ORDER LIMITING DISTRIBUTION OF THE UNREDACTED VERSION OF THE JUDGMENT TO THE PARTIES AND THEIR LEGAL RESPRESENTATIVES.
THIS REDACTED VERSION (FROM WHICH MATERIAL HAS BEEN OMITTED FOR CONFIDENTIALITY REASONS) IS FOR PUBLIC RELEASE.
IN THE COURT OF APPEAL OF NEW ZEALAND
CA508/2010 [2015] NZCA 71
BETWEEN TODD POHOKURA LIMITED Appellant
AND SHELL EXPLORATION NZ LIMITED First Respondent
AND OMV NEW ZEALAND LIMITED Second Respondent
Hearing: 15–23 September 2014
Court: Stevens, Wild and Cooper JJ
Counsel: J A Farmer QC and A S Olney for Appellant L J Taylor QC and O J Meech for First Respondent D J Goddard QC and T C Stephens for Second Repondent
Judgment: 20 March 2015 at 10 am
JUDGMENT OF THE COURT
A The appeal is dismissed.
B The cross-appeal by Shell Exploration NZ Ltd is dismissed.
C Todd Pohokura Ltd must pay costs to Shell Exploration NZ Ltd and OMV New Zealand Ltd calculated as for a complex appeal on a band B basis, together with usual disbursements, provided that the daily recovery rate is to be uplifted by 50 per cent. We certify for two counsel.
TODD POHOKURA LIMITED V SHELL EXPLORATION NZ LIMITED CA508/2010 [2015] NZCA 71 [20 March 2015]
D An order is made limiting distribution of the unredacted version of the judgment to the parties and their legal representatives.
E An order is made prohibiting search of the Court file unless permitted by a Judge of this Court after hearing from the parties. ______
REASONS OF THE COURT
(Given by Cooper J) Table of Contents
Para No Introduction [1] Factual background [9] The work programme [32] The proposed gas balancing agreement [39] Offtake rules and nomination protocols [45] Challenge to offtake regime [52] The contract claims The proceeding in the High Court [55] The appellant’s arguments in this Court [66] The respondents’ arguments [76] Approach to interpretation of the JVOA [80] Analysis [87] The Commerce Act causes of action The claims [150] High Court findings [154] The Commerce Act appeal [170] The relevant market [171] Approach to market definition [175] Market definition: this case [180] The factual and counterfactual analysis (i) The factual [198] (ii) The counterfactual [205] The effect of the alleged anti-competitive conduct [212] The purpose of the alleged anti-competitive conduct [253] Sections 30 and 31 [272] Damages [284] Shell’s cross-appeal [285] Result and costs [300]
Introduction
[1] The appellant, Todd Pohokura Ltd (Todd) and respondents, Shell Exploration NZ Ltd (Shell), and OMV New Zealand Ltd (OMV), are participants in a joint
venture that mines petroleum from a field at Pohokura, located offshore from Motunui, on the North Taranaki Coast. Todd appeals and Shell cross-appeals against a decision of the High Court resolving disputes arising from the joint venture.1
[2] The activities of the joint venture are governed by a Joint Venture Operating Agreement (JVOA). Todd, Shell and OMV were successors to the rights of the original parties. Pursuant to the joint venture, petroleum is mined and supplied to the parties as gas and condensate in quantities intended to reflect their respective participating interests in the joint venture.
[3] Under the JVOA, mining activities are controlled by an Operating Committee consisting of representatives of the parties. On 3 March 2006, the Operating Committee purported to make a resolution on behalf of the “Pohokura Joint Venturers” to adopt, be bound by and to direct the Operator of the gas field to implement certain “offtake rules” governing the production of gas. Todd’s representative on the Operating Committee voted against the adoption of the offtake rules. Todd alleged that both the rules and associated “nomination protocols” had not been validly adopted and breached its contractual rights. It is said the rules and protocols had the effect of depriving Todd of its proper entitlement to gas under the JVOA.
[4] Todd’s contract claim was founded on art 10.1 of the JVOA. Todd claimed art 10.1 gave it the right to take petroleum in amounts that reflected the extent of its participating interest in the joint venture, calculated on the basis of the facility operating at maximum capacity. However, Shell and OMV claimed that the Operating Committee could control the rate of production having regard to the relevant provisions of the JVOA.
[5] Todd also claimed that the offtake rules and actions taken to implement them constituted contracts, arrangements or understandings between Shell and OMV that were in breach of ss 27, 29 and 30 of the Commerce Act 1986. Todd claimed they had the purpose, effect or likely effect of substantially lessening competition in a
1 Todd Pohokura Ltd v Shell Exploration NZ Ltd HC Wellington CIV-2006-485-1600, 13 July 2010 [High Court judgment].
market comprising producers of gas and first point of sale customers.2 For the purposes of this part of the claim, Professor Martin Richardson, a Professor of Economics at the Australian National University, sat as a lay member of the High Court. Dobson J recorded that:
[5] Professor Richardson, a Lay Member of this 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 … 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 … 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] Todd’s claims were rejected by the High Court. The Court held Todd could not establish the various causes of action it had pleaded and, even if it could, it had not shown the impugned conduct had resulted in loss to Todd.
[7] Todd now appeals.
[8] We begin by setting out the factual background. We then address Todd’s appeal against the High Court’s conclusions on the claims under, respectively, the JVOA and the Commerce Act. A concluding section will deal with a cross-appeal by Shell.
Factual background
[9] The original parties executed the JVOA on 15 July 1999. As the High Court noted, its terms were substantially based on a standard form contract developed in 1995 by the Association of International Petroleum Negotiators, widely used as a starting point for such contracts.3 Although the Association is an organisation based in the United States, the model contract was one intended for use outside the United States, Canada and the United Kingdom. It covers the three broad phases of petroleum mining: appraisal, development and production.
2 A further claim that the offtake rules had the purpose, effect or likely effect of controlling or maintaining the price of gas and were exclusionary provisions for the purposes of s 29 of the Commerce Act 1986 was rejected in the High Court and has not been pursued on appeal. 3 At [45].
[10] The original parties to the JVOA were Fletcher Challenge Energy Taranaki Ltd (Fletcher) and Preussag Energie GmbH (Preussag), a company incorporated in Germany. Those parties and two others had previously been granted a permit effective from 1 December 1995, giving them the exclusive right to explore for petroleum in an area of over 780 square metres in the North Taranaki Bight. The other two parties subsequently withdrew from the permit, leaving Fletcher and Preussag with the participating interests of 66.667 per cent and 33.333 per cent respectively, as recorded in art 3.2 of the JVOA.
[11] The permit was granted by the Minister of Energy under s 25 of the Crown Minerals Act 1991, for a term of five years. The permit remained in force when the JVOA was executed. The definition of “permit” in art 1 specifically referred to the permit in the following terms:
Permit means Petroleum Exploration Permit No. 38459 issued by the Minister on 1 December 1995, including any variations, extensions or renewals of it, and any other permit acquired or granted in substitution (in whole or in part) for it (including a Mining Permit).
[12] As contemplated by that definition, the exploration permit was subsequently replaced by a mining permit but the exploration permit remained in force when the JVOA was executed and although there were subsequent amendments, many of the key provisions that need to be construed are unaltered from their original form. The fact that the JVOA was executed at a time when the parties originally bound by it were still in the exploration and appraisal phase, unaware whether they would find an exploitable resource and if so, what it would comprise, is an important part of the factual matrix in which the agreement must be construed.
[13] Fletcher agreed to assign separate participating interests under the agreement to Shell (Petroleum Mining) Ltd and Todd Petroleum Mining Company Ltd of 18.333 per cent and 15 per cent respectively. As a consequence, Fletcher’s share was reduced to 33.3337 per cent. A significant discovery was made in February 2000. In September 2000, Fletcher amalgamated with a number of other companies into a newly named company, Energy Exploration NZ Ltd (EENZL). Fletcher Challenge Ltd (which included EENZL) sought to sell its energy business and on 17 November 2000 the Commerce Commission issued a determination giving a clearance for Shell
Overseas Holdings Ltd’s acquisition of the shares of Fletcher Challenge Ltd associated with Fletcher Challenge Energy and its holding company, Energy International Holdings Ltd.4 As a consequence, EENZL changed its name to Shell Exploration NZ Ltd and Shell’s interest under the JVOA became 48.0003 per cent: the combination of the interests of Shell Exploration NZ Ltd (29.6673 per cent) and Shell (Petroleum Mining) Ltd (18.333 per cent).
[14] In mid-2003 OMV acquired the international gas and oil exploration and production assets of Preussag, including its interests in the Pohokura field. Contemporaneously, Todd Petroleum Mining Ltd and OMV agreed that the former would acquire from OMV a 9.86195 per cent participating interest in Pohokura. That acquisition was given Commerce Commission clearance on 22 September 2003. Todd Petroleum Mining Ltd’s interest in the Pohokura field was then transferred to the present appellant.
[15] These various changes in the joint venture participants and the extent of their participating interests were all recorded in endorsements on the exploration permit having received the necessary ministerial consent under s 41 of the Crown Minerals Act. The result was that by 3 November 2003 the participating interests in the joint venture were: Shell – 48.0003 per cent OMV – 25.99985 per cent Todd – 25.99985 per cent
Shell’s interests were consolidated on 7 July 2005 when Shell (Petroleum Mining) Ltd’s interest was transferred to the first respondent. Since that time the parties to the joint venture and the extent of their interests in it have remained the same.
[16] Prior to the decision to proceed with the mining activities the parties received and considered a Pohokura field development plan (FDP) prepared by Shell Todd Oil Services Ltd (STOS). STOS had been appointed as the Operator under the JVOA,
4 Commerce Commission Determination pursuant to the Commerce Act 1986 in the matter of the application for clearance of a business acquisition involving: Shell Overseas Holdings Ltd and Fletcher Challenge Energy CC Decision No 411, 17 November 2000.
and as such had defined rights and duties. Its duties included the provision of a development plan for the Operating Committee’s consideration.
[17] The FDP, produced in April 2004, was a comprehensive review of what was then known about the Pohokura reservoir and included sections headed “Production Forecasts/Reserves” and “Proposed Development Plan” as well as a section on “Costs & Economics”. Gas and condensate reserves in the field were estimated at 850 petajoules (PJ) of gas and 46 million barrels of condensate, allowing for fracturing in the three onshore wells. It was envisaged that first production would occur from at least two onshore wells in the first quarter of 2006. In a summary of production forecasts there was reference to a “base forecast” derived from the “mean reserves model” having a “plateau rate of 70 PJ/a”. The main body of the report contained a paragraph headed “Production Forecasts at Selected Probability Levels” which discussed production forecasts generated to reflect different “probabilistic reserves levels for the full, optimised field development plan”. The figures and table show maximum production levels of 70 PJ/a for gas, that level of production being made for a plateau period of varying length according to varying reserves levels. The accompanying table similarly recorded a production forecast which did not exceed 70.1 PJ/a in any year between 2006 and 2029.
[18] The FDP was one of a number of documents performing part of what was referred to in evidence as the “sanction package” considered by the parties between April and June 2004. It was clearly material to the decision each of the parties made to invest in the development of the Pohokura field. In Todd’s case that decision was preceded by a board decision based on a recommendation of its managing director, Mr Richard Tweedie. In a management paper dated 24 May 2004, Mr Tweedie recommended to the board that Todd vote in favour of development of the Pohokura field, and contribute $199.3 million for Todd’s share of the development cost. Section 3.3.3 of Mr Tweedie’s report noted:
Production forecasts have been developed for the P50 Reserves Outcome.[5] This is shown in Figure 2 for the start-up date of June 2006 and offtake of 70 PJ/a thereafter (although offtake could be higher given a planned nameplate capacity of 82.5 PJ/a).
5 P50 is a reference to estimated gas recoverability: it refers to gas that has a 50 per cent probability of being recoverable.
[19] Figure 2 depicted the production forecast with a plateau period at 70 PJ/a lasting between 2008 and 2013.
[20] Mr Tweedie’s report noted Todd’s investment in the project would be underwritten amongst other things by a “[ ] PJ gas contract with Genesis valued at $[ ] million”. Mr Tweedie commented:
This project represents over five years of work by the Todd management team to identify the prospect, farm-in, discover and appraise the field, refine the development plan, purchase additional equity and market the gas to give a robust project for investment.
[21] Mr Tweedie explained in evidence that although his investment recommendation was made on the basis of a production forecast based on P50 reserves, with a 70 PJ/a offtake, that was a “conservative expectation”. Given that the “nameplate” capacity6 of the production facility was 82.5 PJ/a, offtake could be higher than 70 PJ/a, with additional potential economic benefit to Todd.
[22] Mr Tweedie’s report also noted that at that stage no formal “gas balancing mechanism” had been agreed by the parties. This was a reference to discussions that had taken place between the parties about the possibility of agreeing rules for the offtake of production from the field. Mr Tweedie reported to the Todd board that the parties had agreed it would be desirable to enter into more detailed arrangements at a later date, particularly in respect of managing nominations for gas and the over or underlift of gas by the parties. By 30 June 2004, the date scheduled for the final investment decision (FID), such discussions had not reached fruition.
[23] Another issue the subject of negotiation was the possibility of joint marketing gas produced at Pohokura. The JVOA was amended to provide for that possibility in September 2002. In December of that year the joint venturers lodged an application with the Commerce Commission to authorise such sales. When the application was made to the Commission a redetermination of the extent of reserves at Maui (then New Zealand’s major gas field) was underway. In April 2003, the Government issued a policy statement under s 26 of the Commerce Act. The High Court found
6 The “nameplate” capacity is what the production facility could produce if run every day at maximum capacity.
that the “implicit effect” of the policy statement was to encourage the Commission to grant the authorisation sought in circumstances that would facilitate early development of Pohokura as another significant field.7
[24] Included in the policy statement was the observation that:
… 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.
[25] In September 2003, the Commission granted an authorisation for the joint marketing of gas, subject to conditions, including a requirement that commercial production commence by 30 June 2006.
[26] The joint venturers were motivated by differing commercial objectives that affected their stance in the discussions about joint sales. Todd sought to sell gas on the basis of firm commitments to buy relatively constant quantities, within defined timeframes. Shell and OMV, on the other hand, preferred to offer buyers flexibility as to how much gas they took in any particular period. The buyer would pay a rate for the capacity to call for the gas which had the effect of incentivising the taking of gas but not requiring that to occur. An additional amount would be paid for any gas actually delivered. The High Court referred to this approach as “selling with ‘swing’”.8
[27] In the first quarter of 2004, Shell and OMV concluded it would not be possible to reach agreement with Todd on terms for the joint selling of gas within the timeframe necessary to enable the parties to decide to proceed with development of the Pohokura field. On 2 April 2004, Shell and OMV both wrote to Todd advising they would not pursue negotiations on the terms for joint marketing of gas. Shell also stated it would separately market its share of Pohokura gas. On the same day, Shell and OMV had entered into an “Alignment Agreement” under which they agreed to market and sell their respective Pohokura gas entitlements separately, and:
7 High Court judgment, above n 1, at [10]. 8 At [17].
… work together in good faith to agree, as between themselves, principles for the intra-joint venture rules and agreements necessary or desirable to facilitate separate marketing and sales of Pohokura gas, including (but not limited to) the matters listed in schedule 1.
[28] Schedule 1 dealt with a range of subjects including the commissioning of facilities, the right and obligation to take gas, procedures for the joint venture parties to nominate the amount of gas required for their needs on a day-to-day basis and gas balancing issues. Under the heading “Gas Balancing Issues” the subjects listed were:
- Definition of overlift and underlift;
- Period allowed for overlift/underlift mismatch before compulsion reconciliation applies;
- Reconciliation methodology
- Payment of operating costs during periods of unbalanced gas lifting;
- Form of gas balancing agreement.
[29] Shell and OMV did not advise Todd of their entry into the Alignment Agreement, and Todd only found out about it on obtaining discovery in the present proceeding. Shell negotiated gas supply agreements with Genesis, the National Gas Company and Multigas. Similarly, on 6 May 2004, OMV entered into a gas sales agreement with Contact Energy Ltd in respect of the first tranche of its share of Pohokura gas. These agreements underwrote Shell and OMV’s investment in the development of the Pohokura field.
[30] An Operating Committee meeting was held on 30 June 2004 at which representatives of the parties made the FID. All the joint venturers were present and voted at the meeting to approve the Pohokura development plan, and the first annual development work programme and budget, as had been submitted by STOS as Operator on 5 April 2004. Article 6.2 of the JVOA contemplated that resolution would be made by the Operating Committee. The resolution was based on the information presented in the sanction package, including the FDP.
[31] The Operating Committee also resolved at that meeting to apply for a mining permit. The application was made by STOS and was in a form discussed and agreed
by the parties, following consultation with officials of the Ministry of Economic Development. It sought to surrender the existing petroleum exploration permit, and to receive a mining permit in exchange. The then Associate Minister of Energy granted the application on 8 October 2004. The permit authorised the permit holders to “conduct mining operations for the purpose of developing and producing petroleum from the area described”.
The work programme
[32] The permit was granted for a duration of 32 years, including the time needed for construction of the production facilities and drilling of the initial production wells. It was a requirement that the permit holders comply with the work programme set out in the third schedule to the permit. Further, there was a requirement that the permit holders produce petroleum from wells in the Pohokura field in the manner described in the approved work programme.
[33] The work programme, attached as the third schedule, was intended to describe what was then known about the Pohokura field and outline the joint venture’s plans for its development and the intended mining activities. The programme had been provided with the application. It can conveniently be referred to for a description of the principal aspects of the mining activities proposed, and the methods to be employed. The activities proceeded in general accordance with what was proposed.
[34] The programme recorded that the field comprised a gas/condensate accumulation. Under the heading “description of the discovery” there was a description of the exploration and appraisal wells drilled between February 2000 and January 2003. Most of the wells were drilled offshore but there was reference to an onshore well drilled in March 2001.
[35] Another part of the work programme referred to the wells and facilities proposed as follows:
The development is based on a normally unattended wellhead platform with six production wells (mean reserves case), delivering wellstream fluids to an onshore production station at Motunui through a 12” corrosion resistant and
insulated subsea flowline. In the base case a further three wells will be drilled from an onshore wellsite located adjacent to the Pohokura Production Station. Depending on the structural configuration of the Pohokura Field and the reservoir quality, the P90 to P10 range in well numbers is seven to 14.
The system peak capacity chosen for the development is 220 TJ/d of sales gas, based on estimated maximum market demand. Products from the plant will be sales gas exported into the pipeline reticulation system and condensate exported from Port Taranaki (Stage One) and potentially propane and butane (Stage Two), dependent on market analysis of product pricing.
The existing onshore well, Pohokura South-01B may be tied back to the production station.
[36] The onshore processing plant was described in the following terms:
At the front end of the plant fluids are separated in a three-phase slug catcher/production separator. Gas is dehydrated and dewpointed by a combination of glycol contacting and auto-refrigeration. The peak capacity of the plant is 220 TJ/d, equivalent to 80 PJ/a, (200 MMscf/d gas and 15,000 stb/d condensate in the early production period). Late in the field life inlet booster compression and additional cooling will be incorporated to allow production to be sustained by lowering backpressure on the wells.
