350 Case Notes (2006) 25 ARELJ

to determine if there were poor disclosure practices.56 ASIC has indicated that such companies may have their announcements more closely scrutinised. The ASIC Study makes it clear that officers of companies listed on the ASX also need to take reasonable care when drafting their announcements, so as to avoid misleading investors by using industry jargon or promotional material. The "if in doubt, disclose" principle is an aspect of the ability of the market to regulate itself. Investors in companies that "over release" may lose interest and sell their shares, or move to replace directors to ensure that there are directors that properly exercise their skill and judgment when dealing with companies' affairs. POSTSCRIPT In Australian Securities and Investments Commission v Chemeq Limited57 Justice French of the Federal Court of Australia considered breaches of that defendant's continuous disclosure obligations under the current form of the ASX Listing Rules and Corporations Act 2001 (Cth).58 In that case the defendant admitted that it had contravened section 674(2) of the Corporations Act by not disclosing material information. Although "negligence", "intent" and "recklessness" are no longer elements of the continuous disclosure obligations under the Corporations Act, Justice French considered these factors when determining an appropriate penalty to be imposed on that defendant.59

ACCC PNG GAS PROJECT AUTHORISATION DETERMINATION Authorisation by certain companies within ExxonMobil Group, Oil Search Group, the Mineral Resources Development Company Limited Group, the Merlin Petroleum Company and AGL Gas Developments (PNG) Ltd for authorisation in respect of the PNG Gas Project (3 May 2006, Authorisation No. A40081, Public Register No. C2000/1421) ACCC authorisation ­ joint marketing ­ s 88 Trade Practices Act 1974 (Cth) ­ the relevant market ­ public benefits ­ anti-competitive detriments, David Brewster* and Charles Coorey**

1. 1.1 BACKGROUND The application for authorisation

On 14 December 2004, the joint venture participants to the PNG Gas Project (Project)(Applicants) applied to the Australian Competition & Consumer Commission (ACCC) for authorisation to:

56

57 58

59 * **

The conduct of the study by ASIC into the correlation between extremely frequent disclosures, significant increases in share prices and poor disclosure practices is interesting in light of Master Sanderson's reliance on the fact that the defendant's share price increased in 1996 when it released the third party information as proof that the third party information was "material", and ought have been disclosed (in 1994). [2006] FCA 936. That is, rule 3.1 of the ASX Listing Rules and sections 674, 676 and 677 of the Corporations Act 2001 (Cth). The Chemeq decision was delivered approximately six weeks prior to the Jubilee decision. At para's 93-95, 99 and 112. Partner, Allens Arthur Robinson. Lawyer, Allens Arthur Robinson.


351 · · ·

negotiate the common terms and conditions (including price) under which gas produced by the Project will be offered for sale; jointly market that gas to a common buyer or common buyers; and enter into and give effect to contracts, arrangements and understandings between the Applicants relating to common terms and conditions (including price and price arbitrations/determinations) upon which gas will be offered for sale and sold by the Applicants to buyers.

The Applicants applied for authorisation for the life of the Project, which was estimated to be 30 years. Significantly, the Applicants also requested that the authorisation be expressly stated to apply to future participants in the Project. The reason for doing so was that it was inevitable that membership of the Project would change in the future, in particular due to the potential for the State of PNG to exercise a right to enter the Project. 1.2 The statutory test The Applicants applied for authorisation under s 88(1) of the Trade Practices Act 1974 (Cth) (`TPA') to make and give effect to arrangements that might substantially lessen competition in contravention of s 45 of the TPA. Importantly for the Applicants, s 88(10) of the TPA provides that an authorisation may be expressed to apply to or in relation to another person who becomes a party to the proposed arrangements in the future. As noted above, the Applicants sought authorisation to apply to any future participant to the proposed arrangements. Under ss 90(6) and 90(7) of the TPA, the ACCC may grant authorisation in respect of a contract, arrangement or understanding, or in respect of a proposed contract, arrangement or understanding that may have the purpose or effect of substantially lessening competition, if it is satisfied that the contract, arrangement or understanding would be likely to result in a benefit to the public; and the benefit would outweigh the detriment to the public constituted by any lessening of competition that would be likely to result from the contract, arrangement or understanding. The assessment of whether or not the ACCC may grant an authorisation involves:

