Payment claims to boom in Victorian oil and gas projects, following reforms to the security of payment regime

There is general consensus that natural gas will continue to play a vital role in securing Australia’s energy future and supporting the global energy transition to renewables.

Bass Strait gas continues to help meet demand in Melbourne, regional Victoria, and across the east coast. As a result, while Victoria is pursuing cleaner energy through initiatives like Victoria's Gas Substitution Roadmap, it also has revived its oil and gas industry via the Victorian Gas Program and the Petroleum Legislation Amendment Bill 2020 (Vic).

Significant investment has been made in opportunities designed to bolster the resilience of the existing gas reserves in the Bass Strait, particularly the Otway Basin and Gippsland Basin, along with many complex projects underway to decommission non-producing infrastructure.

Payment claims on these projects are usually (subject to the mining exception) regulated by the Building and Construction Industry Security of Payment Act 2002 (Vic) (SOP Act), to which major amendments have been made by the Building Legislation Amendment (Fairer Payments on Jobsites and Other Matters) Bill 2025. The Bill has been passed and recently received Royal Assent. Key parts of the revised SOP Act will commence upon proclamation which will occur no later than 1 September 2026.

Parties working on oil and gas projects in the Bass Strait region should be prepared for what is to come, as these reforms fundamentally alter the balance of power in disputed payment claims. They will apply retrospectively to construction contracts that are already in effect when the new laws are proclaimed, and therefore will affect oil and gas projects that have commenced or are soon to commence (with limited exceptions). The clock is ticking for industry participants to get up to speed with and prepare for the new regime.

Use of Victoria's security of payment regime to increase

Security of payment regimes exist across all Australian States and Territories. They provide a mechanism for resolving disputed payment claims on a prompt and interim basis, and properly utilised can powerfully impact the strategic dynamic between parties.

It is no secret that the Victorian security of payment regime has been historically underutilised relative to the comparable regimes in other jurisdictions, such as New South Wales and Queensland. Recent data indicates that in New South Wales there are twice as many adjudication applications and determinations as in Victoria and at significantly higher valuations.

The culture of low-use in Victoria has been attributed to the State's "excluded amount" and "non-claimable variation" schemes, under which traditionally high-value claims during project delivery phase (such as those involving disputed variations, time-related delay costs, latent conditions, and changes in regulatory requirements) cannot be claimed under the SOP Act. All of these are common issues faced on large and complex infrastructure and engineering projects, including oil and gas developments and decommissioning projects.

Many industry participants consider the current Victorian situation to be contrary to the very essence of the SOP Act, which embodies a "pay now, argue later" principle to secure prompt payment to claimants on an interim basis.

It is this culture of low-use which the amendments to the SOP Act are designed to change. They introduce claimant-friendly changes to the SOP Act, and likely will tip the scales in favour of increased usage of the adjudication pathway for disputed payment claims.

Big changes ahead for the oil and gas industry

Excluded amounts are abolished: site access, ground conditions, interfacing of commission and testing regimes and supply of feedstock are just some of the unique complexities that can give rise to high-value disputed variation and delay claims during oil and gas projects. These claims will no longer be excluded under the revised SOP Act, leaving it open to contractors to potentially obtain quick and dirty determination of multi-million dollar payment claims via the adjudication process, giving them the benefit of prompt payment on an interim basis and the strategic advantage in any subsequent commercial negotiations.

Prohibition on unfair time bars: with key stakeholders ranging from lenders to owners to offtakers, big money can be on the line if completion of an oil and gas project is delayed. Under the new regime notice-based time bar provisions may be declared as unfair. Decision-makers must consider certain factors when deciding this issue, including when and how the notice is required to be given and the relative bargaining power of each party in entering into the contract. However, there remains inherent uncertainty regarding the application of this remedy. Accordingly, strict notice provisions in delivery contracts are unlikely to be a silver bullet.