Condensate is stabilised for storage and exported through an intermediate pressure flash vessel and stabiliser column. Flash gas is compressed to production separator conditions and combined with the plant inlet gas stream.
[37] Under the heading “export lines” it was stated:
Sales gas will be metered and then exported from the onshore plant in a spur pipeline connected into the Maui pipeline at the Bertrand Road intersection.
Condensate will be exported from a storage tank at the plant through a new cross-country pipeline to bulk liquid storage facilities near Port Taranaki from where it will be exported. Storage tanks may be shared requiring fiscal metering into the tanks.
[38] Other parts of the work programme referred to uncertainty as to the extent of reserves and a need to do further work in order to assess possibilities for “recovery optimisation” over the life of the field. There was a reference to what at the time was thought to be annually averaged gas and condensate production, depicted in a graph. It is relevant to record that insofar as gas production was concerned, the production forecast showed a peak for gas of 50 PJ/a. That reference can be
contrasted with the description of the peak capacity of the plant, in paragraph 3.4 of the work programme, which has been set out above.9
The proposed gas balancing agreement
[39] In August 2005, Shell and OMV voted to remove STOS as the Operator, and to place Shell in that role.10 Meanwhile, the parties were involved in ongoing discussions about a possible agreement on gas “balancing” arrangements and offtake rules. Todd evidently participated in these negotiations notwithstanding its view that a gas balancing agreement (GBA) was not necessary because of the provisions of art 10.1 of the JVOA.
[40] A draft GBA was provided on 17 November 2005 by Mr Murray Jackson, a Shell manager involved in the discussions. Mr Jackson explained in evidence that the objective of the draft GBA was to provide the parties with flexibility as to the quantities of gas they were entitled and obliged to take as a consequence of their respective equity shares in total available production under the JVOA. A GBA would allow the parties to underlift or overlift compared with their equity share of total available production, within a particular period, with corrective adjustments during subsequent periods. The objective was to:
… establish a flexible regime that would allow the [parties] at different times to take more or less than the quantities to which they would be entitled on the basis of their participating interest shares of total available production (during the relevant period of production). Necessarily, that meant the agreement also included a mechanism to allow and incentivise underlifters to get back into a balanced position.
[41] The draft GBA provided for a flexibility period during which the parties would be able to take on each day a quantity of gas up to their respective share of daily capacity; a balancing period during which daily lifting entitlements would be adjusted; and an equity period during which the parties would be expected to lift according to their equity shares of total available production.
[42] Mr Jackson also explained that at the time Shell envisaged a process in which total production for each year would be the sum total of the parties’ expectations of
9 At [35]. 10 This is discussed below at [98].
requirements, based on the gas each expected to sell. If that were consistent with what had been anticipated in the field development plan, then forecast production would have been around 70 PJ/a. However, that figure was not stipulated in the GBA proposed at that stage.
[43] Shell’s proposal was unsatisfactory from Todd’s point of view. In essence, that was because under the proposed GBA if Shell and OMV chose to underlift or if Todd, in circumstances where there was underlifting by the other parties, chose to overlift, Todd would be required to come back into balance less than halfway through the life of the field. This might mean that Todd would not be allowed to take its full percentage share of available production. Todd asserted that it had alternative uses for gas produced from the Pohokura field which meant it would be able to take its full share of available production every day, which was its right under the JVOA.
[44] However, Shell and OMV were of the view that provisions needed to be put in place to govern the day-to-day offtake of petroleum from the field and to define the communication processes between the parties and the Operator to ensure proper arrangements were in place to provide for the rights and obligations of the parties. Part of their concern was that, if imbalances arose in respect of amounts taken by the parties, the necessary rebalancing in accordance with contractual entitlements later in the life of the field could be problematic. Dobson J found Shell and OMV reached a common view about the content of appropriate offtake rules providing for nomination of quantities of gas per hour and per day, and for the procedures by which the Operator would respond (the nomination protocols). They reached that common view in the course of a dialogue that did not include Todd.11
Offtake rules and nomination protocols
[45] In February 2006, having previously provided a draft to OMV, Shell circulated draft offtake rules and nomination protocols to the other parties with a proposal that they be debated and agreed by the Operating Committee. Those offtake rules were considered at a meeting of the Operating Committee held on
11 High Court judgment, above n 1, at [30].
3 March 2006. Shell and OMV voted to implement the offtake rules. Todd voted against the resolution, having advised the other parties of its view, based on legal advice, that the rules would breach art 10.1 of the JVOA, and could not be adopted by the Operating Committee without unanimity.
[46] On 26 April 2006, Shell and OMV voted in the Operating Committee to adopt the associated nomination protocols, setting out the procedures under which the parties would nominate the amounts of gas and condensate to be delivered to them on a daily basis. Once again, Todd voted against adoption of the nomination protocols, claiming that they were in conflict with the JVOA.
[47] The offtake rules and nomination protocols remain in effect, subject to Todd’s challenge to their validity in this proceeding. Under the offtake rules, the Operator is required to assess the minimum daily gas offtake required to maintain continuous gas deliveries for each day of the relevant year. The Operator is also required to assess the total production available for the relevant year, including the share of that available to each of the parties. These figures are required to be included in the Production Work Programme and Budget the Operator must deliver under art 6.3(A) of the JVOA.12
[48] Four working days before the end of each calendar month, the Operator is obliged to advise each of the parties of the expected maximum daily availability (MDA) for each day of the immediately succeeding month, and estimated MDAs for the following two calendar months. Each party is then required (in a manner detailed in the nomination protocols) to make “nominations” for gas delivery. Such nominations must be for a quantity equal to or greater than that party’s share of the minimum daily gas offtake and equal to or less than the party’s share of the MDA advised by the operator from time to time.
[49] Other provisions of the offtake rules provide for the Operator to reject nominations that would result in a party exceeding its share of the total production available for the year and deal with a party taking less than its share of the total production available for the year. In the latter case:
12 The capital letters here reflect the JVOA.
1. that PJVer may nominate for a quantity of gas greater than its share of the total production available in a subsequent year (the excess quantity being called underlift recovery); but
2. any such underlift recovery will only be accepted until such time as its overlift equals its underlift from previous years.
Provided that the PJVer exercising this provision shall not do so if it has the effect of either preventing another PJVer from accessing its proper nomination on any day, or preventing another PJVer from accessing its share of total production available in any year.[13]
[50] Annual limits on production were not set out in the offtake rules. But as noted above the offtake rules require the Operator to include in the Production Work Programme and Budget an assessment of the total production available for the relevant year and to advise, monthly in advance, the expected MDA.
[51] Since the adoption of the offtake rules, the Operator has relied on them and the associated nomination protocols in managing the production of gas. Successive Production Work Programmes and Budgets provided by the Operator and approved by the Operating Committee have included an annual production limit. The first Programme, approved on 28 June 2006, was for a part year only, that being the year when production first occurred. It contained a gas production figure of 16.5 PJ. In the case of each subsequent year relevant to Todd’s claim the Programme has provided for an annual figure of approximately 70 PJ/a.
Challenge to offtake regime
[52] Shell and OMV claim this “offtake regime” is valid and appropriate having regard to relevant provisions of the JVOA, which they say allow the Operating Committee to control the amount of gas to be produced in any period.
[53] However, as its general counsel, Mr Hall, explained in evidence, in Todd’s view the offtake regime imposed an artificial constraint on the annual production of petroleum from the Pohokura field, denied Todd the ability to take its share of what could in fact be produced and allowed Shell and OMV further to underlift their shares of the (wrongly) capped production with a right to take the deferred
13 The expression “PJVer” is used by the parties (here and in other documents) as a shorthand for Pohokura Joint Venturer.
production in a subsequent year or years. Todd’s claim that the offtake regime was contrary to the JVOA and could not be imposed by the Operating Committee lies at the heart of its contract claim.
[54] In August 2006, Todd successfully issued a proceeding against Shell and OMV, seeking an injunction directing them to allow the connection of Todd’s pipelines to the plant, without first agreeing to be bound by the offtake rules.14 In October 2009 Todd filed an amended statement of claim, advancing the causes of action dealt with in the High Court judgment giving rise to this appeal.
The contract claims
The proceeding in the High Court
[55] Todd advanced three causes of action based on the JVOA. Article 10.1 of the JVOA is central to the contract claims:
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 always 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.
[56] Articles 10.2. and 10.3 are also relevant. Article 10.2 obliged the parties to negotiate in good faith and conclude the terms of an agreement to cover the offtake of any oil produced from the field. It set out in paragraphs (A) to (H) matters for which such an agreement would make provision. It also provided that, if an agreement had not been entered into by the date of the first delivery of oil, then the
14 Todd Pohokura Ltd v Shell Exploration NZ Ltd HC Wellington CIV-2006-485-1600, 23 August 2006.
parties would be “bound by the principles set forth in this Article 10.2 until an offtake agreement has been entered into”.15
[57] Article 10.3 then provided:
Article 10.3 Natural Gas
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.
[58] In the first cause of action, Todd alleged that the Operating Committee did not have the power to approve the offtake rules and the nomination protocols. In summary, Todd claimed the rules and protocols wrongly allowed each party to take less than its share of “total production available” (a phrase in art 10.1 of the JVOA) and were therefore inconsistent with the obligations each party had to take and dispose of its full share of such production. Any qualification on such rights and obligations could only be the result of unanimous agreement of the parties under art 10.2 or 10.3. In the circumstances, Shell and OMV had breached their obligations to take their full equity share of total production available, and Shell as Operator had breached its obligations under the JVOA. The rules and protocols were accordingly invalid, and not binding on any of the parties or on Shell as the Operator.
[59] In a second cause of action in contract Todd claimed the purpose and effect of the Work Programmes and Budgets for 2006 to 2009 was to limit production from the Pohokura field to amounts below the total production available in each year contrary to good mining practice, the mining permit and therefore the JVOA. By imposing production limits, the Work Programmes were inconsistent with arts 10.1, 10.2 and 10.3. Consequently the Operating Committee did not have power to approve the Work Programmes. By voting to do so, Shell and OMV breached the implied obligation of good faith, and by failing to take their full share of total production available they breached art 10.1. Shell, as the Operator, had failed to conduct “Joint Operations”, in accordance with its obligations under art 4.3(A).
15 An agreement as contemplated by art 10.2 was never concluded. However, on appeal Todd argued that in the absence of “special arrangements for the disposal of natural gas” under art 10.3, the parties were obliged to apply the principles set out in paragraphs (A) to (H) of art 10.2.
[60] In a final cause of action having its origins in the JVOA Todd claimed Shell as Operator had breached fiduciary duties it owed by failing to act in the best interests of all the joint venturers; preferring the interests of Shell and OMV to those of Todd; and exercising its powers under the agreement for an extraneous purpose so as to suit its own and OMV’s commercial purposes outside the scope of the Pohokura joint venture.
[61] These claims were rejected by Dobson J. He held that the Operator could properly incorporate a suggested level of production in accordance with its role under art 6.3(A).16 That article provided for the Operator to provide, annually, a Proposed Work Programme and Budget detailing the “Joint Operations” in respect of production to be performed during the following year. The article also provided for the Operating Committee to “consider, modify and then either approve or reject” the proposed Work Programme and Budget. The Judge considered that a proposed Work Programme and Budget which set the following year’s level of production could properly be approved by a majority of the parties in the Operating Committee.17
[62] The Judge also held that although art 10.3 of the JVOA raised the possibility of the parties entering into special arrangements for the disposal of gas, the provisions of art 10.1, as to the disposition of gas production, could apply even though such special arrangements had not been made.18
[63] However, appropriate arrangements could be made by the Operating Committee, if necessary by a majority decision, and those arrangements were capable of being special arrangements for the purposes of art 10.3.19 If that conclusion were incorrect, then at least those parts of the offtake rules and nomination protocols that did no more than provide for the ascertainment of quantities and procedures required to make art 10.1 work would be within the jurisdiction of the Operating Committee. That was so because of the breadth of the Committee’s powers under art 5 and the “imperative that it be able to fill gaps in more formal arrangements between the parties, sufficient to enable the JVOA to
16 At [151]. 17 At [151]. 18 At [158]. 19 At [166].
work.”20 Further, in the absence of a GBA, some form of offtake rules was necessary. Those adopted were capable of providing for the exploitation of the field in a manner reasonably consistent with the FID. As a result, those aspects of Todd’s contract causes of action that depended on its preferred interpretation of art 10.1, and the absence of the Operating Committee’s power to promulgate offtake rules, could not succeed.21
[64] The Judge found that the right and entitlement to take and dispose of “the share of total production available” provided for by art 10.1 related to each party’s proportionate share of the gas actually produced. That amount was appropriately settled on an annual basis by the budgetary process, proposed by the Operator and approved by the Operating Committee.22 The offtake rules constituted special arrangements for the disposition of gas for the purposes of art 10.3, and had been adopted in accordance with the relevant provisions of the JVOA by majority vote of the Operating Committee. Alternatively, those parts of the offtake rules that dealt with the disposition of gas were competently concluded by a majority resolution of the Operating Committee.23 Although Todd had made out certain aspects of the conduct, particularly conduct by Shell, of which it had complained, the criticisms did not constitute a breach of any relevant obligation of good faith.24 In particular, Dobson J found that:25
… there was an absence of good faith in Shell and OMV covertly concluding an alignment agreement, thereby committing them to vote together on the operating committee. …
… Shell’s initiatives to prepare itself for separate marketing of Pohokura gas, before conveying to Todd that joint marketing initiatives were at an end had showed a lack of good faith.
[65] However, those limited failures to act in good faith in dealing with Todd did not fall within any of the forms of good faith obligations pleaded by Todd. Neither
20 At [181]. 21 At [197]. 22 At [519]. 23 At [520]. 24 At [521]. 25 At [251(a) and (b)].
were they sufficiently related to the harm Todd alleged in the contractual context to give rise to any relevant liability.26
The appellant’s arguments in this Court
[66] Mr Farmer QC argued that the overall objective of the JVOA was to maximise the return on the significant investments made in the development of the field. It was inconceivable and contrary to commercial common sense that any one of the parties would have embarked on such significant expenditure on the basis that the timing of the return on its investment would be left to the “arbitrary whim” of the others voting on the Operating Committee.
[67] Todd argued that under art 10.1 it had the right to take petroleum produced from the Pohokura field in amounts that represented its participating interest in the joint venture (26 per cent), with the production facility running at its maximum capacity of 234 terajoules (TJ)/day, the equivalent of 85.4 PJ/annum. This was subject only to necessary shutdowns for maintenance, field development and good oil field practice. The other parties had the same right consistent with their respective participating interests. That right was subject under art 10.1 to the terms of any offtake agreement for oil under art 10.2 and any special arrangements for natural gas under art 10.3 that might be agreed by all the parties. However, as there was neither an offtake agreement under art 10.2 nor any special arrangements under art 10.3, Todd’s right under art 10.1 had not been diminished by the terms of the JVOA in any way. In this respect, there was nothing in the principles set forth in art 10.2 that diminished that right. Indeed, Mr Farmer submitted that the principles in paragraphs (B), (C), (D) and (H) of art 10.2 supported Todd’s argument about the rights arising under art 10.1.27
[68] A further argument advanced by Todd was that in the absence of unanimously agreed special arrangements under art 10.3 relating to the disposition of gas, the offtake obligations of the parties in respect of gas must be the same as, or consistent with, those that apply in the case of oil under art 10.2. This was said to flow from the fact that gas and condensate are produced together, and the production of one
26 At [255]. 27 These are set out in [137] below.
cannot be increased or decreased independently of the other. The Operating Committee has no jurisdiction to make a majority decision inconsistent with the rights and obligations of the parties under art 10.2. Since art 10.2 exclusively governs the production and disposition of oil and is a matter for agreement between the parties, it would be odd if the level of production and disposition of gas (which is inextricably linked to oil) could validly be determined by a majority in the Operating Committee.
[69] Another version of this argument was addressed in a synopsis of submissions served by Todd in July 2014. It was to the effect that in the absence of special arrangements under art 10.3, the provisions of art 10.2 will necessarily govern the production of both oil and gas.28 Since those provisions require agreement, it would be contrary to the terms of the JVOA to allow a majority of the Operating Committee to impose a different regime for the disposal of natural gas under art 10.3.
[70] For all these reasons, Mr Farmer submitted that the production cap of 70 PJ/a imposed down to the end of 2013 by successive decisions of the Operating Committee in the context of approving the annual Work Programme and Budget was a breach of Todd’s contractual right under art 10.1. The same would apply to any future caps imposed, reducing the total production available from what could be produced if the plant were operated at capacity.
[71] While emphasising that art 10.1 contains both the right and obligation to take, Todd acknowledged the “obligation” was one that could be fulfilled over the life of the field and in the event of an imbalance at the end of the field’s life the rights and obligations of the parties could be “reconciled and settled”. Mr Farmer referred to the right to take the full entitlement as one to be applied “periodically”. The obligation to take was one that “must be performed in full over the life of the field”. The position was not inflexible, and the JVOA itself recognised by the
28 Mr Taylor QC complained, and we accept, that this argument was new, not raised in the High Court, or in Todd’s principal written submissions served in June 2011. However, the argument was similar to the argument advanced in closing in the High Court and repeated on appeal that unanimity would be required for any art 10.3 special arrangements because agreement was required for oil under art 10.2. Given that the argument was in the synopsis served in July this year and did not appear to depend on facts not already part of the record we were not persuaded that there was any prejudice to the respondents and allowed Todd to present the argument.
definition of “entitlement” and the terms of art 10.2(D) that a party could determine the timing of its performance of that obligation. The definition refers to “a quantity of petroleum of which a Party has the right and obligation to take delivery … after adjustment for overlifts and underlifts”; and art 10.2(D) refers to the “elimination of overlifts and underlifts”.
[72] Mr Farmer argued that the manner in which a party chooses to exercise its right cannot derogate from Todd’s right to take its share of gas at capacity level if it so chooses. In practical terms this meant that if all three parties chose to take their full entitlement on a daily basis and continued to do so production must be at maximum capacity, and no party would at any time be able to take more than its share of that production.
[73] However, in the event that a party at any time chose to take less than its full entitlement, the remaining parties could then take at a greater rate. Should that situation continue, the inevitable outcome (in the absence of a GBA) would be that a party who had taken at a greater rate than its proportionate share would use up its entitlement (at some stage during the life of the field) more quickly and at that point would need to stop taking further gas. Todd acknowledged that in the event that gas reserves were ultimately found to be “less than first determined” the imbalance might become a permanent one. In that situation the party that had taken more than its share would be required to compensate the others accordingly, if necessary in money. There were precedents in United States jurisdictions granting relief at common law for parties who had “underlifted”.29 Further, cl 1.4.1 of the Accounting Procedure (Exhibit A to the JVOA) provides a mechanism by which rights and obligations could be reconciled and settled between the parties.
