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Pohokura Gas Authorisation draft determination


Commerce Act: Commission releases draft determination on Pohokura Gas Authorisation

The Commerce Commission would authorise the joint marketing and selling of gas produced from the Pohokura field subject to certain conditions. The Commission’s preliminary view is that while there are benefits associated with the joint venture marketing arrangements, the Commission cannot be certain that, in the absence of conditions on the authorisation, the benefits will be achieved.

Commission Chair John Belgrave said subject to the Commission’s proposed conditions and dependent on technical performance, the field could be developed, with gas being available from February 2006.

The Commission today released its draft determination relating to an application by Preussag Energie, Shell Exploration and Todd Petroleum Mining (the Applicants), for authorisation under section 58 of the Commerce Act to enter into arrangements to jointly market and sell gas produced from the Pohokura field off the Taranaki coast. Preussag advised the Commission this week that it has sold its participating interested in the Pohokura joint venture to OMV New Zealand Limited.

Mr Belgrave said that although the Commission’s preliminary view was to grant the authorisation, the draft determination identified four conditions that an authorisation would be subject to.

Those conditions are:
* limiting the time period of the authorisation to five years;
* requiring first gas from the Pohokura field to be available by February 2006 and for the field to be under full production capability by 30 June 2006;
* restricting the authorisation to not apply to any successors of the Applicants; and
* ring-fenced marketing of the Pohokura field.

“The Commission’s preliminary view, subject to the proposed conditions, is that benefits would result from the timely development of the Pohokura field and that these benefits would exceed the potential detriment to future competition in the effected markets,” said Mr Belgrave.

The arrangement comprises two provisions under which the Applicants propose to: * discuss and agree on all relevant terms and conditions, including price, quantity, rate, specification and liability for the joint sale of gas form the Pohokura field; and * negotiate and enter into contracts for the sale of Pohokura field jointly (ie as one seller).

The Commerce Act prohibits competitors agreeing to work together in a way that reduces competition between them. However, the Act does allow for authorisation of potentially anticompetitive business practices if the public benefit is greater than the detriment to competition. Mr Belgrave said the Commission invited submissions on its draft determination.

The deadline for submissions was Monday 9 June 2003.

The Commission will hold a conference on 1-3 July 2003 (inclusive), with the final determination due on 7 August 2003.

A copy of the draft determination is available on the Commission’s website, http://www.comcom.govt.nz/adjudications/publicregisters

EXECUTIVE SUMMARY

Introduction

1. By letter dated 20 December 2002, Preussag Energie Gmbh (“Preussag”), Shell Exploration New Zealand Limited and Shell (Petroleum Mining) Company Limited (“Shell”); and Todd (Petroleum Mining Company) Limited (“Todd”), applied to the Commerce Commission (“the Commission”) under s 58(2) of the Commerce Act 1986 (“the Act”) for authorisation to enter into arrangements to jointly market and sell gas produced from the Pohokura field (“the Arrangement”).

2. On 14 May 2003, the Commission was notified that OMV New Zealand Limited (“OMV”) has purchased Preussag’s participating interest in the Pohokura Joint Venture (“the Pohokura JV”). Accordingly, the Application for authorisation made by the Pohokura Joint Venture parties (“the Pohokura JV parties”) on 20 December 2002 was amended by substituting OMV for Preussag.

3. The Arrangement comprises two provisions in essence under which the Applicants propose to:

• discuss and agree on all relevant terms and conditions, including price, quantity, rate, specification and liability for the joint sale of gas from the Pohokura field; and • negotiate and enter into contracts for the sale of the Pohokura field gas jointly (ie as one seller).

4. The Applicants have explicitly excluded the marketing and sale of all petroleum products, other than natural gas,2 from the scope of their Application for authorisation. Framework for Consideration

5. The Commission is responsible for deciding whether to authorise the Application under the relevant provisions of the Act.

6. In brief, the Commission must determine whether the Arrangement would result, would be likely to result, or is deemed to result in a lessening of competition in the market, and if so, whether the detriments flowing from this lessening of competition are outweighed by the public benefits that result or would be likely to result from the Arrangement. The Commission considers that a public benefit is any gain, and a detriment is any loss, to the public of New Zealand, with an emphasis on gains and losses being measured in terms of 1 This Executive Summary is provided for the assistance of readers. It does not purport to completely encompass all details of the Application, the Commission’s investigation of the facts, the Commission’s analysis of those facts and the draft determination. Readers are referred to the body of the reasons for the draft determination for a complete picture. 2 For example, oil, condensate, liquefied petroleum gas, and naptha.

economic efficiency. If the Commission is satisfied that the public benefits outweigh the detriment, it may authorise the Arrangement.

