Greymouth Holdings Limited v Jet Trustees Limited
[2015] NZHC 306
•27 February 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
COMMERCIAL LIST
CIV-2011-404-005309 [2015] NZHC 306
BETWEEN GREYMOUTH HOLDINGS LIMITED
First Plaintiff
R M P DUNPHY Second Plaintiff
P H AND J A MASFEN Third Plaintiffs
AND
JET TRUSTEES LIMITED First Defendant
cont …/2
Hearing: 29, 30 September, 1 October 2014; 3, 4 February 2015
Further submissions: 12, 16 February 2015
Appearances:
J A Farmer QC, M D O'Brien, B Ward and M Jenkins for
Greymouth Petroleum Holdings Limited
M Corlett for John Sturess & Associates Limited
J G Sturgess in personJudgment:
27 February 2015
JUDGMENT OF GILBERT J [Quantum of damages]
This judgment is delivered by me on 27 February 2015 at 3.00 pm pursuant to r 11.5 of the High Court Rules.
..................................................... Registrar / Deputy Registrar
GREYMOUTH HOLDINGS LTD & ORS v JET TRUSTEES LTD & ORS [2015] NZHC 306 [27 February
2015]
2 …
J G STURGESS Second Defendant
JOHN STURGESS & ASSOCIATES LIMITED
Third Defendant
GREYMOUTH PETROLEUM HOLDINGS LIMITED
Fourth Defendant and Cross-Claimant
Introduction
[1] In a judgment delivered on 8 May 2013, I determined that Mr Sturgess and his company, John Sturgess & Associates Limited (JSAL), were liable to pay damages to Greymouth Petroleum Holdings Limited (GPHL) for negligence in connection with a seismic survey programme at Midhurst and a fracture stimulation operation at the Radnor-1B well, both in Taranaki.1 This judgment deals with the quantum of damages payable.
Radnor
[2] In the principal judgment, I found that Mr Sturgess, who was then the chief operating officer for the Greymouth group of companies, directed a fracture stimulation operation at the Radnor-1B well on 29 and 30 May 2010. At the time he gave this direction, the well was not producing any gas, low flow rates were expected and there were limited prospects of finding producible hydrocarbons. Mr Sturgess did not obtain specialist advice or commission appropriate studies to ascertain whether the cost of the operation was justified. Mr Sturgess did not consult with his fellow directors before proceeding, as he was required to do. The operation produced no benefit for GPHL and I concluded that Mr Sturgess’ decision to proceed with it was negligent.
[3] I ruled that Mr Sturgess and JSAL were liable for the cost of the operation less the cost that would have been incurred if a mini frac had been conducted as recommended by Ricardo Guerra. Mr Guerra, a petroleum engineer with specialist expertise in fracture stimulation operations, proposed a small scale mini frac, which he estimated would cost US$20,000, as an inexpensive way of assessing the potential productivity of the well prior to considering whether it would be worthwhile incurring the cost of a full scale operation. I found that Mr Sturgess should have adopted this course and that the damages should reflect this.
[4] Colin Willett, the general manager of finance and administration for the
Greymouth group, calculates that the operation carried out on 29 and 30 May 2010 cost $733,345.73. From this figure he deducts $28,847.54, being the New Zealand
1 Greymouth Petroleum Holdings Ltd v Jet Trustees Ltd [2013] NZHC 1013.
dollar equivalent of US$20,000. This leaves a balance claimed of $704,498.19 which GPHL has rounded down to $700,000.
[5] Mr Sturgess claims that the mini frac proposed by Mr Guerra was “fatally flawed” and would have cost approximately $484,000 if it had proceeded. He claims that the full frac, which he says was confined to the operation conducted on 30 May 2010, cost approximately $375,000. On this basis, Mr Sturgess contends that the company saved $109,000 by proceeding with the full frac rather than the mini frac proposed by Mr Guerra. Mr Sturgess therefore submits that no damages should be awarded in relation to Radnor.
[6] The issues I need to determine fall into the following two categories: (a) What were the costs of the frac that was conducted?