[74] In relation to art 10.3, Todd’s initial argument set out in the submissions filed in June 2011 was that in the absence of special arrangements, the rights and obligations set out in art 10.1 applied, and were not subject to any modifications as in the case of oil. Unlike oil, there was no “express mechanism” for eliminating
29 Reference was made to Anderson v Dyco Petroleum Corp 782 P 2d 1367 (Okla 1989); Doheny v Wexpro Co 974 F 2d 130 (10th Cir 1992); Heiman v Atlantic Richfield Co 891 P 2d 1252 (Okla 1995); Beren v Harper Oil Co 546 P 2d 1356 (Okla Civ App 1975) and United Petroleum Exploration Inc v Premier Resources Ltd 511 F Supp 127 (WD Okla 1980).
overlifts and underlifts; but they could be addressed under common law principles established by North American case law.
[75] However, the offtake rules and nomination protocols had been wrongly imposed by the Operating Committee. As they had the effect of implementing the unlawful cap imposed on production they were in breach of Todd’s rights under art 10.1.
The respondents’ arguments
[76] The respondents submitted Todd’s approach placed too much weight on art 10.1 and overlooked the fact that the level of production is governed by art 6.3(A) of the JVOA. As already noted, under that provision the Operator delivers a proposed Production Work Programme and Budget, containing a projected production schedule.30 The Operating Committee then decides to modify, approve or reject the proposal. Under art 5.9(A) the decision of the Operating Committee can be made by a majority comprised of two or more parties having a participating interest of 65 per cent or more. Once made the decision is binding on the parties.
[77] On its plain meaning art 10.1 deals with the disposal to each party of its proportionate share of petroleum actually produced, not what the facilities are capable of producing from time to time. It has no bearing on, nor is it determinative of, production levels. The article’s opening words simply refer to the each party’s share of “total production” from the field.
[78] The respondents further submitted that the Operating Committee is entitled, by majority if necessary, to establish rules governing “offtake matters”, and the Offtake Rules and Nomination Protocols were validly adopted by majority decision in the Committee. Both Shell and OMV argued they were “special arrangements” of the kind contemplated by art 10.3. Alternatively, if unanimity were required, the Operating Committee could nevertheless establish rules and procedures designed to enable each party to take its proportionate share of total production. Mr Goddard QC, for OMV, submitted the best reading of art 10, consistent with its
30 Above at [61]. See [119] below for the full provision.
language and the commercial context, was that “special arrangements” includes both agreements between the parties and, in the absence of agreement, determinations of the Operating Committee. Unless that approach were adopted art 10.1 could not operate: it was necessary for there to be “specified quantities” and “procedures” for the article to have practical or legal effect.
[79] Both respondents argued it would be contrary to commercial common sense to hold that the parties who executed the JVOA wished to be bound to terms requiring the facilities to be operated at maximum capacity for the life of the field without regard to market conditions prevailing from time to time, and before they knew whether petroleum would be found and if it were, its nature and quantity.
Approach to interpretation of the JVOA
[80] This is not a case giving rise to any particular difficulties as to the approach to be taken in interpreting the relevant contractual provisions. In Boat Park Ltd v Hutchinson this Court adopted what was said by Lord Hoffman in Investors Compensation Scheme Ltd v West Bromwich Building Society.31 For present purposes it is sufficient to note that the task before the Court is to ascertain the meaning the document would convey to a reasonable person with all the background knowledge reasonably available to the parties in the situation they were in when the contract was made. The relevant background includes anything that would have affected the way in which the language would have been understood by a reasonable person.
[81] The factual background should always be taken into account, even if the words appear plain on their face, for the reasons addressed by Tipping J in Vector Gas Ltd v Bay of Plenty Energy Ltd:32
[22] Nor does the objective approach require there to be an embargo on going outside the terms of the written instrument when the words in issue appear to have a plain and unambiguous meaning. This is because a meaning that may appear to the court to be plain and unambiguous, devoid of external context, may not ultimately, in context, be what a reasonable
31 Boat Park Ltd v Hutchinson [1999] 2 NZLR 74 (CA) at 81–82; Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL) at 912–913. 32 Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444 (footnotes omitted).
person aware of all the relevant circumstances would consider the parties intended their words to mean.
[82] Words should be given their natural and ordinary meaning, unless there is something in the background that justifies a conclusion that something “must have gone wrong with the language” and some other meaning must have been intended.33
[83] As part of the consideration of the relevant background it can be legitimate and helpful to consider the commercial purpose of the contract and all the parties invited the Court to take that approach here.34 However, since there are always at least two parties, it needs to be accepted that they may have had different purposes in mind. In Melanesian Mission Trust Board v Australian Mutual Provident Society Lord Hope, writing for the Privy Council, contrasted the different commercial objectives of a lessor and lessee in respect of a clause in a lease relating to the rent payable under a lease of commercial premises.35 Further, as Lord Wilberforce observed in Prenn v Simmonds:36
… the commercial, or business object of the transaction, objectively ascertained, may be a surrounding fact. … And if it can be shown that one interpretation completely frustrates that object, to the extent of rendering the contract futile, that may be a strong argument for an alternative interpretation, if that can reasonably be found. But beyond that it may be difficult to go: it may be a matter of degree, or of judgment, how far one interpretation, or another, gives effect to a common intention: the parties, indeed may be pursuing that intention with differing emphasis, and hoping to achieve it to an extent which may differ, and in different ways. The words used may, and often do, represent a formula which means different things to each side …
[84] The task of ascertaining the commercial purpose of the JVOA in the present case is best approached on the basis of the words in the document and inferences able to be drawn from them: as has already been discussed, none of the parties before the Court negotiated or executed the JVOA, and their rights and obligations under it result from the assignment of the interests of others at various times. We were not referred to any evidence of the purpose(s) the original parties had in
33 Investors Compensation Scheme Ltd, above n 31, at 913. 34 Prenn v Simmonds [1971] 1 WLR 1381 (HL) at 1385. 35 Melanesian Mission Trust Board v Australian Mutual Provident Society [1997] 1 NZLR 391 (PC) at 394. 36 Prenn v Simmonds, above n 34, at 1385.
entering the JVOA, and the intention of the parties to the present dispute is plainly irrelevant to the meaning of the agreement.37
[85] A final point is the elementary one that the meaning of particular provisions of a contract must be construed in the context of the contract as a whole. It is unnecessary to do more than refer to what is said on this subject in Chitty on Contracts:38
Every contract is to be construed with reference to its object and the whole of its terms, and accordingly, the whole context must be considered in endeavouring to interpret it, even though the immediate object of inquiry is the meaning of an isolated word or clause …
[86] Against the background of the foregoing discussion of the law we now turn to consider the provisions of the JVOA.
Analysis
[87] The JVOA presents as a carefully drafted commercial agreement. It is divided into a recitals section, followed by 20 articles and four exhibits.
[88] For present purposes, the most relevant of the recitals is recital E which records:
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, production, marketing and sales of any discoveries in the Permit Area.
[89] Article 3 is headed “Scope”. Article 3.1(A) provides:
The purpose of this Agreement is to establish the respective rights and obligations of the Parties with regard to operations under or otherwise in connection with the Permit, including without limitation the joint
37 We note that two amendments were made by the present parties to the JVOA: in 2002, the JVOA was amended to allow for the appointment of Shell Todd Oil Services Ltd as Operator (see below at [98]) and facilitate use of the JVOA to regulate joint marketing of gas. The second amendment, in 2004, amended the wording of art 3.1(A) and (B). We do not consider these amendments to be directly relevant to the present interpretation issue: see High Court judgment, above n 1, at [48]. 38 HG Beale (ed) Chitty on Contracts (31st ed, Sweet & Maxwell, London, 2012) vol 1 at [12-063] (footnotes omitted).
exploration, appraisal, development and production of Petroleum from the Permit Area and all exploration, appraisal and development outside of the Permit Area that is related to the Permit but is conducted outside of the Permit Area either as a Joint Operation or Sole Risk Operation.
[90] The words “joint exploration, appraisal, development and production” are reflected in the drafting of various provisions in art 6 which set out particular provisions for each of those phases of the activities of the joint venture. Thus art 6.3, to which reference has already been made,39 deals with production, while arts 6.1 and 6.2 concern respectively exploration and appraisal, and development.
[91] Article 3.2 sets out the participating interests of the parties as at the date of the agreement. As has already been discussed, the two parties were Fletcher and Preussag whose interests were respectively 66.667 and 33.333 per cent. The expression “participating interest” is defined in art 1. It means:
… 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.
[92] That definition used two other terms that are also defined in art 1, namely, “joint operations” and “joint property”. The former is defined as meaning:
… those operations and activities carried out by Operator pursuant to this Agreement on behalf of all the Parties, the costs of which are chargeable to all Parties.
[93] “Joint property” is defined as follows:
… all or any property (real, personal or otherwise) and/or rights acquired, held or used by the Parties (or the Operator on their behalf) severally in proportion to their respective Participating Interests or in connection with Joint Operations, including the Permit and Petroleum prior to custody, ownership, possession and control of Petroleum passing as provided in Article 10.
[94] Those definitions are relevant to art 3.3, which is headed “Ownership, Obligations and Liabilities”. Article 3.3(A) is in the following terms:
Unless otherwise provided in this Agreement, all the rights and interests in and under the Permit, all Joint Property and any Petroleum produced from
39 At [61].
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.
[95] Article 3.3(B) provides that all liabilities and expenses incurred by the Operator in connection with Joint Operations are to be shared by the parties in accordance with their respective participating interests. The same sharing arrangement applies in respect of any third party liabilities, under art 3.3(C). Article 3.3(D) then provides:
Each Party shall pay when due, in accordance with the Accounting Procedure, its Participating Interest share of Joint Account expenses, including cash advances and interest, accrued pursuant to this Agreement. The Parties agree that time is of the essence for payments owing under this Agreement. Subject to the provisions of the Accounting Procedure, a Party’s payment of any charge under this Agreement shall be without prejudice to its right to later contest the charge.
[96] We consider it is clear from the provisions of art 3 and the relevant definitions in art 1 to which we have referred that:
(a) everything the Operator does pursuant to the JVOA is within the concept of “Joint Operations”;
(b) each party is liable to meet the costs incurred by the Operator in conducting Joint Operations, to the extent of its percentage participating interest in the joint venture;
(c) each of the parties owns any petroleum produced from the field to the extent of its participating interest; but
(d) the petroleum produced is joint property until custody, ownership, possession and control of the petroleum passes “as provided in Article 10”.
[97] Article 4 provides extensively for the rights and obligations of the Operator. First, “Operator” is a defined term meaning:
… a Party to this Agreement designated as such in accordance with this Agreement, and acting in that capacity and not as the owner of a Participating Interest.
[98] Consistently with that definition, art 4.1 provided that Fletcher was designated “Operator”, and agreed to carry out the duties of Operator in accordance with the JVOA. As earlier explained Shell became the Operator in August 2005 when it replaced STOS by a majority decision in the Operating Committee.40 Given art 4 defines Operator as a party to the agreement, the appointment of Shell to fill the role of Operator in August 2005 was consistent with the JVOA’s contemplation of that role.41
[99] Article 4.2 sets out the rights of the Operator. Article 4.2(A) provides that, subject to the terms and conditions of the JVOA, the Operator has the right and obligation to conduct all Joint Operations. Article 4.3(A)(1) provides that in doing so, the Operator must comply with the provisions of relevant regulatory controls, the JVOA itself and, importantly:
… the instructions of the Operating Committee not in conflict with this Agreement;
[100] Other duties set out in art 4.3(A) oblige the Operator to conduct the Joint Operations diligently and safely, in accordance with good and prudent oil and gas field practice and make it responsible for employment of staff and the negotiation of employment contracts. Article 4.3(A)(5) and (6) are similarly important. Under their provisions, the Operator must:
(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[42] as provided in Article 6;
(6) Implement such work programs and budgets as shall, together with the relevant AFEs, have been approved by the Operating Committee;
…
[101] Under other provisions of art 4.3(A) the Operator must pay the costs incurred in connection with Joint Operations and make payment to the government of
40 Due to the fact the JVOA requires the Operator, by definition, to be a party to the JVOA, the then parties had to enter into an amendment agreement on 6 September 2002, in which they agreed to make various amendments to the JVOA to allow for the appointment of STOS as Operator. However, the definition of Operator was not changed. 41 We also note that a proceeding commenced by Todd challenging the validity of the resolution to remove STOS as Operator was unsuccessful: Todd Petroleum Mining Company Ltd v Shell (Petroleum Mining) Company Ltd HC Wellington CIV-2005-485-819, 14 December 2005. 42 An “AFE” is defined in art 1 as being “an authorisation for expenditure pursuant to art 6.6”.
royalties, taxes and fees pertaining to the Joint Operations. Under art 4.4, the Operator determines the number of employees and their terms of engagement. Under other parts of art 4 it handles any legal proceeding brought against the Operator or any of the parties arising out of Joint Operations or related in any way to joint property and procures and maintains appropriate insurance cover in respect of the Joint Operations and joint property. In short, the Operator runs the activities of the joint venture.
[102] Article 5 contains the provisions governing the Operating Committee. Article 5.1 provides for the establishment of the Committee. It reads:
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. Each Party holding a Participating Interest of 15% or more shall appoint one (1) representative and one (1) alternate representative to serve on the Operating Committee. Each Party shall as soon as possible after the date of this Agreement give notice in writing to the other Parties of the name and address of its representative and alternate representative to serve on the Operating Committee. Each Party shall have the right to change its representative and alternate at any time by giving notice to such effect to the other Parties.
[103] Four points should be noted. First, as can be seen from the opening words of that article, the Operating Committee is responsible for the overall supervision and direction of Joint Operations. Second, parties entitled to be represented on the Operating Committee are those with a participating interest of 15 per cent or more. However, art 5.1 must be read together with art 13.1 which contains detailed provisions governing the assignment of interests under the JVOA. One of the restrictions is that no assignment may be made if as a result of it the participating interest of the assignor or assignee would be less than 15 per cent. As a result, the parties to the JVOA would inevitably be represented on the Operating Committee because their interests would always be at least 15 per cent. Third, we emphasise the care with which provision was made for each party to appoint not only a representative but also an alternate representative to serve on the Operating Committee. It seems clear that the intention was that the activities of the Operating Committee should not be inhibited by the unavailability of one of the appointed representatives. The fourth point is that each party appoints a representative (and an
alternate representative) without differentiation to reflect the extent of each party’s participating interest.
[104] However, the potential for significant disparities in the extent of participating interests was reflected from the outset by art 5.9, which required decisions of the Operating Committee to be made on a basis that took into account the extent of the parties’ participating interests. Article 5.9(A) provides:
Except as otherwise expressly provided in this Agreement, all decisions, approvals and other actions of the Operating Committee on all proposals coming before it shall be decided by the affirmative vote of two or more Parties having individually or in aggregate a Participating Interest of not less than 65% however in the event that at the time of the vote there are not more than two Parties then all such proposals shall be decided by the affirmative vote of a Party or Parties having individually or in aggregate a Participating Interest of not less than 85%. The vote of all the 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 thereof or unitisation.
[105] The effect of that provision, when the JVOA was initially signed with only two parties, was to require both of them to agree because Fletcher’s interest was only 66 per cent. However, with the advent of additional parties each having an interest of at least 15 per cent, the main outcome was to require the affirmative vote of two or more parties whose combined interest was not less than 65 per cent.
[106] Another important aspect of art 5.9 is its reference to particular matters that require unanimity (the “vote of all the Parties”). Those matters listed in the article itself were approval of a development plan, voluntary release or surrender of the Permit and any extension or renewal of the Permit or “unitisation”.43 Other matters requiring unanimity are surrender of part of the permit area (art 12.1(B)); certain applications to the Minister relating to the Permit (art 5.15(B)); appointment of a party to be the Operator for the purposes of “sole risk drilling” (art 7.7(G)); modification of the JVOA (art 20.5)44 and other procedural provisions dealing with
43 None of the parties addressed what was meant by “unitisation”. In the present context, we assume that the reference is to the second definition of “unitization” given in Lesley Brown (ed) Shorter Oxford English Dictionary on Historical Principles (5th ed, Oxford University Press, Oxford, 2002) vol 2 at 3448: “the joint development of a petroleum source which straddles territory controlled by several companies”. Here, we infer the concept would involve development of the Pohokura field together with an adjacent field not covered by the Permit. 44 Article 5.2(4) expressly denies the Operating Committee power to determine any proposal to amend the JVOA.
establishment of subcommittees, notices of meetings and dealing with items not on the agenda for an Operating Committee meeting. Apart from these limited matters, decisions of the Operating Committee will be valid if the participating interest percentage requirements set out in art 5.9(A) are satisfied.
[107] Article 5.2 sets out the powers and duties of the Operating Committee. Its opening words are as follows:
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.
[108] There are then further paragraphs which are said not to limit the “generality” of the opening words. They 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;
…
(4) the consideration and, if so required, the determination of any other matter relating to the Joint Operations which may be referred to it by the Operator or a Party (other than a dispute between the Parties or any of them, or between a Party and the Operator, and other than any proposal to amend this Agreement), or which is otherwise designated under this Agreement for reference to it.
(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.
[109] The words of art 5.2 are thus a very broad conferral of power to the Operating Committee to carry out the activities of the joint venture. The powers given even extend to the determination of whether or not to proceed with “Development Operations”. That term is comprehensively defined in art 1 by reference amongst other things to “all operations carried out in the course of the
development of a Discovery … in accordance with a Development Plan approved by the Minister under the [Crown Minerals Act] …”. Further, the reference in art 5.2(2) to the “consideration, modification and approval or rejection” of a number of programmes and budgets, development plans and “AFEs” confirms the breadth of the power conferred, as will be apparent when we discuss the provisions of art 6.
[110] Before leaving art 5, we mention art 5.14. That provides (with exceptions not relevant for present purposes) that all decisions taken by the Operating Committee under art 5 shall be conclusive and binding on the parties.
[111] As earlier noted, the provisions of art 6 deal successively with three distinct phases of the joint venture: exploration and appraisal, development, and production. In each case, the language used is similar and requires the Operator to deliver annual programmes and budgets to the parties, and the Operating Committee to consider, modify and then either approve or reject the documents in question.
[112] Article 6.1 deals with exploration and appraisal. It provides for delivery by the Operator, at least two months prior to the end of the “Permit Year” of a “proposed Exploration Work Programme and Budget detailing the Joint Operations in respect of exploration to be performed for the following Permit Year”.45 That document is to be produced “together with a contingent Exploration Work Programme and Budget” for the following permit year, and tentative Exploration and Work Programmes and Budgets for the following two permit years. The Operating Committee is obliged to meet to consider, modify and then either approve or reject the Exploration Work Programme and Budget for the following permit year.
[113] Other provisions in art 6.1 deal with what is to occur in the event of a discovery of petroleum. They oblige the Operator to report on the discovery and make a recommendation as to whether it merits appraisal. If so, the Operating Committee has to determine whether it should be appraised, and in that case the Operator is obliged to produce an Appraisal Work Programme and Budget. Once again, the Operating Committee is required to “meet to consider, modify and then
45 The term “Permit Year” was defined in art 1 as a period of 12 months running from the anniversary date of the commencement of the permit on 1 December 1995.
either approve or reject that Appraisal Work Programme and Budget”. If the Operating Committee approved the document then all the parties were “committed and obliged to proceed in accordance with it”.46
[114] Article 6.1(G) empowers the Operating Committee to revise any approved Exploration or Appraisal Work Programme and Budget. Under art 6.1(H)(1), if an exploration well has reached its authorised depth, the Operator is to provide a recommendation as to whether to “complete” the well (broadly, take the necessary steps to enable production testing). Once again, it is for the Operating Committee to decide whether or not to attempt to complete the well, and its decision is binding. Similar provisions apply in respect of appraisal wells, under art 6.1(H)(2).
