Lessons from a royalty dispute in the oil and gas sector

The recent decision in Oil Basins Limited v Esso Australia Resources Pty Ltd [2025] VSC 34 is a reminder of the Australian court’s pro-arbitration stance, and underscores the importance of having clear terms in royalty agreements, especially within the oil and gas sector.

Need to know

• The case considered whether the depreciation and decommissioning (D&D) claims related to a royalty agreement were arbitrable under the terms of a Settlement Agreement between the parties.
• Oil Basins (OBL) argued these claims fell outside arbitration due to a Settlement Agreement. The Producers sought a stay of proceedings under s 7(2) of the International Arbitration Act 1974 (Cth) (IAA), arguing the arbitral tribunal had jurisdiction (Kompetenz-Kompetenz principle).
• The Court ruled that the issues raised by the parties were complex, both legally and factually, and thus, in accordance with the Kompetenz-Kompetenz principle, it should be decided by the arbitral tribunal.
• This case underscores the importance of having clear and precise terms in royalty agreements, especially within the oil and gas sector. The decision also reaffirms the arbitration friendly approach of the Australian courts.

Background

OBL and Esso Australia Resources (the Producers) entered into a royalty agreement (Royalty Agreement) in relation to a significant resource project in Bass Strait over 60 years ago. OBL is entitled to a 2.5% overriding royalty on hydrocarbons produced in a specified area of Bass Strait under the Royalty Agreement.

Disputes regarding the calculation of royalties led to a series of arbitrations and a 1994 Settlement Agreement (amended in 1997 and 2018) (Amended Settlement Agreement). The Amended Settlement Agreement provides for a methodology derived by a special referee to calculate royalties and, in several places, for the modification of that methodology.

In 2023, disputes had arisen with respect to the treatment of GST in the calculation of the overriding royalty and issues relating to depreciation and decommissioning (D&D Issues).

OBL commenced proceedings in 2024, seeking declarations, including that the D&D Issues were not capable of being arbitrated under the Amended Settlement Agreement.

In particular, OBL maintained that the D&D Issues did not constitute an arbitrable dispute, because by reason of clauses 5(b) and 6B(f) of the Amended Settlement Agreement, no modification may be made to the special referee’s modified methodology by arbitration under the Amended Settlement Agreement.

Clause 5(b) of the Amended Settlement Agreement states that:

“No further modification may be made by arbitration under this Agreement to, or which is inconsistent with, the modifications to the Special Referee’s methodology referred to in any of clauses 6(a), 6(b)(i)(aa), 6(b)(i)(bb), 6(b)(ii), 6(b)(iii), 6(h), 6A(a), 6A(b)(i)(aa), 6A(b)(i)(bb), 6A(b)(ii), 6A(b)(iii), 6A(f), 6B(a), 6B(b)(i)(aa), 6B(b)(i)(bb), 6B(b)(ii), 6B(b)(iii), 6B(b)(iv) and 6B(f) and the application of any of clauses 7, 8 and 9 of this Agreement.”

Clauses 19(a) and 19(b) of the Amended Settlement Agreement states that:

1.  Any dispute (other than a dispute required to be determined under clause 12) in any way arising out of or related to or connected with this Agreement shall be determined by arbitration in Melbourne, Victoria, Australia, in accordance with the Commercial Arbitration Act 1984 (Vic).
2. For the purposes of clause 19(a) and subject to clause 5(b), a dispute means a dispute, difference or question in any way arising out of or related to or connected with this Agreement, including as to:
   1. its termination or breach; and
   2. any further modification of the Special Referee’s modified methodology.

Issues 

The Court was tasked with deciding whether the D&D Issues were matters that could be arbitrated under the Amended Settlement Agreement, or whether they were outside the arbitrator’s jurisdiction, particularly considering the application of the Kompetenz‑Kompetenz principle, which allows the arbitrator to decide on their own jurisdiction.

The Court considered:

(a) Stay under s 7(2) of the Internal Arbitration Act 1974 (Cth) (IAA):

Whether the D&D Issues are capable of settlement by arbitration in pursuance of the arbitration agreement.

(b) Kompetenz-Kompetenz Principle:

Whether it is for the arbitral tribunal or the court to determine jurisdictional issues, particularly where the tribunal’s competence to rule on its own jurisdiction is invoked under Article 16 of the UNCITRAL Model Law on International Commercial Arbitration 1985 (Model Law).

(c) Scope of Arbitration Agreement:

Interpretation of clause 19 of the Amended Settlement Agreement and its relationship to clauses 5(b) and 6B(f), which concern limitations on modifying the Special Referee’s methodology used to calculate royalties.

Judgment

Justice Croft granted the stay of proceedings under s 7(2) of the IAA, holding that:

1. The doctrine of Kompetenz-Kompetenz applied, meaning the arbitral tribunal had authority to rule on its own jurisdiction.
2. Any challenge to the arbitrability of the D&D Issues must first be referred to the tribunal, not the court.

The Court rejected OBL’s argument that the D&D Issues fell outside the arbitration agreement due to clause 5(b) (which prohibits modifications to the Special Referee’s methodology inconsistent with clause 6B(f)). It held:

1. Clause 19 creates a broad arbitration agreement covering disputes “in any way” arising out of the Agreement.
2. The reference to clause 5(b) in clause 19(b) did not create a carve-out from arbitrability but limited the remedies available.
3. In any case, whether the D&D Issues fall foul of clause 5(b) is a matter for the arbitral tribunal.

Additionally, in this decision, Justice Croft acknowledged a potential exception to the court’s obligation to stay court proceedings when the jurisdictional challenge was strictly confined to a short question of law that, once determined, would be dispositive (see [31]).

However, if the resolution of a stay application raises questions of fact or mixed questions of fact and law, then there is no discretion and the court must refer the matter to arbitration, unless the questions of fact require only superficial consideration of the documentary evidence in the record (see [32]).

What’s next

Read our next case note on the recent decision in Roadpost Inc v Beam Communications Pty Ltd [2025] FCA 120, where we take a look at the jurisdictional challenges in the telecommunications sector.

For more information, please contact Veno Panicker or Elena Stojcevski.