Todd Pohokura Limited v Shell Exploration NZ Limited HC Wellington CIV 2006-485-1600
[2010] NZHC 1134
•13 July 2010
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2006-485-1600
BETWEEN TODD POHOKURA LIMITED Plaintiff
ANDSHELL EXPLORATION NZ LIMITED First Defendant
ANDOMV NEW ZEALAND LIMITED Second Defendant
Hearing: 15-19 February 2010; 22-26 February 2010
1-5 March 2010; 8-12 March 2010; 15-17 March 2010
22-27 March 2010
29 March-1 April 2010; 12-14 April 2010; 16 April 2010
19-23 April 2010
Counsel: J A Farmer QC, A S Olney, M Corlett, C Brown, I Clarke & D Abricossow for plaintiff
L J Taylor, J Douglas, O J Meech, N A Anderson, N Wood & P Roy for first defendant
D J Goddard QC, T C Stephens, K R Hodgson, R P Brier & N A Taylor for second defendant
Judgment: 13 July 2010 (reissued after confidential release on 5 July 2010 and consideration of request for amendment of references to confidential material)
RESERVED JUDGMENT OF DOBSON J AND PROFESSOR RICHARDSON
In accordance with r 11.5 I direct the Registrar to endorse this judgment with the delivery time of 4pm on the 13th day of July 2010.
TODD POHOKURA LIMITED V SHELL EXPLORATION NZ LIMITED And Anor HC WN CIV-2006-485-
1600 [13 July 2010]
Table of Contents
Introduction ....................................................................................................................................... [1] Factual background .......................................................................................................................... [7] History of the field development ..................................................................................................... [7] Shell and OMV align .................................................................................................................... [19] Field Development Plan and Final Investment Decision ............................................................. [22] Gas balancing arrangements/off-take rules ................................................................................. [26] Export pipelines............................................................................................................................ [34] Todd’s contract causes of action .................................................................................................... [39] The JVOA ..................................................................................................................................... [45] The Off-take Rules and Nomination Protocols ............................................................................. [75] The relevance of swing to the level of production ........................................................................ [82] Origin and status of 70 PJ/a as the plateau level of production .................................................. [97] Interpretation of the JVOA .......................................................................................................... [109] Article 10.1 ................................................................................................................................. [113] Article 10.1 create an inflexible obligation? .............................................................................. [140] Article 10.3 ................................................................................................................................. [157]
Off-take rules “special arrangements” under Article 10.3? ...................................................... [161] Off-take rules “a GBA in drag”? ............................................................................................... [185] Majority decisions inconsistent with parties’ rights? ................................................................. [188] Claimed obligations of good faith ................................................................................................ [198] Good faith – the law ................................................................................................................... [198] Todd’s claim ............................................................................................................................... [205] Shell and OMV’s response ......................................................................................................... [208] Implied terms in law ................................................................................................................... [213] Implied terms in fact ................................................................................................................... [222] Obligation not to prevent Todd maximising its financial benefits? ....................................... [222] Obligation to act honestly, and to have regard to interests of other venturers? ..................... [226] Obligation not to act for purposes extraneous to the JV? ...................................................... [230]
Good faith – the facts ................................................................................................................. [233] The Shell/Todd relationship ....................................................................................................... [234] Breach of fiduciary duty ............................................................................................................... [261] Breach of the Crown Minerals Act 1991 ..................................................................................... [274] Inter-connection dispute ............................................................................................................... [286] The Commerce Act claims ............................................................................................................ [297] Cause of the claimed constraint ................................................................................................. [302] Market definition ........................................................................................................................ [313] The economic evidence ............................................................................................................... [332] The relevant market...................................................................................................................... [344] Geographical extent ................................................................................................................... [349] Functional dimension ................................................................................................................. [350] Product market ........................................................................................................................... [352] The SSNIP test....................................................................................................................... [352] Elasticity of demand .............................................................................................................. [355] Temporal dimension ................................................................................................................... [372] Conduct in the counterfactual ...................................................................................................... [376] Market response: what likelihood of a substantial lessening of competition? ......................... [384] Would Todd have sold more gas?............................................................................................... [384] MMCs’ response to increased Pohokura production ................................................................. [416] Spare capacity at M&M? ........................................................................................................... [423] Todd’s internal use of gas .......................................................................................................... [431] Claim that condensate should be shared relative to uplift, not in proportion to equity shares .. [440] Section 27 ....................................................................................................................................... [449] Section 27 – Effect ...................................................................................................................... [450] Section 27 - Purpose................................................................................................................... [451] Prioritising Maui ........................................................................................................................ [462] “Protecting reserves” at Pohokura............................................................................................ [475] Section 27, “via” s 30..................................................................................................................... [481] Section 29 ....................................................................................................................................... [489]
The joint venture defence ............................................................................................................. [495] Wider policy considerations ......................................................................................................... [498] Damages ......................................................................................................................................... [505] Summary ........................................................................................................................................ [519] Contract claims .......................................................................................................................... [519] Commerce Act claims ................................................................................................................. [524] Costs ............................................................................................................................................... [525] A last word ..................................................................................................................................... [526]
Introduction
[1] The plaintiff in this proceeding is a member of the Todd Energy Limited group and holds Todd‘s interest in the Pohokura joint venture (JV), which is exploiting a substantial oil and gas resource in Taranaki. The first defendant is the Shell entity which holds Shell‘s interest in the JV. That company also acts as operator of the field, being contracted to do so by the JV partners. The second defendant is the New Zealand subsidiary of an Austrian-based mining and petroleum company. The parties are conveniently referred to as ―Todd‖, ―Shell‖ and ―OMV‖.
[2] The essence of this dispute is an allegedly unlawful constraint on the level of production from the Pohokura field. If it is such, the constraint has operated since the field commenced production in late 2006, with the level of production being supported by Shell and OMV, and opposed by Todd. Of more immediate concern when the proceedings were issued was the refusal by the others to allow Todd to connect its own pipes to the Pohokura Production Station (PPS) in order to transport its share of gas and condensate away from the point of production, except on terms that were objectionable to Todd. In August 2006, a mandatory interim injunction issued in favour of Todd, requiring the others to facilitate Todd‘s access, and to connect its separate pipelines.
[3] In essence, by way of 11 causes of action, Todd:
a) claims that the manner in which the production constraint has been imposed is in breach of the contractual arrangements between the parties;
b) pleads that in enforcing the production constraint Shell and OMV
have breached obligations of good faith owed by them to Todd as a
fellow joint venturer, and, discretely, that Shell has breached fiduciary duties owed by it in its capacity as operator of the Pohokura field;
c) alleges that the arrangements procured by Shell and OMV as to the level of Pohokura‘s production are in breach of ss 27 and 30 of the Commerce Act 1986 (the Act);
d)alleges that the contractual arrangements it objects to are in breach of s 41 of the Crown Minerals Act 1991 (CMA) so that they are illegal and unenforceable;
e) seeks substantive confirmation of its entitlement to connect separate pipelines for the export of gas and condensate from the PPS;
f) claims that certain agreements, resolutions and the course of conduct estop Shell and OMV from denying Todd‘s entitlement to connect those pipelines;
g) seeks declarations as to the unenforceability or illegality of the sources of the constraints under challenge and orders for the removal of Shell as operator; and
h)seeks damages quantified variously up to approximately $320,000,000 for alleged breaches of contract and the Act. In addition, exemplary damages are sought, with a suggested formula of three times the commercial gain made by Shell and OMV from their alleged breaches suggesting a sum in excess of $600 million.1
[4] Shell and OMV both counterclaim in respect of the inter-connection rights asserted in e) and f) above, seeking declarations that Todd is not entitled to connect its pipes until it has completed an inter-connection deed on terms approved by them
within the JV decision-making forum, but objected to by Todd. In addition, if there
1 Todd closing submissions, para 30.28.
has been a breach of the CMA, then Shell and OMV seek relief under the Illegal
Contracts Act 1970.
