Divesting Kupe key to Shell deal

By FIONA ROTHERHAM

Kupe, New Zealand's largest undeveloped petroleum resource, is the key to Shell's taking control of Fletcher Challenge Energy.

Shell plans to divest Kupe to stop itself gaining dominance in the gas market. It may also end a Commerce Commission legal action against Fletcher Energy.

The Dutch-owned oil company is seeking the commission's clearance before formalising a deal already done in principle with Fletcher Challenge.

An economic impact report by the Network Economics Consulting Group on the proposed purchase said gas market dominance had to be split between now and the shutdown of the giant Maui field.

The report argues that until the Maui gas contract ends in 2009, the proposed acquisition will have little, if any, effect at either gas production or wholesale levels unless the Methanex plant remains in operation beyond 2005.

The real market power in the gas industry during that period lies with the three major wholesale purchasers - Methanex, NGC and Contact - who have back-to-back contracts with the Crown for Maui gas.

The report says Maui gas should meet contracted demand in the North Island until 2009, without undeveloped fields such as Kupe and Pohokura needing to be brought on stream.

Methanex has said it will stay in New Zealand after 2005 providing it can get enough gas at the right price. And Fletcher Energy recently said that Pohokura could be making its first gas deliveries by early 2004.

After 2009, the expiry of the Maui contract and depletion of the field, which accounts for 70 per cent of gas production, will substantially change the market and make it more competitive.

Figures have been deleted from the public copy of the report, which says Shell will control a lower quantity of gas reserves than Fletcher Energy in 2009 if the acquisition fails.

Shell has undertaken to sell Fletcher Energy's 36.75 per cent stake in Kupe along with its interests in Kapuni Gas Contracts and Fletcher Challenge Gas Investments.

These two companies on-sell Kapuni gas to Methanex and the Taranaki combined cycle power station. Without these divestments, the acquisition may give the merged entity dominance in the gas market post-2009, the economic report says.

But the divestments at both gas production and wholesale level will enhance competition.

Kupe would provide a significant constraint on market power once on-sold, despite the fact that it would be expensive to develop. The report argues that as Kupe is undeveloped, purchasing shares in the field is the same as purchasing an option to cap gas prices at a specific level in the future. Kupe represents 25 per cent of total reserves in 2010.

Texas oil company Vanco is still a willing buyer of the Taranaki gas field. It has just missed out on acquiring a 10 per cent stake being sold by Shoseki Oil Development Company (a joint venture between Shell and a Japanese industrial company) after the existing stakeholders NZ Oil and Gas and Genesis exercised pre-emptive rights.

Of concern to Shell is the current Commerce Commission action against Fletcher Challenge, Fletcher Energy, the Electricity Corporation and Genesis over 1997 transactions involving Kupe. Shell said it would be vitally affected by the outcome of the proceedings if successful in its bid for Fletcher Energy.

This potential uncertainty was behind its decision to divest the Kupe stake, therefore achieving the outcome sought by the commission, s spokesman said. "Obviously, having undertaken to divest all of Fletcher Energy's interest in the Kupe field which provoked that litigation, it would be in the interest of the applicant to procure its settlement - at least with regard to Fletcher Energy - as expeditiously and cost effectively as possible."