Rejig of Fletcher deal still on cards

By GEOFF SENESCALL

Royal Dutch Shell was last night poring over a 72-page Commerce Commission report to see if it can find a way to rejig its $4.6 billion bid for Fletcher Energy.

The report's release followed the commission's decision last Thursday to reject Shell's application because it would strengthen dominance in the New Zealand gas market.

It is understood that Shell's initial reaction to the report was that the commission had left the door wide open. Certainly the tone of the report is not hostile to Shell or an outright no. It is more a case of the commission needing more evidence that Shell will not end up strengthening its dominance over NZ's gas market.

Shell declined to comment last night. It wanted more time to consider the report, the release of which was held up by computer problems.

But its NZ chairman and chief financial officer, Ed Johnson, said last week that the deal was far from dead.

"I believe there is enough scope that gives us the capacity to find a way forward."

The commission pointed to three markets where Shell would strengthen dominance: present gas production, gas production after 2009 and LPG.

In terms of the present gas market, the commission did not think there would be new competing gas fields to constrain the merged entity in the near term.

Possible new production in the next two or three years is likely to be small, with a significant amount coming from Fletcher Energy's Mangahewa field.

The commission noted that Todd, Shell's partner in several projects, would not place any competitive constraint on Shell.

As for existing production, the main field was Maui - the largest in NZ. It is 68.75 per cent owned by Fletcher Energy, 25 per cent by Shell and 6.25 per cent by Todd.

Many market analysts disregarded Maui as being an issue because most of its gas is wrapped up in long-term contracts.

Under the deal, Maui gas must be sold to the Crown at a fixed price, with some inflation adjustments.

The Crown then has onsell contracts with Natural Gas Corporation, Contact, Petralgas and Methanex. Apart from Methanex, whose contract expires in 2005, the contracts expire in 2009.

Given these contracts, the commission ruled Shell could not act in a totally unconstrained manner.

"In particular, existing large customers will be substantially protected by their ability to enforce the provisions of their long-term supply contracts.

"Further, some constraint would also arise from arbitrage potential, although the commission considers that this potential is considerably more limited than suggested by the applicant.

"However, the merged entity will not face an effective competitor, significant new entry within the next two years is very unlikely, and in respect of current uncommitted gas the merged entity will not be constrained by contractual arrangements.

"The commission considers that overall constraints on the merged entity would not be such in themselves as to prevent it from being able to exercise a high degree of market control."

The other key area was the gas market after 2009.

The commission noted the potential of the Kupe field as important, but this is an asset that Shell has agreed to sell.

The main issue here was over the Pohokura field, of which Fletcher Energy owns 33.3 per cent, Shell 18.3 per cent and Todd 15 per cent. This is expected to replace Maui as this country's largest gas field.

Energy analysts had suggested Shell's dominance might be a hurdle.

The commission said there could be no certainty over the shape of gas production in 10 years, but if the deal went ahead Shell would likely account for at least 63 per cent of production from fields now existing and probably as much as 75 per cent.