[5] Professor Richardson, a Lay Member of the Court, was appointed to sit in respect of the Commerce Act causes of action. Those parts of the judgment considering and determining those causes of action ([297] to [504] below) are our joint work, so that our views in that part of the judgment are appropriately expressed in the plural. Because the evidence on Todd‘s damages claims was linked closely to the economic evidence on the Commerce Act issues, the Professor has also contributed to the analysis of the damages claims ([505] to [518]). The remainder of the judgment is my sole responsibility. To the extent that our joint reasoning relies upon factual findings in the earlier part of this judgment, Professor Richardson agrees with those findings.
[6] Technical terms and abbreviations used in the judgment are explained as they are first referred to but, for ease of reference, a glossary of those terms is appended at the end of the judgment. Similarly, a review of all the material evidence is not warranted. The first reference to any witness is made in terms identifying the position of that witness and a full list of the witnesses and their positions appears after the glossary of terms. In the preliminary factual review that follows, not all references to the specific evidence in issue have been included. However, where they are relevant to more detailed analyses later in the judgment, such references are provided.
Factual background
History of the field development
[7] In 1995, an exploration permit for the relevant Pohokura area was issued by the Minister of Energy to a member of the Fletcher Challenge Energy group of companies plus Preussag Energie GmbH (a European mining entity) and two other entities. By 1999, the respective interests in the exploration permit had been rationalised so that Fletchers had 66.6 per cent and Preussag had 33.3 per cent. In
July 1999, those two companies completed a JV operating agreement (JVOA) to set the rules for their joint exploration, appraisal, development and production work within the area of the Pohokura permit.
[8] The present parties have succeeded to the interests under the JVOA in proportions that, subsequent to OMV‘s acquisition in May 2003, can be rounded to Shell‘s at 48 per cent, and each of Todd and OMV at 26 per cent.
[9] In September 2002, the JVOA was amended to provide for the prospect of joint marketing of gas as a purpose of the JVOA. In December 2002, the joint venturers lodged an application with the Commerce Commission (the Commission) for authorisation of joint gas sales.
[10] At the time the application was made to the Commission, a redetermination of the extent of reserves in New Zealand‘s then major gas field, Maui, was underway. The view arising out of the redetermination was that reserves in Maui were substantially less than had previously been estimated. In April 2003, the Government issued a policy statement under s 26 of the Act. The implicit effect of this was to encourage the Commission to grant the authorisation sought in circumstances that would facilitate early development of Pohokura as another
significant field.2
[11] The policy statement began with an acknowledgement that the Maui redetermination had put economically recoverable reserves at considerably less than earlier industry expectations, raising medium term security of supply issues. The introduction continued:
Gas from Pohokura needs to be available in a time frame and manner that ensures that national energy security and economic growth interests are met.
[12] Under a heading ―Energy Security Risks‖ the statement acknowledged the importance of gas for electricity generation, the extent of additional electricity generation capacity required to meet growth in the economy and that
notwithstanding energy conservation and improvement in energy efficiency goals:
2 Expert witness material, Volume 3, p18631.
…gas will continue to be an important fuel for electricity generation. It is a premium fuel for large-scale generation plant. Direct use of gas will also continue to be an important component of New Zealand‘s energy future.
[13] The statement concluded with the following:
Pohokura and the National Interest
Pohokura is the only sizeable commercial field available to meet the requirement for significant quantities of new gas.
The Government recognises that it is not certain that gas from Pohokura will be secured for electricity generation. However, investment decisions on a number of generation projects are currently on hold until there is greater certainty on the future of gas supply. The timely supply of gas from Pohokura is, therefore, important to provide greater certainty over where the gas is used, enabling new generation investment decisions (whether gas or alternative fuels) to be made.
Accordingly, gas from Pohokura needs to be successfully marketed and in production in a timeframe and manner that ensures that national energy security and economic growth interests are met. This is particularly important to ensure that new electricity generation projects can be built in a timely manner to meet growing electricity demand.
[14] In September 2003, the Commission granted an authorisation for the joint marketing of gas, subject to certain conditions, including that commercial production had to commence by 30 June 2006.3
[15] By late 2003, the present parties had also become all of the joint venturers in the Maui field, being commonly referred to in that context as the Maui Mining Companies, or ―MMCs‖. They held interests in different proportions, with Shell having 83.75 per cent, OMV 10 per cent and Todd 6.25 per cent. The original terms of sale for Maui gas involved the MMCs selling all the gas to the Crown, which had negotiated on-sale contracts to various buyers. Those contracts were revisited in the context of the Maui redetermination, in a process that became known as the Strawman negotiations. An issue that was to impact on the parties‘ respective attitudes to marketing of Pohokura gas was a negotiating point that the MMCs
should guarantee delivery of certain quantities of Maui gas.
3 CB3882.
[16] Ultimately, the revised contractual arrangements resulting from the Strawman negotiations involved Shell and OMV providing such guarantees, but Todd not doing so. Once Pohokura gas was available, it could substitute for Maui gas, so Shell and OMV had an interest in reserving some part of Pohokura production to cover for any shortfall on their guaranteed Maui commitments. That was not an interest shared by Todd.
[17] Other relatively fundamental differences arose on the preferred strategies for joint marketing of Pohokura gas. Todd was confident of selling gas on a ―take it or lose it‖ basis. This meant that the seller passed to the buyer the risk that the buyer would not be able, or did not want, to take delivery within defined time frames of the relatively constant quantities it had committed to buy. In contrast, Shell and OMV preferred to offer buyers flexibility as to how much gas they took in any particular period, so that the buyer paid a rate for the capacity to call for the gas, and was incentivised by that payment to take gas, but was not compelled to. Buyers then made an additional payment for the amount actually delivered. Such terms are described as selling with ―swing‖. I return to the subject of swing in the context of the parties‘ opposing views on contractual processes in [82] to [96] below.
[18] The parties were proceeding on the basis that they needed commitments from buyers for a substantial initial tranche of gas from the Pohokura field before they could commit to the very substantial capital required to construct the facilities needed to produce the gas and condensate. Condensate is produced from the same flow of molecules out of the wells, at a rate necessarily dictated by the rate of flow of the gas.
Shell and OMV align
[19] In the earlier period of debate on joint selling, OMV and Todd‘s interests appeared to be more aligned. However, in February and March 2004, Shell and OMV developed a view that agreement with Todd on mutually acceptable terms for joint selling of gas seemed unlikely within the time-frame that would be necessary to enable the parties to make a decision on development of the Pohokura field. By late
March 2004, Shell was preparing to market quantities of Pohokura gas on a separate basis, and took marketing advice as to how this might best be done.4
[20] On 2 April 2004, Shell and OMV concluded an ―Alignment Agreement‖ pursuant to which they agreed to act together on matters in relation to rules and procedures for the Pohokura JV. A schedule to the agreement specified matters on which Shell and OMV would, in good faith, pursue confidential agreement. These matters included the commissioning of facilities, definition of the rights and
obligations to take gas, gas balancing and nomination procedures.5 The alignment
agreement was to expire on commencement of commercial production from Pohokura. Todd only became aware of that agreement in the course of discovery in these proceedings.
