The Commerce Commission has started court action against Fletcher Challenge Limited (FCL), and Fletcher Challenge Energy (FCE), alleging that the companies' acquisitions of shares in the Kupe gas field and other arrangements involving the field breached the Commerce Act.

Commission Chairman Dr Alan Bollard said the Commission has alleged that FCE will acquire or strengthen a dominant position in the markets for production, wholesaling, transmission and retailing of natural gas and that its arrangements with ECNZ will substantially lessen competition in gas and electricity markets.

The Commission is seeking court orders requiring FCE to divest the interests it acquired in Kupe, and for the court to impose appropriate penalties. The Commission is also asking the court to review the legality of the arrangements between FCE and ECNZ.

"FCE already has an extremely strong position in the gas industry," Dr Bollard said. "These transactions and arrangements gave it effective control of the only discovered field it did not already control.

"They greatly strengthen FCE's position by giving it control of future natural gas supplies on top of its extensive interests in the industry today. These transactions will severely limit prospects for competition in this industry in the future."

In two transactions in March, FCE took its interest in Kupe from 2.5 percent to 22.5 percent and then to 62.5 percent.

FCE subsequently entered into arrangements with ECNZ. These arrangements included a gas supply contact, agreement on aspects of how and when the Kupe field would be developed, and the on-sale of 25.75 percent of Kupe to ECNZ.

Both companies face court action in respect of the initial acquisition and the subsequent arrangements.

The Commission first learned of these transactions at a very late stage. The companies made no applications for clearance or authorisation and, therefore, the Commission investigated the transactions as part of its surveillance of business acquisitions.

In March the Commission required FCE to enter into a Deed obliging the company to preserve the assets and operation of Kupe in a form which could be divested if a Court ordered that to happen.

The Deed allowed the Commission to investigate in detail, without the companies being able to take further advantage of the transactions. The Deed remains in force until the court action is resolved.

Background

Statement of claim

The Commission has filed its proceedings in the Commercial List of the High Court in Auckland. The Commission has no objection to the release of the Statement of Claim, but advises that, under the High Court Rules, the release of this document is a matter for the Court and its officials.

The action has been commenced against FCL and FCE for contravention of section 47 of the Commerce Act 1986, and against FCL, FCE and ECNZ for contravention of section 27 of the Act. Section 47 prohibits business acquisitions that result in dominance being acquired or strengthened. Section 27 prohibits contracts, arrangements and understandings that substantially lessen competition.

Penalties

The High Court has wide powers to order that assets or shares acquired in contravention of the Act be divested and to rescind or vary contracts or arrangements which contravene the Act.

The maximum monetary penalty which may be imposed if contraventions of these sections is found is $5,000,000 per company.

Current share-holdings in Kupe

FCE 36.75 percent

ECNZ Energy 25.75 percent

The Crown 11.00 percent

NZ Oil and Gas Ltd 16.50 percent

Shoseki Oil Development Company of Taranaki Ltd 10.00 percent

Share-holdings in Kupe before the transactions of concern

FCE 2.50 percent

ECNZ 0.00 percent

The Crown 11.00 percent

NZ Oil and Gas Ltd 16.50 percent

Shoseki Oil Development Company of Taranaki Ltd 10.00 percent

Western Mining Corporation (NZ) Ltd 40.00 percent

Norcen Energy Resources Ltd 20.00 percent

Gas is currently produced from the following fields

field level of FCE interest approximate annual production

McKee 100% FCE 8 Peta Joules

Maui 68.75% FCE 170PJ

Tariki, Ahura, Waihapa 96.78% FCE 10PJ

Kapuni Owned by Shell/Todd, FCE is field operator,50% of gas output is dedicated to FCE interests* 22PJ

Kupe is expected to produce gas in future at around 25PJ a year

* The only existing production not controlled by FCE is the 50% of the production from the Kapuni field freed up by the recent Kapuni judgement of the High Court. this transferred one-half of Kapuni production to Shell/Todd.

Other FCE gas interests

FCE also has very substantial interests in gas and oil exploration and downstream interests in the gas sector, including 33 percent of Natural Gas Corporation (NGC). NGC owns the North Island pipelines and the only gas processing facility, and has shareholdings in gas retailers.

Media contact: Communications Officer Vincent Cholewa

Phone work (04) 498 0920

Commission media releases can be viewed on its web site www.comcom.govt.nz