TODD POHOKURA LIMITED V SHELL EXPLORATION NZ LIMITED AND ANOR HC WN CIV-2006-485-1600 [2009] NZHC 1458 (21 October 2009)

IN THE HIGH COURT OF NEW ZEALAND
WELLINGTON REGISTRY
                                                                    CIV-2006-485-1600



               BETWEEN                    TODD POHOKURA LIMITED
                                          Plaintiff

        
      AND                        SHELL EXPLORATION NZ LIMITED
                                          First Defendant

       
       AND                        OMV NEW ZEALAND LIMITED
                                          Second Defendant


Hearing: 
     16 October 2009

Counsel:       A S Olney, M Corlett and I Clarke for plaintiff
               L J Taylor for first defendant
               D J Goddard QC, T C Stephens and R Brier for second defendant

Judgment:      21 October 2009



                
  RESERVED JUDGMENT OF DOBSON J
             (Further discovery applications on behalf of defendants)



[1]    Since service of
the briefs of evidence and list of documents proposed for
inclusion in the trial bundle on behalf of the plaintiff (Todd), both defendants
(Shell
and OMV) have pursued access to documents, the existence of which is suggested by
the briefs or the list but which appear
not to have been discovered previously. In
addition, recent media reports of reappraisal by Todd of the extent of hydrocarbons
at
other Taranaki sites have caused Shell and OMV to seek discovery of documents
including categories relating to Todd's rate of production
from those other sites, and
Todd's projections in respect of production at those other sites.




TODD POHOKURA LIMITED V SHELL EXPLORATION
NZ LIMITED AND ANOR HC WN CIV-2006-
485-1600 21 October 2009

[2]        Several of the requests had been resolved prior to the
hearing, and my Minute
of 19 October 2009 confirms the extent to which consent orders were able to be
made during the hearing


[3]
       However, argument on the remainder took the best part of a day. In addition,
Todd filed a further Memorandum dated 20 October
2009, and OMV responded with
one the same day. A decision is now required promptly, given that briefs on behalf
of Shell and OMV
are due to be served on 6 November 2009, and any additional
discovery needs to be analysed and referred to those providing briefs
for those
parties.


OMV's application



Paragraph 1(c): RM.157.002 in unredacted form


[4]        The first contested part of
OMV's application is its challenge to the extent of
redactions made by Todd in a May 2004 Board paper supporting a recommendation
by executives to invest in Pohokura. In the course of argument, I invited counsel for
Todd to provide a completely unredacted copy
of the document to me, so that I could
assess the appropriateness of the extent of redactions Todd still seeks to maintain.
That
course was agreed to, and I afforded solicitors for Todd until 5pm on 19
October 2009 to make additional submissions, in light of
the fact that I would have
the unredacted document, rather than merely hearing submissions in the absence of
access to the redacted
content.


[5]        An executive summary, an index and some 30 pages of analysis have been
disclosed. OMV seeks five pages of detailed
financial data on the whole of the Todd
Energy Limited group from the start of the Board paper, and then a five page section
at the
end of the Board paper entitled "10 year cash flow forecast".


[6]        The financial data at the outset is in detailed form,
and includes cash flows,
capex and profit and loss in respect of each field invested in. There is also a
combined balance sheet,
as well as ratios for ratings purposes and a projected extent

of non-compliance with banking covenants, these extending for a 10-year
period
from 2004.


[7]    Section 7 at the end of the paper that is also redacted provides an analysis of
the cash flow effect for
the Todd Energy Group of proposed investment in Pohokura,
focusing for the most part on the first five year period. It draws upon
some of the
data in the opening pages, and includes certain assumptions made in respect of the
cash flow commitment that would be involved.


[8]    Predictably, the analysis of
the proposal to invest in Pohokura is not
conducted on a single company basis for Todd Pohokura Limited. Rather, it reflects
the
commitment that would be made by the Todd Energy Group.                 Numerous
previously discovered Todd documents apparently
make it clear that Todd's energy
interests are indeed managed on a group basis.


[9]    The figures are certainly very detailed
and Todd has grounds for concern that
such highly sensitive commercial detail should not be misused.            However, a
relatively
strict protocol for limited access to commercially sensitive information has
previously been resolved between the parties, and there
is no question but that that
would apply to any further parts of the Board paper that are required to be
discovered.