[21] Also on 2 April 2004, each of Shell and OMV wrote to Todd advising that they would no longer pursue negotiations on the terms for joint marketing of gas and, in Shell‘s case, stating that it would separately market its share of Pohokura gas.6 Until that point, at least the bulk of gas produced was to be disposed of jointly. Accordingly, there had been no pressing need for the parties to address the arrangements that would facilitate a balancing of their separate entitlements to gas, to the extent that production from the field was not apportioned on an hour-by-hour basis in the same percentages as the parties‘ respective interests in the venture. However, once the prospect of joint marketing was abandoned, the prospect of
arrangements that would allow for various circumstances of ―unders and overs‖ in
the parties‘ respective levels of off-take of gas became a more relevant issue.
Field Development Plan and Final Investment Decision
[22] In April 2004, a field development plan (FDP) was presented by the then operator to the joint venturers. It was a thorough review of the business case for
developing Pohokura, which ran to 187 pages plus appendices. It included
4 CB6599-6604.
5 CB6908.
6 CB6919, 6921.
projections about the level of production of gas.7 During April and May 2004, each of the parties concluded conditional contracts for sale of sufficient quantities of their respective gas entitlements to enable them to commit to a final investment decision (FID).
[23] At a meeting on 30 April 2004, representatives of the parties recognised that a gas balancing agreement (GBA), which would provide for inconsistencies in the respective level of gas off-take and procedures for addressing imbalances, was not necessary before the field went into production. However, they acknowledged that such arrangements would desirably be worked on constructively between them.
[24] The FID was unanimously agreed on 30 June 2004. It was made in respect of production facilities that would have a ―nameplate‖ capacity to produce approximately 86 petajoules of gas per annum (PJ/a). In much of the work assessing the feasibility of the development, a working assumption had been made, doing various calculations on the basis of production at a plateau level of 70 PJ/a. There is disagreement between the parties as to the standing of that working assumption.
[25] In October 2004, the Minister of Economic Development issued a permit to authorise exploitation of the field. It appears the parties were aiming to commence commercial production from the field around the middle of 2006. Subsequently, in June 2006, the Commission formally withdrew its authorisation for joint marketing of Pohokura gas.
Gas balancing arrangements/off-take rules
[26] During 2004 and 2005, technical personnel within Todd were keen for a GBA to be concluded, because of the difficulties they foresaw in production occurring without an agreed set of rules for the off-take of production from the field. Those responsible for marketing gas within Todd did not treat a GBA as a necessity, and wanted to resist any proposals that could constrain Todd from taking its
maximum proportionate entitlement at all times.
7 CB6617-6811.
[27] Similarly within Shell, internal communications from those nearer the technical production areas were urging the need for clear, practical instructions as to how division and off-take of gas was to be managed on a daily basis. Those responsible for managing the relationship with Todd were determined not to compromise on the terms for balancing gas entitlements, for instance resisting any terms that might allow Todd to get ahead of the others in proportionate production in circumstances where there was any risk that the others could not ―catch up‖.
[28] In November 2005, Shell proposed a form of GBA, intending that the joint venturers agree on arrangements for off-take, allowing for ―unders and overs‖ relative to each party‘s proportionate share of production of gas.8 Todd pursued
initiatives to have a GBA on different terms accepted by the other joint venturers,9
but ultimately no gas balancing arrangements were agreed between them.
[29] Throughout the period of the present joint venturers‘ work at Pohokura that has been reviewed thus far, the joint venturers had retained Shell Todd Oil Services Limited (STOS) as operator. That company, jointly owned by Shell and Todd, was also acting as operator for other ventures in Taranaki, including Maui and Kapuni. In August 2005, Shell and OMV voted to remove STOS as operator at Pohokura, and appoint the first defendant Shell company as the operator instead of STOS. That change, which was part of a wider campaign by Shell to reduce Todd‘s influence over, and involvement in, the operation of Taranaki petroleum fields, was opposed by Todd. Court proceedings challenging the change were unsuccessful in respect of
Pohokura, but successful in respect of Maui.10 The change in operator at Pohokura
became effective from 1 April 2006. The joint venturers‘ primary point of liaison with the operating company was by way of an operating committee, on which all of the joint venturers were represented.
[30] In late 2005, various committees of representatives of the joint venturers had before them, as an aspect of their commercial readiness plans for the production of
gas, certain draft off-take rules providing for the mechanical processes for
8 CB9505, 9509.
9 CB9843.
10 Todd Petroleum Mining Co Ltd v Shell (Petroleum Mining) Co Ltd HC Wellington CIV-2005-
485-819, 14 December 2005.
nomination of quantities of gas per hour and per day, and the procedures by which the operator would respond (nomination protocols). I find that Shell and OMV reached a common view about the content of such rules, in the course of dialogue that did not include Todd. In January 2006, Mr Murray Jackson, a contract support manager for Shell‘s upstream companies, proposed separately to OMV a version of
―off-take rules‖ that would allow underlift and overlift, ―(albeit minimalist)‖.11
[31] Then in February 2006, Shell circulated draft off-take rules and nomination protocols to the joint venturers with a proposal that they be debated and agreed by the operating committee.12 Todd‘s immediate internal reaction was that the form of balancing would ―…result in significant loss of value and liquids for Todd‖.13
[32] At a meeting of the operating committee on 3 March 2006, the off-take rules were approved. Shell and OMV voted for the resolution to implement them. Todd voted against the resolution.14 Todd‘s opposition was based on legal advice to the effect that the proposed rules conflicted with the rights and obligations of the parties under Article 10.1 of the JVOA, and as such the rules would need unanimous agreement. In addition, Todd saw the proposed rules as being in breach of the terms of the mining licence.15
[33] At a meeting of the operating committee on 26 April 2006, the majority of Shell and OMV resolved to adopt and be bound by, and to direct the operator to implement, a set of nomination protocols.16
Export pipelines
[34] The FDP had contemplated joint pipelines to export the processed gas and condensate from the PPS. STOS originally had a contract for construction of such a
11 CB10305.
12 CB10497.
13 CB10519.
14 CB10835-10837.
15 CB10828-10833.
16 CB11393.
new pipeline on behalf of the Pohokura JV. These proposals contemplated the acquisition of certain redundant pipelines from Methanex. Methanex is an international business that has been active in Taranaki in extracting methanol from natural gas, and exporting it. In April 2005, Methanex withdrew from negotiations to sell those pipelines to the Pohokura JV, and in July or August 2005 Shell and OMV separately formed another JV (EPJV) to provide pipeline services for those two parties. The EPJV was able to purchase the redundant pipelines from Methanex. The FDP was amended by an operating committee resolution in August 2005, to
accommodate separate arrangements for the export of products.17
[35] Those August 2005 resolutions reflected the prospect, then confronting Todd, of the requirement for it to construct its own pipelines (assuming it would not be able to negotiate satisfactory terms for use of the EPJV‘s pipelines). One of the August
2005 resolutions allowed the operator to make all consequential changes to the FDP in order ―to accommodate the export of gas and liquids through the export pipelines proposed by the EPJV and/or Todd Pohokura Limited or any other lines that may be used for this purpose‖.