(b) What would the mini frac recommended by Mr Guerra have cost?
What were the costs of the frac that was conducted?
[7] Mr Sturgess argues that the full frac was carried out on 30 May 2010 and that the operation conducted on 29 May 2010 was a mini frac. He says that the costs associated with this mini frac should be excluded from the claim. This analysis is flawed because it is based on a misinterpretation of the judgment. Mr Sturgess and JSAL are liable for all of the costs associated with the fracture stimulation operations carried out on 29 and 30 May 2010 less the costs that would have been incurred had the mini frac proposed by Mr Guerra gone ahead. All costs must therefore be taken into account, not just those relating to that part of the operation carried out on
30 May 2010.
[8] Mr Sturgess’ next contention is that GPHL’s claim for proppant is considerably overstated. He says that low-cost “20/40 carbo prop” manufactured in China was used, some of which had been recovered from earlier frac operations at the Kowhai-A1R well in Taranaki with the rest having been re-bagged into “Terraprop” bags supplied by BJ Services after the original sacks had failed.
Mr Sturgess says that the “FlexSand HS 20/40" that was used had also been
recovered from the Kowhai-A1R well before being cleaned and re-bagged.
[9] Mr Sturgess says that this material was contaminated and unsuitable for use other than in a mini frac operation. For this reason, he says that all of this material had been written off and did not feature on any inventory list. He contends that there was no cost to GPHL in using this material and that GPHL avoided disposal costs by pumping it down the well at Radnor.
[10] Alternatively, if a charge is to be made for these materials, Mr Sturgess says it should be for the cost of the Chinese carbo prop being $19,808, not the amount claimed by GPHL for Terraprop of $100,791. The cost of the FlexSand is not disputed.
[11] Mr Sturgess acknowledges that he has no direct knowledge of the proppant used at Radnor because he was not present at the time. The operations were conducted by BJ Services Company which provided GPHL with a comprehensive post fracture report dated 22 June 2010. This records that the proppant used in the operation was TerraProp-HS, some of which was mixed with FlexSand-HS. Mr Willett produced the invoice showing that these products were purchased in February 2010 for an intended operation at Turangi-3. However, that operation did not proceed and I am satisfied on the evidence that the material used at Radnor was part of this consignment.
[12] Dr Robert Brady, general manager, exploration, geology and physics for the Greymouth group of companies, gave evidence that this material has a more or less indefinite shelf life and could have been used by the company in other frac operations had it not been expended at Radnor. I accept this evidence. The full cost claimed by GPHL for this material should therefore be allowed.
[13] The next issue concerns the cost of two gate valves installed on the well head. GPHL initially claimed $30,258 plus freight of $4,697 for these valves. Dr Brady was unable to say why these valves were installed and could not discount the possibility that they were installed on the well head for the purposes of an earlier
pumping operation on 4 May 2010. In any event, the valves did not remain on the well head. Dr Brady confirmed that it is highly unlikely that they would have been destroyed in the frac operation and they could have been removed for use at other wells. In these circumstances, GPHL reduced its claim for these items by
50 per cent.
[14] GPHL has been unable to prove that these valves were a cost of the operation. I therefore consider that the entire cost of the valves should be removed from the claim. The claim should therefore be reduced by a further $15,129 for the valves and $1,879 for the freight.
[15] This brings the total costs claimed for the frac operations to $716,338. It is not possible to calculate these costs precisely. GPHL recognised this in rounding its claim down by approximately $4,500. I consider that a slightly more generous allowance should be made and fix the costs associated with the frac operations on
29 and 30 May 2010 at $700,000. This is before deduction of the costs that would have been incurred had the mini frac recommended by Mr Guerra proceeded.
What would the mini frac proposed by Mr Guerra have cost?
[16] Mr Guerra’s recommendation for a mini frac was summarised in his email to
Mr Sturgess on 20 May 2010:
Subject: Minifrac radnor 1B John,
The Minifrac programs for next week. In general : 2 HAL cementers 1 batch mixer. Rate 9.5 BPM, 6000 psi.