[10]   Todd
also questions the relevance of the level of detail that would be
revealed. Mr Corlett's Memorandum dated 20 October 2009, filed
in response to my
invitation at the hearing, points out that section 6 of the Board paper (which has
already been disclosed) contains
a DCF valuation and sensitivity analysis reflecting
the extent of various price changes. Mr Corlett submits that is sufficient for
the
analytical testing Mr Goddard proposed. Further, that section 7 tests the impact of
variables not on the proposed operation at
Pohokura, but for the parent company.


[11]   Certain of the details seem unlikely to advance matters that OMV may wish
to challenge.
However, as Mr Goddard QC pointed out, OMV is now aware of the
basis on which Todd is advancing the quantification of its claim to
damages, and the
lines of argument to challenge that that could well be advanced by contrasting the

basis on which the damages
claim is calculated against the projections in the detailed
financial data. The exceptions to this are the top and bottom boxes on
the fifth page
that provide spreadsheets on S & P ratios and S & P ratings (long term), leaving to
be discovered to the defendants
the middle box "Other relevant information".
Similarly, the bank covenant analysis on the fourth page cannot realistically become
relevant to any of the sort of arguments foreshadowed for OMV. They can remain
redacted on the basis that they are irrelevant.


[12]   As to section 7 of the paper, the five year projections included there and
comments on them may now be relevant given OMV's
interest in challenging the
basis of claimed damages. As the Board paper reflected projections used by Todd in
May 2004, there is
an extent to which so much has changed since then that it may be
difficult for OMV to attribute any material relevance to those projections,
if Todd's
financial case has moved on significantly in light of the actual experience in the last
five years. However, I am not satisfied
that that deprives the 2004 data of the
relevance that preparation of OMV's case may well seek to attribute to it.


[13]   One specific
aspiration suggested by Mr Goddard was that the assumptions
used in the cash flow forecast would enable OMV to test Todd's claim
that it would
not have made the final investment decision if Todd were aware of the constraint on
the level of production that has
ensued. The terms of section 7 of the Board paper do
not explicitly specify an assumed level of production. However, that is not
to say
that calculations deconstructing the assumptions that are recorded in the paper may
not reflect an assumption of the level
of production.


[14]   Accordingly, I do not consider the bulk of the redactions can be sustained.
On 1(c) of OMV's application,
I order the discovery of RM.157.002 in unredacted
form, except for the fourth page headed "Bank covenant analysis", and the top and
bottom boxes on the following, fifth, page. Todd is sufficiently concerned at the
sensitivity of this Board paper to request back
the copy provided to me. I will direct
the Registry to return it to Todd's solicitors.

Schedule 2: paragraph 1(d)


[15]   The documents sought in paragraph (d) of OMV's application
are those
referred to in briefs of evidence from Todd witnesses.               They are listed in
17 paragraphs to Schedule 2 to
the application and include agreements for sale of gas
and condensate from various fields.


Schedule 2: paragraph A3(d)


[16] 
 The first contested category within Schedule 2 was agreements for sale of gas
by Todd of McKee/Mangahewa gas to industrial, commercial
and residential
customers of Nova, an energy retailer that is now a member of the Todd Energy
Group of Companies. OMV's submissions
in respect of this category acknowledged
that the request is confined to contracts relating to the supply of more than .5 of a
petajoule
per annum.


[17]   Mr Goddard suggested in argument that the cut-off of contracts above .5 of a
petajoule per annum would restrict
the number involved to a relatively modest one,
and Mr Corlett did not dispute the point. In his 20 October 2009 Memorandum,
Mr Corlett
goes further and advises that there are no such contracts above that level,
in this or various other categories where contracts were
sought. On the assumption
that OMV accepted the minimum .5 of a petajoule cut-off across all categories of gas
sale agreements, it
would render a good deal of what was argued academic.
However, in OMV's 20 October 2009 response, Mr Goddard clarified that the .5
of a
petajoule cut-off was not accepted generally, and that some of the contracts were
sought, irrespective of the quantity of gas
to which they related.


[18]   The upshot appears to be that an order is not sought in respect of gas sale
contracts by Nova in
respect of McKee/Mangahewa gas, but the opposing views
remain relevant to other categories of contract for less than .5 of a petajoule.


[19]   Todd resisted discovery, submitting that references in one of its executive's
briefs of evidence to such contracts was merely
"setting the scene as part of an

overview of Todd's business". Todd denies that the terms of such contracts can be
relevant in
any way to the issues raised by its proceedings.


