Contact gas deal a $25m windfall

By FIONA ROTHERHAM

Contact stands to reap millions in a gas deal it struck with Fletcher Challenge Energy within hours of a major court case.

Contact chief executive Paul Anthony said the gas option agreement could result in a net profit of up to $25 million for the power company.

That reflects the difference between the market price and what Fletcher Challenge Energy (FCE) was willing to pay under two one-year options for up to 10 petajoules of gas a year.

FCE intends on-selling the gas to meet its contract with Electricity Corporation of New Zealand, upheld by the High Court.

The decision could speed up development of FCE's Pohokura discovery off the Taranaki coast after stellar results for oil and gas in production testing.

The news helped lift FCE shares 8c to close at 588c yesterday after going as high as 610c.

The deal between FCE and Contact was negotiated a few months ago and was signed immediately after last Friday's High Court decision.

The ECNZ contract is now assigned to Genesis, one of the three state-owned enterprises formed by the split of ECNZ in April last year.

FCE has to supply 10pj of gas a year to Genesis for the first two years of a 17-year contract.

FCE limited the Contact agreement to two years because it was confident it could supply from other sources the remaining 20pj a year for the contract.

The oil explorer did not have surety of supply when it signed the deal with ECNZ for 320pj of gas in 1997.

The Pohokura gas discovery will take two to three years to develop.

The quantity of gas and high amount of condensate (light oil) produced in the first of two planned flow tests on Pohokura 2 will make it more attractive to develop.

FCE chief executive Greg Gailey said both flow rates and the condensate-to-gas ratio were better than the best seen from Pohokura 1. The highest condensate-to-gas ratio from the first well was 67 barrels per million standard cubic feet of gas, whereas the second well tested up to 89 barrels per mscf.

Gas reserve estimates for the field are likely to be revised upwards once testing is completed this weekend.

Under the deal with FCE, Contact was paid an immediate option fee for a confidential amount. That fee is repeated and the gas paid for each year FCE takes up the option.

"It is a unique deal when both sides walk away from the table with smiles on our faces," Mr Anthony said.

FCE has said the ECNZ contract is worth between $1.2 billion and $1.8 billion, depending on inflation factors.

That works out about $3.75 a gigajoule, at least $1 above the market rate.

Contact negotiated its price without knowing what FCE would be paid, Mr Anthony said.

"We were blind to that to be honest ... It is a fair premium for what risk we're managing and a fair deal to Fletchers."

The gas will be supplied from Contact's existing portfolio of gas entitlements, including its take-or-pay Maui entitlement. Contact already supplies Genesis with gas for the Huntly power station.

When Contact was set up in 1995, it had a contingent liability of $1.4 billion on its books as a result of the mismatch between the gas it was contracted to buy and the gas it did not use.

The turnaround came six months after its public listing last year when it signed a major gas supply agreement with synthetic fuels manufacturer Methanex. As a consequence, Contact was able to value at $72 million banked gas it had paid for but had not been able to access.

Genesis has 28 days to file an appeal against the High Court decision and is assessing its options. Chief executive Murray Jackson "didn't have any view at all" on the decision. "This is something ECNZ engaged in and we were asked to take it on."