Gas hunt results poor, court told

By KRIS HALL – The Dominion Post | Wednesday, 11 June 2008

JOHN SELKIRK/The Dominion Post

COURT BATTLE: James Patek outside Auckland’s High Court, which is hearing former Southern Petroleum shareholders’ lawsuit against Shell – New Zealand’s longest-running insider trading case.

Production fall-offs and poor exploration results prompted a “dramatic decline” in Southern Petroleum’s shares before its 1996 takeover by Fletcher Challenge Energy, a court has been told.

Former Fletcher Challenge Energy director James Patek said he was unmoved by suggestions of unproven deep gas prospects in Taranaki’s Mangahewa gasfield given past drilling failures, and was confident the 75 cents-a-share price offered to Southern minorities was fair.

About 700 former Southern Petroleum investors are seeking tens of millions of dollars from oil giant Shell – which inherited the assets and obligations of Fletcher Challenge Energy after a 2001 takeover – amid claims their shares were undervalued.

The plaintiffs allege that revelations from a team of experts at a deep gas study presentation in New Plymouth in late 1995, relating to the Mangahewa gasfield, prompted Mr Patek to force through the takeover of subsidiary Southern Petroleum.

They allege he did this to gain access to untapped gas reserves “potentially bigger than Maui” and thus obtain a commercial advantage for the Fletcher Challenge Group.

Mr Patek said the claims lacked substance because he was not privy to such information till after the takeover and at the time was unconvinced drilling in the area would yield economic success.

“Between 1960 and 1995 seven wells had been drilled into the Mangahewa structural feature with no commercial production achieved,” he said.

Mr Patek said he was aware of “this dismal history” and it impacted on his perspective on the prospects for deep gas, particularly in the northern portion of the Taranaki Basin.

Mr Patek was a director of both Fletcher Challenge subsidiaries, Petrocorp and Southern Petroleum, in 1995.

The two companies had split onshore and offshore exploration interests and entitlements in Taranaki gasfields through an alignment agreement struck in 1993.

By June 1995, Petrocorp owned nearly 85 per cent of the shares in Southern. The rest were owned by members of the public.

“In the 12 months prior to June 1995, Southern’s share price had fallen dramatically by 45 per cent, reflecting rapidly declining production from the Waihapa and Ngaere fields, following unexpected water breakthrough,” Mr Patek said.

“The fall in share price was based largely on production fall-offs and poor exploration results.”

In August 1995 a bid for Southern Petroleum’s remaining shares was launched through takeover vehicle Petroleum Industries, a wholly owned subsidiary of Petrocorp, at 63c a share.

It was rebuffed by significant shareholders, Mr Patek said, on grounds related to Southern’s valuation.

Complicating the deal was an award by the Government of five onshore Taranaki exploration permits to Southern/Petrocorp.

In addition, Petrocorp had acquired interests in five exploration permits in which Southern had the option to acquire a 50 per cent interest through the 1993 alignment agreement.

After a review of Southern interests a revised share price of 75c was offered, despite opposition from the Fletcher Challenge chief executive at the time, Hugh Fletcher, Mr Patek said.

“Mr Fletcher was vehemently opposed to increasing the offer price, as he was sceptical of the value already attributed to the exploration portion of the [Southern] portfolio and as a matter of principle against what he saw as a tried and true `greenmail’ tactic by large minority shareholders.

“Had I believed there was information regarding Mangahewa that would have supported my attempts to justify an increased offer price, I would have raised it … on the basis of the information available to me at the time, I was firmly of the view that the price offered … was more than sufficient.”

The case continues.