CSG Compensation – A Drought-proof Income

By 4 December 2019Property
CSG Compensation

The upswing of large scale CSG development in the Surat Basin since 1996 has been an emotive and often unwelcome distraction for affected land owners. Now, in the grip of one of the worst droughts in living memory, many affected owners have been grateful for the regular, and often substantial, income stream paid by CSG companies for the impact the gas extraction has on their land and business operations.

While the long term impact of CSG on agribusiness remains controversial, increasingly land owners are coming to the view that if CSG is going to be developed on their land, then they need to ensure that they have the best compensation arrangements they can reasonably achieve.

Compensation arrangements paid by CSG companies are documented in a Compensation and Conduct Agreement, commonly known as a “CCA”. With CSG development programs expected to last for 20+ years, it is important to consider the long term impacts of the deal struck in CCA’s with CSG operators.

What makes for a “good” CCA?

Each land owner’s situation is unique and requires careful consideration when negotiating compensation arrangements. In the 25 years that Tony Randall has been assisting land owners with the start-up and expansion of CSG in Queensland, there has been no “standard” arrangement that suits each and every land owner and the only “constants” he has been able to identify are:

  • the industry is in a continuous state of change, with the technology constantly evolving and changing to become more efficient; and
  • the CSG personnel are rarely long term, with high turnover of staff the industry norm.

With this in mind, there are a number of general considerations that a land owner should be aiming to achieve when negotiating CCA’s. Broadly, these are:

  • tax advantaged compensation arrangements – tax impacts can make a huge difference to the amount left “in hand” from compensation arrangements;
  • achieving a CCA that your bank manager and valuer see as value-adding to your property;
  • a document that clearly records in detail the expected impacts of the CSG development activity on the property, including expected time frames for various activities and when they will begin;
  • strong bio-security procedures and obligations on the CSG company;
  • value adding:
    • by supplying materials or services where possible; and
    • arranging for infrastructure needed for CSG development on the property to be located in ways that add value (or at least minimise adverse impacts).
  • a dispute mechanism that provides for gradual escalation of issues of concern to the land owner, with the CSG company paying for the landowner’s costs unless the landowner is found to be behaving unreasonably; and
  • a clear trail to follow, detailing how the compensation agreed has been calculated in relation to the expected impacts. This is important when dealing with the inevitable changes in personnel and changes in how the CSG development unfolds on the property.

Some of the best CCA arrangements identified include those for the Fairy Meadow Road Irrigation Pipeline that was delivered by Origin. In that arrangement 7 landowners are given access to large volumes of treated CSG by-product water that is then used for extra irrigation on their land. The arrangement helps Origin dispose of by-product water in a way that adds value to the local community. The arrangement will not last forever, as volumes of by-product water are expected to reduce over time as the gas field dynamics change. In the meantime, there is enough certainty in the arrangements for landowners to make plans for a short to medium term investment to generate significant extra productivity from their land. This extra water is not dependant on seasonal conditions, and is allowing production to continue on those properties despite the severe drought.

Even if extra water is not part of the compensation arrangements (and it usually won’t be), a cash flow stream that is not dependant on the seasons allows for safety in borrowing to either invest in infrastructure that improves productivity on-farm or to buy income producing “off farm” investments that smooth out seasonal cash flow variations.

There is no doubt that CSG development on a rural property creates extra work and inconvenience for the land owner. A well-constructed CCA recognises this and properly compensates the affected landowner. An affected land owner should be aiming to be better off as a result of the extra impact CSG will have on the running of their business.

“Bad” compensation arrangements

So, if we know generally what a good CCA arrangement looks like, what are the things that make for a “bad” CCA? This issue has usually arisen when a client interested in buying a rural property that comes with CCA arrangements in place that they will inherit as the potential new owner.

The CCA’s that Murdochs has reviewed and advised potential buyers against have had some of these types of issues:

  • inadequate compensation generally – sometimes a land owner has agreed to figures that are much less than the accepted “going rate” in the area;
  • no review mechanisms to increase compensation over time or if the CSG development on the property changes from the plan that applied at the time the CCA was negotiated;
  • little or no clarity on expected impacts/timing of the development on the land;
  • no thought to long term commercial impacts – a classic issue is the original owner that has taken all or most of the compensation up front (usually at a substantial discount), leaving little or no compensation for any new owner;
  • no effective dispute resolving process (there will almost invariably be some wrinkles that need sorting out;
  • CCA’s where the CSG company is given very broad powers, such as “anything ancillary to the permitted activities”. While these might be “ancillary” to the permitted activities, in and of themselves they can have very substantial impacts that the land owner might reasonably expect to be compensated for.

Of all these issues, one that is the most difficult to recommend to a potential buyer is when a previous owner has walked away with the compensation for the next 15-20 years’ worth of impact that the CSG development will have on the property in question. Many potential buyers are likely to apply a discount to properties where this has happened. It does not mean that the property will not sell, but there is no doubt that the seller may be getting less than they otherwise would. In the future these properties may also be negatively marked by banks and valuers as potential security for borrowings.

A commercial legal approach

There is no perfect outcome for land owners affected by CSG development on their land. While the aim of any CCA negotiation should be to make sure the owner is better off in return for having CSG development on their land, there are some impacts that a CSG company cannot or will not give a guarantee against.

There is also the issue of the limitations that CSG development can have on properties. An example of this are some American and Chinese investors who are active in Australian agribusiness rightly or wrongly have very strong views on potential contamination caused by CSG. These potential buyers are not interested in buying properties where there is CSG development and so the potential buyer pool is reduced for affected land owners.

This leaves the land owner with having to make a commercial decision on what risks they will accept as a result of CSG development and what price they put on the risks they do accept. A good lawyer helps inform the land owner in clear terms of the likely risks and provides practical options for the land owner to consider in response. Even better is a lawyer with a strong understanding of the factors that positively and negatively affect a property’s value long term.

Whether you are a fan of CSG development or have serious misgivings, if you are a landholder with CSG activities on or proposed for your property, the care you put in to negotiating CCAs can have a significant impact on the value of your land. It is worth getting an expert on your side, phone Tony Randall today on 1300 068 736 to discuss your situation.

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