SMELLIE SNIFFS THE BREEZE: Fruits of Pohokura

SMELLIE SNIFFS THE BREEZE: Fruits of Pohokura

by Pattrick Smellie

July 14 (BusinessDesk) - As soured corporate relationships go, it would be hard to go past the 55 year-old partnership between New Zealand-owned oil company Todd Energy and its multi-national partner, Shell.

This week's judgment from Judge Richard Dobson, dismissing the $274 million damages claim brought by Todd against Shell and the Austrian oil company, OMV, over offtakes from the Pohokura oil and gas field are the latest in a string of litigation between Todd and Shell. He records the depth of ill-feeling in one fruity quote after another, making the 170-plus judgement an almost entertaining read.

As the judge himself notes, the rancour between the parties goes back so far it's impossible to stay "who cast the first stone", but if we confine matters to major court battles of the last decade, the score currently sits at one-all.

Shell lost in 2006 an attempt to sever the relationship with Todd over gas processing from the jointly-owned Maui gas field, managed through the Shell Todd Oil Services joint venture, much to Todd's delight.

Meanwhile, they were also partners, along with more recent entrant OMV, in the Pohokura oil and gas field, just offshore north of New Plymouth, which has now replaced Maui as the country's largest source of natural gas and vital to keeping baseload electricity generators running.

In 2006, Todd learnt that Shell and OMV - who between them own 74% of Pohokura to Todd's 26% - had agreed secretly to vote together on operational decisions relating to the Pohokura field.

In Todd's view, this led Pohokura ouput being limited in order both to frustrate Todd and to underpin the price of gas to major users as supply became constrained with the rundown of Maui.

The extent of that constraint is writ large in the latest MED Energy Data File, which shows natural gas for electricity generation jumped by almost a third to over $7 a Gigajoule in 2009. While Todd would probably argue that reduced Pohokura contributed to that, the judge in effect disagreed, saying Todd had failed to prove the extent of damages claimed, even if his judgment were overturned.

The reality is that gas prices are rising anyway, and the truth about oil and gas resources is often less about exactly how much is in the ground than how much it costs to extract. Unless it's truly exhausted, it's always likely that an oil and gas field will grow if the price of oil and gas keeps rising.

The suspicion is also that the oil majors, which include Todd in the New Zealand context, know there's more oil and gas to come from known fields than has currently been disclosed. That's why the Crown Minerals unit of the Ministry of Economic Development has been seeking information from all players about so-called P10 reserves - meaning areas where there's even a 10% chance of finding more reserves. So far, only P50 and P90 reserves have ever been disclosed.

And given Todd Energy managing director Richard Tweedie's long-standing and almost airy confidence about gas supplies beyond 2015, it seems fair to assume that he and the Maui and Pohokura partners know more than they've told us so far about the likely true size of those and other fields. In that sense, the testy triumvirate of Shell, OMV and Todd is itself playing a game with gas consumers to ensure that it can maximise the price it receives for the gas it's prepared to extract.

Nothing wrong with that. It's purely commercial behaviour.

In essence, Judge Dobson has agreed, in that he found there was nothing illegal or contractually offensive about Shell and OMV playing the same game with Todd over Pohokura output rates, reflecting the "negative power" that Shell enjoys because of its majority ownership of the field.

While the judge agreed it was perhaps not the greatest show of good faith since Adam was a boy, Shell was nonetheless entitled to wield such influence.

"I am not satisfied that any of Shell's relevant conduct in respect of Pohokura occurred for the purpose of harming Todd," he found, although he did find there was a case for "a thorough breath of fresh air" to be breathed into a surprisingly toxic relationship, which Tweedie himself has described as "truly a David and Goliath struggle, a little New Zealand company trying to act in its and New Zealand's best interests versus the might of a large multi-national only interested in itself and going to any lengths to get its way."

To anyone who has ever negotiated with Todd - one of the country's most powerful private companies - for serious quantities of gas, such a statement is liable to cause a snort of bitter mirth. Todd has always played for keeps, and the judge credits the company with bringing "skill, determination and continuity of personnel to counter Shell's intitiatives."

The judgement records just how paranoid Shell became of Todd, with numerous internal memos discussing Todd's routinely succeeding in wringing value from the partnership at Shell's expense.

"Shell have a guarded respect for Todd, yet they do not respect Shell," sniffed a Shell memo in June 2003. "They are extremely good at bullying multi-nationals, extracting value from them, and their general (guerilla) tactics are: take and take, but never give; divide and conquer; attack until the 'weak' multi-national gives in."

In that sense, Tweedie might be said to protest too much over Todd Energy's defeat this week.

After all, in the battle of David and Goliath, it was the little guy who won in the end.

(BusinessDesk) 11:33:09

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