[36] Physical works on both sets of pipelines proceeded. In May 2006, Shell and OMV passed by a majority vote a further resolution requiring any party wishing to connect a pipeline to the PPS to enter into a particular form of inter-connection deed. Todd‘s objection to the form of deed was in part because it incorporated the nomination protocols and, by reference, the off-take rules. Todd‘s refusal to complete the inter-connection deed led to a stand-off in which the operator declined physical access to Todd contractors, for the purpose of connecting their pipelines to the PPS. This stand-off resulted in the interim injunction hearing in August 2006.
[37] The JVOA provided for the operator to propose a work programme and budget (WP&B) in respect of each year, for debate and approval by the operating committee comprised of representatives of the joint venturers. The first WP&B for the 2006 year was initially drafted in November 2005, with versions subsequently
issued to the operating committee in May and June 2006. It was unanimously
17 CB8731-8739.
approved on 28 June 2006, although subject to reservations recorded by both OMV
and Todd.18
[38] The pattern established in the first WP&B has been maintained since then. Each subsequent WP&B has proposed a level of production consistent with the projections in the FDP and FID documentation. Each WP&B has been objected to on behalf of Todd, as wrongly constraining the extent of production that Todd is entitled to call for.
Todd’s contract causes of action
[39] The initial imperative when the proceedings were commenced was Todd‘s wish to gain inter-connection. Accordingly, the first four of the 11 causes of action alleged a variety of grounds for Todd‘s entitlement in that regard. However, the primary focus throughout the substantive hearing was on Todd‘s claimed entitlement to greater volumes of gas than has been produced, and it is appropriate to deal first with the issues arising under that broad heading.
[40] Todd‘s fifth cause of action pleads an extensive list of criticisms of the off- take rules and nomination protocols. Todd pleads that their purpose or effect was to limit production to less than was available. Todd contends that the rules and protocols are outside the power of the operating committee on a variety of grounds, including that they are beyond the powers it has under Article 5.2 or, if within Article 5.2, were not valid because they were not necessary or were inconsistent with New Zealand law or the permit. Discretely, the rules are alleged to be in breach of the Commerce Act, but that challenge depends on the second part of the case. In addition, implementation of the off-take rules and nomination protocols is alleged to breach particular provisions of the JVOA and voting for them was in breach of obligations of good faith pleaded to be owed by each of the JV partners to the others.
[41] The sixth cause of action pleads that the terms of the JVOA limit the scope of what the operator can undertake to matters that constitute joint operations within the
18 CB12331.
scope of the JV. Such work must all be done in accordance with the terms of the JVOA, the permit, the CMA and any instructions of the operating committee given to the operator, so long as they do not conflict with the JVOA. For these and other reasons, the 2006 to 2009 WP&Bs are claimed to be invalid and not binding on the joint venturers.
[42] In both the fifth and sixth causes of action, Todd pleads that the operator is obliged to conduct joint operations in a diligent, safe and efficient manner in accordance with good and prudent oil and gas field practice. The limits on production (relative to the larger capacity of the field to produce) reflected in the
2006-2009 WP&Bs allegedly breach such obligations owed by the operator. The approval by the operating committee of those WP&Bs is alleged to have been invalid and voting in favour of them by Shell and OMV was in breach of implied obligations of good faith. Both causes of action also allege that Shell and OMV‘s failure to take their full equity share of total production available breaches an obligation imposed on each of them under Article 10.1 of the JVOA to do so.
[43] The seventh cause of action claims that, in its capacity as operator, Shell owes Todd fiduciary obligations. Such obligations are said to have been relevantly breached in the conduct leading to a ―constrained level‖ of production being made available to Todd.
[44] To assess the detail of these three contractual causes of action, it is appropriate to describe the genesis and structure of the JVOA and the off-take rules, and some relevant features of how production has occurred at Pohokura, before assessing the meaning of the specific terms relied upon by Todd.
The JVOA
[45] The terms of the JVOA are based substantially on a 1995 model produced by the Association of International Petroleum Negotiators (AIPN). That model form of joint operating agreement appears to be widely used as the starting point for such contracts, having been drafted by a United States-based international non-profit organisation. It is intended for use outside the United States, Canada and the United
Kingdom. A clause-by-clause comparison between the model form of contract and the present JVOA reveals that there have been relatively modest changes from the model form.
[46] Both Todd and Shell sought to adduce evidence from United States academics and/or practitioners specialising in oil and gas contracts. However, I upheld an objection on behalf of OMV to the admissibility of evidence from these experts, given that the essential purpose of the proposed evidence was to address contractual interpretation as a matter of New Zealand law. I did acknowledge that the respective parties might use the opinions from the experts they had retained as supplements to their legal submissions, and I revert to points relevantly made as part of the arguments on interpretation of the terms of the JVOA at [139].
[47] None of the present parties was involved in the JV at the time the JVOA was originally concluded. In that sense, the JVOA is inherited and there is accordingly no relevant factual matrix affecting the circumstances in which its terms were originally drafted for these parties.
[48] There have been two amendments to the terms of the JVOA, the first in 2002 and the second in December 2004. Again, there is no compelling factual matrix relevant to the current contractual dispute by way of context in which those changes were agreed.
[49] The scope of the JVOA, as originally entered into in July 1999, was reflected in recital E which originally specified as follows:
The Parties now wish to enter into this Agreement for the purpose of forming a joint venture, appointing an Operator, carrying out exploration, appraisal, development and production work and defining their respective rights, interests and obligations in respect of the exploration for Petroleum and the appraisal, development and production of any Discoveries in the Permit Area.
[50] On that original scope, the joint venturers were agreeing to pursue together steps up to the production of ―petroleum‖ which is given the meaning ascribed to it by the CMA, and in practice extends to all natural gas and liquid hydrocarbons (respectively ―gas‖, and ―condensate‖ or ―oil‖). The 2002 amendment to the JVOA
expanded the scope of the venture by adding to the last words of the recital as follows:
…development, production, marketing and sales of any discoveries in the
Permit Area.
That, and other changes made at the time, were intended to facilitate use of the
JVOA to regulate joint marketing of gas.
[51] Article 1 contains some six pages of definitions of words and terms used in the JVOA. Reference is made to some of those later, as they become relevant in interpreting the JVOA.
[52] The JVOA was to continue in effect ―for so long as the Permit remains in force and until all joint property has been removed and disposed of, and final settlement has been made amongst the Parties‖.19
[53] The scope of the agreement was defined in Article 3.1, which began:
(A) The purpose of this Agreement is to establish the respective rights and obligations of the Parties with regard to operations under the Permit, including without limitation the joint exploration, appraisal, development and production of Petroleum from the Permit Area.
[54] Article 3.1 then specified a list of activities that were outside the scope of the agreement. The list included the construction and operation of any facilities downstream from the point of delivery of the parties‘ shares of oil, and transportation of oil, in both cases, beyond the point of delivery, which was to be provided for in an off-take agreement for oil that was to be resolved in terms of Article 10.2 of the JVOA.
[55] Article 3.3 is headed ―Ownership, Obligations and Liabilities‖ and begins:
(A) Unless otherwise provided in this Agreement, all the rights and interests in and under the Permit, all Joint Property and any Petroleum produced from the Permit Area shall, subject to the terms of the Permit and the Act, be owned by the Parties in accordance with their respective Participating Interests.