Commission Process

7. In preparing this draft determination, the Commission has fully considered and given weight to information and analysis from a wide range of sources. It has: • reviewed the information and analysis in the Application, including the economic analysis submitted by the Applicants’ economic experts; • sought further information and clarification from the Applicants on a range of points; • considered submissions from interested parties; • interviewed the Applicants and other parties; • sought advice from its own legal, economic, and industry experts; and • conducted its own analysis and modelling.

8. Below is a summary of the Commission’s key preliminary conclusions.

The Factual and Counterfactual

9. In order to assess the competition effects, as well as the detriments and benefits, the Commission compares the factual to the counterfactual, or what would likely happen in the absence of the Arrangement. The factual is what would happen if the Arrangement proceeds. A counterfactual will not necessarily be a continuation of the status quo, but rather encapsulates a pragmatic and commercial assessment of what is likely to happen in the absence of the factual.

10. The factual and counterfactual give rise to different states of competition in the relevant market. A comparison between them allows a judgment to be made as to whether competition in the factual is likely to be lessened relative to the counterfactual.

The Factual

11. The factual, involves the three Pohokura JV parties jointly developing and marketing the gas from the Pohokura field, with first gas scheduled for the beginning of February 2006, and full production capability for the second quarter of 2006.

The Counterfactual

12. The Applicants considered three counterfactuals as follows: • ‘no development’ of the field if authorisation for joint marketing was not granted;

• ‘Scenario 1’ where the parties separately sell their proportion of gas after agreeing on parameters for the development of the field, but that the development of the field would be delayed by at least 3 years; and • ‘Scenario 2’ where each party separately sells its share of gas to buyer(s), and then the parties agree on appropriate development to support the sales contracts in place. The Applicants claim that under Scenario 2 the development of the field would be delayed by more than 3 years, possibly indefinitely.

13. The Applicants argued that the ‘no development’ counterfactual was the most likely in the absence of authorisation being granted, citing reasons for why separate marketing is not feasible in the New Zealand context. Two years ago, in correspondence to the Commission, two of the Applicants advised that separate marketing of gas from the Pohokura field was feasible and probable. The Commission sought and obtained explanations with regard to why their views have changed, and now has some difficulty in reconciling the current view argued by the Applicants.

14. The Commission, on the basis of the information it has received to date has reached the preliminary conclusion that the likely counterfactual will have the following characteristics:

• the Pohokura JV parties will negotiate and agree on the development profile and gas output of the field; • the parties will then separately sell their proportion of the gas in line with their equity ownership of the field; • the parties will negotiate and agree on measures (including a gas balancing agreement) to address the problems associated with separate marketing; and • production of the Pohokura field would be delayed by one year from the February 2006 commencement date, to February 2007 for first gas and the end of June 2007 for full production capability.

Market Definition and Competition Analysis

15. The Commission has concluded that the market relevant to its consideration of the Application is the national natural gas production (and first point of sale) market (“the gas market”).

16. The Applicants have claimed the Arrangements have neither an anti-competitive purpose or anti-competitive effect, and that joint marketing would not have the effect of substantially lessening competition. Rather, the Applicants claim that joint marketing would have a neutral or positive effect on competition when compared with any of the three counterfactuals.

17. The Commission has reached the preliminary conclusion that the overall impact of the Arrangement would result, or would be likely to result, in a lessening of competition in the gas market.

18. In broad terms, it is considered that joint marketing would:

• restrict the number of competitors in the market; • result in higher prices and enhance the potential for price discrimination; • result in a more limited range of terms and conditions being offered to gas purchasers; and • slow or inhibit the rate at which a more efficient and competitive market may evolve in the future.

19. On the other hand the Commission accepted that there would also be some features which would inhibit competition in the counterfactual, including the fact that field development and output parameters would be determined jointly by the Pohokura JV parties.