Pump 12 bbls of solvent + 12 bbls of acid + 50 bbls 3% KCL water + 50
bbls of 40 lb gel with 1 bag of natural sand (1 ppg) + 125 bbls flush. Objective: clean the perforation, remove skin damage, leave sand in perforation, evaluate production potential.
Cost estimated 20k USD. Rgds
Ricardo
[17] Mr Sturgess claims that this proposal would not have worked because the Halliburton equipment Mr Guerra planned to use had insufficient horsepower to pump and place the proposed frac. Mr Sturgess considers that if the operation had
been attempted using this equipment, proppant would have become lodged in the well necessitating a coil tubing operation to clean it out. He says this would have resulted in wasted pumping charges of approximately $29,000 and a further
$100,000 for the coil tubing clean up.
[18] Mr Sturgess speculates that the company would then have had to hire pumping equipment from BJ Services to complete the operation at a further cost of approximately $116,000. He says additional charges would also have been incurred, including coil tubing operations to remove fluid from the well at a cost of approximately $97,000, well testing costs of about $57,000, supervision charges of about $25,000 and other charges in the order of $60,000. On this basis, Mr Sturgess estimates that if the mini frac proposed by Mr Guerra had been attempted, it would have ended up costing approximately $485,000, not US$20,000 as estimated.
[19] The mini frac proposed by Mr Guerra was only ever intended to be a low- cost, small scale operation because the well was not producing, low flow rates were expected and the prospects of finding producible hydrocarbons were not promising. If Mr Sturgess is correct that the mini frac Mr Guerra proposed was not feasible and would have required such extensive modification that the cost would have blown out to approximately $485,000, it would not have gone ahead. Mr Guerra had no authority to incur costs of that magnitude, nor did Mr Sturgess. Board approval would have been required and would not have been given without specialist advice based on the types of studies described by Dr Brady. Therefore, if I were to accept Mr Sturgess’ contention, no deduction should be made for the Guerra mini frac because it would not have proceeded.
[20] I accept that it would have been difficult to achieve the flow rate and pressure proposed by Mr Guerra using the two Halliburton pumps. However, it does not follow that the operation would have proceeded exactly as indicated by Mr Guerra in his email, resulting in proppant becoming lodged in the well. Mr Guerra and other personnel involved would have to be incompetent to allow this to happen, particularly given the small amount of proppant needed for this small scale operation.
[21] The much more likely scenario, if pumping capacity became an issue, is that the operation would have been scaled back. Dr Brady was confident that a mini frac which would meet the objectives identified by Mr Guerra could have been undertaken within range of the estimated cost. I accept this evidence but consider that some allowance for contingencies and for other costs that may not have been fully allowed for should be added to Mr Guerra’s cost estimate. Again, it is not possible to be precise but the Court is required to make the best assessment it can based on the available information. Taking all matters into account, I fix the total costs to be deducted for the mini frac proposed by Mr Guerra at $50,000.
[22] Mr Sturgess claims that Bridge Petroleum Ltd met 41.67 per cent of the Radnor frac costs but GPHL was not given leave to sue on its behalf. For that reason, he contends that any damages must be reduced by this percentage.
[23] The plaintiffs’ application for leave to bring proceedings in the name of and on behalf of GPHL against Mr Sturgess and JSAL identified the prospective claims and the companies in the Greymouth group on whose behalf they would be pursued. Bridge Petroleum was not referred to, apparently through oversight. The memorandum of counsel filed in support of the application annexed a draft statement of claim. Bridge Petroleum was referred to in the body of the claim as one of the Radnor permit holders but was omitted from the schedule of relevant companies attached to the claim.
[24] However, the terms of the orders sought were recast when the application was heard. The reference to companies listed in the schedule to the application was replaced with a more general description extending to “other companies in the Greymouth Group” for the claims identified in the draft statement of claim and for any other substantially similar or related claims that may subsequently arise or be identified. Rodney Hansen J granted leave accordingly.
[25] It is clear that the plaintiffs were given leave to sue in the name of GPHL for the losses allegedly suffered by all relevant companies in the Greymouth group in relation to the fracture stimulation operation at the Radnor-1B well. This includes
the losses suffered by Bridge Petroleum which was specifically named in the draft statement of claim as one of the permit holders.