[115] Article 6.2 deals with development, setting out what is to happen if the Operating Committee determines that a discovery should be developed. In that eventuality, the Operator is obliged to deliver a development plan, together with “the first annual Development Work Programme and Budget and Provisional Development Work Programmes and Budgets for the remainder of the Discovery”.47 In accordance with the pattern established by art 6.1, it is for the Operating Committee to accept or reject the development plan. If the plan is approved, each party is committed and obliged to proceed with it, subject to the parties obtaining the necessary mining permit. Each party and the Operator is obliged to use its best endeavours to ensure that a mining permit is issued.48
[116] It is unnecessary to go into further detail in relation to the various provisions in art 6.2. It is sufficient to note that the decision to proceed with development of the field is one for the Operating Committee to make and there is no suggestion that the voting procedure in art 5.9 should not apply. As with art 6.1, the Operating Committee is the formal decision maker in respect of the key decisions to be made under art 6.2. That is consistent with the Committee’s role, powers and duties under art 5, discussed above.
46 Article 6.1(D). 47 Article 6.2(A). 48 Article 6.2(D).
[117] This brings us to art 6.3, headed “Production”. There is no definition of “production”, but Production Operations are defined as follows:
… all operations carried out in the course of the production of Petroleum from a Pool[49] in accordance with approved Production Work Programmes and Budgets, and includes, but is not limited to, the preparation of proposed Production Work Programmes and Budgets, Reworking, Recompletion, the drilling of further Development Wells and the construction of additional facilities.
[118] The expression “Production Work Programme and Budget” is itself a defined term, meaning:
… a work programme for Joint Operations in respect of production and a budget therefor as described and approved in accordance with Article 6.
[119] Article 6.3(A) provides for the development of a Production Work Programme and Budget as follows:
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.
[120] As can be seen, the proposed Production Work Programme and Budget which the Operator is obliged to submit under this article must detail the Joint Operations in respect of production to be performed for the following Permit Year. Although the defined phrase “Production Operations” is not used in the article, it is clear the Work Programme and Budget relate to the Operator’s intended production activities. The words used readily extend to stipulating the amount of petroleum to be produced in any year.
49 Article 1 defines “pool” as an underground accumulation of petroleum in a discrete natural reservoir geologically separated from any other accumulation.
[121] Mr Farmer noted that the words of the article refer to approval by the Operating Committee of only the proposed firm Production Work Programme and Budget. He submitted this meant the projected production schedule was not something to be approved by the Committee. He argued that art 6.3(A) drew a deliberate distinction between matters relating to expenditure (the Production Work Programme and Budget) and matters relating to production (the province of the production schedule). We reject that submission. It effectively puts on one side the definition of Production Work Programme and Budget, which embraces both a work programme for Joint Operations and a budget.
[122] In any event, we consider that the projected production schedule is part of the work programme. The natural way of reading the opening sentence of art 6.3(A) is that the proposed Production Work Programme and Budget is to “detail” two matters:
(a) the Joint Operations in respect of production to be performed for the following Permit Year; and
(b) the projected production schedule for that year.
[123] Consistently with this approach, the words “and which is intended to be firm for the following Permit Year” are plainly intended to relate to the Work Programme and Budget, which includes both those matters. So, both are intended to be firm for the following Permit Year. It would make no sense to construe the clause as requiring provision to the Operating Committee of two separate documents, one for the Committee’s approval and one not, especially when the projected production schedule must reflect and be accommodated by the proposed Production Work Programme. The only sensible construction is that both programme and schedule must be consistent. In the result, when the Operating Committee approves the proposed firm Production Work Programme and Budget it is necessarily also approving the schedule.
[124] It is not without significance that there was no evidence of a separate projected production schedule ever having been produced by the Operator, or of any
complaint by Todd about a failure to provide one. On the contrary, the practice adopted was to include the projected production schedule in the proposed Production Work Programme and Budget.
[125] The Operator must also include a contingent Production Work Programme and Budget for the succeeding Permit Year (which we read as meaning the Permit Year after the “following” Permit Year), and finally, tentative Production Work Programmes and Budgets for the two subsequent Permit Years. The purpose of all these documents is “to enable estimation of annual revenues and budgets by the Parties”.50 Again, we think it is clear that, if the purpose of the documents is to enable the estimation of annual revenues, they would be able to detail the amount of petroleum to be produced.
[126] In accordance with the familiar pattern, the Operating Committee must then “meet to consider, modify and then either approve or reject that proposed firm Production Work Programme and Budget”.51 The Operating Committee’s approval commits and obliges the parties to proceed in accordance with it for the following Permit Year. The Committee does not at this time approve or reject the “contingent” and “tentative” Production Work Programmes and Budgets for subsequent permit years. Doubtless that is because those Production Work Programmes and Budgets will be the subject of formal decisions by the Operating Committee in the succeeding years when the proposals they contain will become (probably in altered form) “firm”.
[127] Subsequent parts of art 6 contain provisions which are of more general application, applying to all three phases of the activities of the joint venture: exploration and appraisal, development and production. We note that under art 6.4(B) the Operator is obliged to include itemised estimates of costs of Joint Operations to be made during the Permit Year in the case of each kind of Budget and Development Plan (exploration, appraisal, development and production). The itemised estimate must identify each work category “in sufficient detail to afford the ready identification of the nature, scope and duration of the activity in question”.
50 Article 6.3(A). 51 Article 6.3(A).
In the case of a proposed firm Production Work Programme and Budget that must implicitly include the amount of petroleum to be extracted and of gas and condensate to be produced. Unless that is so the object of the article would be defeated. Mr Farmer referred to evidence that the costs of production were not sensitive to the volumes produced; however, the requirement is to include sufficient detail to enable the nature, scope and duration of the activity to be identified. It is relevant for present purposes that those are clearly matters for Operating Committee approval.
[128] Article 10 is headed “Disposition of Production”. Article 20.6 provides that the “topical headings” used in the JVOA are:
… for convenience only and shall not be construed as having any substantive significance or as indicating that all of the provisions of this Agreement relating to any topic are to be found in any particular Article.
[129] Such restriction does not stand in the way of the observation that the JVOA, construed as a whole, deals with different subject matters in a logical sequence. The early definition of the scope of the activities of the joint venture, followed by the allocation of powers and duties to the Operator and the Operating Committee is one example of that. The following separate provisions for each phase of the activities of the Joint Venture are another example, as is the chronological sequence in art 6 moving from exploration through appraisal, development and then production. By the time art 10 is reached, the JVOA has already articulated how the processes of exploration, discovery and production are to occur, and in the case of the latter, how the amounts of petroleum to be produced are to be ascertained from year to year. It is entirely consistent with what has gone before to see art 10 as dealing with disposition of the petroleum that has been produced in accordance with the preceding provisions of the JVOA. On this approach the heading of art 10 reflects the conclusion indicated by those provisions.
[130] The next heading, for art 10.1, is “Right and Obligation to Take in Kind”. Again, it is consistent with the earlier provisions that this refers to the taking of petroleum that has been produced. Article 10.1 has been set out earlier.52 The key words used are “the share of total production available to it under this Agreement.”
52 At [55].
In our view the natural and ordinary meaning of those words read in context is that they refer to petroleum that has been produced from the field and is available to be distributed to the individual parties. Todd’s argument that the words refer to what is available to be produced from the field if the facilities are run at their maximum capacity, has to confront numerous difficulties.
[131] Many of those difficulties will be apparent from the following discussion. They relate principally to the fact that the clear words of art 6.3(A) place annual production activities under the control of the Operating Committee. That is consistent with the role of the Operating Committee as the supervisor of Joint Operations, the Committee’s power and duty to authorise such operations, and the binding nature of the decisions the Committee is empowered to take in respect of the annual Work Programmes and Budgets (including the production schedule). It is consistent too with the role and duties of the Operator in the annual budgetary process, and its duty to implement the decisions of the Operating Committee.
[132] While Mr Farmer asserted it would be contrary to commercial common sense to conclude that any of the parties would have made the considerable capital investment required for development of the field if the timing of the return on their investment were to be controlled by a majority vote on the Operating Committee, there are common sense arguments to the contrary. They include the unlikelihood of the parties being comfortable commercially with the idea that the facilities would always be run at capacity for the life of the field without regard to prevailing or predicted market conditions from time to time. Importantly, at the time the JVOA was executed, there was no certainty as to what would be found or in what quantities, and the capacity of the facilities to be constructed was also unknown. As the present dispute shows, there can be more than one view as to the commercial desirability of consistently ensuring maximum rates of production, the result of which would be that the field would be exhausted in advance of when that might otherwise occur. We are not persuaded the essential premise of Todd’s argument based on commercial reality is sound.
[133] Further, since the JVOA was plainly drafted with a view to the possibility that further parties would become bound by its provisions (as has in fact occurred) it was
desirable, and in accordance with commercial common sense, that the Operating Committee should be constituted and empowered to an extent that would enable the activities of the joint venture to be efficiently conducted. The ability for necessary decisions to be made under a regime allowing for majority decision where there was no unanimity would help achieve that outcome and avoid disputes that might otherwise lead to delays and potential deadlock. As we have mentioned, there are instances where the JVOA required unanimity. The essential provisions dealing with the conduct of Joint Operations were not in that category. This is explicable in the interests of efficiency.
[134] Todd’s argument treats the petroleum as “available” to each party at a time when it is plainly not available as a matter of fact. When it is in the ground it is owned by the Crown, under s 10 of the Crown Minerals Act. The joint venturers simply have the right to extract it pursuant to the permit. When extracted, it is jointly owned by the joint venturers: as has been seen, “Joint Property” as defined in the JVOA includes petroleum “prior to custody, ownership, possession and control … passing as provided in Article 10”. The petroleum is not “available” to each party while it is owned by the Crown; the point of availability only arises when it can be distributed. How much is then available is a factor depending on what has in fact been produced, and the percentage of each party’s participating interest. These considerations again favour the view that the right given to each party by art 10.1 is to take the share of petroleum that has been produced, and is not related to the theoretical capacity of the facilities or notional availability.
[135] The right to take petroleum is qualified by reference to quantities and procedures that “may be set forth in the offtake agreement referred to in art 10.2” and in the “special arrangements for Natural Gas referred to in art 10.3”.53 In the absence of an offtake agreement and special arrangements, Todd submitted the principles in art 10.2 must be applied. The foundation for this submission is the provision in art 10.2 that:
If an offtake agreement has not been entered into by the date of the 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.
53 Article 10.1.
[136] Article 10.2 applies if oil is to be produced. It requires the parties to negotiate in good faith to conclude an offtake agreement making provision for various matters which are listed in paragraphs (A) to (H). Those are then referred to as “the principles” in the passage we have just quoted. As we have seen, no such agreement was able to be negotiated.
[137] Of particular relevance to Todd’s argument are paragraphs (B), (C), (D) and (H). They provide for:
(B) Operator’s regular periodic advice to the Parties of estimates of total available production for succeeding periods, quantities of each grade of Oil produced and each Party’s share for as far ahead as is necessary for Operator and the Parties to plan offtake arrangements. Such advice shall also cover for each grade of Oil total available production and deliveries for the preceding period, inventory and overlifts and underlifts;
(C) Nomination by the Parties to Operator of acceptance of their shares of total available production for the succeeding period. Such nominations shall in any one period be for each Party’s entire share of available production during that period subject to operational tolerances and agreed minimum economic cargo sizes or as the Parties may otherwise agree;
(D) Elimination of overlifts and underlifts;
…
(H) The option and the right of the other Parties to sell an Entitlement which a Party fails to nominate for acceptance pursuant to (C) above or of which a Party fails to take delivery, in accordance with applicable agreed procedures, provided that such failure either constitutes a breach of Operator’s or Parties’ obligations under the terms of the offtake agreement, or is likely to result in the curtailment or shut-in of production. Such sales shall be made only to the limited extent necessary to avoid disruption in Joint Operations. …
[138] Mr Farmer submitted that not only was there no agreement under art 10.2 which could have the effect of diminishing Todd’s right to its share of total production under art 10.1, but there was also nothing in any of these paragraphs which could have that effect. Further, the provisions for estimates of total available production (para (B)), nomination of acceptance of the parties’ shares (para (C)), the elimination of overlifts and underlifts (para (D)) and providing for what is to happen in the case of a party failing to take its proportionate share (para (H)) were all
consistent with Todd’s argument that there was a right and obligation for each party to take its share of the petroleum available to be produced.
[139] We do not consider that art 10.2 furthers Todd’s case. Mr Farmer accepted in argument that its contents could not be construed as adding to the rights of the parties under art 10.1. The principles set out in the various paragraphs in art 10.2 are equally consonant with the respondents’ argument that art 10.1 deals with the disposal of petroleum that has in fact been produced. Further, on the view we take it does not really matter whether those principles are applied or not, because the effect of the offtake rules and the nomination protocols is to impose a regime which in all material respects is of a similar nature to what would have been applicable had an offtake agreement in fact been executed under art 10.2. We say that on the basis that the reason a GBA was not able to be negotiated was Todd’s insistence on its right to a take its full share of petroleum every day, the plant operating at maximum capacity.54
[140] That stance depended on its argument that the annual Production Work Programme and Budget had wrongly imposed a 70 PJ/a production cap in breach of the JVOA. As became clear when that proposition was tested in argument, the core foundation for Todd’s argument was its assertion that the reference in art 10.1 to “total production available” is to be construed as referring to petroleum able to be produced as opposed to that which has been produced. We reject that contention.
[141] Another of Todd’s arguments was that because the parties had not entered into special arrangements of the kind contemplated by art 10.3, and there were no default provisions equivalent to paras (A) to (H) of art 10.2, the “right and obligation” provision in art 10.1 is not qualified or subject to modification as it is in the case of oil. Further, while there is no express mechanism for eliminating overlifts or underlifts, these could be addressed by applying common law principles derived from North American case law.55
54 Allowing for necessary shutdowns for maintenance or other unavoidable reasons consistent with good practice. 55 Above at [73] and above n 29.
[142] There is an obvious tension between those propositions and Todd’s argument that the principles set out in art 10.2 must be applied to gas in the absence of special arrangements under art 10.3. Further, the idea that the original parties to the JVOA would have envisaged that its terms might involve the adjustment of their rights by resort to common law principles and the potential for litigation inherent in that seems most unlikely.
[143] Putting those points on one side, Todd’s argument under art 10.3 has two strands. The first depends on its fundamental proposition about the proper interpretation of art 10.1. The second is the contention the Operating Committee exceeded its powers when it purported to adopt the offtake rules and nomination protocols over Todd’s opposition. Ultimately, the second point depends on the first, and we do not accept Todd’s argument about the meaning of art 10.1 for reasons already addressed.
[144] We have earlier described the way in which the offtake rules and nomination protocols are applied in the context of the Production Work Programmes and Budget and explained our view that the Operating Committee has power to provide for the amount of petroleum to be produced in any permit year. The offtake rules and the nomination protocols together provide the mechanisms by which the parties can nominate and take the petroleum produced in accordance with their requirements. They are, of course, obliged to take their respective share of the petroleum in fact produced, and if they do not do so then there will be a requirement for an adjustment from time to time. Similarly, if a party exceeds its entitlement, an adjustment will again be necessary. The offtake rules acknowledge this and provide essentially that the adjustment will occur on an annual basis, with overlifts and underlifts in any year able to be adjusted in the following year.
[145] All this is commercially sensible and practical. Todd’s own submissions acknowledged:
As a general observation, overlifting and underlifting needs to be addressed in some way in respect of the entitlements over the life of the field if a party is not to be deprived of its total (life of the field) entitlement. However, there is no impediment to a party taking more than its periodic entitlement, and hence overlifting, whenever another party underlifts. That will mean an
adjustment later to ensure that the life of the field entitlements are ultimately in balance and there is no deprivation of a party’s life of the field entitlement. The purpose of a GBA is to achieve that goal while at the same time permitting overlift and underlift flexibility during the life of the field. The US case law previously mentioned also addresses that goal where there is no express contractual mechanism that does so.
(Footnote omitted).
[146] Some periodic process to address any disproportionate taking of petroleum is necessary and appropriate; and we do not accept the annual period so adopted in the offtake rules of itself involves any breach of the JVOA. However, one of Todd’s complaints is that by providing for an underlifting party to overlift in the following year, Todd’s right to its proportionate share of the maximum during the period of the adjustment might be lost. That does not appear to be the intent of the offtake rules56 but the question is whether, if Todd is right, that makes the rules invalid.
[147] That question is really part of the broader issue of whether it was competent for the Operating Committee to adopt the offtake rules against Todd’s opposition. We consider the Operating Committee was entitled to do so for these reasons:
(a) Article 10.1 cannot work unless it is supplemented by rules that deal with the quantities and procedures that are to apply. This is plainly reflected in the drafting referring to the quantities and procedures to be set forth in the offtake agreement under art 10.2, or the special arrangements contemplated for natural gas. Contrary to Todd’s contention, art 10.1 cannot function in isolation.
(b) In the case of oil, there does not need to be an agreement defining the quantities to be disposed of under the article. It is sufficient if the principles in art 10.2 are applied. But the drafting does not contemplate that it is simply a matter of applying art 10.1 alone, without the need for further provision for disposal of the oil. The same must apply where there are no special arrangements under art 10.3.
56 See above at [44].
(c) The contrast between the words “special arrangements” in art 10.3 and the more formal “offtake agreement” adopted in art 10.2 for oil is obvious. A difference must have been intended.
(d) The Operating Committee’s powers to authorise and supervise Joint Operations (art 5.2) to determine all matters relating to general policies, procedures and methods of operation (art 5.2(1)) and to approve the Production Work Programme and Budget (including the projected production schedule) (art 5.2(2)) are together sufficient to authorise the adoption of offtake rules and nomination protocols such as those adopted.
(e) Had the rules and protocols been adopted unanimously there could be no argument that they were not special arrangements for the purposes of art 10.3: their subject matter is entirely consistent with the kind of arrangements envisaged by art 10.1, including practical measures to deal with important issues concerning the process of nominations for petroleum to be produced, and overlifts and underlifts which Todd itself acknowledges to be necessary.
(f) We consider it makes no difference that the rules were not adopted unanimously, since their subject matter falls clearly within the ambit of the Operating Committee’s powers, and their subject matter is not specified by the JVOA as requiring unanimity.
(g) The offtake rules themselves do not establish the annual cap on production. That is and has been a feature of successive production Work Programmes and Budgets approved by the Operating Committee in accordance with its clearly expressed powers.
[148] For the same reasons we conclude that the offtake rules and nomination protocols were special arrangements for the purposes of arts 10.1 and 10.3.