· · · · · a consideration of the relevant market(s); a comparison of the likely shape of the future both with and without the relevant conduct for which authorisation is being sought; an examination of the public benefits arising from the arrangements or conduct in question; an examination of the detriment constituted by any lessening of competition arising from the arrangements or conduct in question; and a weighing of the public benefits against any anti-competitive detriments.

If the public benefits or expected public benefits outweigh the anti-competitive aspects, the ACCC may grant authorisation. Authorisation may be granted subject to conditions.


352 Case Notes (2006) 25 ARELJ

2. 2.1 FACTS The Applicants

The Applicants consisted of the following companies Esso Highlands Limited, Ampolex (Highlands) Limited, Ampolex (PNG Petroleum) Inc., and Merlin Pacific Oil Company Limited (together ExxonMobil); Oil Search Limited, Oil Search (Tumbudu) Limited and Oil Search (PNG) Limited (together Oil Search); Petroleum Resources Kutubu Limited and Petroleum Resources Gobe Limited (companies in the Mineral Resources Development Company Limited group of companies (together MRDC); and Merlin Petroleum Company (Merlin). The operator of the Project is Esso Highlands Limited (Esso). In March 2006, AGL Gas Developments (PNG) Pty Limited (AGL) was included as an applicant following its acquisition of a ten per cent interest in the Project from Oil Search in February 2006. 2.2 The Project1 The Project will comprise the following five distinct operations: (i) production of gas in PNG; (ii) refinement of gas products in PNG; (iii) transportation of dry gas through a pipeline from PNG to Queensland; (iv) marketing of the dry gas to customers in eastern Australia; and (v) sale of the dry gas to customers in eastern Australia. Development of the Australian component of the gas transmission pipeline is being undertaken by a consortium of AGL and Petronas. Buyers of Project gas will enter sales contracts with individual Applicants. The Applicants sought authorisation to negotiate common terms for these contracts. The total cost of the Project is estimated to be more than US$4 billion. The Project is the largest infrastructure development ever to occur in PNG and one of the largest in Australia. 2.3 The relevant market The Applicants submitted that Project would result in a significant change in the nature and structure of the market. It will enhance competition between gas and other energy sources both in product terms and geographic terms, providing energy consumers with an increasing number of potential suppliers as the market continues to expand. Accordingly, it was submitted that the ACCC should consider the Project in the context of an expanding energy market in eastern Australia, particularly when having regard to the market over the medium to long term. 2.4 The future with and without test The submissions by the Applicants and other interested parties as to the application of the future with and without test must be understood in the context of whether separate marketing of Project gas was feasible.

1

The description of the Project in this article represents the structure of the Project as described to the ACCC in the Applicants' application for authorisation. Recent developments have meant that the structure of the Project is likely to change.