[20]   One reason OMV sought such contracts is to demonstrate the importance of
"swing" - that is the ability to have flexibility in the extent of gas the buyer is
obliged to take at any particular time. Counsel
engaged in numerous exchanges as to
what the basis of Todd's case is, in respect of the relative lack of flexibility for
production
levels from Pohokura, if the provisions of the joint venture are to be
interpreted in the way Todd contends. I do not intend to attribute
to Todd any
definitive record of how it will present this part of its case. However, the debate
demonstrated that examples of the
extent of "swing" provided for in downstream
contracts to which Todd entities are parties may be relevant to the issues in the
proceedings.
Discovery could not be sought because of any aspiration to analyse the
finite amount of "swing" that Todd needs to provide for in
dealing with all its
customers. Rather, to the extent OMV wishes to argue that "swing" is a pervasive
feature of gas contracts at
some or all points in the transactions from producer to
consumer, then at least some sample of the terms on which other Todd entities
contract is likely to be relevant.


[21]   Todd's notice of opposition took the point that such contracts would not be
under the
control, or in the possession, of Todd Pohokura Limited, the plaintiff.
That is likely to be correct. However, in circumstances where
the business of the
particular plaintiff is operated on a group basis as one of a series of companies, I do
not see substantial merit
in that ground for resisting discovery. If necessary, the
discovery obligations of the wider Todd Energy Group that would benefit
from any
success in the proceedings should also be treated on a group basis. If it became
necessary, it would be appropriate to make
an order against other commonly owned
and controlled companies in the Todd Energy Group as non-parties. By the end of
the submissions, I did not take the
argument on behalf of Todd to be pushing the
point, but if it is then such orders would be the appropriate outcome. I note that
Mr
Corlett's 20 October 2009 Memorandum explicitly records Todd's reservation
that to the extent the consent orders involved discovery
by the plaintiff of documents
that did not belong to it, then it was doing so without prejudice to its stance that it
did not have
any general obligation to discover non-Todd Pohokura Limited

documents. I apprehend that Shell and OMV will be prepared to inspect
other
documents on the same basis.


Schedule 2: paragraph A5


[22]   This sought discovery of any agreement between Todd and its
electricity
business unit for sale of landfill gas. That arrangement is listed among Todd's gas
interests in Mr Hamish Tweedie's
brief, without any comment or indication of any
relevance to the issues in the case. It now appears that it would be for less than
.5 of
a petajoule. It is an entirely internal arrangement within Todd, so would not be
subject to the usual commercial tensions of
an arm's length contract. Whilst it may
exemplify Todd's attitude to "swing", that would arise in a context easily
distinguished
as atypical. I accordingly uphold Todd's objection to its production.


Schedule 2: paragraph A7


[23]   This sought the agreements
for the sale of gas by Todd to the Kapuni Energy
Joint Venture.    In the course of argument, Mr Goddard accepted Mr Corlett's
assurance
that there is no such document and therefore that aspect of the application
is not pursued.


Schedule 2: paragraphs A8, A9


[24]
  OMV's application separately sought agreements for the sale of
McKee/Mangahewa and Kapuni gas by Todd to the Whareroa Joint Venture,
that
being a joint venture between Todd and Fonterra.          I took Todd to accept the
obligation to discover such documents, but
to deny that any separate order was
necessary where they were specified separately in OMV's application because they
were encompassed
within a more general category of documents which has been
resolved by agreement.

Schedule 2: paragraphs A10(a), (b), A11


[25]
  Todd did resist discovery of a contract that had been entered into in 1995 for
sale of Kapuni gas to the Whareroa Joint Venture,
and which expired prior to 31 July
2006. Given the scope of discovery of other, more current, contracts that is being
provided voluntarily
or by order, I accept Todd's concern that this one must be
beyond the margins of potential relevance and am not prepared to order
its
discovery. The current contract for this dealing has been discovered.


[26]   Todd also resists discovery of an agreement for
sale of Kapuni gas to
Taranaki By-Products, apparently entered into in the mid 1990s and which expired
on 30 November 2007. It can
now be assumed to relate to less than .5 of a petajoule
per annum. The inclusion of this in a list of all contracts, without more,
does not
render it relevant, especially when its terms were apparently settled in the mid 1990s.
Todd is not required to discover
it.


[27]   On similar grounds, I uphold Todd's objection to OMV's application for
agreements for sale of non-Kapuni gas by Todd
and/or Nova to Taranaki By-
Products following the expiry of that earlier contract.      This is because of the
extremely small amount
of gas to which such contracts relate, taking them below the
size that could constitute something relevant to the proceedings.