[149] Consequently Todd’s appeal in respect of the contract claims cannot succeed.
The Commerce Act causes of action
The claims
[150] Todd advanced three causes of action based on alleged breaches of the Commerce Act. Each claim focused on the annual cap on production contained in the successive Work Programmes and Budgets for the years from 2006 to 2009. Those Work Programmes and Budgets, the offtake rules and the nomination protocols were collectively referred to in the pleadings as “the offtake documents”. We use that term or “offtake regime” to refer to all three. The first cause of action claimed that the offtake documents were arrangements or understandings between Shell and OMV that had the purpose, effect, or likely effect of substantially lessening competition in the national natural gas production (and first point of sale) market in each year from 2007. That gas market encompassed transactions between “producers of gas and first point of sale customers”.
[151] The second cause of action alleged that the provisions of the offtake documents had the purpose, effect, or likely effect of controlling or maintaining the price of gas “both from the Pohokura field and otherwise”. Since Shell, OMV and Todd were in competition with each other for the supply of gas, the offtake documents were deemed to have the purpose, effect or likely effect of substantially lessening competition in the gas market under s 30 of the Commerce Act.
[152] The third cause of action alleged a breach of s 29 of the Commerce Act. Todd claimed the offtake documents comprised exclusionary provisions within the meaning of s 29(1) of the Act, and they had the purpose of limiting the production and supply of Pohokura gas, consequently preventing, restricting or limiting the supply of that gas to actual and potential wholesale purchasers as well as Nova Energy Ltd, one of the Todd Corporation energy companies.
[153] These claims were advanced independently of the contract causes of action, on the basis that even if the offtake documents were not in conflict with the JVOA, the respondents’ conduct was nevertheless contrary to the Commerce Act.
High Court findings
[154] The High Court identified a threshold difficulty with Todd’s argument, noting that Shell and OMV had been prepared to allow Todd to nominate to take its full share, assuming maximum production from the facilities, provided there were arrangements in place to enable them to bring the respective amounts of gas provided to the parties into balance. That had been the objective of the draft GBA proposed by Shell in November 2005.57 The draft had foundered on Todd’s opposition, which was based on its proposition that the draft’s terms were inconsistent with Todd’s rights under the JVOA. As the High Court put it:
[303] Todd’s opposition to the proposed terms of a GBA was because Todd treated the terms proposed as inconsistent with its contractual rights. Todd asserted a right to have access to at least its share of the maximum capacity at which the plant could produce on a daily basis, rather than accessing its proportionate share of a lower level of production settled by the annual budgetary process.
[155] The High Court concluded that if Todd had not persisted with its incorrect interpretation of the JVOA, it was likely the parties would have concluded a GBA prior to the commencement of commercial production at Pohokura. While that may not have been in the form proposed by Shell, there would have been flexibility for overlifting and underlifting, subject to a mechanism by which imbalances could later be redressed. The Court said:58
We accept the evidence of economists to the effect that concluding a GBA was the entirely rational response once the parties were not distracted by differences over the interpretation of the contract, and Todd’s asserted right to require Pohokura to produce full-out all the time had been rejected.
[156] The High Court found that Shell and OMV would not have permitted the joint venture to proceed on the basis that Todd would be able to procure production of more than its share of agreed volumes of gas in the absence of a GBA.59 On the other hand, the principles underlying Shell’s proposed GBA were in accordance with the JVOA,60 and the Court was not prepared to find that Shell and OMV would have blocked Todd’s access to larger volumes of gas had Todd accepted the proper
57 High Court judgment, above n 1, at [302]. 58 At [305] (footnote omitted). 59 At [308]. 60 At [306].
interpretation of the JVOA.61 Had Todd agreed to terms “consistent with the contractual interpretation it has thus far rejected” then it would have been able to obtain access to larger volumes of gas.62
[157] This was important for Todd’s analysis seeking to identify a substantial lessening of competition for the purposes of the Commerce Act claims based on s 27. Such analysis depended on the extent of the difference in the level of production between what had occurred (“the factual”) and a “counterfactual” in which all three parties increased the level of their offtake from Pohokura to the plant’s capacity, as opposed to Todd alone doing so in respect of its 26 per cent participating interest. The High Court considered that such an outcome was “not among those reasonably entertained as likely”, because a GBA on terms acceptable to Shell and OMV would have resulted in them not needing to match Todd’s offtake on a daily basis.63
[158] The Court considered this to be a “fundamental impediment” to Todd’s Commerce Act claims.64 If Todd had not persisted in its incorrect view of the contract then:65
… the factual situation would more likely than not have been different in that the constraint on the level of production Todd complains of would not have been present. In these circumstances, the factual situation reflecting the position that was correct in law, and the counterfactual situation in which the constraint did not exist, become the same.
[159] The High Court found there was a second threshold obstacle to Todd’s Commerce Act claims. The Court considered that the relevant “market” for the purposes of the claims was wider than the market for “natural gas production and first point of sale” which Todd alleged as the relevant market. This was because:66
… producers of gas compete in its sale with wholesale traders in gas, such as Contact Energy and Vector. Wholesale traders are not producers, but can compete with producers in re-selling gas they acquire at a “first point of sale”.
61 At [307]. 62 At [309]. 63 At [310]. 64 At [312]. 65 At [311]. 66 At [315].
[160] Accordingly Todd had failed to make out an essential element of its causes of action by failing to prove the pleaded market in which the unlawful activity is alleged to have occurred.
[161] The High Court found there was no evidence as to how gas wholesalers who were not producers would respond to a material increase in the volumes of gas available in the market that would be the result of an increase in production from Pohokura. Yet the volumes available to those wholesalers were significant: both Contact and Vector were substantial buyers of Maui gas while Vector also had rights in respect of half of the production from the Kapuni field. Kapuni provided 12.8 per cent of the total national gas production in 2008.67 Yet there was no detailed analysis of the terms on which these substantial volumes of gas were available to wholesalers such as Contact or Vector. The Court was only able to observe that the volumes available to wholesalers appeared to be larger than those wholesalers needed for their own generation and retail, or industrial resale purposes.68
[162] The Court considered the difference between the market as pleaded and that established on the evidence was material, and there were meaningful differences in the economic analysis required for each. It would be prejudicial to Shell and OMV to require them to adjust their analysis, evidence and arguments to rebut the allegations against them in relation to the wider market including wholesalers. Therefore Todd had failed to make out the functional dimension of the market it alleged and, applying Commerce Commission v Bay of Plenty Electricity Ltd,69 this constituted a second fundamental obstacle to Todd’s Commerce Act claims.70
[163] Notwithstanding its view that these difficulties were sufficient to dismiss the Commerce Act claims, the High Court proceeded to analyse the other elements of the claims, considering the elements of the relevant market, conduct in likely counterfactuals and the likelihood of a substantial lessening in competition. Key conclusions were:
67 At [327]. 68 At [328]. 69 Commerce Commission v Bay of Plenty Electricity Ltd HC Wellington CIV-2001-485-917, 13 December 2007. 70 At [330].
(a) The market in which field owners produce and sell gas extends to the activities of major gas wholesalers, including at least Contact and Vector, given their access to substantial volumes of gas and their ability to compete with producers for sales to third parties.71
(b) The counterfactual scenario on which Todd’s principal economic expert, Mr Kieran Murray, proceeded was that Todd could have insisted on the production of 26 per cent of the plant’s capacity since the commencement of production in 2006, and forced the other parties to match Todd’s offtake. However that scenario was “inherently unlikely”.72 The more likely scenario was that full production would have been available for Todd once some form of GBA was in place. In that case, Shell and OMV would not have needed to match Todd’s offtake and would not have done so until relatively recently.73
(c) The Court was not satisfied to the requisite standard of a “real and substantial prospect” that a counterfactual situation would have arisen in which all three joint venturers would have called for production at capacity. Rather, the likely counterfactual was that, subject to agreeing on a process for redressing imbalances, Todd would have been able to produce full-out, but Shell and OMV would not follow suit.74
(d) Todd’s counterfactual was premised on it being able to force production at maximum capacity. While Mr Murray initially estimated it would reach 86 PJ/a,75 he later revised this to a production plateau of 82.5 PJ/a (equivalent to 235 TJ/day) for the 2009 to 2013 period after allowing for maintenance and outages. Such a volume of gas would still have meant a significant increase
71 At [370]. 72 At [381]. 73 At [382]. 74 At [383]. 75 However, that figure does not allow for maintenance and other shutdowns. Todd’s claim that it should have been entitled to up to an additional 4 PJ/a was apparently calculated on the basis of its entitlement to a 26 per cent share of the production increased from 70 PJ/a to 86 PJ/a: see High Court judgment, above n 1, at [387].
(approximately 12.5 PJ/a) in the amount of gas available to buyers which Todd argued would have had a material impact on price. However, there was no real and substantial prospect that the additional volumes of gas postulated by Todd would have been sold.76
(e) Todd had been unable in the period relevant to the claim to sell all the gas available to it in any event, and the contemporary documents did not support its claim now made that it was seeking larger volumes of gas, and was confident it could sell them.77
(f) An increase in the amount of gas produced from the Pohokura field was likely to be offset to some degree by a decrease in the volume produced from the Maui field.78
(g) From 2006 to 2009 Todd was not motivated to find all possible gas for sale, and its conduct in relation to reinjection was inconsistent with a desire on its part in 2006 and subsequently to source and sell more gas than was otherwise available to it.79 This flowed from findings that:
(i) Todd could have sourced more gas for sale from the McKee and Mangahewa fields in the years from 2006 to 2009, had it wished to do so.80
(ii) Although gas was reinjected at the McKee field for the purpose of optimising the ultimate amounts of gas and condensate able to be extracted, that did not reflect any precise calculation of competing benefits of production of gas for sale on the one hand, against the increased value ultimately able to be derived from reinjection on the other.81
76 At [386]. 77 At [389]. 78 At [422]. Shell has a controlling interest of 83.75 per cent in the Maui field. 79 At [430]. 80 At [427]. The McKee and Mangahewa fields are owned by Todd Energy, a wholly owned subsidiary of Todd Corporation. 81 At [428].
(h) Overall, Todd could not establish its counterfactual that, had it been permitted to insist on receiving its 26 per cent share of capacity at Pohokura, there would have been a sufficiently material increase in the supply of gas to produce a material lessening in price. The same conclusion would apply if the position were analysed on the assumption made in Todd’s counterfactual that all parties would call for production at maximum capacity.82
(i) In the result, Todd could not make out a substantial lessening of competition.83
[164] It followed that Todd could not demonstrate that the offtake documents had any anti-competitive effect in terms of s 27(1) of the Commerce Act. Further, on an objective analysis, the significant margin by which Todd had failed to demonstrate a substantial lessening of competition tended against a finding that the documents had an anti-competitive purpose. In discussing this issue the Court rejected arguments by Todd that the limit on production was designed to prioritise production from Maui, and protect reserves at Pohokura.84 In addition, it emphasised that Shell and OMV had not sought to prevent Todd from taking more gas from Pohokura. Rather, the concern had been to secure in place a mechanism for redressing imbalances that might arise should Todd take more than its 26 per cent share of the production level agreed by the majority.85
[165] The Court also found that there were valid grounds for Shell and OMV to require that such arrangements be in place: if they were not then those parties would run the risk of losing part of their return not only on the capital invested, but also on the ongoing contribution to operating costs required to be made on the basis of each party’s participating interest. The stance of Shell and OMV was “not about limiting sales, but rather about protecting entitlements”.86 It was not tenable in the
82 At [438]. 83 At [439]. 84 At [474]. 85 At [472]. 86 At [478].
circumstances to assert that the wish to protect reserves was an anti-competitive purpose in terms of s 27.87
[166] As to the cause of action based on the combination of ss 27 and 30 of the Commerce Act,88 the High Court accepted there could “conceptually” be an arrangement expressed as controlling the output of goods but in fact arrived at for the purpose of controlling or maintaining prices. However it noted there was no authority for that proposition and said it did not need to decide the point.89
[167] The Court reasoned that an agreement on price would only be undertaken if the parties to it thought their market position was sufficiently strong for that to be advantageous. However, arrangements as to the level of output between joint owners of production facilities can have a legitimate rationale other than an intention to influence prices, and in such a case there will be no justification for finding liability under s 30. The Court held that, to the extent that the offtake documents reflected an arrangement to limit supply, the arrangement should be assessed under s 27 and not treated as an arrangement to limit prices under s 30. This cause of action therefore failed.90
[168] If, contrary to that conclusion, the offtake documents did amount to an arrangement limiting price, the Court was satisfied the joint venture defence in s 31 of the Commerce Act would have applied.91
[169] Finally, in relation to the cause of action based on s 29 of the Commerce Act, the High Court noted there was nothing in the offtake documents that identified any particular potential purchasers; on their face they applied to the whole potential market.92 The Court concluded that the absence of any targeted element in the offtake documents meant that they did not breach s 29. If that conclusion were
87 At [480]. 88 Under s 30, there is a deemed substantial lessening of competition in the case of arrangements that have the purpose or likely effect of fixing prices for goods supplied by parties to the arrangements. 89 At [486]. 90 At [488]. 91 At [497]. 92 At [492]. Section 29 of the Commerce Act prohibits contracts, arrangements or understandings containing exclusionary provisions.
wrong, then Shell and OMV had a defence under s 29(1A) because the documents had neither the purpose nor effect of substantially lessening competition in the relevant market.93
The Commerce Act appeal
[170] Todd’s appeal on the Commerce Act claims challenged all of the High Court’s key conclusions discussed above. However, at the hearing Todd did not advance submissions concerning its claim under s 29 of the Act.94 It will be convenient to deal with the issues raised under the following headings:
(a) The relevant market.
(b) The factual and counterfactual analysis.
(c) The effect of the alleged anti-competitive conduct.
(d) The purpose of the alleged anti-competitive conduct.
(e) The s 30 claim and s 31 joint venture pricing defence.
The relevant market
[171] Todd argued the High Court was wrong to conclude that the relevant market for the purposes of the claims was wider than the market for natural gas production and first point of sale, and included wholesalers who are not producers. Todd claimed that since the purpose of market definition is to clarify the sources and potential effects of market power, the market should be defined as narrowly as possible. The fact that when Contact and Vector resold gas they would be doing so in competition with producers was not significant for market definition where the anti-competitive conduct alleged is based on constraints on production.
[172] Accordingly, it was unnecessary to consider any factors operating beyond the production and first point of sale market, as only producers with the ability to
93 At [494]. 94 See [169] above.
increase the quantity of gas in the market could provide a relevant competitive constraint on producers and the market in which the Pohokura production constraints operated. It followed there was little “utility” in defining the market broadly, so as to include wholesalers.
[173] Todd submitted the market definition on which it relied was appropriate and sufficient in terms of the functional dimension of the market, claiming that it was best able to “bring out” the competitive forces at play. Counsel emphasised that the Commerce Commission, in granting an authorisation for joint marketing of the Pohokura gas, had analysed the proposal on the basis of a production/first point of sale market. Todd contended this supported its conception of the market definition to be adopted in assessing the production constraints.
[174] Todd also claimed the High Court’s findings as to the relevant market were inconsistent with other findings it made recognising that the conduct of wholesalers did not operate so as to constrain the amount of gas produced. Todd’s submission was that, whether or not the market was defined so as to include wholesalers, the offtake documents had the effect of restricting output, so as to result in a substantial lessening of competition. Consequently, the market definition exercise should not determine its competition claims.
Approach to market definition
[175] We summarise the key principles to be applied as follows. The starting point is s 3(1A) of the Commerce Act. That provides:
3 Certain terms defined in relation to competition
…
(1A) Every reference in this Act, except the reference in section 36(A)(2)(b) and (c), to the term market is a reference to a market in New Zealand for goods or services as well as other goods or services that, as a matter of fact and commercial common sense, are substitutable for them.
[176] The orthodox approach to market definition is settled in New Zealand and has been addressed in previous decisions of this Court.95 Market definition is not an end in itself, but is required to assist in identifying competitive constraints that operate in “real markets”; the market is an analytical tool for framing the competition issues.96 The specific definition of the market and its parameters in any given case will differ depending on the competition concerns, the sources and potential effect of market power, and structure of the industry concerned.97
[177] As noted in Port Nelson and Re Queensland Co-Op Milling Assoc, market definition typically proceeds with analysis of the relevant dimensions influencing potential and actual transactions in that market. This will usually (but not always) include an assessment of “substitutability” in the product, temporal and geographical dimensions. In this case the functional dimension of the gas market in which the parties operate is particularly important, because considerations relating to temporal and geographical dimensions are not significant for market definition.
[178] The functional dimension of a market refers to the “levels” in the market. These may involve separate or distinct markets of production and/or manufacture, and wholesale and/or retail sales. The functional dimensions in a market can be identified by observing industry practice, and the structure of relationships between buyers and sellers in that industry. Where there are a series of discrete and self-contained levels, none of which constitutes a competitive constraint on the other, it may be appropriate for each level to be treated as a separate independent market. Conversely where, for example, the wholesale and retail activities are interwoven and not discrete, it will be appropriate to analyse the market as embracing both. As was recognised by the High Court in Telecom Corp of New Zealand Ltd v Commerce Commission ultimately the functional divisions appropriate for a market definition exercise will be those which “will best expose the play of market forces actual and
95 Port Nelson v Commerce Commission [1996] 3 NZLR 554 (CA) at 560, referring to Re Queensland Co-operative Milling Assoc Ltd [1976] 8 ALR 481 (Trade Practices Tribunal) at 517. 96 Brambles New Zealand Ltd v Commerce Commission (2003) 10 TCLR 868 (HC) at [137]. 97 Telecom Corp of New Zealand Ltd v Commerce Commission (1991) 3 NZBLC ¶99-239 (HC) at 10,362–102,363. See generally Matt Sumpter New Zealand Competition Law and Policy (CCH New Zealand Ltd, Auckland, 2010) at 73 and Maureen Brunt “‘Market definition’ Issues in Australian and New Zealand Trade Practices Litigation” in Rex J Ahdar (ed) Competition Law and Policy in New Zealand (Law Book Company, Sydney, 1991) 115 at 134–135.
potential upon buyers and sellers”.98 A rigid functional analysis should not be applied at the expense of capturing all relevant competitive dynamics at play.
[179] The starting point is to examine the alleged competitive abuse and the relevant product. It is then appropriate to examine the actual and potential competitive constraints present in the field in which the competitive abuse is said to arise, and arrive then at a market definition designed best to expose and analyse those constraints.
Market definition: this case
[180] The impugned conduct to be examined is the constraint on production from the Pohokura field allegedly resulting from the offtake documents. Todd contends that, because this is a constraint on production, the market effects and competitive consequences of such behaviour can only be ascertained by assessing effects on fellow producers. In other words, Todd claims the production level is the only relevant functional aspect to consider, and no other dimension of the gas market will influence or constrain activities in that market. The validity of those propositions needs to be assessed with reference to the industry structure, the participants in it and their behaviour.
