Reviewing coal seam gas compensation due to a “material change in circumstances”

The Land Court of Queensland recently delivered its decision in the matter of Nothdurft & Anor v QGC Pty Limited & Ors [2017] QLC 41.[1]

The case is significant because it is the first time the Court has reviewed the compensation agreed under a Conduct and Compensation Agreement (CCA) for coal seam gas activities due to an alleged “material change in circumstances”. The Court has a statutory power of review in such a case under what is now s.101 of the Mineral and Energy (Common Provisions) Act 2014 (Qld).

In Nothdurft, the Court held that there had been a “material change in circumstances” since the date of the relevant CCA but only to a limited extent in comparison to what the landholders had alleged overall. The Court awarded the landholders an amount of $60,500 by way of additional compensation for the material change, which was only a small portion of the their total claim.

The Court’s decision is important for the coal seam gas industry and landholders alike because it provides answers to a number of important questions. When is a change a “material change”? Will a material change automatically lead to an amendment of the agreed compensation? To what extent can the Court review the agreed compensation if a material change has occurred? We consider the Court’s answers to these questions.

Background

Mr and Mrs Nothdurft own Bellara, a property spanning almost 350 hectares south of Chinchilla (Property). They live on the Property and use it for cropping and grazing activities. It is also the base for a manure processing and spreading business operated by them, which services properties in the Chinchilla area.

The Property falls within the area of two petroleum leases held by QGC Pty Limited (QGC) and others. In 2005, the Nothdurfts entered into a CCA with QGC pursuant to which the parties agreed upon the amount of compensation payable by QGC for certain coal seam gas activities to be carried out on the Property. This agreement was superseded by a later CCA dated April 2006.

Since the date of the CCAs, QGC has constructed seven coal seam gas wells on the Property. It has also constructed underground gas and water gathering lines which connect to the wells. QGC’s activities have been subject to the terms of the CCAs, the two petroleum leases mentioned above and an Environmental Authority issued under the Environmental Protection Act 1994 (Qld).

The Property is within an area of coal seam gas development undertaken by QGC as part of the “QCLNG Project”. The area includes numerous coal seam gas wells and associated infrastructure, as well as compression and processing facilities and a water treatment plant. The gas that is received at the compression and processing facilities is transported several hundred kilometres via an underground network of pipes to Curtis Island, Gladstone, where it is processed into liquefied natural gas and shipped to export markets.

The Nothdurfts’ Application for Review

The Nothdurfts commenced proceedings against QGC and the other petroleum lease holders on 17 March 2016 seeking additional compensation under s.537C of the Petroleum and Gas (Production and Safety) Act 2004 (Qld). That section (since repealed, but adopted in substantially the same form in s.101 of the Mineral and Energy Resources (Common Provisions) Act) conferred jurisdiction upon the Land Court to review and amend the compensation agreed under a CCA where there had been a “material change in circumstances”.

When is a change a “material change”?

To trigger the Court’s review function, the Court in Nothdurft held that the change must be material to the agreement about compensation. This requires “a focus on effect rather than activity”. Thus, a change which does not result in any change to the compensatable effects suffered by the landholder will not be reviewable under the Act. On the other hand, a change which does alter the compensatable effects may be.

Not every change in compensatable effect will be reviewable. The change must be “material” to the agreement about compensation, which means that it must be of significance or importance and not merely trivial or inconsequential. If reliance is placed on change in amenity (as was the case in Nothdurft), the impacts must be more than minimal.

If there has been a material change, to what extent can the Court review the agreed compensation?

The Nothdurfts argued that there was no method of review mandated by the Act and that the Court should assess compensation “afresh” on the changed circumstances. This involved ascertaining the “global” compensation payable to the Nothdurfts as though no CCA had ever been concluded. If the compensation assessed on this basis exceeded the original agreed compensation, then QGC had to pay the difference.

