2011, Shell undertook Project Manna, an internal project to evaluate whether FLNG could be a viable development concept for the Project.
From November 2011 to August 2012, work was performed by the Operator and Shell on Project FETA which was work undertaken with a view to determining whether FLNG might be put forward to the venturers as the concept to be used in evaluating whether to proceed with development of the Project. This work was not undertaken pursuant to the terms of the joint venture or pursuant to any decision of the Venture Committee. It was undertaken on the initiative of Shell outside the arrangements that governed the exercise of the proportional rights held by each of the venturers in the Statutory Titles by reason of the terms of the joint venture agreements.
From and after 1 November 2012, the three fields were sufficiently appraised for the venturers to proceed with identifying and evaluating possible development concepts for the Project and to progress a preferred concept through the usual development stages. Thereafter, some further analysis was undertaken of existing data concerning the characteristics of the discovered field, principally by analysing and reporting on the data from the Rafter survey in October 2013 and processing data from the Rosebud survey (and by merging all of the data into a single dataset as part of what was described as the Megator project), but no further offshore work was undertaken for the purpose of identifying and better understanding the characteristics of the field. All offshore work thereafter was undertaken as part of the development stage and mostly for the purpose of obtaining information that was needed to better understand the way in which production infrastructure and pipelines may be located.
On 17 May 2013, the Operator issued an updated report entitled 'Project FETA Concept Select and Pre-BOD phase Technical Report'. In the report's executive summary, it was said that the report described technical work undertaken between February and August 2012 and 'the work done in the subsequent pre-BOD phase between September 2012 and March 2013'. It then said:
Upstream work which comprised subsurface, drilling and completions, integrated production modelling, subsea and pipelines and overall integration was carried out by WEL. The FLNG facility, risers and mooring and flow assurance work was carried out by Shell. Throughout the period, the WEL and Shell members of the team worked very closely together to create a fully integrated development concept. The majority of the work was done without the use of external consultants.
The above summary reflects the evidence given by witnesses to the effect that offshore activities were being undertaken prior to the publication of the updated report for the purposes of evaluating whether the FLNG concept might be put forward to the venturers as the development concept for the Project.
The updated report concluded as follows:
The level of technical definition available for the application of Shell FLNG technology to the Browse fields at this stage is far greater than normally would be the case at Concept Select. The study work has, to a large extent, drawn upon the previous work done on the JPP project and on [another Shell project]. The level of understanding of the challenges associated with obtaining government approvals for application of Shell's FLNG technology on the Browse fields is also well advanced owing to the work done on the JPP project and [another Shell project].
There are a number of risks which have been identified which will need to be managed. There are also several opportunities to improve both cost and schedule.
In April 2013, the venturers formally abandoned the JPP development concept and the Operator made an announcement that it had 'completed its technical and commercial evaluation of the proposed Browse LNG Development near James Price Point and determined that the development concept does not meet the company's commercial requirements for a positive final investment decision'. The Operator also announced that it would engage with the venturers 'to recommend evaluation of other development concepts to commercialise the Browse resources, which could include floating technologies, a pipeline to existing LNG facilities in the Pilbara or a smaller onshore option at the proposed Browse LNG Precinct near James Price Point'.
On 2 September 2013, the Venture Committees of the two joint ventures considered the Operator's evaluation of alternative development concepts for the three fields. It was unanimously agreed to select the FLNG concept as the development concept to commercialise the Project. The Committees also resolved to commence BOD (basis of design) work in relation to the FLNG concept.
The selection of the FLNG concept did not bring to an end the evaluation of the feasibility of the FLNG concept. Evaluation of commercial feasibility was an ongoing process that was to be informed by the BOD stage. It was conceivable that the iterative process may have resulted in a decision not to proceed after the BOD stage. However, the decision to proceed with the FLNG concept and commit more than $75 million to the BOD stage reflected an assessment that had been made that there was sufficient technical and economic feasibility in the FLNG concept to proceed to the next stage.
Certain of the information that had been gathered in evaluating the JPP development concept was able to be used in evaluating the FLNG concept. Information was also available to Shell from the consideration of the FLNG concept for another project.
On 16 December 2014, the Operator announced that the venturers had completed the BOD stage and that a revised schedule for FEED (front end engineering and design) had been agreed and that it was anticipated that the Project would be in a position to enter the FEED phase in mid‑2015.
In July 2015, the Project entered the FEED phase.
On 23 March 2016, following completion of FEED, the venturers decided not to progress with development of the Project 'at this time considering the current economic and market environment'.
As to the facts relevant to the claim that s 40-80 was disapplied by the Transitional Provisions, those facts are not in issue: see para 73 of Shell's reply submissions to the Commissioner's closing submissions.
Conclusion and orders
It follows that from the time of approval and registration in early November 2012, Shell became the holder of intangible assets comprising the additional proportional interest in each of the Statutory Titles that had been held by Chevron. The intangible assets were depreciating assets because each was a mining, prospecting or quarrying right, specifically because each intangible asset was an interest in the Statutory Titles which conferred a right to explore for petroleum.
After Shell held the additional proportional interest in each of the Statutory Titles in early November 2012, the additional proportional interest in the Statutory Title for area A (being WA-28-R) was first used for exploration in 2012. Therefore, the decline in value that may be claimed by Shell in 2012 for its additional proportional interest in WA-28-R is the cost of that intangible asset.
In 2014, each of Shell's additional proportional interest in the other intangible assets in the other Statutory Titles (save for WA-275-P, an exploration permit) was first used to explore for petroleum. Therefore, the decline in value that may be claimed in 2014 by Shell for each of those intangible assets is the asset's cost.
First use of WA-275-P has not been demonstrated by Shell on the evidence.
Having regard to the conclusions I have reached, I propose to invite the parties to prepare a minute of orders to give effect to these reasons, including any order as to costs. If the parties are not agreed as to the appropriate orders then they should file competing minutes and short submissions in support of the orders sought. I will then determine whether there should be a further hearing or whether the question of the orders to be made to give effect to these reasons can be determined on the papers.
I certify that the preceding four hundred and twenty-one (421) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Colvin. Associate:
Dated: 12 May 2021
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