(2006) 25 ARELJ ACCC PNG Gas Project Authorisation Determination 353

2.4.1 Joint versus separate marketing

The Applicants submitted that separate marketing was not feasible in Australia or for the Project specifically. In support the Applicants cited the KPMG Report commissioned by the Parer Committee which expressly recognised that separate marketing of gas from the Project was not feasible. The Applicants also submitted that the high capital costs of developing the Project as a greenfields project led to a requirement of certainty of appropriate financial return over the life of Project in order to attract investors. The Applicants submitted that satisfying this requirement was not an easy task due to the difficulty of amalgamating sufficient customer volumes to underwrite the Project, given the small customer pool in Australia, the countervailing power of buyers, strong competition from other energy sources and that many potential customers sought a high degree of assurance that the Project would proceed before committing. Obtaining authorisation for joint marketing was seen by the Applicants as a means of providing a degree of the certainty required. Further, the Applicants submitted that given their limited presence and experience in Australia, Oil Search, MRDC and Merlin would have little prospect on their own of obtaining sufficient customers under separate marketing to warrant the financial risk of proceeding with the Project. Further, since Oil Search, MRDC and Merlin had limited bargaining power, multiple commercial negotiations would be unlikely to result in prices and terms that would make the Project viable. 2.4.2 The Applicants' claim as to the appropriate counterfactual It was the firm belief and expectation of the Applicants that the Project would not proceed at all in the foreseeable future unless authorisation was granted in the terms sought, which enabled the Applicants to underwrite the massive investment required by jointly marketing gas over the life of the Project. Accordingly, the Applicants submitted that in light of the pro-competitive impact of the Project, and the considerable public benefits that would arise as a result of the Project, the `future with and without test' was clearly satisfied as in the future `with' a long term authorisation in place, there would be significant public benefits and no anti-competitive detriment; and in the future `without' a long term authorisation in place, the public benefits would be foregone and a critically important opportunity to facilitate a major infrastructure development with immense national significance would have been denied. 2.5 The claimed public benefits arising from the Project The Applicants submitted that the following public benefits would arise from the Project:

· · · · · ·

increased competition with other basins for gas sales; benefits to regional communities through infrastructure upgrades; reduce costs and increased efficiency for industries that use gas as a fuel; development of import replacements and growth in export markets; employment benefits through the creation of almost 900 jobs; environmental benefits through significant switches from coal to gas as a fuel for electricity generation; and


354 Case Notes (2006) 25 ARELJ

· 2.6 improvements in the Australia-PNG relationship. The anti-competitive detriments

The Applicants submitted that since the Project would facilitate a development that would not otherwise occur there was no anti-competitive detriment arising from the Project. The Applicants also submitted that actual and potential suppliers of gas, coal seam methane and other energy sources would exert strong competitive constraints on the Project and that this competition would strengthen as the market expanded. The Applicants further submitted that the large customers with whom the Project contracts have significant countervailing bargaining power due to the fact that they have alternative energy options and are aware of the importance to the Applicants of securing sales. Therefore, the Project would not have sufficient market power to lessen competition. 2.7 Balancing public benefits and anti-competitive detriments The Applicants submitted that joint marketing would not have any effect or likely effect of lessening competition so as to raise concerns under the TPA. On the contrary, the Project was overwhelmingly pro-competitive as it would provide a new, competitively priced source of gas to the energy market in eastern Australia. In that sense, the Applicants submitted that joint marketing would not create any anti-competitive detriment since it would facilitate a development that would not otherwise occur. The Applicants also submitted that even if the ACCC did not accept the Applicants' analysis and believed there to be a lessening of competition resulting from the joint marketing arrangements, the public benefits flowing from the Project would significantly outweigh any detriment to the public. 3. THE ACCC'S DETERMINATION On 16 January 2006, the ACCC released its Draft Determination and proposed to grant authorisation for a term of 16 years. This term was based on a submission by Oil Search's financial advisor as to the minimum period necessary to satisfy the Project's financiers that they would receive the necessary return on their investment. The Project Participants were satisfied with this proposed term. On 1 March the ACCC held a pre-decision conference in Brisbane at the request of the EUAA. The main issues raised by the EUAA were the appropriate term of the authorisation and how that term should be calculated. The ACCC issued its final Determination on 3 May 2006 and reached the following conclusions. 3.1 The relevant market The ACCC commenced its analysis in the narrow market consisting of the wholesale supply of gas in Queensland. The product dimension was extended only to include coal seam methane. The ACCC considered that if the detriments resulting from a lessening of competition in this narrow


