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Todd alleges Shell, OMV colluded

TVNZ

Published: 5:47AM Tuesday February 16, 2010

Multinational Shell “colluded” with Austrian oil company OMV by restricting the gas and oil they allowed to be produced from the Pohokura gas field in competition with gas from the Maui field, in which Shell holds a major stake, the Todd family claimed on Monday.

Todd Pohokura Ltd went to the High Court at Wellington seeking damages of $274 million from its international partners in Taranaki’s Pohokura gasfield, Shell Exploration NZ Ltd and OMV NZ Ltd.

Todd alleged that from 2006 and each year since Shell and OMV constrained Pohokura production to 70 petajoules (PJ) of gas, when it could produce 86PJ.

Shell holds 48% of Pohokura, with Todd and OMV each holding 26%.

The case is before Justice Andrew Dobson, assisted by specialist Professor Martin Richardson.

QC Jim Farmer, representing Todd, on Monday told the court that it claimed Shell and OMV worked together “colluding to inhibit Todd’s ability to sell gas and condensate (oil)”.

Pohokura has been estimated to contain 700 billion cubic feet of gas and 42.8 million barrels of light oil condensate.
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Farmer said the Pohokura joint venture gave each party the right and obligation to take and sell its share of the total available production.

The claimed difference between gas available and the amount allowed to be taken was 16PJ – which meant Todd, with a 26%stake, was missing out on sales of up to 4PJ each year. This gap was distorting the market, he said.

The three owners had “good faith” obligations to each other, and Shell also had a fiduciary duty in connection with its role as the field’s operator.

“Shell is in breach of its good faith duties as a partner,” he said.

Farmer said the partners could agree to specific arrangements for varying the amount of gas taken, but Todd had refused to agree to taking less than the amount of gas available, so Shell had controlled the flows through the operation of the field, delivering only 70PJ a year, by dominating the voting on the operating committee.

“There never has been a special agreement,” he said. “Todd can’t be deprived of its property right.”

Farmer alleged such a constraint was a breach of the Commerce Act’s rules against substantially reducing competition. Limiting the output of gas had the effect of raising prices by controlling supply.

Todd alleged Shell was concerned about sale of Pohokura gas eroding its earnings from the Maui field, but said the effect on Maui gas sales was less of a concern for Todd, which had only a 6% stake in that field.

Farmer alleged a key issue was the different ways the companies were selling their gas, with Shell and OMV with customers such as electricity generators taking a specified amount, equivalent to Shell’s share of the 70PJ a year total output.

Shell had the security of being able to boost production if necessary, through its control of the field’s operations. Todd had no such security, and had the most to gain from selling as much gas as possible from the available flows.

Farmer said that when a review in 2003 suggested there might be less gas left in the Maui reserves than had been previously thought – and prices lifted – the three partners successfully sought Commerce Commission approval for joint marketing of the Pohokura gas.

But in 2005 and 2006 it became apparent there was more gas in the Maui reserves, and Shell might even be faced with a surplus of gas.

Concerns about Todd getting ahead of its two partners in sales of the Pohokura gas led to production constraints on that field in the form of an “offtake regime”.

Farmer noted Shell and Todd had originally jointly operated the Maui and Pohokura fields, through Shell Todd Oil Services (STOS), a 50:50 joint venture that had been running oil and gas enterprises for the previous 50 years.

Shell and OMV were expected to begin their defence in about three weeks, nearly halfway through the hearing.

Late next month, the trial is expected to feature an unusual “hot tub” (CRRCT) session, with expert witnesses on the economics for the petroleum sector appearing together as a panel to each address the evidence of the opposing side.

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