First published in NZLawyer, 20 August 2010.
Todd Pohokura Limited (Todd), Shell Exploration NZ Limited
(Shell), and OMV New Zealand Limited (OMV) are
the joint venture partners engaged in developing the Pohokura oil and gas field
in Taranaki. The field is recognised by the government as a matter of national
interest as Maui gas reserves decline.
From the outset (indeed, from well before production started) the parties'
relationship has been frustrated by disputes about access to the gas field and
the level of production or off-take that each member of the joint venture is
permitted. In 2006, Todd commenced proceedings alleging, in essence, that Shell
and OMV were unlawfully constraining the level of production from the Pohokura
field. Over nine weeks from February to April of this year, the trial of those
proceedings was heard before Justice Dobson and Professor Richardson, sitting as
lay member under the Commerce Act 1986 (the Act). In a 528
paragraph judgment delivered last month, the Court rejected Todd's claims,
finding in effect that the remedy to Todd's concerns lay within its own control.
Among the claims were allegations that arrangements between Shell and OMV
regarding the level of Pohokura's production breached both Todd's contractual
entitlements and sections 27, 29 and 30 of the Act. In particular, Todd alleged
that Shell and OMV had given effect to an arrangement or understanding that had
the purpose, effect or likely effect of substantially lessening competition for
the purposes of section 27 by artificially limiting production. Todd also
alleged that the restrictions on production had effects on price amounting to
price-fixing under sections 27 and 30. Finally, Todd claimed that the
arrangements between Shell and OMV constituted exclusionary provisions under
Each of these claims failed for several reasons, but primarily because they
depended on the success of what the Court described as Todd's "untenable
interpretation of the contract regulating their relationship". In finding that
Todd did not have a contractual entitlement to greater volumes of gas, the Court
concluded that Shell's and OMV's conduct did not prevent Todd from taking
greater production. Instead, they made a higher rate of extraction of gas
conditional on completion of a set of rules by which unequal levels of off-take
could later be redressed. The Court stated, "In short, Todd has had the remedy
for accessing larger volumes of gas in its own hands. Shell and OMV concerns to
have a GBA [gas balancing agreement] in place before allowing material
discrepancies in the level of off-take were not unreasonably required to protect
their own interests in production from Pohokura, and we are satisfied that had
Todd agreed to terms consistent with the contractual interpretation it has thus
far rejected, then it could have obtained access to larger volumes of gas."
That finding was directly reflected in the Court's approach to the Commerce
Act causes of action. In applying a counterfactual analysis (contrasting the
outcomes of the conduct complained of with the hypothetical outcomes without
such conduct), the Court said a "plaintiff must establish a real and substantial
prospect, recently treated as something less than a balance of probabilities
"more likely than not" standard." Rather than accepting Todd's proposed
hypothetical, the Court concluded that the likely counterfactual was one in
which Todd procured an entitlement to produce "full-out", but subject to
agreeing appropriate commitments to redress imbalances.
The Court also concluded that Todd failed to establish a substantial
lessening of competition in terms of section 27, because it did not accept that
if Todd had been permitted to increase production at Pohokura to its share of
capacity, there would have been a sufficient increase in the supply of gas to
produce a material lessening in price.
That conclusion (no sufficient anti-competitive effect) was in turn
significant to the Court's finding of no anti-competitive purpose. The Court
referred to the approach of the majority of the Court of Appeal in ANZCO v
AFFCO  3 NZLR 351 – purpose is primarily assessed objectively but
subjective evidence of anti-competitive purpose is relevant to the inquiry.
Further, there can be a prohibited purpose notwithstanding no actual or likely
effect of substantially lessening competition. However, if the conduct is
incapable of substantially lessening competition that is also relevant to the
purpose inquiry. The Court stated, "If we apply an objective analysis of purpose
as preferred by the majority of the Court of Appeal in ANZCO, then the
substantial margin by which Todd fails to make out any requisite effect or
likely effect in the nature of an SLC [substantial lessening of competition]
tends to negative the existence of any relevant anti-competitive purpose. Where,
on a fully informed analysis, it appears highly unlikely that an
anti-competitive effect could be achieved, then an objective assessment of
purpose would tend to lead to a consistent result, that an anti-competitive
purpose could not be made out." Nothing in the conduct of Shell and OMV
demonstrated an anti-competitive purpose.
In relation to the allegation under sections 27 and 30 that the alleged
arrangement to fix the level of production was "the other side of the
same coin as competitors arranging to fix prices", the Court recognised (without
deciding) the prospect that a carefully crafted arrangement between competitors
to restrict output might arguably be caught by section 30, but noted simply
"that is not the situation here".
Finally, in relation to section 29, prohibiting contracts, arrangements, or
understandings containing exclusionary provisions, the Court noted that section
29 is aimed at boycotts intended to exclude or inhibit a competitor from
competing in a market. In this case, the absence of any targeted element against
Todd took the complaint outside the prohibited conduct. Moreover, if necessary,
Shell and OMV could establish a defence under section 29(1A), i.e., the relevant
conduct did not have the purpose or likely effect, of substantially lessening
competition in the relevant market.
Completing the rout, the Court accepted that if it had been persuaded that
arrangements as to the level of output were arrangements limiting price, then it
would have accepted that the joint venture exception contained in section 31 of
the Act applied, providing a complete defence.
No doubt correctly, the Court notes, first, that it would be naive to expect
that the judgment will not be appealed given the amounts at stake and the
tensions in the relationships between the parties and, secondly, that any
commercial resolution seems impossible while the competing positions advanced in
the litigation continue to be pursued. The only consolation that offers to
competition lawyers, at least, is the prospect of further judicial consideration
of sections 27, 29 and 30 of the Act. In the scheme of things, that is cold
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.