19 Article 2.
[56] Articles 4.2 and 4.3 dealt respectively with the rights and duties of the operator. Article 4.3(A) provides that in the conduct of joint operations, the duties of the operator are to include 18 specific duties that are then described. These include:
(1) Perform Joint Operations in accordance with the provisions of local laws, rules and regulations, the Permit, the Act, this Agreement and the instructions of the Operating Committee not in conflict with this Agreement;
(2) Conduct all Joint Operations in a diligent, safe and efficient manner in accordance with good and prudent oil and gas field practice and environmental and conservation principles generally followed by the international petroleum industry under similar circumstances;
…
(5) Perform the duties for the Operating Committee set out in Article 5, and prepare and submit to the Operating Committee the proposed work programs and budgets and AFEs* as provided in Article 6;
(6) Implement such work programmes and budgets as shall, together with the relevant AFEs*, have been approved by the Operating Committee;
…
(* The role of AFEs, authorisations for expenditure, is described in [63] below.)
[57] Article 5 of the JVOA makes provision for the operating committee, beginning in Article 5.1 with provision for its establishment:
To provide for the overall supervision and direction of Joint Operations, there is established an Operating Committee composed of representatives of each Party holding a Participating Interest of 15% or more…
[58] Article 5.2 then addresses the powers and duties of the operating committee:
The Operating Committee shall have power and duty to authorize and supervise Joint Operations that are necessary or desirable to fulfil in a timely manner the terms of the Permit and properly explore and exploit the Permit Area in accordance with this Agreement and in a manner appropriate in the circumstances. Without limiting the generality of the foregoing, but subject to the other provisions of this Agreement, the powers and duties of the Operating Committee shall include:
(1) the consideration and the determination of all matters relating to general policies, procedures and methods of operation under this Agreement including the Safety, Health and Environmental Policy;
(2) the consideration, modification and approval or rejection of all proposed Exploration, Appraisal, Development and Production Work Programmes and Budgets, Development Plans and AFEs (including the amount of detail provided therein) prepared and submitted to it pursuant to the provisions of this Agreement;
(3) the determination of the timing, location objection and depth of all wells drilled as part of the Joint Operations and any change in the use or status of a well; and
…
(5) the determination of whether or not to proceed with Development Operations in respect of any Discovery and the manner in which such development shall be carried out.
[59] Article 5.3 provides that the representative of any party is authorised to represent and bind that party, and that representatives for all parties who have a participating interest of 15 per cent or more are entitled to vote and have a vote equal to the participating interest of the party that that person represents. Article 5.9 provides for a voting procedure in which decisions may be made by a majority vote of two or more parties having individually or in aggregate a participating interest of not less than 65 per cent (in the circumstances of the shares that have pertained at all relevant times), subject to defined exceptions. Article 5.9 also specifies those exceptions, in that the vote of all parties shall be required in respect of any proposal to approve a development plan, voluntary release or surrender of the permit, and any extension or renewal or unitisation of the permit.
[60] Subject to defined exceptions that are irrelevant for present purposes, Article 5.14 specifies that decisions taken by the operating committee ―…shall be conclusive and binding on all parties‖. The operating committee is the only forum provided for in the JVOA in which decisions about the operations of the JV can be made. Therefore, except on the few fundamental decisions on which Article 5.9 requires unanimity, the venturers all have to comply with majority decisions on matters within the scope of the JVOA.
[61] Article 6 deals with WP&Bs. First, in Article 6.1 with regard to the exploration and appraisal phase, and second in Article 6.2 with regard to development. Article 6.2(A) requires the operator to deliver a development plan to the parties with a first annual development work programme as soon as practicable
after an operating committee determination that a discovery should be developed. The operating committee is then required to approve or not approve the development plan. That is one of few decisions required by Article 5.9 to be made unanimously. Once a plan is approved, subject to the parties obtaining a mining permit in respect of the discovery, ―each party shall be committed and obliged to proceed with it‖.20
[62] The next phase, production, is provided for in Article 6.3, paragraph (A) of which provides:
(A) At least two months before the commencement of production and thereafter before the end of each Permit Year, Operator shall deliver to the Parties a proposed Production Work Programme and Budget detailing the Joint Operations in respect of production to be performed for the following Permit Year and the projected production schedule for the following Permit Year, and which is intended to be firm for the following Permit Year, together with a contingent Production Work Programme and Budget for the succeeding Permit Year and tentative Production Work Programmes and Budgets for the following 2 Permit Years, to enable estimation of annual revenues and budgets by the Parties and the intended staffing plan, (for information purposes). Within 30 Days of such delivery, the Operating Committee shall meet to consider, modify and then either approve or reject that proposed firm Production Work Programme and Budget. Approval by the Operating Committee of that proposed Production Work Programme and Budget will commit and oblige all Parties to proceed in accordance with it.
[63] Within an approved budget, Article 6.6 of the JVOA also provides for the operator to notify all non-operator parties of proposed commitments or expenditure in excess of $50,000, excluding general and administrative costs that may be listed as separate line items in an approved WP&B. These ―AFEs‖ afford the operating committee an on-going opportunity to oversee the expenditure of the parties‘ money by the operator and again, once the operating committee has approved an AFE, each party is committed to the expenditure involved.
[64] By Article 9, any party that fails to pay a funding requirement for the operator in full is deemed a defaulting party, and such a party is not entitled to attend operating committee meetings or to vote on any matter until the default has been
remedied.
20 Article 6.2(D).
[65] Article 10 then deals with what the heading describes as ―DISPOSITION OF PRODUCTION‖. First, it provides in Article 10.1 as follows:
Article 10.1 Right and Obligation to Take in Kind
Except as otherwise provided in this Article 10 or in Article 9, each Party shall have the right and obligation to own, take in kind and separately dispose of the share of total production available to it under this Agreement in such quantities and in accordance with such procedures as may be set forth in the offtake agreement referred to in Article 10.2 or in the special arrangements for Natural Gas referred to in Article 10.3 provided that Operator shall have the right and authority in conducting the Joint Operations to use or flare as much Petroleum as may be reasonably required by it, and the quantities so used or flared shall be excluded from production estimates to be provided by Operator.
[66] The 2002 amendments to the JVOA included inconsequential changes to the terms of Article 10.1, removing the article before ―Operator‖ in the seventh and last lines as the clause is reproduced above, and capitalising the reference to ―natural gas‖ in the sixth line.
[67] Article 10.2 is headed ―Offtake Agreement for Crude Oil‖ and its opening
paragraph provides as follows:
If Oil is to be produced from the Permit Area, the Parties shall in good faith, and not less than three (3) months prior to the first delivery of Oil, negotiate and conclude the terms of an agreement to cover the offtake of Oil produced from the Permit Area. This offtake agreement shall, to the extent consistent with the Act and the Permit, make provision, interalia, for:
That is followed by eight matters that are to be addressed in any such off-take agreement in relation to oil, such as delivery point, the process for the operator to provide periodic advice of estimates of total available production, inventory and overlifts and underlifts, nominations by the parties to the operator, elimination of overlifts and underlifts, and a process by which other parties might sell an entitlement to which one party fails to nominate.
[68] The first of the matters provided for was in the following terms:
(A) The delivery point, at which title and risk of loss of Participating Interest shares of Oil shall pass to the Parties interested (or as the Parties may otherwise agree);
[69] ―Participating Interest‖ is a defined term in Article 1, meaning:
…in respect of each Party the undivided interest expressed as a percentage held from time to time by that Party under this Agreement in the Joint Operations, Joint Property and all or any rights, property, obligations or liabilities in connection with the same.