Schedule 2: paragraph F16


[28]   This sought documents relating to the risk to the availability of project
finance posed by the
30 June 2006 first gas deadline. That aspect of the application
was not pursued.


Paragraphs (l) to (o) of the application: Further
McKee/Mangahewa documents


[29]   There was substantial argument about the last disputed categories in OMV's
application, namely
those in paragraphs (l) to (o). These sought documents relating
to the daily level of gas re-injection at McKee and Mangahewa for the period from

1 March 2006 until the present,
and documents relating to decision-making about the
level of gas re-injection and gas production at those fields throughout the same
period.


[30]      These requests go further than an application made much earlier in the
proceedings on behalf of Shell, which
was initially unsuccessful when declined in a
judgment of MacKenzie J issued on 7 August 2007. However, Shell appealed that
decision
and after presentation of part of the argument in the Court of Appeal, Todd
modified its stance enabling consent orders to be made
by the Court of Appeal for a
narrower class of documents relating to production levels at McKee and
Mangahewa. Orders (i) to (k)
in OMV's present application seek updated discovery
of those categories of documents, and Todd has consented to an order in relation
to
those documents.


[31]      Todd resists provision of the further categories of documents on the basis that
they could not be
relevant to issues in the proceedings, and are in any event a second
application in respect of categories of documents where the
defendants have
previously failed.


[32]      Mr Goddard argued that a detailed analysis of the way in which Todd
operates these
other fields will be important components of the counter-factual
scenario involving the increased production from Pohokura that Todd
contends for,
both on the Commerce Act 1986 liability analysis and also, now that the basis for
Todd's claim to damages is signalled
by the content of their briefs, in challenging
Todd's case on quantum.


[33]      Part of the concern for both OMV and Shell is
to be able to challenge the way
in which Mr Murray, an economist expert being called by Todd, has relegated any
importance there
might otherwise have been in McKee and Mangahewa producing at
less than their maximum capacity. Mr Murray dealt with the point only
in a footnote
to his brief, in terms suggesting that re-injection of gas produced at those fields is
undertaken in order to "maximise
oil recovery and hence the value of the field over
its lifetime". It appears that both defendants wish to challenge that explanation.
It
assumes relevance for the defendants because they wish to challenge Todd's

projection of the market for further gas from Pohokura,
on grounds including the
proposition that Todd could produce greater quantities of gas from other resources,
including by running
McKee and Mangahewa at higher levels.


[34]   I am satisfied that the further documents sought in these parts of OMV's
application
are relevant.     Whether they avail the defendants in challenging
Mr Murray's view on the factors influencing the rate of production
at McKee and
Mangahewa is entirely another matter. However, for that part of the defendants'
case and also because of the prospect
that it may influence the challenge to the basis
on which damages are claimed, the documents requested come within those
reasonably
discoverable.


[35]   As to whether OMV should be disentitled because some or all of such
documents have previously been unsuccessfully
requested, that does not constitute
an adequate ground for declining OMV's current application.            The application
determined
by MacKenzie J under the former r 300 of the High Court Rules required
the applicant to establish necessity for an order. The replacement
r 8.24 does not
require that, so that a material ground relied upon in the earlier judgment is no longer
relevant. Furthermore, the
shape of the plaintiff's case, and accordingly the scope of
issues the defendants seek to test, has advanced substantially since
July 2007. I
apprehend that it would not have been possible for Shell, at the time of pursing its
application, to attribute relevance
in the same way to a document sought in relation
to the plaintiff's case on the quantum of loss claimed. I am satisfied that the
case has
moved on sufficiently, and the relevant test has been modified sufficiently, to
warrant the present OMV application to be considered afresh on its merits.


[36]   I note that there was a marked difference between counsel on the
circumstances in which Shell's appeal from MacKenzie J's
judgment was resolved
in the Court of Appeal. Mr Taylor characterised Todd's change in position as
occurring after a clear indication
from members of the Court that the judgment
would be, at least in part, overturned. Mr Olney denied that Todd's change of
position
was caused by any such indication. I accordingly place no reliance on the
prospect of a finding by the Court of Appeal that the Judge's
decision was incorrect.

[37]   However, for the foregoing reasons, OMV is entitled to the orders sought in
paragraphs (l) to (o)
of its application.    I summarise at the conclusion of this
judgment the overall outcome, taking account of the matters that did
not have to be
argued, those dealt with by consent (listed in my Minute of 19 October 2009) and
this present decision on the contested
elements of OMV's application.


