Todd v Shell and OMV - running out of gas?

Friday 20 August 2010

Author: Simon Ladd

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 section 29.

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 [2006] 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 comfort.


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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.

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  • Simon Ladd

    Partner Auckland
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