[70] Article 10.2 concludes with the provision:
If an offtake agreement has not been entered into by the date of first delivery of Oil, the Parties shall be bound by the principles set forth in this Article
10.2 until an offtake agreement has been entered into.
[71] The heading of Article 10.3 is simply ―Natural Gas‖. Its current wording is
as follows:
The Parties may enter into special arrangements for the disposal of Natural Gas which are consistent with the Development Plan and subject to the terms of the Permit. These arrangements may provide for joint marketing and sales of Natural Gas as may be agreed between the Parties from time to time.
[72] As originally completed, this provision of the JVOA was as follows:
The Parties recognise that if Natural Gas is discovered it may be necessary for the Parties to enter into special arrangements for the disposal of the Natural Gas which are consistent with the Development Plan and subject to the terms of the Permit.
[73] Other relevant provisions include Article 15.1 which declares all the rights, duties, obligations and liabilities of the parties to be several, not joint or collective, states that each party is to be responsible only for its individual obligations, and records the parties‘ ―express purpose and intention that the ownership of their respective interests shall be as tenants in common in undivided shares‖. That article also negatives the agreement being construed as creating a partnership, and stipulates that in their relations with each other under the agreement the parties are not to be considered fiduciaries except as expressly provided.
[74] Article 19 provides that the applicable law of the agreement is the law of
New Zealand.
The Off-take Rules and Nomination Protocols
[75] The 3 March 2006 resolution of the operating committee was on terms that the parties ―…adopt, be bound by and implement, and to direct the operator to implement, offtake rules in accordance with and on the basis set out in the following paragraphs‖.21 The rules first provided that the WP&B required to be delivered by the operator was to include the operator‘s assessment of the total production available for the relevant year, the share of that available to each venturer, and the
operator‘s assessment of the minimum daily gas off-take required to maintain continuous gas deliveries for each day of the year.
[76] The operator was also to advise the parties four working days prior to the commencement of each calendar month of the expected maximum daily availability (MDA) for each day in the immediately succeeding month, and estimated MDA for each day in the two further months thereafter. That notification was also to advise any amendment to the operator‘s assessment of the minimum daily gas off-take required to maintain continuous gas deliveries.
[77] The resolution next contemplated that the operator would propose nomination protocols. These were to set out how the parties were to convey nominations for the amount of gas to be delivered to them each day, and within individual days. The off- take rules contemplated that each daily nomination provided by a joint venturer had to be for a quantity equal to or greater than that party‘s share of the minimum daily gas off-take and for equal to or less than that joint venturer‘s share of the MDA, as currently advised by the operator. If any nomination was not within those parameters then, where it was for less than that party‘s share of the minimum off-take, the quantity nominated would be delivered if the combined quantity of nominations of all parties was in excess of the minimum daily gas off-take. If the aggregate of the nominations was less, then the nomination by the party whose nomination was below its share of the minimum would be treated as a nomination for the minimum amount required to get total delivery up to the minimum daily gas
off-take. Where the nomination was for greater than a party‘s share of MDA for that
21 CB10835-10837.
day, then the operator would deem the nomination to be for the amount equal to that
party‘s share of MDA for the day.
[78] However, in a separate paragraph the operator was to reject any nomination if it sought delivery of an amount of gas which, when added to that party‘s share of the estimated minimum daily off-take for each day in the remainder of the year, would result in that party exceeding its share of the total production available for the whole year. (In other words, the operator would monitor the level of production going to each party, and prevent any deliveries that would result in ―overlifting‖.) That constraint was subject to a further separate paragraph providing that in the event of an underlift in any year by a party, that party would be permitted to nominate for a quantity of gas greater than its share of the total production available in the following year, but only to the extent that such nominations enable the party to recover its underlift in the sense of getting back into balance. The right to recover underlift was limited so that it could not occur where it would prevent another party from accessing that party‘s share of total production available in any year.
[79] The rules then separately provided:
Liquids are to be lifted by each PJVer in accordance with its percentage Participating Interest (regardless of gas nominations) and the principles of Article 10.2 of the JVOA.
[80] As contemplated in the 3 March off-take rules‘ resolution, nomination protocols in relation to the implementation of the gas off-take rules were circulated and resolved by a Shell/OMV majority at a further operating committee meeting on
26 April 2006.22 These protocols set detailed rules for the timing and content of
nominations that each party was to send to the operator, first for a rolling 12 month basis as to forecasts of off-take demand monthly, then for a rolling 28 day period on a weekly basis. In addition, there are separate nominations for the daily gas delivery requirements for the following week, with an additional requirement to give notice of any changes in gas delivery requirements for any given day, before 1pm the day preceding the day of delivery. To the extent intra-day nominations were allowable
under the Maui pipeline operating code, if a joint venturer sought to change its
22 CB11395.
nomination within a day, it was to advise the operator 60 minutes before any intra- day nomination cycle under the Maui pipeline operating code.
[81] As to obligations after deliveries had occurred, the nomination protocols required the operator to determine and advise each party of the allocated gas quantity, the total metered gas quantity through the export points and any calculated imbalance. There was a similar obligation on the operator to forward to each party a summary of that party‘s ―current gas balancing position‖.
The relevance of swing to the level of production
[82] Many potential purchasers of gas have fluctuating levels of demand, by hour, day, week or season. On the other hand, most large purchasers will have a constant base-load demand (a ―flat profile‖) and varying levels of demand above that base-load, depending on their business circumstances. Mr David Hunt, called by OMV as an independent expert in relation to gas usage and demand in New Zealand, produced a graph illustrating observed daily demand for gas in the period between September 2006 and September 2009. That graph is reproduced as Appendix 3 at the end of this judgment. Mr Hunt accepted in cross-examination that the graph demonstrates that there was a constant base-load demand for approximately
250,000 gigajoules per day,23 with fluctuations going as high on some winter days as
more than twice that, and an average calculated at somewhat more than 400,000 gigajoules per day. Todd‘s approach implicitly seeks to fulfil that base-load demand, whereas Shell and OMV seek to sell on terms that will attract buyers whose usage includes the substantial fluctuations above the ―base-load‖ level.
[83] Within the New Zealand gas market, there has thus far been no material capacity to store gas. Terms of sale that permit fluctuating levels of gas to be delivered, commonly referred to as ―swing‖, would therefore be important to such
If the plaintiff has suffered damage that is not too remote, he or she must, so far as money can do it, be restored to the position he or she would have been in had the breach of contract not occurred.
[510] Mr Murray‘s assessment depended on the premise that, had Todd known in early 2006 that it could obtain its share of full deliverability from Pohokura, then it would have committed at that time to long-term sales out to 2016 for all the additional gas. Further, Mr Murray‘s analysis was on the basis that Todd would have taken advantage of higher prices potentially available at that time, before the market became aware of substantially more gas being available from Maui, than the market considered was the case in light of a substantial downward redetermination of the extent of Maui reserves in 2003.
[511] Mr Murray‘s analysis accepted that if sales were not made in that window, then the price differential would drop substantially, and any loss would have to be valued on a substantially more modest basis. No alternative calculations were proposed. In addition, Mr Murray acknowledged that not all of the volume of
additional sales he originally attributed to Todd in this favourable window would
244 Todd closing submissions, paragraph 30.28.
245 T4223/21-28.
246 Burrows, Finn and Todd Law of Contract in New Zealand (3rd ed, LexisNexis, Wellington,
2007) at [21.2.1].
have been made because it depended on an upwards re-estimation of the extent of reserves at Pohokura not known to the parties until 2007.
