Parrots, Politics and Policy: Governmental Risk in Energy and Resources Projects

By: Minter Ellison

Provided by World Services Group


Parrots, Politics and Policy: Governmental Risk in Energy and Resources Projects

   Published November 15, 2006 - Australia

Energy and resources projects face a range of governmental risks, which are often erroneously described as sovereign risk. Two recent cases of adverse governmental impacts help distinguish different types of governmental risk for the resources and energy sector.

Governmental risks arise in relation to the interaction of government (ie the legislature, judiciary and executive) with private sector businesses and projects.

Governmental risk encompasses sovereign risk and regulatory risk. The key distinction is the lack of redress for government acts which may truly be described as sovereign risk.

Sovereign risk v regulatory risk
Sovereign risk is the risk of the State using its power to alter the established rights of private sector companies. It is a risk to private sector participants that a project's implementation may be hindered or prevented, or its operation adversely affected, because:
- agreements made, or assurances and undertakings given by a government are unenforceable
- a government exercises its powers selectively, imposing additional or different obligations on the project participants
- selective decisions or actions in government deprive the participants of ownership of or access to the resource, or limit the exportation of the resource
- federal or state governments inconsistently exercise their respective constitutional powers.

By its nature, a sovereign risk event can only occur after a project has commenced. Commercial or project outcomes negotiated with government prior to the commencement of a project are not instances of sovereign risk.

Regulatory risk arises where there is a risk that a regulatory decision made under an existing regulatory framework will impact negatively on a private sector project or business. This type of risk is common because the resources and energy sector is heavily regulated.

The distinction between sovereign risk and regulatory risk is demonstrated by an examination of two recent developments in the energy and resources sector:

Western Australian domestic gas policy
The Western Australian Government is currently proposing to reserve up to 20 percent of offshore LNG gas reserves for domestic consumption. The government intends to use its regulatory powers to veto future gas projects unless project proponents agree to domestic reserves. The proposal has sparked debate on the freedom of project proponents to determine the market(s) for their product. This policy development, although targeting future gas production, has sovereign risk implications for gas producers who have undertaken exploration to prove fields for future LNG production.

Additional regulatory barriers to the development of these fields is a sovereign risk event because it potentially poses a significant economic constraint on the established business activities of affected gas producers. If the policy is implemented, gas producers will have no point of redress.

Bald Hills Wind Farm
By contrast, the vetoing of the Bald Hills Wind Farm Project by application of the Environmental Protection and Biodiversity Conservation Act (EPBC Act) is an example of regulatory risk. The Commonwealth Minister for Environment refused to approve the proposed wind farm because a study suggested that one orange bellied parrot a year could be killed. With reportedly fewer than fifty breeding pairs of orange-bellied parrot left in the world, this was considered sufficient to threaten the survival of the species.

While the decision has prompted much media speculation, it is clear the Minister acted under an existing statutory discretion, making it a regulatory act rather than an instance of sovereign risk.

The project proponents submitted a new application to the Minister on 19 September 2006. Public comment on the application closed on 11 October 2006.

Strategies for project proponents
It is prudent for project proponents to develop strategies to mitigate major areas of regulatory risk (eg in the areas of planning, environmental policy, industry regulation) as a component of conceptualising a project and developing a project implementation plan.

The options are more limited for mitigating sovereign risk,. Although project proponents may be afforded some protection by appropriately structured changes of law clauses in ratified agreements with the State, sovereign risk is by its nature difficult to predict and mitigate.

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1 Peter Turner, 'Some Aspects of Sovereign Risk', paper presented at Australian Mining and Petroleum Law Association Conference (Adelaide, July 1993) cited by Denis Gately Native Title: Sovereign Risk or Judicial Activism? (1 August 1993) at page 3.

Carolyn Vigar, Senior Associate
T:+61 3 8608 2753