(2006) 25 ARELJ ACCC PNG Gas Project Authorisation Determination 355

market were outweighed by the public benefits, analysis of competition effects in wider markets would not be necessary. 3.2 Conclusion on the counterfactual The ACCC considered that separate marketing for the Project was not feasible at this time. Accordingly, the ACCC agreed with the Applicants that the appropriate counterfactual was that the Project would not proceed in the foreseeable future. However, the ACCC was also of the view that once the Project had been commissioned and as the market developed, separate marketing could become feasible and joint marketing might not be necessary to sustain the Project. 3.3 ACCC assessment of public benefits The ACCC was of the view that public benefits arising from the Project, as distinct from the joint marketing arrangement itself, were relevant for the period in which separate marketing was not likely to be feasible. In summary, the ACCC considered that substantial public benefits were likely to result from jointly marketing Project gas in this period, including the following:

· · · · · · · 3.4 wholesale gas prices in Queensland were likely to be lower than they would be in the absence of the Project; increased competition in Queensland between gas and other energy sources; greenhouse gas emissions would be lower; capital investment would increase; Australia's GDP and exports would increase; regional communities would benefit from improvements to local infrastructure and employment; and efficiency in industries using gas as an input would increase. ACCC's assessment of anti-competitive detriment

The ACCC was of the view that at that time there was little to no anti-competitive detriment from the joint marketing of Project gas. The ACCC stated that arguments claiming that joint marketing resulted in anti-competitive detriment that would not arise under separate marketing were not relevant for the foreseeable future in which separate marketing was not a viable option for the Project. In contrast to some of the views expressed by some third parties that the position the Project would occupy in the Queensland market would lead to an increase in prices, the ACCC considered that prices in Queensland were likely to fall at least in the short to medium term as a result of the entry of Project gas. The ACCC was also of the view that although coal seam methane production in Queensland was likely to face greater competitive pressure from the Project, CSM would continue to compete against the Project. The ACCC stated that while the Project would possess some bargaining power, other energy sources would constrain the Project from exercising market power and imposing monopoly prices, at least in the foreseeable future. Among these sources would be gas from the Cooper Basin, which would constrain the Project at least in the first few years of operation.


356 Case Notes (2006) 25 ARELJ

However, the ACCC noted that over time the Project was forecast to become the major source of gas supply into Queensland. While this in itself was not synonymous with market power, the ACCC thought it was conceivable that the Project could possess market power at some stage in the future. 3.5 ACCC's assessment of balancing public benefits and anti-competitive detriments The ACCC concluded that for the period in which separate marketing was not a feasible option for the Project the joint marketing of Project gas would allow substantial public benefits to be realised. The detriments arising from any lessening of competition in the wholesale market for gas in Queensland would be sufficiently low such that a net public benefit would arise. The ACCC was of the view that consideration of broader markets encompassing other energy sources and/or the whole of eastern Australia was unnecessary as a net public benefit would invariably arise for the period in which separate marketing was not feasible. The ACCC recognised that it was necessary for the Project to have a long term period of regulatory certainty in relation to its marketing activities and, accordingly, granted authorisation for a period of 16 years, commencing on 25 May 2006. The authorisation includes a `grandfathering' provision which ensures that contracts entered into within the 16 years, and any extensions to contracts which commence within the 16 years, will be covered by the authorisation for the term of the contract and not simply the term of the authorisation. Importantly, the ACCC determined that the authorisation would also apply to future participants in the Project who:

· · do not have an economic interest any other gas business in eastern Australia; or if they do:

-

acquire less than a 20 per cent interest in the Project on entry; and do not have the individual capacity, either directly or indirectly, to determine the outcome of decisions about the Project's financial, marketing and operating policies.

Accordingly, future participants in the Project who satisfy these conditions will not be required to obtain the ACCC's approval before entering the Project and no amendment to the authorisation will be required. This is the first time that the ACCC has authorised such a mechanism. This was an important achievement for the Applicants as it was regarded as essential that any authorisation be flexible enough to accommodate inevitable changes to the Project's membership.