The Court was quick to reject this submission. It confirmed that the relevant section of the legislation imposed an express limitation on the Court’s function. The Court “may review the original compensation only to the extent it is affected by the change.” The section is not a gateway to consider the appropriateness of the original agreement.

Thus, the scope of a Court’s review on an application under the Act is limited to the compensable effects suffered by the landholder due to the material change in circumstances. The Court’s task is to identify the material change and to determine whether the compensatable effects caused by the change warrant additional compensation.

Was there a “material change in circumstances” in Nothdurft and, if so, did the Court amend the agreed compensation?

The Nothdurfts alleged that there had been numerous matters which, either alone or together, had given rise to a material change in circumstances. These matters included:

• non-compliance with noise limits;

• cessation of supply of untreated CSG water;

• emission of fugitive gasses;

• incorrect well locations;

• contamination of rainwater tanks; and

• perceived health risks in living in or around a gas field.

As discussed below, a number of these allegations were contrary to the evidence and were therefore not upheld by the Court.

The Court also rejected the central premise underlying the Nothdurfts’ claim that the alleged changes had rendered their residence uninhabitable and their Property unusable for business purposes and that, as a result, they should be compensated for the costs of relocating their residence and business to alternative locations in Chinchilla.

Noise levels

The Nothdurfts’ main complaint was that the noise levels generated by QGC’s activities on and in the vicinity of the Property were frequently and substantially in excess of the noise limits prescribed in the Environmental Authority, the night-time and low frequency noise limits in particular. The Nothdurfts contended that the noise levels had rendered their residence uninhabitable and that the Property was no longer capable of being used for business purposes.

The Court rejected these submissions.

The Court noted that QGC had taken the issue of noise seriously and had taken numerous steps to reduce noise impacts at night, including modifications to its infrastructure. The Court accepted that QGC was now complying with noise limits in nearly all respects. It also accepted the expert evidence given by an independent acoustic engineer engaged by QGC that the Nothdurft residence remained habitable.

However, QGC accepted that there had been exceedances of the noise limits in the past and the Court found that the Nothdurfts had experienced noise exceedances on an irregular but ongoing basis since 2015. The Court concluded that this was an increase in amenity impacts which amounted to a material change in circumstances.

As the amenity impacts were in the past, and not current and enduring, the Court accepted QGC’s submission that the Court should approach the issue like a claim for damages for nuisance and award a reasonable amount to fairly compensate the Nothdurfts in light of the character, duration and frequency of the noise exceedances.

QGC proposed an award of $55,000, reflecting the cost of noise attenuation modifications to the home, which the Court accepted. Flowing from the finding that there had been a material change of circumstances in relation to noise, the Court also awarded the landholders an additional 10% ($5,500) for the consequential impacts of having to devote time to raising and responding to noise issues which were found to be in excess of authorised limits.

Access to untreated CSG water

It was common ground that Mr and Mrs Nothdurft had the right under the 2006 CCA to request the supply of untreated CSG water from storage ponds or pipelines that QGC had constructed on the Property, but that no such supply had occurred since 2010 due to regulatory changes which had come into effect in that year.

The water supplied under the CCA could only be used for stock purposes and it was Mr and Mrs Nothdurft’s responsibility to ensure that the water could be used for this purpose.

The Court considered that an unlimited supply of untreated CSG water which was or could be made suitable for stock purposes was something that would have had significance or importance to a landholder’s decision about compensation, particularly for a dry land property such as Bellara.

Although it was clear that access to water had changed since the date of the CCA dated April 2006, that change could not be considered in isolation to other events that occurred.

Since December 2011, Mr and Mrs Nothdurft had enjoyed access to an annual allocation of 100ML of treated CSG water under a take-or-pay agreement with SunWater. Mr and Mrs Nothdurft draw the water directly from a pipeline operated by SunWater as part of the Chinchilla Beneficial Use Scheme which traverses Bellara. The Chinchilla Beneficial Use Scheme involves CSG water extracted from the wells on Bellara and other properties being treated at QGC’s Kenya Water Treatment Plant which is then piped by SunWater to the Chinchilla Weir for town supply and irrigation. Mr and Mrs Nothdurft use the water for irrigation and garden and stock use.