[512] The basis on which damages were argued for at trial is in stark contrast to the quantification of losses when Mr Hall spelt out Todd‘s claims in a letter to Shell and OMV in July 2007. Todd quantified its damages at that time at $4-4.5 million for gas, plus $3.5-4 million for deferral of condensate.247 The projections of gas losses assumed Todd would get ―at least 3.2 PJ/a of gas until at least the end of the plateau period…‖. The letter treated Pohokura‘s maximum capacity as 82.5 PJ/a.
[513] The Court analysed the prospect of further sales by Todd in the course of analysing its counterfactual hypotheses under the Commerce Act causes of action.248
In challenging both the suggested conduct in the counterfactual, and the construction of Todd‘s claim for damages, Mr Goddard focused particularly on the need for Todd to have made what Mr Goddard labelled as a ―mega sale‖ in the short timeframe at the beginning of 2006, when Todd was aware of a further revision of Maui reserves, this time upwards, but the market was not. Todd‘s analysis also treats Shell and OMV as being unable to act as promptly as Todd would have, in negotiating long-term commitments for large volumes of gas. For all the reasons analysed in [384] to [439] above, I am satisfied that Todd cannot make out that such sale was more likely than not to have occurred.
[514] Todd did not invite analysis of the losses on any alternative loss of a chance basis.249 Given the substantial doubts established about a number of the impediments to Todd achieving favourable sales, the Court has simply not been provided with the evidentiary basis on which to test the proportionate prospects of such improved sales. Nor was any hypothesis along those lines tested in the course
of evidence or argument.
247 CB12895-12899.
248 [384] to [439] above.
249 See generally, Burrows, Finn and Todd Law of Contract in New Zealand (3rd ed, LexisNexis, Wellington, 2007); Benton v Miller & Poulgrain [2005] 1 NZLR 66 (CA).
[515] Accordingly, I am satisfied that had there been a breach of contract, Todd would not have been able to make out losses of the type postulated in Mr Murray‘s reconstruction.
[516] Two further issues that would arise in evaluating Todd‘s entitlement to damages should be noted. First, Shell and OMV identified numerous strands under the heading of failure to mitigate that they argued would very substantially limit any award to which Todd was entitled. A first point is that access to greater volumes of Pohokura gas has been in Todd‘s own hands. It could have concluded a GBA recognising the arrangements to apply to rebalancing the shares taken, without prejudice to its claim that the regime imposed by the present off-take rules was not within the powers of the operating committee. Such an arrangement could also have been concluded without prejudice to the outcome of these proceedings. Todd could then have contracted to sell, and taken at higher rates than Shell and OMV, subject to Shell and OMV having appropriate contractual commitments to redress the imbalance later, either by taking gas at higher levels, or by resolving a formula for financial adjustment in the event that the imbalances could not be redressed in terms of delivery of production.
[517] Second, Todd‘s case was that the presence of the off-take rules and the pattern of majority decisions taken by Shell and OMV reasonably caused Todd to fear for the level of production that Shell and OMV would authorise in subsequent years. This ―chilling effect‖ was claimed to operate to an extent that precluded Todd undertaking any further sales, at any level. The obvious rejoinder was that any such
―chilling effect‖ could not rationally operate in that absolute way. Shell and OMV would, in all probability, want to continue production at the same levels, and Shell has indicated a preference for increasing levels of production. The chilling effect claimed could therefore not operate to rationally deter Todd from pursuing a base level of sales for subsequent years, within reasonable parameters around the levels of production already approved by the majority.
[518] A further concern raised was the period of delay since Todd commenced the proceedings, in circumstances where it was claiming on-going losses. Todd opposed an earlier initiative on behalf of Shell and OMV to separately determine Todd‘s
challenge to the lawfulness of the off-take rules. Instead, Todd has insisted on protracted interlocutories and the building of what has been a very extensive case, where on the terms of its own claims, every month has added very significantly to the damages it seeks from Shell and OMV. If the point became material, Shell and OMV could well be entitled to argue that damages ought not to run through at least some part of the protracted period of preparation for the substantive hearing.
Summary
Contract claims
[519] I have found that Todd cannot make out any of its claims for breach of contract. The right and entitlement addressed in the provisions on disposition of property in Article 10.1 relates to Todd‘s proportionate share of the gas actually produced at the PPS. That volume is appropriately settled on an annual basis by the budgetary process, proposed by the operator and eventually approved by the operating committee.
[520] The off-take rules constitute special arrangements relating to disposition of gas for the purposes of Article 10.3, and were promulgated in accordance with provisions of the JVOA by majority vote of the operating committee. Alternatively, if they cannot have status as special arrangements in the absence of unanimity, then the parts of the off-take rules dealing with disposition of gas were competently concluded by a majority resolution of the operating committee.
[521] Todd has made out certain of the aspects of conduct, particularly by Shell, of which it complained. However, those criticisms do not constitute a breach of any relevant obligation of good faith. Nor is Shell in its capacity as the operator of the Pohokura JV in breach of any fiduciary obligations owed to Todd.
[522] Notwithstanding that Todd was incorrect in asserting the interpretation it did of Article 10.1, it was entitled to connect its export pipelines in August 2006, and that entitlement continues.
[523] In the event that I am wrong on all these conclusions, I have analysed the claims brought by Todd for damages, for breach of contract. I am satisfied that it could not make out the losses claimed.
Commerce Act claims
[524] All of Todd‘s claims under the Commerce Act have been unsuccessful. Todd‘s claims failed two preliminary hurdles. First, an answer to the complaints they made of anti-competitive behaviour lay in their own hands. Second, they failed to make out a material element of the market they pleaded as the one in which the alleged anti-competitive behaviour occurred. In addition, we are satisfied that Todd could not make out a substantial lessening of competition, and the challenged arrangements do not constitute price fixing so as to attract per se liability under s 30. Nor do they constitute trade boycotting so as to be caught by s 29.
Costs
[525] Shell and OMV are entitled to costs. In light of the final observation I am about to make, I urge discussion between the parties on costs, having regard to the desirability of a positive on-going business relationship, rather than a sole focus on the history of the litigation. If needed, the parties may have a period of six months before reverting to the Court, should resolution of the costs issues not be possible between them.
A last word
[526] Any reader with the fortitude to have reached this point of an already overly long judgment will inevitably come to the view that it would be naïve in the extreme to urge that this judgment not be appealed, in light of the amounts at stake and the tensions in the relationship between the parties. Nonetheless, I take the unusual step of recording my view that the issues this judgment leaves the parties to grapple with ought to be resolved by negotiation between them, and not by further litigation. I venture that view not as a Judge apprehensive that the Court of Appeal might arrive
at a different view on any of the material issues. Rather, I do so as a New Zealander concerned that the resource vested in these parties by virtue of the permit they have from the Crown deserves to be managed without the significant inefficiency caused by the distraction of this dispute.
[527] There was general consensus among the expert economists that a GBA is, in all rational evaluations, inevitable. Professor Richardson agrees with that. Even on Todd‘s view of the dispute, flexibility of off-take has substantial value and after the very thorough airing all Todd‘s arguments have had, the prospects of securing any basis for disproportionate off-take without enforceable arrangements to redress the physical and/or financial consequences of doing so are surely negligible.
[528] This is a significant business relationship that needs a thorough breath of fresh air. That is possible in the context of renewed attempts to agree a GBA but seemingly impossible whilst the competing positions advanced in the litigation continue to be pursued.
