Shenhua buy back made easier by kill clause

A condition in the company's exploration licence says if “substantial development” of a mine had not started on the site within eight years, its exploration licence can be cancelled – the deadline falls on Saturday, October 22.

However, given Shenhua is owned by the Chinese government, the NSW government is unlikely to cancel the licence as it could damage international relations with Australia’s biggest trading partner.

Instead, the government may use the clause as a bargaining tool to negotiate a fair settlement for the company to walk away from development.

Institute for Energy Economics and Financial Analysis director Tim Buckley said the clause “dramatically enhanced” the government’s position.

“It would be politically delicate for the government to pay way over the top for BHP [to walk away from its Caroona mine], then turn around and cancel the licence of a foreign state-owned enterprise,” Mr Buckley said.

“Given the BHP precedent, you would think they would want to remove this as an issue and proceed to negotiate in good faith.

“It’s a difficult position for the government, but it’s good news for NSW taxpayers. It’s a good opportunity, but the government has got to grab it before it becomes an outcome.”

The NSW government is negotiating to buy back part of Shenhua's exploration licence, which it says would restrict the mine to the ridges and protect the plain’s black soil. But given China’s current approach to coal, Mr Buckley said Shenhua would be open to a total buy back. 

“China’s coal consumption has been falling for three years in a row,” Mr Buckley said. 

“The country is moving away from coal, it doesn't need another coal mine because they've got more than enough from domestic sources.” Shenhua, who declined to comment, has applied for an exemption from the cancellation clause.