The Court accepted that the cessation of supply of CSG water under the 2006 CCA was a material change in circumstances. However, when assessed in context, the change was a beneficial one for the Nothdurfts. The Nothdurfts now have treated, better quality water via the Chinchilla Beneficial Use Scheme which would not exist but for QGC’s activities. The water has allowed them to irrigate paddocks for cropping and to grow feed and there was evidence that secure access to water had a beneficial impact on the value of rural properties.

In light of these matters, the Court declined to amend the compensation on account of this material change.

Emission of fugitive gases

Mr Nothdurft gave evidence that high point vents and other gas field installations in the vicinity of the Nothdurft residence were emitting fugitive gasses, which posed a risk to personal safety.

Mr Nothdurft’s evidence was contrary to the expert evidence on this point, which included ambient air quality monitoring undertaken by the Department of Natural Resources and Mines and by an environmental consulting firm engaged by Mr and Mrs Nothdurft for the purposes of the Land Court proceedings.

Given the expert evidence, which was unchallenged, the Court concluded that no material change in circumstances had been established in respect of alleged gas emissions.

Incorrect location of wells

Mr and Mrs Nothdurft alleged that three of the seven wells on Bellara had been constructed in different locations to those that were originally agreed during a site inspection / pegging party in 2005.

The Court was not satisfied that the wells had been constructed in different locations. Even if they had, there was no evidence that any change in well location had given rise to any change in the compensatable effect of QGC’s activities.

Contamination of rainwater tanks

This allegation concerned QGC’s use of Noel Robinson Road, which runs adjacent to and in close proximity to Bellara. The Nothdurfts alleged that QGC’s use of the road had caused excessive dust which had deposited onto their roofs and into their rainwater tanks. The Nothdurfts further alleged that QGC had used coal seam gas water for dust suppression purposes, which meant that the dust contained harmful metals.

The evidence was that dust disturbance was no longer an issue – it was only a concern to the Nothdurfts up until approximately 2012 at which time QGC’s construction phase came to an end.

In cross-examination, Mr Nothdurft conceded that he did not know the source of the water that QGC used for dust suppression and the only evidence as to QGC’s practices in relation to dust suppression was post-2012 (i.e. after the period of most concern to the Nothdurfts).

Given these matters, and also given that the Nothdurfts did not lead any evidence from a person who had sampled or tested the water in the tanks, the Court concluded that the Nothdurfts’ allegations were not supported by the evidence and that no material change in circumstances had been established.

Health risks

The Nothdurfts initially alleged that their family had suffered ill-health as a result of excessive noise and fugitive gas emissions (i.e. actual health impacts). During the course of the proceedings, they changed their position to say that there was a widespread perception of increased health risks associated with living in a gas field and that this perception affected the market value of the Property (i.e. perceived health risks).

The Court concluded that the evidence did not provide any basis for it to make the serious finding that any member of the Nothdurft family had suffered health impacts attributable to QGC’s activities.

As to perceived health risks, the Court accepted that perceptions could affect market value and could be relevant in determining compensation. However, it is necessary to demonstrate that the perception has given rise to some actual change in circumstances as a matter of fact. A mere perception, without foundation in fact, will not constitute a material change in circumstances.

Final Comments

The Nothdurft case has provided useful guidance for the coal seam gas industry and landholders as to the relevant principles that will apply in a “material change in circumstances” case. A full copy of the Court’s judgement is available here.

Given the need to focus upon the effect rather than the activity, a key enquiry will be whether there has been any change in compensatable effects not addressed by the original compensation. If there has been, and the change is significant or important, then grounds will exist for a review.

The Court’s review will be limited to identifying the compensatable effect attributable to any “material change” and determining whether additional compensation is justified in respect of that change. Identifying a change will not provide a basis for a wholesale review of the compensation originally agreed between the parties.