[181] OMV called evidence from Mr David Hunt, a director of a Wellington-based firm specialising in energy sector issues. His evidence included an overview of the New Zealand gas market describing how natural gas is used in three main ways. These are as a fuel source for electricity generation and co-generation, as a direct energy source for residential, commercial and industrial uses and as a feedstock in chemical processes (particularly the manufacture of methanol and fertiliser).
[182] Mr Hall, Todd’s general counsel, explained in his evidence that the gas is produced from five main fields and 11 smaller fields. The five main fields are Maui, Pohokura, Kapuni, McKee/Mangahewa, and Kupe (which was scheduled to commence production in late 2009). Other, much smaller fields included Rimu/Kauri, Tawn, Turangi and Ngatoro. Collectively, the smaller fields produced
98 Telecom Corp of New Zealand Ltd v Commerce Commission, above n 97, at 102,363.
approximately 11 PJ/a, which can be compared with the approximately 275 PJ/a produced at the other fields.
[183] Rights in respect of the various gas fields are held by a small number of entities, either alone or in combination. Mr Hall recorded the parties with participating interests as follows:
(a) Maui – Shell, OMV and Todd;
(b) Pohokura – Shell, Todd and OMV;
(c) Kapuni – Shell and Todd;
(d) McKee and Managhewa – Todd;
(e) Kupe – Genesis, New Zealand Oil and Gas and the Crown.
The smaller fields were controlled by Swift Energy, Origin Energy, Greymouth Petroleum and others.
[184] Mr Hunt explained that before 1979, the Kapuni field accounted for most of New Zealand’s gas supply. In 1979 Maui came on stream, underpinning a major expansion in demand until 2006. Thereafter, supply became more fragmented, with no individual field accounting for more than 50 per cent of production.
[185] The manner in which the gas is sold is relevant for present purposes. As various witnesses confirmed, gas trading and sales in New Zealand occur mainly through long-term physical supply contracts between gas producers and buyers. The buyers are principally electricity generators, gas aggregators and the largest users of gas.
[186] With reference to production, the major producers have significant existing direct contractual obligations to sell to parties who include significant wholesalers in Vector, Contact and Genesis. We earlier noted the High Court’s observation that
the volumes available to these wholesalers are substantial.99 In Todd’s case, it sells to Nova which then on-sells the gas. The evidence established:
(a) The Maui mining companies100 entered into substantial gas delivery contracts with Crown entities early in the field’s life. The purchaser of that gas is now Genesis, which is guaranteed a substantial amount of gas per annum. Similar arrangements are in place with Methanex, a large methanol production company. According to Mr Hall, following renegotiation which occurred in 1 January 2003 (when it was considered that reserves at Maui were lower than previously thought) there was an obligation to supply 367 PJ/a to the Crown/Genesis and 40 PJ/a to Methanex. In addition to those contracts, there are right of first refusal (ROFR) arrangements in favour of Vector and Contact over additional gas quantities produced from the Maui field (where reserves have now been reassessed upwards). Essentially, Vector and Contact have the right to pre-empt any sales of this gas to other parties.
(b) The Todd Energy Group, comprising a number of different entities, has contractual arrangements in place from its fields to deliver quantities direct to Genesis and other gas aggregators. In addition, Todd has contractual arrangements to deliver most of its gas to its own wholesale subsidiary, Nova Gas.
(c) The Kapuni field is also subject to direct delivery contracts with Vector, which is guaranteed half of the output over the life of the field.
[187] One of the expert witnesses on whom Todd relied for the purposes of market definition was Dr Cento Veljanovski. In cross-examination, Dr Veljanovski accepted that Vector and Contact were competing in the same market as Todd when they sold to mid-sized industrial consumers. The Court also noted that Dr Veljanovski accepted that the wholesale and first point of sale gas markets were interrelated “to
99 Above at [163]. 100 This was the collective name given by the High Court to the present parties with respect to gas production from the Maui field.
some degree”.101 This emerged in the cross-examination of Dr Veljanovski by Mr Goddard, where the following exchanges ocurred:
Q. Do you agree that when Vector and Contact are competing to sell to people like Ballance or mid-sized industrials, they are competing in the same market as Todd?
A. When they’re selling gas?
Q. Yes.
A. Yes.
Q. And Vector and Contact aren’t field owners, are they?
A. No.
And later:
Q. It’s actually pretty plain isn’t it that Vector and Contact do compete in the same market as OMV?
A. Yeah. For the sale of gas. By the same market I mean, it might be different contractual terms that are being offered for that gas, and that gas may be slightly different, but I think for the purposes of this proceeding we’ve all defined one gas market as potentially the narrowest. We haven’t gone to submarkets within the markets to make any relevant arguments about that.
Q. In fact it’s positively unhelpful to try to think separately about a production [and] first point of sale market distinct from a wholesale market in circumstances where wholesalers like Vector and Contact compete directly with OMV?
A. Yes, but it all depends what implications you’re trying to draw out of it I think, because that gas will come from – the wholesale gas comes from producers.
Q. You need to pay attention to the whole competitive dynamics, to the nature of the resource available to everyone, correct?
A. Yes.
[188] Questioned by the Court, Dr Veljanovski said:
A. If I was concerned with the competition issues in the wholesale market I would be making a strong distinction because I’m looking at that market in particular. But, given that first point of sale gas goes into the wholesale market, they are interrelated to some degree.
101 At [368].
[189] The “distinction” to which Dr Veljanovski was referring was in context a distinction between producer and wholesale gas markets and the reservation he expressed, consistent with other aspects of his evidence, reflected his view that the issues raised by Todd’s claim related to the conduct of Shell and OMV as gas producers, and not as gas wholesalers. While his opinion was that the functional market comprised the market for producers’ sales of gas, the High Court was entitled to refer to and be influenced by Dr Veljanovski’s evidence that the wholesale and first point of sale gas markets were interrelated. The Court was not bound to accept Dr Veljanovski’s view that because the impugned conduct was a restraint on production, the interrelationship was not significant.
[190] Todd’s other expert witness on this issue, Mr Kieran Murray (whose expertise was in market analysis with a particular focus on the energy sector) was also of the view that because the complaint concerned a restriction on production, the relevant market should be confined to production and first point of sale. However, he too conceded in evidence that wholesalers compete head-to-head with field owners for sales to a range of customers. He contended his analysis would not be affected if the market also included wholesalers who were not producers, because the relevant issue was the effect of the restraint on production, which had the consequence of limiting the quantity of gas in the market for any defined period of time. However, he stated in cross-examination:
If you’re concerned about [who is] bundling up the gas that’s in the market in any one year packaging it to suit particular customer profiles, as I understand Nova does, then it certainly will be competing with other wholesalers.
[191] Mr Richard Tweedie also referred to Todd securing a contract to supply gas to the Whareroa joint venture after a competitive process with Contact.
[192] Mr Hamish Tweedie, the Group Manager – Gas for Todd Petroleum Mining Company Ltd, said that a major part of his role was to monitor Todd’s competitors’ activities in the gas market.102 Those competitors were primarily Shell, OMV, Vector and Contact. He also referred to Genesis, MRP, Ballance, and “anybody that’s a
102 Mr Hamish Tweedie was responsible, among other things, for managing Todd’s wholesale gas sales.
major gas buyer is somebody that you would keep an overview of what they’re doing and where they’re going.” Referring to Genesis and Contact, he said:
… they buy gas and they on-sell gas, so everybody is working in that same wholesale market. To crudely put it, regurgitating gas around when they don’t necessarily have a need for it or they can find a higher value home for it.
[193] Mr Hamish Tweedie also referred to a number of specific instances where Vector had on-sold volumes of ROFR gas in 2006 to Genesis, MRP, Methanex, Ballance and (together with Contact) to “large industrials”. Moreover, he confirmed Mr Hall’s evidence that Todd sells all its Pohokura gas to Nova and any sales of Pohokura gas to third parties are made by Nova, not Todd. Nova sells to industrial, commercial and retail customers.
[194] It follows that, although producers control quantities of gas produced, a significant proportion of the gas is contracted and committed to wholesalers. The nature of these contracts means that the wholesalers can, to a material extent, control the quantity of gas in the market at any one time and the entities to whom and on what terms that gas is on-sold. Wholesalers have the capacity to respond to incentives and change their output, contracting behaviour, sales strategies and internal use of gas. Producers and wholesalers also compete side-by-side to sell the balance of gas quantities not contracted to large wholesalers.
[195] We therefore consider there was ample evidence justifying the High Court’s conclusion that the market in which field owners produce and then sell gas extends to the activities of major wholesalers of gas, including at least Contact and Vector, given their access to substantial volumes of gas and ability to compete with producers for sales of that gas to third parties. We would go further and find that the market also includes Nova.
[196] It is artificial to confine the analysis of the competitive consequences of the Pohokura constraints to the effect on producers. A more accurate picture is obtained by assessing the response of producers and wholesalers taken together. In order to do that, sufficient evidence and analysis of those market participants, their behaviour, contractual rights and powers and incentives would have to be adduced. The fact
that the High Court was not in a position to quantify the extent of the wholesale market does not in our view detract from the conclusions it reached: it reflected the fact that detailed evidence about the activities of the wholesalers was not before the Court. That resulted from the way in which Todd had pleaded the relevant market. It had the onus of establishing what the market was, and failed to do so.
[197] We are satisfied, as the High Court concluded, that the relevant market was in fact significantly different from that pleaded by Todd and addressed and analysed in the evidence. The High Court did not err when it held that there was insufficient information about the dynamics of the involvement of the wholesalers for it to be able to determine how the market would operate in the theoretical counterfactual.103
The factual and counterfactual analysis
(i) The factual
[198] The High Court concluded that it would be inappropriate to analyse the notional counterfactual with reference to a “factual” that was based on Todd’s incorrect stance as to its rights under the JVOA. Had Todd not maintained that incorrect stance, it was likely the parties would have concluded some form of GBA, enabling Todd to call for its maximum capacity entitlement, Shell and OMV not doing the same but relying on periodic adjustments of imbalances. In that situation the constraint of which Todd complained would not arise, and the factual and counterfactual would be the same.
[199] Todd contends its Commerce Act case did not depend on its contractual claim and, even if the offtake documents were validly adopted by the Operating Committee, they were nevertheless in breach of s 27 of the Commerce Act. Todd submits the Court’s approach was in effect to create a hypothetical factual; this was “unprecedented and flawed”. The orthodox approach would have been to start from the existing position in which the offtake documents prevent Todd taking petroleum at capacity, and compare that with relevant counterfactuals in which that constraint did not exist.
103 At [371].
[200] We do not accept the High Court erred. As Mr Taylor QC submitted, in a case such as the present, where it is necessary to analyse the effects of conduct beyond the present day, the analysis must necessarily be forward-looking and embrace events yet to occur. It is not only the counterfactual that has that quality: unless the factual scenario chosen for the purposes of the comparison is also one that extends to the future its utility as a comparator might be greatly reduced. Section 2(3) of the Commerce Act implicitly recognises this because it contemplates that a contractual provision validly entered into may become unenforceable because of its effect later in time. Similarly, where authorisations are sought under the Act for proposed actions, the analysis of both factual and counterfactual must necessarily include the future effects and considerations.
[201] This was acknowledged in Commerce Commission v Woolworths Ltd, a case involving the proposed acquisition of The Warehouse Group Ltd by supermarket interests. The Commerce Commission declined applications for clearances under s 66 of the Commerce Act, but its decision was overturned on appeal to the High Court.104 On further appeal, this Court restored the Commerce Commission’s decision.105 The case engaged s 47(1) of the Commerce Act which prohibits the acquisition of a business if the acquisition would have or would be likely to have the effect of substantially lessening competition in a market. This Court stated:
[63] The proscribed effect (ie actual or likely substantial lessening of competition in a market) is assessed in relative rather than absolute terms. This exercise requires a comparison of the likely state of competition if the acquisition proceeds (“the factual”) against the likely state of competition if it does not (“the counterfactual”). The expression “factual” is, in the context of a clearance application, a misnomer as it is just as hypothetical as the counterfactual. …
Subsequently the Court also observed that “[b]oth factual and counterfactual are forward looking”.106
[202] The same applies in any case where the Commerce Act requires consideration of effects of conduct into the future. Todd’s expert Mr Murray compared factual and counterfactual scenarios extending out to 2036. In a different case there might be
104 Woolworths Ltd v Commerce Commission (No 2) [2008] NZCCLR 10 (HC). 105 Commerce Commission v Woolworths Ltd (2008) 12 TCLR 194 (CA). 106 At [75].
some anticipated regulatory or perhaps taxation policy change due to come into operation that would affect the factual in the near future. It would not be sensible to put such a consideration to one side, and the legislation does not require that to occur. Here it is the ongoing factual that must be brought into the equation and it cannot be a valid criticism that the High Court postulated that the future factual might be different from the present. We accept Mr Taylor’s submission that the forward looking analysis of both factual and counterfactual necessarily incorporates a hypothetical element.
[203] While the factual here had already been in effect by the time of the High Court hearing, it would be unreal for the Court to assume that Todd would continue its opposition to a GBA when, as we have held, that opposition was founded on an erroneous view about its contractual rights. That feature distinguishes this case from others where it may well be sensible to assume for the purposes of the factual the continuation of a current state of affairs. It was legitimate for the High Court to conclude (for the reasons it gave)107 that, once the contractual issues had been determined against Todd it was probable that some form of GBA would have been agreed. This would have enabled Todd to call for production of its maximum entitlement, but provided for a process under which, periodically, the parties’ underlifts and overlifts were adjusted to reflect their respective participating interests.
[204] It is no answer to insist as Todd does that its Commerce Act claims are advanced independently of its contract claim. While that may be so, it does not mean the High Court was required to make the artificial assumption that, appraised of the correct contractual interpretation, Todd would nevertheless maintain its previous position. That is reinforced by the fact that Todd’s argument that the Court was wrong to conclude that a GBA would have been agreed was substantially based on the history of an inability to agree on acceptable terms: we consider that disagreement had its origin not only in conflicting commercial objectives, but also in Todd’s mistaken view of its contractual rights. We therefore reject Todd’s criticism of the High Court’s analysis of the factual position.
107 High Court judgment, above n 1, at [305]–[309].
(ii) The counterfactual
[205] As to the counterfactual, Todd submitted the High Court was wrong to conclude there was only one feasible counterfactual (which would have involved a GBA), and that it should have considered a likely alternative counterfactual that instead of concluding a GBA, the parties would have:
(a) eliminated any reserves risk from differential lifting by simply calling for production of, and selling, their shares of “capacity”. Todd claimed this has been the practice adopted by both Shell and Todd at Kapuni, where there is no GBA; or
(b) elected to continue the strategy of taking less than capacity, but on profitable terms that allowed flexibility of daily uptake by their customers. Under this scenario any imbalance would be addressed later in the life of the field, if necessary by seeking an accounting by the Court using the accounting records required to be kept under the JVOA.
[206] Todd also argued the approach taken was contrary to that taken by the High Court in Woolworths Ltd v Commerce Commission (No 2) in which the Court recognised there may be more than one relevant counterfactual that should be considered.108 Reliance was placed in particular on the Court’s statement that the correct approach was to consider each possible counterfactual; while those which were merely remote possibilities were to be discarded, the factual was to be assessed against any counterfactuals that were “real and substantial possibilities”.109 Such counterfactuals need not be established as “probable”: it would be sufficient if there were a real chance they would arise. Thus Todd submitted the High Court was wrong in this case to limit its counterfactual analysis to one where the parties concluded a GBA.
108 Woolworths Ltd v Commerce Commission (No 2), above n 104. Although this judgment was reversed on appeal the issue of multiple counterfactuals was not considered on appeal. 109 At [122].
[207] We are satisfied the High Court did not deviate from the approach discussed in Woolworths Ltd v Commerce Commission (No 2). Rather it concluded, as a matter of fact, that the counterfactual scenarios on which Todd sought to rely were not real and substantial possibilities. The possibility that all parties would have agreed to production at capacity (Shell and OMV because they would want to eliminate reserves risk) was rejected as “inherently unlikely”.110 We accept that finding. And the idea that Shell and OMV would have allowed Todd to take its maximum entitlement based on capacity, without a GBA, but on the basis that imbalances could be redressed later in the life of the field (if necessary in the context of litigation) is also a very remote possibility, not to be described as “real and substantial”. The Court had earlier rejected the notion that Shell and OMV would have permitted substantially unequal production to occur without an enforceable commitment for redressing imbalances.111 Consistently with that, it found there was no real and substantial prospect (either in the JVOA or otherwise) that Todd would be able to insist on its full capacity entitlement accrued since commencement of commercial production.112 Again, we agree with that conclusion.
[208] For completeness we note that at various stages in argument Mr Farmer purported to rely on an observation that the Court made when referring to Todd’s counterfactual proposition that it could insist on production of its full share of capacity, in the absence of an enforceable agreed process for redressing imbalances later in the life of the field. The Court commented that: “It would only be in those circumstances that Shell and OMV would have the incentive to match Todd’s level of off-take”.113
[209] Mr Farmer attempted to rely on this as a finding that Shell and OMV would each match Todd’s request for maximum production in circumstances where there was no GBA. However, this overlooks the Court’s “inherently unlikely” finding, and its conclusion that it was much more likely the parties would agree on a commitment
110 At [371]. 111 At [305]–[308]. 112 At [379]. 113 At [381].
to redress imbalances, so that it would be Todd alone that called for production of its entitlement based on capacity.114
[210] For those reasons we find no error in the High Court’s approach to the counterfactual analysis. We agree that, but for Todd’s mistake as to its contractual rights, it was probable it would have been able to call for its maximum entitlement based on capacity production, provided it agreed to a GBA under which imbalances (as a result of Shell and OMV not taking their maximum entitlements) could be periodically addressed. In that circumstance the constraint of which Todd complained would not exist.
[211] Both that conclusion, and the finding that Todd had failed to plead the relevant market, were fatal to Todd’s claim. The High Court nevertheless proceeded to consider the other disputed aspects of the Commerce Act claims, and those matters were also canvassed in this Court. We proceed to deal with them for completeness, notwithstanding the conclusions already reached.
The effect of the alleged anti-competitive conduct
[212] One such issue was whether, accepting Todd’s counterfactual proposition that all parties would have called for production at capacity, Todd would have been able to sell more gas. Mr Murray, on whose calculations Todd relied for its damages claim, postulated that production would have increased from 70 PJ/a to a plateau rate of 82.5 PJ/a applying between 2009 and 2013. This was additional gas that would have been available for sale, and that quantity was sufficient to have had a material impact on price. If so, the production constraint could properly be characterised as one having the effect of substantially lessening competition in the market contrary to s 27(1) of the Commerce Act.
[213] That argument appears to have been based primarily on the assumption that all the parties would have called for production at capacity, a proposition that the
114 At [382]: Contrary to Todd’s submission, although the Court went on to describe the agreement to redress imbalances as “a clearly more likely scenario”, we do not think that can detract from its conclusion that Todd’s scenario was inherently unlikely. Todd’s counterfactual was rejected for that reason, not simply because it was less likely than what the Court thought would occur.
High Court rejected. Since we have upheld the Court’s conclusion in that respect there is no point in engaging further with the point.
