Court ruling sparks Energy share surge

Securing a supply deal is the latest in a run of good news, reports FIONA ROTHERHAM.

Shares in oil and gas explorer Fletcher Challenge Energy climbed yesterday after a High Court ruling that secured its $1.2 billion gas supply contract with state-owned power company Genesis.

FCE shares leapt 26c in trading before closing 10c up.

One analyst said the court ruling was "another good story for the stock," which was likely to go higher than its closing price of $5.89. Since May 1, the stock has risen 31 per cent.

The decision is likely to increase the value of the Pohokura gas prospect off the coast of Taranaki, in which FCE has a one-third share.

On Friday, Justice Wild ruled in favour of FCE after Genesis disputed a 1997 heads of agreement signed by its predecessor, Electricity Corporation of New Zealand, and FCE.

Genesis, one of three SOEs formed by the April 1999 split of ECNZ, has yet to decide whether to appeal.

Other factors behind FCE's rise appear to be confidence the Fletcher group will be split up and rumours linking the United States oil giant Chevron and Fletcher Energy. FCE denies it is talking with Chevron.

Under the generic (non-field specific) contract, Genesis will start taking FCE gas at Huntly from October this year. FCE will supply 20 petajoules a year or 320 pj of gas over 17 years.

In January, Genesis signed an eight-year deal with Natural Gas Corporation to take 90pj of gas for use at Huntly.

The heads of agreement was part of a bigger deal between FCE and ECNZ to acquire a 40 per cent stake in the Kupe gasfield up for sale by Western Mining Corporation in early 1997. The two agreed not to increase competing bids for the stake, to split the shareholding between them if successful, and for ECNZ to then enter a long-term contract to purchase gas.

However, talks to discuss the detail broke down in early 1998. ECNZ said FCE was seeking to turn an incomplete and unsuccessful negotiation, recorded on 3sfr1/2 pages of paper, into a binding contract for gas supply.

FCE argued ECNZ made a deliberate decision not to reach full agreement, because it wanted out of the deal after electricity prices went down.

"ECNZ, from the outset, set about to obtain a better deal than the [heads of agreement] gave it," said Justice Wild.

The "deal breaker" in the negotiations was the economic delivery test inserted to protect FCE because of its supply uncertainty from 2011 to 2017.

Ord Minnett analyst Chris Stone said the ruling would have an impact on FCE's bottom line only if the price agreed to in the heads of agreement was better than the expected market price. "The question, and it is a big one, is what the nominal gas price in New Zealand, given Maui is going to be depleted by the end of the decade, is going to do over the next 17 years."

FCE, ECNZ and Genesis still face court action by the Commerce Commission over the Kupe deal. The commission launched a $15 million lawsuit in 1997, alleging the deal gave FCE voting control over Kupe's operation, including the timing of the field's development and production.

Strike-out applications from the defendants to the commission's amended statement of claim were largely upheld by the High Court late last year.

A commission appeal against this ruling is to be heard next month.