Performance security regime: it is standard practice for contractors working in oil and gas to provide high-value performance security to protect the project company in the event the contractor fails to comply with its contractual obligations. The form of security often is an unconditional bank guarantee that can be called without notice. This status quo is about to shift in favour of the security provider, with the following protections to come into effect:

1. recourse to performance security is to be prohibited unless notice has been given, and five business days have passed since that notice was given; and

2. contractors may serve a claim for the release of their performance security (in whole or part) and pursue that claim via adjudication in a substantially similar manner as payment claims under the SOP Act.

The latter amendments somewhat align with the trajectory of recent caselaw, in which stay applications by security providers have been more successful than historically has been the case. For example, the South Australian Court of Appeal clarified that a beneficiary to a bank guarantee in a construction project can lose its right to have recourse to the guarantee after the date upon which the beneficiary was required to return or release the guarantee in accordance with the construction contract (Synergy Construct Australia Pty Ltd v GSA North Terrace Pty Ltd [2025] SASCA 72).

The amendments will supercharge this tendency, as early notice before recourse is likely to result in an uptick in injunction applications.

Some protection to oil and gas owners and producers from the mining exception

The current mining exception in section 5(2) of the SOP Act states that "construction work" for the purposes of the SOP Act does not include:

"(a) the drilling for, or extraction of, oil or natural gas; or

(b) the extraction (whether by underground or surface working) of minerals, including tunnelling or boring, or constructing underground works, for that purpose…"

There are no changes proposed to this exclusion. Nonetheless, there is still uncertainty about how far this exception goes, as it has not been litigated in Victoria. That uncertainty may be short-lived, because the SOP Act amendments offer contractors operating in the mining and oil and gas sectors broader rights to adjudicate disputed amounts.

The exception exists in a similar form in each Australian State and Territory, and so far the Australian courts have more often than not favoured a narrow interpretation.

• In Cadia Holdings Pty Ltd v Downer EDI Mining Pty Ltd [2020] NSWSC 1588, the NSW Supreme Court held that the contract between the parties was for work preparatory to and in anticipation of mineral extraction (tunnelling, boring, and constructing underground works in preparation for future mineral extraction), rather than for the purpose of actually extracting minerals. The works therefore were not excluded under the relevant mining exception.

• In Zurich Bay Holdings Pty Ltd v Brookfield Multiplex Engineering and Infrastructure Pty Ltd [2014] WASC 39, the Western Australian Supreme Court upheld the adjudicator's determination that the mining exception in Western Australia did not apply to the work performed by the contractor (earthworks, drainage, and roadwork requirements for the Roy Hill Iron Ore accommodation village) as it was not closely connected to a water treatment plant used for extracting or processing minerals.

• In HM Hire Pty Ltd v National Plant & Equipment Pty Ltd [2012] QSC 4, the Queensland Supreme Court found that the work completed (the excavation and removal of timber and topsoil from the site) was not directly for the extraction of minerals and therefore not excluded by the mining exception in Queensland.

It is worth noting that where there is heated disagreement as to the application of the mining exception at the pre-adjudication stage, a court may be reluctant to intervene. In Nepean Conveyors Pty Ltd v Linkforce Industrial Services Pty Ltd [2024] WASC 71, the Western Australian Supreme Court denied a request to injunct the making of an adjudication application. Instead, the Court preferred to let the adjudication process play out as intended, leaving it to the party arguing that the mining exception applies to pursue judicial review should the adjudicator not find in its favour.

Getting Victorian oil and gas projects ready for the expected rise in security of payment claims

Oil and gas remains an important part of Victoria's energy future. The operation of the mining exception means that contractors operating in this sector in Victoria will have slightly less access to the rapid adjudication and payment offered by the SOP Act compared to other construction sectors.

However, a narrow interpretation of the exception is likely to be preferred by Victorian courts in line with the approach taken in other jurisdictions. This will expose many oil and gas development and decommissioning projects to the full variety of payment claims under the amended SOP Act.

Being well-versed in the amendments to the SOP Act in Victoria and their potential consequences will assist companies operating in the oil and gas space with anticipating, managing and resolving payment disputes under the revised SOP Act. This is especially the case given the amendments will have retrospective force (except in respect of pre-existing payment claims and adjudications). The amended SOP Act will apply to your existing oil and gas project, whether you plan for it, or not.