[214] However, as part of its argument on this issue, Todd relied on a claim that, had it been able to secure its maximum capacity entitlement, a further quantity of gas, initially calculated as up to 4 PJ/a,115 would have been available to it, which it would have been able to sell. The High Court found, however, that Todd would not have altered its behaviour had it been permitted to procure its maximum “capacity” entitlement of Pohokura gas. This was one of the bases on which it rejected the possibility there would have been a sufficiently material increase in the supply of gas in the market to produce a material lessening in price. And it was part of the basis on which the Court held that the offtake documents would not result in a substantial lessening of competition. Other considerations underpinning that conclusion have been summarised above.116 The issues are also relevant to the assessment of damages that would be payable if Todd could sustain its Commerce Act claims.
[215] There was substantial disagreement on these issues in the High Court, and on appeal. Todd argued that the High Court had made a number of significant errors of fact in determining them. Todd relied in particular on evidence from Mr Hamish Tweedie that he was confident Todd could have sold its share of incremental gas from 2006 onwards. He said that after the redetermination of Maui reserves there was a producers’ market, and Todd had done many other substantial deals in the period from 2004 to 2006. He noted Shell and OMV had sold 274 PJ of Maui ROFR gas for delivery between 2007 and 2014. He identified, in order of preference Genesis, Contact/Vector/Mighty River Power and Methanex/Ballance/“large industrials” as potential purchasers of the incremental gas to which Todd claimed it was entitled. Genesis was the first preference: it would have been “an attractive sales opportunity” for Todd for a number of reasons addressed by Mr Tweedie in his evidence.
[216] Todd submitted that the Court had erred by concentrating on what Shell and OMV called the “mega-sale”, to the exclusion of other strands of Todd’s claim.
115 See above at [163(d)], n 75. 116 At [163(f) to (h)].
This was a reference to Mr Hamish Tweedie’s claim Todd would have been able to sell a substantial volume of gas in the first quarter of 2006 (for supply after its existing supply contract with Genesis ended in December 2011). Such a sale would have occurred at a time when Todd (as one of the Maui mining companies) was aware (but the market generally was not) of the significant upwards revision of the known gas reserves at Maui. That revision meant substantial volumes of ROFR gas would be available for sale.
[217] Mr Hamish Tweedie claimed in his evidence that but for the steps taken by Shell and OMV to control access to Pohokura gas culminating in the offtake regime, the receipt in January and March 2006 of the information about the increased Maui reserves would have fundamentally altered Todd’s sales strategy for that gas. Specifically, Todd would have “moved quickly to make sales” where possible, before the market became aware of the substantial ROFR increase but certainly before the large volume of ROFR gas was offered to the market by Shell and OMV in September 2006. Mr Tweedie gave evidence that Todd would have been looking to sell a [ ] to [ ] year gas tranche or series of tranches. This would have been made up of gas from various sources within Todd’s portfolio, [material omitted].
[218] [Material omitted].
[219] Counsel referred also to the “chilling effect” arising from the production cap at 70 PJ/a, and the fact that Shell and OMV asserted the right to control production levels through the Operating Committee. This prevented Todd marketing gas for supply in the period after December 2011 that it would otherwise have been able to sell, because it had no way of knowing what production would be in any given year. Therefore Todd could not be sure that it would be in a position to follow through on any supply contracts it might enter into.
[220] Todd’s claim that it could have sold additional gas rested largely on the assertions made by Mr Hamish Tweedie. Mr Farmer also referred to the evidence of Mr David Hunt, a New Zealand based energy market economist called by OMV. Mr Hunt confirmed that there was a significant demand for gas in the first two quarters of 2006, and a shortage at that time of gas for delivery after 2010.
[221] The difficulty facing Todd on this part of its claim was that there was compelling evidence based on the contents of its own contemporary documents to demonstrate that it was unable to sell all the gas that it had available to it in the period relevant to its claim. The High Court specifically rejected Mr Hamish Tweedie’s evidence to the extent it was inconsistent with those contemporary documents.117 We see no basis to disturb that finding for the following reasons.
[222] Successive Corporate Plans for the 2006 to 2009 years identified, in each case, significant volumes of gas that were uncommitted for the year ahead. Within constraints designed to protect commercial sensitivity the High Court discussed relevant aspects of these Plans.118 It recorded Mr Richard Tweedie’s confirmation that the Corporate Plans constituted thorough reviews prepared for the Board.
[223] The Managing Director’s overview in the 2006 Corporate Plan referred to the available gas supply [material omitted]. This was the year that Pohokura gas was to come on stream, and the Corporate Plan envisaged that it would produce [ ] PJ for sale by Todd. [Material omitted].
[224] The 2006 Corporate Plan was presented to the Todd board on 31 March 2006 and adopted on that day. The Gas Group’s presentation to the Board on that day identified as one of the strategies for 2006 and beyond [material omitted].119
[225] There was no statement in either the Corporate Plan or the presentation to the Board to the effect that there was a shortage of gas to meet available market opportunities, nor any suggestion that the Pohokura offtake regime would have the effect of limiting sales. In cross-examination Mr Richard Tweedie said he did not regard the offtake regime as a significant issue in March 2006, because of an assumption that Todd would be able to take its maximum capacity entitlement. Even if that assumption were later disappointed, it is inconsistent with the claim that the offtake regime was hampering Todd’s ability to sell Pohokura gas at that time.
117 At [411]. 118 At [394]–[396] and [403]–[408]. 119 [Material omitted].
[226] Nor was there any mention of a prospective (or lost) opportunity to enter into a new long term commitment to supply [name omitted].120 That company was not referred to as a prospect for a new long-term commitment in respect of what would have been a substantial proportion of the Pohokura gas available to Todd down to [year omitted]. [Name omitted] was only mentioned as a possible purchaser of short-term spot sales and in the context of possible supply for [purpose omitted].
[227] The High Court’s finding is also supported by evidence that at the time of the original sale of Pohokura gas to Genesis, Todd decided to defer making further commitments until it was better informed about the performance of the field.121
[228] Moreover, emails sent by Mr Hamish Tweedie dated 24 January 2006 and 23 May 2006 discussed gas availability. The first was in response to a comment by a Todd executive about the treatment of uncommitted gas from Pohokura in a valuation of gas assets. Mr Tweedie observed a prudent approach was being taken and said:
At this stage it looks remote that we will move this gas even if we discount it significantly. Maui now appears to have extra reserves and will be discounting significantly in a market when everybody is fairly contracted over that period due to Pohokura first gas. I am all ears as to how we can sell this gas, but can’t see how it can be budgeted that we will roll the dice and sell it now.
This is incompatible with a suggestion that Todd was at that stage actively engaged in seeking additional buyers for Pohokura gas, or had any in prospect.
[229] The 23 May email was in reply to an email of the same date from Mr Hall. He had received the 2006 Pohokura Production Work Plan and Budget the day before, and had summarised salient features of it, including the 70 PJ/a production level. Mr Hamish Tweedie sent his email to Mr Hall, Richard Tweedie, and other Todd employees. He wrote as if previously unaware of the 70 PJ/a production limit at Pohokura:
120 The Corporate Plan would have been in preparation during the brief period that Todd would have had to make the “mega-sale” before knowledge about the increased Maui reserves became known to the market generally in March. 121 At [393].
Has the [Operating Committee Meeting] approved a target production of 70 PJ pa and does it have this mandate .. surely the field can produce more and if it has more why can’t we uplift?
This is inconsistent with the notion that the 70 PJ/a production limit constrained Mr Hamish Tweedie’s gas marketing activities prior to that point.
[230] The High Court found Todd had failed to establish that further sales would have occurred in the brief period available down to the point in March 2006 when the revision upwards of the Maui reserves became generally known.122 We uphold that finding.
[231] The 2007 Corporate Plan forecast [material relating to gas sales volumes omitted].
[232] Again, the 2008 Corporate Plan showed [material related to available volumes of uncommitted gas omitted].
[233] In 2009, the Corporate Plan again showed [material related to available volumes omitted].
[234] None of these Corporate Plans contains any suggestion that there was an undersupply of available gas. The tenor of all of them is the reverse. Nor is there any suggestion the Pohokura production limit was causing any concern for the marketing of the gas available to Todd. If the chilling effect of the offtake regime at Pohokura was preventing Todd from entering into supply contracts it seems remarkable that there was no mention of this in successive Corporate Plans. Nor was there any other contemporary documentary evidence supporting that claim. In our view, the likely explanation for this is that over the relevant period the gas available to Todd and not sold appears to have comfortably exceeded the additional (approximately) 3.25 PJ/a of gas to which it claimed to be entitled.
[235] Neither is Todd’s thesis about the chilling effect of the offtake regime supported by direct evidence. The answer given by Mr Hamish Tweedie in
122 At [392].
cross-examination that it was not possible to market gas when there was no security of the amount to be produced at Pohokura is not convincing in the setting that the 70 PJ/a figure appears to have been the approximate figure achieved year on year, and was the notional production target on which all parties had made the FID. We were not referred to evidence of any actual attempt to sell frustrated by concerns about security of supply. Further, the limit did not in fact prevent Todd selling substantial volumes of gas and, as we have seen, was not mentioned as an inhibition in the Corporate Plans.
[236] We therefore see no reason to differ from the High Court’s conclusion that Todd had been unable to sell all the gas available to it. There is also no reason to depart from the Court’s rejection of Todd’s claim that the offtake documents had prevented it selling greater volumes of gas.
[237] The Court’s conclusion that the offtake documents had not resulted in a substantial lessening of competition had two other disputed bases which we now discuss. The first was the finding that an increase in the amount of gas produced at Pohokura was likely to have been offset to some degree by a decrease in the volume of gas produced from the Maui field. This conclusion was based substantially on the fact that Maui was not producing at capacity. Mr Hunt’s evidence was that in the 2007 and 2008 years Maui capacity had been utilised only as to 63 per cent and 58 per cent respectively. The Court accepted evidence given by experts called by Shell and OMV that the rational response of the Maui Mining Companies would have been to decrease production from that field so as not to result in a weakening of the market in the event that there was increased production from Pohokura.123 The Court also referred to commentary in Todd’s 2008 Corporate Plan that [material omitted].124
[238] There was a further relevant observation in Todd’s 2008 Corporate Plan, not referred to by the Court, which said [material related to production forecast omitted].
123 At [417]. 124 At [421].
[239] The Court also referred to a February 2006 draft of Todd’s preferred form of gas balancing arrangements for Pohokura in which there was an observation linking increased Pohokura production with decreased Maui production.125 The Court found that the parties understood an increase in production by one of the major fields would be met by a corresponding decrease in production from another. It concluded, having regard to the fact Maui was producing at less than capacity, that the Maui mining companies would take steps to offset increased production from Pohokura by reducing production from Maui.126
[240] Todd has not presented a developed argument (or referred to evidence establishing) that the High Court’s approach on that issue was incorrect.
[241] The second issue concerns the Court’s conclusion that had Todd wished to sell more gas, it could have sourced it from the McKee and Mangahewa fields between 2006 and 2009.127 Mr Farmer submitted the High Court erred in making that finding.
[242] As has been seen, Todd alone held the rights to exploit the McKee and Mangahewa fields. McKee is mainly an oil field, but some gas is produced with the oil. Mangahewa is a gas field, but as with Pohokura, condensate is also produced from the wet gas stream. The production facilities of the two fields are integrated.
[243] Mr Hunt gave evidence to the effect that there were volumes of unsold gas roughly equivalent to additional gas Todd claimed should have been available to it from Pohokura. However, Todd called evidence from Mr Winfred Boeren, employed as Technical and Onshore Assets Manager of Todd Petroleum Mining Company Ltd, and responsible for managing Todd’s onshore petroleum interests including the McKee, Mangahewa and Kapuni fields. Mr Boeren’s evidence was that up to late December 2008, Mangahewa had produced at capacity, although there was limited spare capacity in 2009. He said there had been no material spare gas production capacity at McKee since April 2005. As to the latter, he explained that oil recovery was increased by leaving some gas in place, and also re-injecting gas produced from
125 At [420]. 126 At [422]. 127 At [427].
some parts of the McKee field into other parts of it. Gas so used was not “spare capacity”.
[244] Mr Boeren described modelling work he had done to provide guidance on the trade-off between the longer term benefits of gas injection and the short term benefits of spot gas sales. This work resulted in a graph showing the interplay of gas and oil prices, demonstrating the prices at which Todd should be indifferent to whether McKee gas was re-injected or sold, which he called the “value indifference graph”. He said gas re-injection into McKee had at all times been maximised, subject to the need to use McKee gas to meet existing contractual obligations, reservoir management considerations and operational constraints.
[245] The High Court found however that Todd had not managed its McKee re-injection programme by precise application of Mr Boeren’s value indifference graph.128 Rather, Todd made decisions about the extent of gas re-injection at least in part to optimise the ultimate level of gas and condensate able to be extracted; there had been varying levels of gas able to be extracted over and above the amounts prudently re-injected, although the evidence did not allow that to be quantified.129
[246] This conclusion was based at least in part on evidence given by Mr Geoffrey Barker, a Perth based energy consultant called by OMV.130 Mr Barker had evaluated material produced on discovery by Todd about the McKee and Mangahewa fields, as well as Mr Boeren’s evidence. Mr Barker concluded that in the period from March 2006 to September 2009 Todd had [ ] PJ available for sale at McKee and Mangahewa, but which it chose instead to re-inject ([ ] PJ) or leave in place ([ ] PJ). Mr Boeren agreed with these figures, but said that would have meant Todd foregoing its reservoir conservation and enhanced oil recovery strategies.
[247] Todd called evidence in response to that of Mr Barker from Dr Rosalind Archer, a Senior Lecturer in the Department of Engineering Science at University of Auckland. Her evidence reviewed the way in which the McKee field had been
128 At [426]. 129 At [429]. Part of the material on which the Court relied was an internal email of June 2006 in which Hamish Tweedie referred to re-injection of 1.7 PJ at McKee and Mangahewa with a “worst case that it would also defer 2.44 PJ, and a best case that it would defer 1.64 PJ.” 130 The Court made a brief reference to Mr Barker’s evidence at [425]–[427].
managed since early 2002. She concluded that oil production from the field had benefitted from gas conservation and re-injection policies implemented by Todd. As the High Court summarised it, the effect of her evidence was that the re-injection and conservation practices recommended by Mr Boeren had sufficiently beneficial effects for their pursuit to be an economically rational influence on the rate of extraction from McKee and Mangahewa.131
[248] However the Court also concluded on the evidence that after providing for prudent rates of re-injection, Todd could have sourced more gas for sale from McKee and Mangahewa. Moreover, Todd’s re-injection policy was not determinative in terms of its sales strategies. Mr Boeren conceded in cross-examination that since his value indifference graph was created in 2005 he had not updated it. Further, he was not involved in the sales process, and Mr Hamish Tweedie had never consulted him about the issues of whether gas should be sold or re-injected, and whether gas from McKee would be used if necessary to meet sales commitments. He also said:
… the value indifference graph is one of the things, there’s plenty of other things, you know servicing debt, dividends, revenues, customer relations, all those things play a role in it, and if he [Hamish Tweedie] can get a good enough price, then the indifference graph tells us to sell it.
[249] Mr Hamish Tweedie also conceded in cross-examination that in making a decision on whether to sell gas available from McKee and Mangahewa he had never asked Mr Boeren to calculate whether it would have been better to re-inject or sell:
… we’ve got the graph and we work off that and we talked with him until we see something different happen and we’ll reassess that … we haven’t done many sales since 2006, so somewhat of a superfluous task when you can’t do sales because re-injection is providing the insurance policy at the moment.
[250] [Material omitted].
[251] The High Court concluded that Todd’s conduct in respect of McKee and Mangahewa showed it had not been motivated to find all possible gas for sale between 2006 and 2009. Further, such conduct was inconsistent with Todd’s claim
131 At [426].
that in that period it had wanted to sell more gas than was otherwise available to it.132 Given the evidence we have reviewed we consider those conclusions were justified.
[252] Having regard to these findings, we are satisfied that the High Court’s overall conclusion that Todd could not establish that the offtake documents had resulted in a substantial lessening of competition was correct.
The purpose of the alleged anti-competitive conduct
[253] Todd’s claim that the offtake documents had an anti-competitive purpose contrary to s 27(1) of the Commerce Act had two bases. The first rested on propositions that the effect of the offtake documents was to prevent Todd from selling more gas and that, viewed objectively, their purpose was to be seen in the same light. On this approach, there is no significant difference between “protecting reserves” and “stopping Todd selling more gas”. Both are illegitimate. Alternatively, even if the purpose of the offtake documents were to protect the entitlements of Shell and OMV the means by which that was achieved, namely stopping Todd from selling more gas, was anti-competitive and unlawful.
[254] Todd submitted there were three ways in which Shell and OMV could have achieved their objective of protecting their entitlements under the JVOA, two legitimate and one not. The first was to take at capacity and compete with Todd in the market; the second was to enter into a GBA. Both these choices were lawful. The third was to adopt the offtake regime, resulting in the annual limits on production. The third option was anti-competitive and unlawful, because it had the purpose of stopping Todd competing in the market. Todd relied on a distinction drawn in Auckland Regional Authority v Mutual Rental Cars (Auckland Airport) Ltd between a legitimate purpose and illegitimate means of achieving it.133 Counsel complained this argument had been put in the High Court, but not dealt with in the judgment.
132 At [430]. 133 Auckland Regional Authority v Mutual Rental Cars (Auckland Airport) Ltd [1987] 2 NZLR 647 (HC).
[255] The second unlawful anti-competitive purpose alleged by Todd was the prioritisation of Maui over Pohokura. Todd claimed on the basis of internal Shell communications that Shell had pursued deferral of production at Pohokura in order to ensure earlier sales of gas from the Maui field. Todd said that the Court erred when it accepted self-serving evidence from Shell’s managing Director Mr Bansal that prioritising Maui over Pohokura was not Shell’s firm policy. Todd also relied on evidence of Mr Murray that it claimed established a value to Shell of between $71 and $252 million for deferring production at Pohokura in favour of Maui production.
[256] We have earlier briefly summarised the reasons which led the High Court to reject Todd’s arguments about an anti-competitive purpose. In so doing the High Court applied the decision of this Court in ANZCO Foods Waitara Ltd v AFFCO New Zealand Ltd.134 In the leading majority judgment, Glazebrook J held that:
(a) The test for assessing purpose is an objective one, but evidence of subjective purpose can be adduced and taken into account in assessing objective purpose.135
(b) Purpose is not the same as effect or likely effect. However, the purpose that must be proved for s 27 is one that has, as an end in view, the substantial lessening of competition in a market.136
(c) Where it is obvious that could not be achieved if the provision in question were implemented then, assessed objectively, the provision cannot have had that purpose.137
(d) There may be a role for subjective evidence of purpose. However, that would only be where such evidence exists, and it would be restricted to cases where it is “borderline” as to whether there might be an anti-competitive effect.138
134 ANZCO Foods Waitara Ltd v AFFCO New Zealand Ltd [2006] 3 NZLR 351 (CA); High Court judgment, above n 1, at [451]. 135 At [255]. 136 At [257]. 137 At [257]. 138 At [261].
