Reverse the Curse: Maximizing the potential of resource-driven economies

According to a recent report from think-tank Chatham House, arbitration cases have increased nearly fourfold between 2001 and 2010 in the mining sector, reflecting tensions among stakeholders which escalated with the commodity price boom. The rise in commodity prices increased popular expectations, and governments accordingly came under pressure to show that citizens would receive greater benefits as a result of the rising resource revenues.

In the face of growing uncertainty about future prices and demand, however, extractive companies started to face pressure from their shareholders to scale back, delay or even cancel projects.

Governments were therefore seeking to benefit from windfall profits during price spikes, whilst on the other hand the companies wanted the ability to delay or downsize the project during a downturn.

Unfortunately, many contracts did not provide the flexibility required; the Chatham House report notes that model contracts of the 1990s have by and large failed to weather the commodities price boom.

For more information click here for the full article.

For further information, please contact Jay Leary, Partner, Naomi Lisney, Associate or your usual Herbert Smith Freehills contact

New McKinsey Global Institute Report: Reverse the Curse: Maximizing the potential of resource-driven economies

On 5 December 2013, Herbert Smith Freehills hosted a breakfast panel session in its London offices to mark the publication of a new report by the McKinsey Global Institute (MGI), 'Reverse the Curse: Maximizing the potential of resource-driven economies'.

Dr Fraser Thompson, a Senior Fellow at MGI, gave an overview of the report. Fraser then joined the panel, chaired by Greg Mulley (Herbert Smith Freehills, London, Head of Mining), with Kate Carmichael of International Council on Mining & Metals, and Herbert Smith Freehills Mining Team partners Stéphane Brabant (co-head Global Head of Mining) and Jennifer Bell.

The latest report outlines the changing resource landscape and the opportunities and challenges for resource-driven governments and companies in the extractive industry.

All too often, governments have failed to make the most of potential resource wealth. In fact, many resource-driven economies have underperformed those without natural endowments, which is a huge lost opportunity for economic development and poverty alleviation when we consider that about 70% of the world’s poor live in resource-driven countries. If resource-driven countries, particularly those with low incomes, could use their resource sectors effectively as a platform for broader economic development, this could transform their prospects.

This changing resource landscape will also have significant implications for extractive companies, financing and investment. As exploration and production increasingly shift to developing countries and frontier markets, companies that can reframe their mission from simple extraction to ongoing partnership in economic development are likely to secure a real competitive advantage.

Please click here for the full MGI report.

Attendees at the seminar commented that they found the session to be very insightful, informative and overall felt the report identified significant issues that the resources industry is facing.

A key theme of the MGI report is effective communication and engagement with the government and local stakeholders at all stages of a project.  Our dedicated global mining team covers every aspect of the industry, including public and private M&A, joint ventures, IPO’s and secondary capital raisings, compliance, crisis management, dispute resolution and every stage of the project life cycle.

For further information, please contact Greg Mulley (Partner, London), Jennifer Bell (Partner, London), Stéphane Brabant (Partner, Paris), or your usual Herbert Smith Freehills contact.

Qld: Government grants Environmental Approval for North-Queensland projects

On 11 October 2013, Federal Environment Minister Greg Hunt (Minister) approved three North-Queensland projects.

The Minister approved:

• the Abbot Point capital dredging program which involves removal of 3 million cubic meters of spoil in respect of Terminals 0, 2 and 3, making the Port of Abbot Point one of the world’s largest coal ports;
• Adani’s T0 Project, a $3 billion, 70mtpa expansion of Terminal 1 at the Port of Abbot Point and associated infrastructure (including a 2.75km outloading jetty and conveyor, new wharves, ship loaders and development of two offshore berths);
• Arrow Energy’s Curtis Island LNG processing plant, a $17.46 billion project involving a 9.45km underwater gas transmission pipeline from the mainland to Curtis Island.

The Minister’s approval of the projects was accompanied by some of the ‘strictest conditions in Australian history’ due to the potential impact on the Great Barrier Reef. The Minister imposed 95 environmental conditions on the Abbot Point capital dredging program and 53 on the Curtis Island LNG processing plant.

Indian mining giants GVK and Adani Group, the owners of Terminal 3 and Terminal 0 (respectively) stand to benefit most from the Minister’s approval. Both companies are developing significant coal projects (and associated infrastructure) in the Galilee Basin, the coal from which is expected to be exported through the Port of Abbot Point.

The projects mentioned above are all still subject to final investment decision.

For further information, please contact Jay Leary, Partner, Roger Allingham, Graduate, or your usual Herbert Smith Freehills contact.

Australia-Korea FTA concluded

On 5 December 2013, Australia and South Korea concluded negotiations for a Free Trade Agreement (FTA).

Trade with South Korea was valued at AU$31.9 billion in 2012, making Korea Australia’s fourth biggest two-way trading partner (following China, Japan and the United States) and third largest export market.

