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A case of good oil, but bad blood

Shell’s reputation was besmirched by the conduct of its New Zealand executives, whose court testimony Justice Wild rejected as unreliable.

Last updated 09:32 26/03/2010
By NICK SMITH

OPINION: Shell’s standing as a good New Zealand corporate citizen is on the line.

It will be at least  three weeks before Todd Energy’s fascinating $274 million lawsuit against oil multinational Shell finishes at the High Court in Wellington.

Justice Robert Dobson, assisted by economist lay member Professor Martin Richardson, is then likely to reserve his decision on the exemplary damages claim, relating to efforts by Shell and Austrian partner OMV to limit production at the Pohokura gasfield.

Todd alleges this was to increase prices and lessen competition. Reduced production also harmed Todd’s interests.

The Kiwi company’s claims are the culmination of more than a decade of bad blood between Todd and Shell, who have gone at each other  in at least five court battles since 2002.

Todd chief executive Richard Tweedie describes the latest legal challenge as akin to David battling Goliath, just as he did earlier last decade when his legal team bloodied the nose of the oil giant over a separate but related battle to oust the local energy company from its Taranaki gas interests.

It is an apt description given the relative resources of the two combatants. Even so, Goliath must be mightily sick of the pounding it is receiving from its lightweight competitor.

“We’ve gone through five courts, 10 judges and on every occasion Shell lost,” Tweedie told me after the Court of Appeal rejected Shell’s protestations about the earlier dispute.

That battle was about the Dutch oil giant’s attempt to again amplify its return, but in this instance, remove a large obstacle should it choose to sell its New Zealand assets.

Its agreements with Todd represented a $100 million hurdle to a clean sale so it sought to load costs on to its smaller New Zealand partner to compel it to withdraw from  contracts.

In the end, Shell decided to retain its gas interests but sell its chain of service stations, no doubt partly because of Todd’s court success.

Shell’s reputation was besmirched by the conduct of its New Zealand executives, whose court testimony Justice Wild rejected as unreliable.

Success for Todd in the latest fracas would  be a crippling blow to Shell’s standing as a good New Zealand corporate citizen, already in doubt after its earlier court exposure.

Todd’s lawyer, Jim Farmer, QC, told Justice Dobson last month that Shell and OMV have since 2006 sought to manipulate production of the Pohokura field, north of New Plymouth, to artificially reduce its capacity from 85 petajoules to 70 petajoules, a constraint that continues today.

The reduction represents not only a breach of the joint venture operating agreement but deprivation of Todd’s property right, Farmer argues.

“Each party has the right and obligation to take and sell its share of the total production capable of delivery at any given time.”

At the same time, Shell has denied Todd, until forced by court injunction, to connect its export pipes to the production system, a breach of contract and “a further attempt by the defendants to limit Todd’s offtake from the field”, says Farmer.

Those accusations are grave enough but more serious is the charge that limiting production was in intent and effect an attempt to control prices and lessen competition.

“The inevitable effect of that constraint is to deprive the market of a volume of gas that would otherwise be available,” Farmer says.

“That in turn, has an inevitable effect on the price of gas, it being a fundamental tenet of anti-trust economics that output and price are inversely related.”

Farmer provided the court with internal Shell emails that set out its strategy: Pohokura sales would take sales off Maui so that it was desirable, in Shell’s interest, to limit production.

Shell owns 83.75 per cent of Maui but only 48 per cent of the Pohokura field, of which both OMV and Todd hold a 26 per cent share.

“Shell and OMV between them have also been able to control the amount of Maui gas available to the market, with Todd being unable to take and sell its [6 per cent] share of Maui gas separately,” says Farmer.

It is not the first time Shell documents have become court property. In the earlier case, a paper titled “Project Zinfandel” was tabled, revealing the plan to replace Shell Todd Oil Services, the operator of the Maui and Pohokura fields exploration ventures and Omata tank farm, with Shell Petroleum Minings.

The $274m Todd claim in exemplary damages is a huge amount, one the respondents describe as “totally unrealistic”.

Given Shell’s court track record, which Justice Dobson will bear in mind if he finds in Todd’s favour, even such an eye-watering sum cannot be ruled out.

It would certainly pay for a very expensive bottle of zinfandel, to be uncorked on the judge’s ruling.

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