Much ado about Maui

Friday 31st May 2002

Shoeshine can see plenty of reasons to suspect nefarious agendas underlie the gas giants' latest legal clash. But who's trying to screw whom?

At issue this time is how much gas is left in the Maui field, which has supplied most of our needs since 1979.

On one side is Canadian giant Methanex, whose plants at Motonui and Waitara turn natural gas into methanol, a base chemical used in the manufacture of all sorts of useful things.

Methanex is one of three companies that buy gas from the Crown, which gets it from the Maui mining companies, Shell New Zealand and Todd Energy, under the terms of the Maui contract.

Methanex claims it hasn't been given enough information to form a reliable opinion on how much gas is left in Maui and wants the courts to prevent Shell/Todd and the Crown from formally assessing the issue until it has.

Shell and Todd say Methanex has been given all the data it needs and they are opposing the application. So are the other two buyers of Maui gas, Contact Energy and Natural Gas Corporation.

If the marathon 1996 Kapuni trial is anything to go by the litigation will be a goldmine for lawyers.

At the heart of the issue is gas pricing and the numbers are sufficiently large to justify the combatants exhausting their legal avenues.

Methanex is the country's biggest gas consumer, sucking up 90 petajoules (PJs) a year. By comparison Contact Energy, the biggest fossil fuel generator, last year consumed 53PJ firing its plants.

About 80% of Methanex's gas comes from Maui and the rest from Kapuni. The price it pays for Maui gas and the amount it can draw down each year are fixed by a contract directly with the Crown and by supply contracts with NGC and Contact.

Despite some production losses last year Methanex's plants are running at full bore.

The trouble began last November when the mining companies released an informal estimate that Maui wasn't going to last, at the rate of depletion specified in the Crown's contracts, until 2009 as previously thought. Chances were, the miners said, that it would last only until 2007.

The 1990 contracts provide, in circumstances like these, for the Crown and the miners to conduct a formal redetermination. In the event this finds a shortfall in what gas was previously thought to be there, each of the buyers gets its annual supply cut pro rata according to the percentage of output they are entitled to.

In Methanex's case this is just short of 30% so the cut could be very substantial. Hence, industry analysts reckon, Methanex's lawsuit.

How come, they ask, Methanex claims it hasn't got enough information when the other two buyers, who need gas just as much as it does, insist they have? The answer, cynics say, is that Methanex' action isn't about information at all.

The company hasn't been having the best of times in recent years. Its share price, which peaked at around $US19 in 1995, fell to under $US2 early in 2001.

The story is a familiar one with global commodities producers. In an effort to get ever-bigger scale economies producers overinvested consistently in new plant, outstripping demand growth and depressing the prices they got for their products. Methanex lost money yet again in the March quarter.

Lately things have been looking up.

At the annual meeting in Vancouver last Thursday CEO Pierre Choquette gleefully noted large outages around the world, higher than expected gas prices and a wave of plant closures - a net 1.4 million tonnes of annual capacity since the start of 2001 - had triggered rapid increases in methanol spot and transaction prices.

From the Methanex perspective, he crowed, this was "a superb development."

The company's share price has run back up over $US8 and Choquette declared himself "bullish" in the short term.

But on the vexed subject of capacity, he said, the answer was simple. "We need it." That was because Methanex bought from other producers, on average, 1.5 million tonnes of methanol a year.

At an average historical margin of over $US50 a tonne "that's a lot of money to leave on the table," Choquette said, noting "we need to be prudent with our supply source in New Zealand."

That's why the cynics think Methanex's legal action is about delaying the redetermination so it can suck on the pipe at the present rate for as long as possible.

But that may not be all there is to it. The Maui mining companies, Shell and Todd, happen also to be the owners of the Pohokura field, New Zealand's largest find since Maui.

Pohokura is under development and is scheduled to come on stream early in 2005.

The companies are preparing a "request for proposals," effectively an invitation to buyers to tender for gas supply from the new field.

In these circumstances an actual or apparent shortage of Maui gas will do their cause no harm at all.

As for Contact and NGC, neither care much if gas prices rise sooner than expected. They can simply pass it on to their customers through higher power prices, no doubt taking the opportunity to boost margins on the way through.

The procedures for redetermination involve the miners handing over swathes of data to a horde of independent experts who will agree the new economic recoverable reserves figure.

But analysts say the outcome is highly susceptible to manipulation as the miners hold all the data.

No wonder Methanex wants to hold things up for as long as possible.

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