As a result of the FTA, tariffs will be eliminated on key Australian exports to Korea such as beef, wheat, dairy, wine, horticulture and seafood, resources, energy and manufactured goods. The FTA will also provide new market opportunities in other industries such as education, telecommunications and financial, accounting and legal services.

View the full article here.

For further information, please contact Lewis McDonald, Leon Chung or Donald Robertson or your usual Herbert Smith Freehills contact.

Report of the Victorian Gas Market Taskforce released

The Victorian Gas Market Taskforce, which was led by former Howard Government Minister Peter Reith, has released its final report.

The Taskforce was commissioned by the former Victorian Premier, Ted Baillieu, in December 2012 to consider ways to improve the operation and efficiency of the east coast gas market, and increase gas supply.

The recommendations in the report support the development of the onshore gas industry in Victoria to increase gas production, in the context of the depletion of offshore gas reserves and projected increases in the price of gas.

Key recommendations

The report’s key recommendations include the lifting of the current ban on hydraulic fracking and the issue of further CSG exploration licences.

The report also recommends that a Gas Commissioner be appointed to promote community consultation and the dissemination of credible information about CSG, with a view to increasing community confidence in the CSG industry.

Further consultation

In releasing the report , Premier Denis Napthine said that this was the ‘first step in a consultative process to seek Victorians’ views on issues of concern in regard to onshore gas in Victoria’.

Feedback on the report is being sought until the end of March 2014, prior to a 12 month community consultation process to be facilitated by the Minister for Energy and Resources, Nicholas Kotsiras.

A report on the findings of this 2-stage consultation process is planned to be released in July 2015.

Ban on fracking to remain

Dr Napthine also announced that the ban on hydraulic fracking would remain in place until at least July 2015 while the consultation process was ongoing.

According to Dr Napthine, a key factor to be considered by the Victorian Government in relation to the development of the onshore gas industry is the impact to the water table and aquifers, and the Victorian Government would not support onshore gas production until there is scientific evidence showing that the industry would not risk Victoria’s assets.

The bottom line

While the Taskforce’s recommendations clearly support the development of the onshore gas industry in Victoria,  it is unlikely that there will be any movement towards the industry’s development until at least the second half of 2015.

For further information, please contact Myra Stirling, Senior Associate, Brad Popple, Solicitor, Melbourne or your usual Herbert Smith Freehills contact.

Ghana plans to reintroduce a mining windfall tax

The Budget and Economic Policy Statement of 2013 reiterates the willingness of the government to implement a windfall tax on mining profits.

The windfall profit tax was introduced in the Budget and Economic Policy Statement of 2012 and was debated, but not implemented, by Parliament in 2012.

The 2012 proposal was that all entities engaged in mining operations in Ghana would, in addition to their annual corporation tax, pay a windfall tax on their adjusted cash balances for the relevant period. The windfall tax rate proposed was a flat 10% on the adjusted cash balance, such balance being calculated by deducting from chargeable income all taxes paid or payable, all capital expenditures incurred on depreciable assets and inventory during the year of assessment and adding any interest allowed as tax deduction,  capital allowances and any negative cash allowance brought forward. The windfall tax would apply to any positive tax adjusted cash balance after the relevant deductions and additions are made.

Despite the opposition of mining companies, this tax was again debated, however the conditions of its implementation are not yet determined, in particular its interaction with the stabilisation provisions.

For further information, please contact Linda Feniniche, Avocat, Hiba Abi Haidar, Avocat, Paris or your usual Herbert Smith Freehills contact.

Qld: Government releases Galilee Basin Development Strategy

On 7 November 2013, the Queensland Premier, Campbell Newman, released the Galilee Basin Development Strategy (Strategy). The Strategy acknowledges the long-term economic benefits that opening up the Galilee Basin to mining would bring to Queensland and is designed to support and encourage business and industry to develop key infrastructure across the region.

The Strategy details government initiatives aimed at early development of the southern and central Galilee Basin (with priority to be given to ‘first movers’). These initiatives include:

• lowering start-up costs by offering a discounted royalty period which will gradually ramp-up to full royalty by the end of the period,
• streamlining land acquisition, planning, approvals and red tape reduction by compulsorily acquiring land for projects, delivering project approvals in a timely way and consider declaring projects ‘prescribed projects’ to overcome unreasonably delays in obtaining project approvals,
• positioning Abbot Point as the Galilee’s gateway to the world by reserving the Terminal (T2) development site for a proponent to develop coal stockpiling and handling infrastructure, and
• supporting infrastructure development and corridors by supporting the development of localised water solutions, encouraging and assisting private investment in relevant electricity transmission and prioritising the development of roads critical to opening up the Galilee Basin.

No further details have been released at this stage.

Notably, the Strategy comes less than a week after approval of GVK’s Kevin’s Corner project which is expected to be Australia’s biggest coal project. Kevin’s Corner joins the adjacent Alpha Coal project which was approved in August 2012.

In addition, Aurizon has been developing an integrated rail transport and port solution for Galilee Basin coal over the past two years.

For further information, please contact Jay Leary, Partner, Roger Allingham, Graduate or your usual Herbert Smith Freehills contact.