Dobson J for the Court
Solicitors:
Russell McVeagh, Wellington for the plaintiff
Minter Ellison Rudd Watts, Wellington for the first defendant
Simpson Grierson, Wellington for the second defendant
Appendix 1
Glossary of Abbreviations and Terms
3rd ASC Third Amended Statement of Claim AFEs Authorisations for expenditure AIPN Association of International Petroleum Negotiators CB Common Bundle CMA Crown Minerals Act 1991 EPJV Separate joint venture between Shell and OMV for ownership and
operation of one set of export pipes from the PPS
FDP Field Development Plan FID Final Investment Decision GBA Gas Balancing Agreement GSA Gas Sales Agreement JV Joint Venture JVOA Joint Venture Operating Agreement M&M McKee and Mangahewa fields MDA Maximum daily availability MED Ministry of Economic Development MMCs Maui Mining Companies Overlifter Joint venture party taking more gas than its proportionate share of
production in any given period.
P85/P50 etc A measure of reserves, referencing the probability of that outcome. A
―P85‖ measure of reserves is one that has an 85 per cent chance of being exceeded, and P50 where there is a 50 per cent chance of that level being exceeded.
PJ Petajoule - a unit of measurement of gas PJ/a Petajoules of gas per annum PPS Pohokura Production Station ROFR Right of First Refusal – category of sales contracts for Maui gas. SLC Substantial lessening of competition SSNIP test Small but significant non-transitory increase in price – see [352]. STOS Shell Todd Oil Services Limited Swing Facility for buyer of gas to take fluctuating volumes of gas in different time
periods.
T Transcript TJ Tetajoule – unit of measurement of gas. 1,000 tetajoules = 1 PJ the Act Commerce Act 1986 the
Commission
Commerce Commission Underlifter Joint venture party taking less gas than its proportionate share of
production in any given period.
WP&B Work Programme and Budget
Appendix 2
List of Witnesses
Todd Factual Witnesses
Richard Tweedie, Managing Director of Todd
Chris Hall, Todd In-House Counsel and director of numerous Todd Energy Group companies
Hamish Tweedie, Group Manager–Gas for the parent of the Todd plaintiff company, responsible for managing Todd‘s upstream and wholesale gas sales as well as downstream sales by Nova Gas Limited and the Auckland Gas Company Ltd.
Winfred Boeren, Technical and Onshore Assets Manager for the plaintiff company‘s
parent with relevant responsibilities for M&M, also at Kapuni.
Paul Hunt (brief of evidence admitted by consent, no cross-examination), energy analyst at MED.
Todd expert witnesses
Kieran Murray, Economist, Wellington. Credentials described at [332] of the judgment.
Cento Veljanovski, Economist, London, UK. Creditials described at [333]. James Sweeney, Economist, California, USA. Credentials described at [336]. Rosalind Archer, Senior Lecturer, Department of Engineering Science, University of
Auckland. Credentials described at [426].
Shell factual witnesses
Andrew Beaumont, Engineer, until February 2004 employed by STOS with responsibility for development of the Pohokura project.
Murray Jackson, Contract Support Manager for Shell‘s upstream companies in
New Zealand.
Ajit Bansal, Chairman of Shell in New Zealand, January 2004 to June 2007.
Robert MacDonald, Shell In-House Lawyer.
Shell expert witnesses
Jerry Hausman, Economist, Massachusetts, USA. Credentials described at [334].
OMV factual witnesses
George Goodsir, Commercial and Legal Manager at OMV in New Zealand, April
2004 to August 2009.
Michael Wright, Commercial Executive at OMV, July 2003 to May 2004.
John Burt, Commercial Executive at OMV, August 2004 to August 2006, and since
January 2009.
OMV expert witnesses
Gustavo Bamberger, Economist, Chicago, USA. Credentials described at [335]. Geoffrey Barker, Petroleum Engineer, Perth, Western Australia. Credentials
descried at [425].
David Hunt, Wellington based consultant on energy sector issues, former senior executive of Contact Energy.
Appendix 3
(Extract from evidence of David Hunt, referred to at [82] above)
Figure 14 – Observed daily gas demand (GJ/day)
600,000
500,000
400,000
300,000
200,000
Observed demand Ave (Sep 06-Sep 09)
100,000
0
Appendix 4
(Extract from evidence of David Hunt, including footnotes, referred to at [88] above)
Figure 19 – Swing ratios for major producing gas fields
140%
Daily
We e kly
120%
100%
80%
4 we e kly
Daily (de mand) We e kly (de mand)
4 we e kly (de mand)
60%
40%
20%
0%
Pohokura (SHL OMV) Pohokura (Todd) Kapuni McKee Mangahewa Turangi Maui
66. The key points regarding the observed swing ratios are:
(a) Pohokura gas production attributable to Shell and OMV has the lowest swing ratio of all sources shown – ie the ‗flattest‘ production profile. It is also the only gas source with lower swing ratios than overall gas demand (shown as lines).
(b) Production from the Todd share of Pohokura and from the Kapuni field250 exhibits intermediate swing, approximating the swing in overall gas demand.
(c) Gas production from the McKee Mangahewa,251 Turangi252 and Maui fields have much higher swing ratios than the other sources, with ratios well above the levels observed for overall gas demand.
250 As noted later, swing at Kapuni is understood to be entirely related to variations in production capability.
251 The McKee Mangahewa figures are not directly comparable with other estimates due to gas reinjection activities at McKee. This issue is discussed later in my evidence.
252 The observed ratio for the Turangi field should be treated with caution. There is evidence that gas flows occurred from the field to Methanex plant in 2008 that are not captured in the data used for this analysis. The inclusion of the additional data would be likely to reduce the swing ratio for Turangi (assuming the
sales to Methanex have a relative flat profile).
Appendix 5
(Extract from evidence of David Hunt, including footnotes, referred to at [347] above)
Figure 1 - Gas consumption in 2008 (PJ)
0.2
31.0
4.3
3.3
28.7
60.8
Electricity Generation
Cogeneration
Other Transformation Petro-chemicals Commercial Residential
Industrial
Transport
2.5
23.1
Source: MED ‗Energy Data File‘. July 2009.
Figure 2 - Gas consumption over time
300
250
200
150
100
50
Petro-chemicals
Transport
Electricity Generation
Cogeneration
Other Transformation
Industrial
Residential
Commercial
0
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: MED ‗Energy Data File‘. July 2009.
15. Figure 1 and Figure 2 illustrate a number of important features of gas demand:
(a) Overall gas demand fell steeply between 2001 and 2005, but has recovered somewhat since then.
(b) Gas usage within the electricity generation and cogeneration sectors has been a significant component of overall demand and has accounted for over
50% of demand in recent years. It has fluctuated through time, in part due to changing hydrology conditions and partly due to increasing use of coal at
the Huntly power station instead of gas.
(c) The 'direct use' category has grown slowly through time, and is dominated by industrial customer usage.253
(d) Gas usage as a chemical feedstock has fluctuated through time. In 2000, it accounted for approximately 43% of total demand, but since then has declined sharply. In 2008, for example, this usage accounted for approximately 19% of all gas consumed in New Zealand.
16. The steep fall in gas demand over the 2001-2005 period occurred mainly because of
declining usage by two parties… (Huntly Power Station and Methanex).
253 Note that some of the fall in commercial sector consumption over time may be attributed to classification changes in the MED data and/or returns not being filled out on a consistent basis over time. In particular, some of this consumption may have been attributed to the industrial sector in later years.
1
0
1