20. Overall, the Commission concludes that the Arrangment would lessen competition in the gas market.

Detriment

21. The Commission has compared the Arrangement with the counterfactual and concluded that detriments would arise from:

• a moderate, but significant reduction in allocative efficiency in the long-term; • an important loss of dynamic efficiency beyond the short-term from the likely inhibition to the development of more dynamic and competitive markets; and • possibly wealth transfers arising from higher prices paid by New Zealand consumers and the resulting increase in payments to overseas shareholders of the Pohokura JV.

22. The Commission’s preliminary view is that the overall detriment to the public of New Zealand would be likely to be large.

Benefits

23. The benefits are any gain to the public of New Zealand that arise directly from the implementation of the Arrangement.

24. The Commission considers that benefits to the public would arise from: • early development of the Pohokura field; • lower field appraisal and design costs; • lower development costs; and • lower transaction costs.

25. The Commission considers that potentially the most substantial benefit from the Arrangement would arise from the earlier development of the Pohokura field. The Commission has undertaken what it considers is a conservative assessment of the effects of the fields coming into production one year earlier than in the counterfactual. In this scenario the benefits to the public from early development would be in the order of $22.9 million to $57 million.

Net Effect

26. In the Commission’s preliminary view, the overall benefit to the public would be substantial and would outweigh the detriments. However for the Commission to be satisfied about this net effect, it would require greater certainty than it has at present that the Arrangement would lead to an early introduction of gas production from the Pohokura field and associated benefits. It has accordingly imposed conditions, which if applied, would achieve this with greater certainty.

Conditions

27. In the consideration of the Application to date, various interested parties and the Commission have been concerned that if authorisation were granted for joint marketing of gas from the Pohokura field, it is crucial that the benefits of the earlier development of the field be cemented in. In addition, it is equally important that granting the authorisation does not act as an impediment to the further development of gas market arrangements as set out in the Gas Industry GPS

28. At this time, the Commission considers, that in order to authorise the proposal, it would impose conditions on the authorisation which will ensure that the benefits are realised, and that the detriments to future competition in the affected market are reduced. The following are possible conditions that the Commission is considering:

• limiting the time period of the authorisation to 5 years; • a requirement for the Pohokura field to produce first gas by the beginning of February 2006, and full production capability by 30 June 2006; • not allowing the authorisation to apply to successors of the Applicants; and • ring-fenced marketing of the Pohokura field.

Draft Determination

29. The Commission acknowledges that the Arrangement has the potential to deliver the benefits outlined in this draft determination, however, the Commission shall not make a determination granting an authorisation unless it is satisfied that the Arrangement to which the Application relates, will in all the circumstances result, or be likely to result, in a benefit to the public which would outweigh the lessening of competition that would result, or would be likely to result or is deemed to result therefrom. At this stage the Commission is not satisfied that the benefits will in fact be delivered so that they would outweigh the lessening of competition that would result or be likely to result. In these circumstances the Commission would decline to grant an authorisation under s 61(6) of the Act.

30. However, with certain conditions on the proposal, the Commission’s preliminary view is that it would be satisfied that the Arrangement to which the Application relates, will in all the circumstances result, or be likely to result, in a benefit to the public which would outweigh the lessening of competition that would result, or would be likely to result or is deemed to result therefrom. The Commission’s preliminary view is that these conditions are likely to limit the potential detriments to future competition in the affected markets and ensure that the benefits from the timely development of the Pohokura field are achieved.

31. In that case, following consideration of submissions on this draft determination, the Commission, if its preliminary view is confirmed after consideration of submissions, would grant an authorisation under s 61(6) of the Act subject to certain conditions.

Next Steps

32. The Commission is now seeking submissions from interested parties in respect of the preliminary conclusions it has reached in the draft determination. The deadline for submissions to be received by the Commission is Monday 9 June 2003.

33. Pursuant to section 62(3) of the Act, the Commission gives notice to the Applicants and each other person described under section 62(2) to notify the Commission within 10 working days from 22 May 2003 whether they wish the Commission to hold a conference in relation to this draft determination. If such a request is received by the Commission then a conference will be held in relation to this draft determination from 1 July 2003 to 3 July 2003 (inclusive).

34. If the Commission does not receive such a request for a conference under section 62(3) of the Act, the Commission will, of its own motion, pursuant to section 62(6) of the Act, hold a conference in relation to this draft determination from 1 July 2003 to 3 July 2003 (inclusive).

35. The Commission intends to release its final determination on the Application on 7 August 2003.


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