[257] Todd’s complaint is against the offtake documents, with the main focus on the so-called production limit of about 70 PJ/a which has applied from 2007. Both Shell and OMV make the fundamental point that without the offtake documents, there would be no agreed basis on which the parties would uplift the gas.
[258] Todd’s argument that there was a contractual obligation that required the plant to be operated at maximum capacity has already been rejected. Once that point is reached, it is plain that some mechanism was necessary to govern the basis on which parties took gas which is jointly owned until it passes into individual ownership. That is the role of the offtake documents, and there is a fundamental difficulty in the way of describing them as anti-competitive. They are the necessary machinery by which gas is produced from the Pohokura field, and is then conveyed to the parties for sale into the market. On this basis, the Operating Committee’s decisions about annual production levels are decisions that enable or facilitate production, rather than limit it.
[259] We consider there are a number of considerations which establish that, assessed objectively, the purpose of the offtake documents was not to prevent Todd from selling more gas. The first is that the 70 PJ/a figure was the figure stated in the FDP and accepted by the parties at the time they made the FID. All the parties had at the outset concluded gas sales for a number of years on the basis of production of gas at that rate. The High Court held that:139
… Once a pattern of production at the plateau level projected in the FDP and FID was achieved, there was an obvious commercial rationale for continuing at that level, in the absence of a change in circumstances.
[260] Secondly, if the intent of Shell and OMV had been to stop Todd selling more gas, they could have voted in the Operating Committee only to authorise production from Pohokura at levels significantly less than 70 PJ/a. The High Court held that would have been the rational way of proceeding, but that there was no suggestion at any stage that Shell or OMV considered doing that.140
139 At [103]. 140 At [470].
[261] Thirdly, Shell and OMV have throughout adopted the stance that they were prepared to negotiate with Todd as to the terms of a suitable GBA. That would have enabled Todd to increase the amount of gas it took from Pohokura. Alternatively, Shell and OMV have been prepared to allow Todd to increase its offtake subject to a commitment to compensate them in respect of any overlift. Proposals were made by Shell along those lines in letters dated 12 June and 27 July 2007, an email dated 16 October 2007 and again by email dated 8 October 2009. In the last of those, for example, Shell’s Commercial Manager Mr Kelly wrote that Shell:
… would be prepared to participate in arrangements similar to those proposed in previous years whereby any PJVer can lift in excess of its share of total production during a period of increased offtake flexibility (what I for convenience call a pre-balancing period or PBP) provided that all PJVers agree to rebalance at (or within a defined period after) the end of this period.
The PJVers’ agreement to rebalance could be made without prejudice to their respective positions taken in the forthcoming litigation so that, for example, if the litigation is resolved in Todd’s favour before the rebalancing is due to commence, then it may not be required to occur at that point in time. The exact variation obviously would be dependent on the outcome of the litigation.
The key difference to the arrangements we have all discussed previously is the extension of the PBP beyond one year so that there is a (reasonable) chance that the litigation has been resolved before rebalancing needs to be effected/commence. This may be able to be done without impacting existing contracts as Pohokura p85 reserves have increased substantially since the project FID.
[262] Mr Kelly went on to estimate that increased offtakes at levels above 70 PJs could be sustained until 2014, flagging however the possibility of increased risk of liquids losses, and the need to ensure an appropriate methodology to ensure that rebalancing could effectively occur at the end of the pre-balancing period.
[263] We accept this email was written when litigation was already under way. However, the other correspondence to which we have referred pre-dated the litigation. Overall, we are satisfied Shell was endeavouring to find an acceptable way forward commercially, whilst preserving its proper entitlement to participate in exploitation of the field.
[264] Fourthly the High Court found that Shell would have preferred to propose production at a higher level in more recent years but felt constrained from doing so
because of Todd’s stance on the present claims.141 In this respect, the Court referred to evidence from Mr Hall about a meeting between himself and Mr Kelly in April 2009. Mr Kelly had raised the possibility of a gas balancing arrangement for Pohokura, and told Mr Hall that Shell was keen to continue discussions. Mr Hall said:
We went over the key points as had previously been discussed. I said that, from Todd’s point of view, any discussion would have to include as an agenda item compensation for damages incurred by Todd to date. Mr Kelly said that Shell would not be prepared to entertain any discussion on that subject … I said that it therefore appeared to me that there was really no point in convening a meeting.
[265] Finally, Shell and OMV would have been aware of Todd’s other sources of gas, in particular the McKee and Mangahewa fields in respect of which it held all the rights. It can be inferred Shell and OMV could have had no guarantee that their market position would be improved by a control on production at Pohokura established for the purpose of limiting the gas available to Todd from that field.
[266] Having regard to these various considerations, and assessing purpose objectively in accordance with ANZCO Foods, we do not consider the purpose of the offtake document was to substantially lessen competition in the market. In terms of particular issues raised by Todd:
(a) We do not accept the evidence establishes that Shell and OMV set out to stop Todd selling more gas. What they were seeking all along was a workable arrangement under which they could be guaranteed they would have the right to take their share of the available gas. This was not anti-competitive behaviour; it was a consequence of the structure mandated by the JVOA and there is nothing in the principles stated in Auckland Regional Authority v Mutual Rental Cars warranting a different conclusion.142 The present facts would not justify a finding
141 At [104]. 142 Auckland Regional Authority v Mutual Rental Cars, above n 133.
that Shell and OMV were activated by a “substantial” purpose of lessening competition.143
(b) As to Shell’s alleged desire to prioritise production from Maui, we accept Mr Taylor’s submission that there was no proper evidential foundation for the allegation.
[267] On the latter issue, Todd relied on three internal Shell emails. The first dated 28 June 2004 contained an observation about what was needed to “bias buyers to lift Maui over Pohokura”. However, this was expressed in conditional terms and we agree with the High Court that the communication suggested that Shell had yet to form any view on whether one field should be prioritised over the other.144
[268] Secondly, Todd relied on an internal communication dated 12 April 2005 in which it was said: “We have only assumed 70 PJ/a offtake so far in supply/demand study – 83 PJ/a will take even more production/sales off Maui.” We agree with the High Court’s conclusion that in context, the email is an acknowledgement that increased production from Pohokura would displace sales that would otherwise be made of Maui gas. Once again, this falls short of suggesting a view by Shell as to its priorities between the two fields.145
[269] The third internal communication Todd relied on was an email dated 5 October 2005 written by a STOS executive based in New Plymouth to a Shell employee based in the Hague. The email was inquiring as to the potential content of a GBA having regard to the recipient’s experience in relation to such agreements. In the email reference was made to the desirability of having the ability to produce Maui gas preferentially and not lifting Pohokura gas, having regard to Maui’s large capacity in the short term, which would be “somewhat stranded when Pohokura comes on stream”. The High Court did not explicitly deal with this email. However, it implicitly rejected Todd’s proposition (and reliance on the email) when accepting
143 In contrast to the relevant facts in Auckland Regional Authority v Mutual Rental Cars, above n 133, at 677. 144 At [463]. 145 At [465].
evidence given by Mr Bansal, that prioritising production from Maui over Pohokura never reached the stage where it was Shell’s firm policy.146
[270] These documents do not support Todd’s submission that in adopting the offtake documents Shell had the anti-competitive purpose of prioritising Maui over Pohokura. We see no reason to depart from the findings in the High Court.
[271] We accordingly reject Todd’s appeal on this issue.
Sections 30 and 31
[272] Under s 30 of the Act, some provisions in contracts, arrangements or understandings are deemed, for the purpose of s 27, to have the purpose, or to be likely to have the effect, of substantially lessening competition in a market. The deeming provision operates where, among other circumstances, the provision has the purpose, effect or likely effect of controlling or maintaining the price of goods or services that are supplied by the parties to the contract, arrangement or understanding.147
[273] We have given a brief summary of the High Court’s approach to this issue above.148 Todd claims that the High Court erred by reading into s 30 a “legitimate rationale” exception which it then applied to the offtake documents. Todd submits that s 30 is a strict “per se” provision that does not allow for a “rule of reason” analysis. The only exception relevant is that for joint venture pricing contained in s 31, which requires strict compliance with its terms.149
[274] In advancing this submission Todd referred to evidence given by Mr Murray and Dr Veljanovski to the effect that in economic terms, the effect of an agreement to maintain or control supply is the equivalent of an agreement to maintain or control price. Todd argued that if there is no difference in economic terms then the law should not draw a distinction. Counsel noted that s 30 does not simply refer to a provision that fixes prices, but extends to provisions that have the effect or likely
146 At [469]. 147 Section 30(1)(a). 148 At [166]–[167]. 149 We refer to s 31 below: at [279]–[282].
effect of doing so. Todd also argued such a limited scope of investigation was consistent with the per se nature of s 30. Mr Farmer submitted that applying the provision to agreements limiting supply would only require a limited inquiry into whether they have the effect or likely effect of fixing, controlling or maintaining prices.
[275] As far as s 31 is concerned, Todd argued it would not apply here because its terms apply only to provisions that have been entered into or understandings arrived at “for the purposes of a joint venture”. Todd claimed that could not be said of the offtake documents; they had been created to meet the individual objectives of Shell and OMV, rather than to advance the interests of the joint venture. Even assuming (contrary to Todd’s submission) that the production limits did not have an anti-competitive purpose the objective of protecting reserves could not be attributed to Todd and so could not be regarded as the purpose of the joint venture. Further, the purpose of the joint venture was to produce and supply goods and optimise value in so doing; an agreement to restrict supply would not be compatible with that purpose.
[276] Counsel for Todd did not refer to any authority in support of its argument about the application of s 30. Because of the view we have formed about the availability of a defence under s 31, it is not strictly necessary for us to decide the point. However, we doubt s 30 should be applied in the manner for which Todd contended. Section 30 is a deeming provision relating to provisions having the purpose or likely effect of fixing, controlling or maintaining the price for goods or services. Where the impugned control is one that by its terms limits supply, establishing the necessary effect in terms of prices would, on the face of it, require some form of competition analysis similar to inquiries under s 27 of the Act. It would be inappropriate to apply a per se provision such as s 30(1) in that context.
[277] Mr Goddard submitted it cannot have been the intention to proscribe all agreements by joint owners of a resource about the rate at which that resource would be exploited and sold. Todd’s argument would logically apply in any circumstance where a decision was made by the joint owners of a product to limit its release to the market. We think that would be a surprising outcome, especially since goods owned by one person or entity would not be subject to a similar constraint.
[278] There is a further practical difficulty with Todd’s approach. The offtake documents were an essential prerequisite to production from the field. They were practical arrangements necessary to ensure production could occur, while preserving the entitlements of each of the joint venturers under the JVOA. We agree with Mr Goddard’s submission that the proper way to analyse the effect of the offtake documents is to start with the proposition that they enabled or facilitated the production and sale of gas rather than restricting output.
[279] In any event, we are in no doubt that s 31 applies. Relevantly, s 31(2)(a) ousts s 30 in respect of contracts, arrangements or understandings arrived at for the purposes of a joint venture, to the extent s 30 relates to:
(a) the joint supply by the parties to the joint venture, or the supply by the parties to the joint venture in proportion to their respective interests in the joint venture, of goods jointly produced by those parties in pursuance of the joint venture; …
[280] There is no doubt this was a joint venture within the definition of that term in s 31(1)(a). We reject Todd’s argument that the offtake documents were created to meet the individual objectives of Shell and OMV. Todd’s argument cannot stand in view of the conclusions we have already reached about the interpretation of the JVOA. For present purposes, we simply reiterate that the offtake documents were validly put in place by decisions of the Operating Committee. Once that occurred, Todd was bound by them, just as Shell and OMV were. They applied to all joint venturers. Todd had, of course, agreed that it would be so bound by acquiring its participating interest and thereby becoming bound by the JVOA. The offtake documents were the basis on which the joint venture operated and all the gas was produced and passed into the individual ownership of the parties.
[281] In these circumstances, Todd’s argument that the offtake regime had not been adopted “for the purposes” of the joint venture is untenable.
[282] In summary, we doubt (but do not decide) that s 30 could be applied for the purposes Todd alleged. However, there is no doubt that if s 30 applied, then so would s 31. Consequently, this aspect of Todd’s appeal cannot succeed.
[283] In the result, Todd has failed on all the issues raised in its appeal on the Commerce Act claims.
Damages
[284] The conclusions which we have reached rejecting both the contract and Commerce Act claims make it unnecessary to deal with various arguments raised by Todd about the adequacy of the High Court’s discussion of its damages claim. Equally, we do not need to deal with the many flaws in the claim asserted by the respondents.
Shell’s cross-appeal
[285] Shell cross-appeals seeking declarations that:
(a) Todd has no right to connect or maintain connection of any pipeline to the Pohokura Production Station without first executing an interconnection deed and indemnity in the form approved by the Operating Committee; and
(b) Shell as Operator acting for and on behalf of the joint venturers is neither obliged nor authorised to allow connection to the Pohokura Production Station of any of Todd’s pipelines without Todd first executing such an interconnection deed.
[286] The cross-appeal stands somewhat apart from the issues presented by Todd’s appeal. It has as its origin the claims advanced by Todd when it commenced the proceeding in 2006, alleging it had the right to connect its pipelines to the production station at Pohokura so as to convey the gas and condensate that had passed into its sole ownership.
[287] The FDP had contemplated joint pipelines to export the gas and condensate from the production station. However, as matters developed, Shell and OMV provided pipelines through a separate joint venture structure (called the EPJV) which they established and in August 2005, the Operating Committee made a number of
resolutions designed to accommodate the separate export of gas and liquids through the EPJV pipelines and Todd’s pipelines. Todd proceeded to construct its own pipelines and obtained appropriate consents for their use.
[288] Then, in May 2006, a majority vote of the Operating Committee required that any party wishing to connect a pipeline to the production station must enter into a particular form of “inter-connection deed”. Todd objected to the form of deed proposed, in part because the deed made reference to the offtake regime that had been adopted by the Operating Committee on the majority vote of Shell and OMV. The High Court noted that Todd’s refusal to complete the interconnection deed led to a “stand-off” in which the Operator declined physical access to Todd’s contractors for the purpose of connecting their pipelines to the production station.150 It was this dispute that resulted in the interim injunction granted by the High Court in August 2006.151
[289] By the time of the argument in August 2006, matters had developed to the point where Shell and OMV were prepared for Todd to complete the interconnection deed without prejudice to its entitlement to challenge the enforceability of the offtake documents. Todd’s response was that it ought not to be required to complete a deed that made any reference to those documents; it executed an interconnection deed that addressed relevant matters but omitted reference to the offtake documents.
[290] Dobson J, having found that the Operating Committee could resolve to adopt the offtake documents by majority decision, nevertheless held that it did not necessarily follow that Shell and OMV were entitled to insist on Todd executing an interconnection deed requiring Todd to acknowledge its obligations arising under the offtake documents.152 The Court concluded that if the offtake documents were valid and binding, there was no point in requiring any separate acknowledgement of those obligations as a condition of connection.153 The Court was not prepared to hold against Todd’s entitlement to connect, in circumstances where it had committed to all
150 At [289]. 151 Todd Pohokura Ltd v Shell Exploration NZ Ltd, above n 14. 152 At [291]. 153 At [291].
the relevant provisions in the deed except those referring to or relying on the offtake documents.154
[291] Mr Olney, who argued this part of the case for Todd, submitted the High Court’s approach was correct. He submitted that if, as is now the case, this Court upheld the High Court’s interpretation of the JVOA, there was no point in requiring Todd to sign the deed. It was already entitled to connect under the JVOA itself, and confirmation of the validity of the offtake documents meant they were binding on Todd in any event. Further, by signing an amended form of deed, Todd had agreed to all operational matters relevant to interconnection.
[292] For Shell, Mr Taylor noted that the Operating Committee had approved the form on the interconnection deed by a resolution made on 11 May 2006. Given the validity of the offtake documents, there could be no question of the validity of the resolution, and as he put it, the resolution does no more than reference rules that already bind the parties as joint venturers. He submitted that, since the Operating Committee “has primacy for decision-making” in the joint venture it could properly decide on the requirements for interconnection.
[293] Mr Taylor raised the issue that while the offtake documents bind the parties to the JVOA, they would not necessarily bind a third party assignee of Todd’s rights as a pipeline owner. Dobson J had recognised that issue, stating that:155
Consent to assignment should reasonably include an obligation, in the case of a non-Pohokura JV assignee, to acknowledge the need for inter-connection rights to be exercised only on terms that conform to any off-take rules and nomination protocols, or other sources of substantially similar obligations.
The Judge evidently envisaged that as a matter on which the parties should be able to agree.
[294] We think it is clear from the High Court judgment that the relief sought by Shell was declined in the exercise of the Court’s discretion. There does not appear to be any analysis suggesting that the Operating Committee was not entitled to stipulate
154 At [292]. 155 At [295].
that connection of the pipelines should be on a basis recorded in a deed, and there would obviously be some practical advantages in that course being followed. However, we have not been persuaded that the approach taken by the High Court was wrong. We say that for a number of reasons.
[295] First, it is clear in accordance with this judgment that the Operating Committee could validly adopt the offtake documents, and they are binding on Todd as a party to the JVOA. Secondly, to the extent that the interconnection deed deals with operational matters, Todd has already signed a version of the document that omits reference to the offtake documents. The position of Shell and OMV has accordingly already been protected to this extent.
[296] Thirdly, we are not persuaded that any issue that might arise on assignment of Todd’s interest in the pipeline could not be dealt with by the Operating Committee when it arose. In making this point, we note that the nature of such difficulty was not explained other than in the broad terms summarised above. Once the gas is in Todd’s pipeline it is no longer “Joint Property”, nor the subject of any Joint Operations. If the suggestion is that a third party might be able to take more gas than Todd was entitled to we do not understand why that situation would not be apparent and able to be remedied by the Operator.
[297] Fourthly, we were not referred to any other practical problem that has arisen under the current arrangements, which have effectively been in place for over eight years.
[298] Finally, we are reluctant to order a party to execute a deed when there is no compelling reason to do so.
[299] It follows that Shell’s cross-appeal should be dismissed.
Result and costs
[300] Todd’s appeal is dismissed.
[301] Shell’s cross-appeal is dismissed.
[302] Costs should follow the event. The respondents are each entitled to costs accordingly. As was agreed at the hearing, costs should be calculated as for a complex appeal on a band B basis.
[303] However, as was also agreed, there should be an uplift on those costs in accordance with the approach taken in Air New Zealand v Wellington International Airport.156 In that case this Court recognised that where the complexity and significance of a case warrants highly specialised senior counsel from the commercial bar, the normal daily recovery rate for complex appeals would fall well short of the two thirds recovery objective referred to in r 53A(d) of the Court of Appeal (Civil) Rules 2005.157
[304] In this case we consider there should be an uplift on the normal daily recovery rate of 50 per cent. We certify for two counsel.
Solicitors: Russell McVeagh, Wellington for Appellant Minter Ellison Rudd Watts, Wellington for First Respondent Simpson Grierson, Wellington for Second Respondent
156 Air New Zealand Ltd v Wellington International Airport Ltd [2009] NZCA 259, [2009] 3 NZLR 713. 157 At [89].