Shell's application


[38]   Shell seeks an order requiring the Todd plaintiff company or another
one held
in common ownership within the Todd Energy Group, namely Todd Taranaki
Limited, to discover:


       a)      documents
recording or relating to the Todd Energy Group's current
               assessment of gas reserves at the McKee and Mangahewa fields;
and


       b)      documents recording or relating to the Todd Energy Group's proposed
               development plans for the
McKee and Mangahewa fields in light of
               its current gas reserves assessment for McKee and Mangahewa.


[39]   An affidavit
filed in support of Shell's application annexes media statements
from earlier this year, attributing to Todd Energy's managing director,
Mr Richard
Tweedie, optimism about larger than previously projected reserves within Todd's
Taranaki gas interests. In particular,
they refer to an increase in the projected
reserves at Mangahewa, and prospects for an electricity generating plant in Taranaki,
to be fuelled by Todd's gas resources in the region.


[40]   For Shell, Mr Taylor argued for the relevance of these further categories
of
documents on similar lines to those Mr Goddard advanced for the other categories of
McKee/Mangahewa documents considered last
in respect of OMV's application.
Shell wishes to analyse the full history and present projections that Todd has for
utilisation of
its gas resources at McKee and Mangahewa. On the liability issues
arising in the Commerce Act claims, Shell apparently seeks to challenge
Todd's
claims as to its entitlement to extract gas from Pohokura at a greater rate, on grounds
including reference to levels of production
at less than the maximum possible from

McKee and Mangahewa. Shell wishes to challenge the explanation inferred in
Mr Murray's footnote
to his brief of evidence (see [33] above). On quantum of
damages issues, Shell wishes to analyse the history and projections from
the other
Todd resources, to challenge the projections Todd apparently will rely on as to the
profitability of additional gas sales,
had it been able to source more gas from
Pohokura.


[41]   Shell wishes to test Todd's case by challenging whether Todd has produced
to maximum capacity at McKee and Mangahewa in the past, and if not, why not, and
pose the same questions in respect of projections
for the level of production in the
future. It appears that partial answers to these questions may already be available,
but beyond
these questions lie another level of issues as to why, if McKee or
Mangahewa are not run at full capacity, that is so.


[42]   Accordingly,
given the current state of issues, including the outline of Todd's
case on damages, I am satisfied that these further documents are
now relevant. It
could be argued that Shell faces a different constraint by virtue of having asked for
such documents in the original
application that was declined by MacKenzie J. For
the same reasons that that does not avail against OMV, I consider that it does not
avail Todd to resist this request by Shell in its 8 October 2009 application.


[43]   Accordingly, I order that Todd is, within
seven days, to discover the
categories of documents sought by Shell.


[44]   By the end of the argument, I understood Todd not to
be maintaining the
relevance of the corporate distinction between the plaintiff and Todd Taranaki
Limited, another Todd entity within
the Todd Energy Group. If indeed the point is
still taken, then I would be prepared to make the order as against Todd Taranaki
Limited,
or indeed any other company within the Todd Energy Group, that is
recognised by the group overall as having control and possession
of such documents.

Summary


[45]    Many aspects of OMV's application were able to be resolved, as reflected in
the consent orders
recorded in my Minute of 19 October 2009.


[46]    In addition, Todd is to discover to the defendants an unredacted version of
RM.157.002,
except to the extent of the redaction recognised as still appropriate, as
detailed in [14] above.


[47]    The additional McKee
and Mangahewa documents sought in paragraphs (l)
to (o) of OMV's application are to be discovered on the terms sought.


[48]   
The other contested parts of OMV's application were not made out.


[49]    Shell is entitled to an order for further discovery on
the terms of its
application.


Costs


[50]    OMV has been substantially successful.                  However, Todd has made out
grounds for resisting some parts of OMV's application. I accordingly order that
OMV is entitled to two thirds of the costs it would
be entitled to if completely
successful on a half day interlocutory argument, at category 2B scale.


[51]    As to costs on Shell's
application, it has been successful but it was within a
very much narrower compass and was, to an extent, a replication of issues
arising on
OMV's application. Shell is accordingly entitled to costs on the basis of a one hour
interlocutory argument, again at
category 2B.




                                                                           Dobson J
Solicitors:
Russell McVeagh,
Wellington for the plaintiff
Minter Ellison Rudd Watts, Wellington for the first defendant
Simpson Grierson, Wellington for the second
defendant