[26] Mr Sturgess raised a similar point concerning NZ Geophysical Limited in connection with the Midhurst claim. It is answered on the same basis.
Midhurst
[27] In the principal judgment, I found that in early March 2010, after approximately half of the shotholes for a 2D seismic progamme had been drilled, Mr Sturgess negligently directed Mr Bulte to attempt to turn it into a pseudo 3D programme. I found that Mr Sturgess and JSAL were liable for the additional costs incurred as a result of this direction, including the cost of laying six extra receiver lines.
[28] Mr Sturgess contends that JSAL is not liable for these costs, only him. This submission is made because I stated in [164] of the principal judgment that “Mr Sturgess is not liable to Greymouth for the entire costs incurred”. There is nothing in this point. It is abundantly clear that judgment was entered against Mr Sturgess and JSAL, jointly and severally. In the relief section at [473] of the principal judgment I specifically stated that JSAL and Mr Sturgess were liable to pay damages in respect of the Midhurst and Radnor operations. The sealed orders also confirm this.
[29] Mr Sturgess also seeks to challenge my finding at [153] of the judgment that six additional receiver lines were added as a result of his direction. This is not permissible. The judgment stands. The appeal to the Court of Appeal was dismissed and the Supreme Court declined leave for any further appeal. In any event, I accept Mr Bulte’s evidence, which was supported by the contemporaneous documents, that this is what occurred. Nothing Mr Sturgess said at the quantum hearing persuaded me otherwise.
[30] It is irrelevant that Mr Sturgess may not have specifically directed the laying of the six extra receiver lines. The important point is that Mr Bulte was carrying out
Mr Sturgess’ instruction to pursue the pseudo 3D endeavour in laying these extra lines. Mr Bulte was required to follow that instruction but it was up to him how to implement it.
[31] Mr Dunphy’s evidence was that the cost of laying out these extra receiver lines amounted to $93,220. There was no challenge to this evidence and I accept it.
[32] GPHL also claimed additional processing costs of $75,361. These comprise
$33,940 for the cost of processing the 2D data as 3D, $2,470 for Midhurst data transformations and $38,951 described as Stratford 3D migration. The latter cost was for reprocessing existing data collected in two earlier 3D surveys conducted in the nearby areas of Waipuku and Stratford. Mr Bulte acknowledged that part of these costs, C$6,348, should be deducted from the claim.
[33] I am not persuaded that any of the costs of reprocessing the Waipuku and Stratford 3D data resulted from Mr Sturgess’ decision to attempt to convert the 2D survey into pseudo 3D. The company needed to gather all readily obtainable information to guide the “drill or drop” decision it had to make in terms of its permit. Reprocessing the Waipuku and Stratford data could provide materially improved information for comparatively little cost and is likely to have been undertaken irrespective of the pseudo 3D attempt. I therefore disallow this part of the claim.
[34] I accept the balance of the processing costs claimed by GPHL totalling
$36,410. This brings the total recoverable costs to $129,630.
Further issues
[35] Mr Sturgess contends that the damages calculation should allow for potential taxation benefits. This is not correct. The additional costs incurred may have reduced the taxable income of the relevant companies within the group. To the extent that these costs are recovered, this may give rise to tax obligations. These taxation consequences are not relevant for the purposes of assessing the damages.
[36] Mr Sturgess also argues that the recoverable damages should be reduced to reflect the Group 2 shareholding held by Jet Trustees and him. This is also not correct. The claim is made by the company, not by its shareholders.
Result
[37] The damages payable by Mr Sturgess and JSAL in relation to the fracture stimulation operations at the Radnor-1B well amount to $650,000.
[38] The damages payable by Mr Sturgess and JSAL in relation to the seismic survey at Midhurst amount to $129,630.
[39] Interest is payable on these sums from the date the costs were incurred to the date of judgment at the rate prescribed under the Judicature Act 1908.
[40] Costs are reserved.
M A Gilbert J
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