AGL Wholesale Gas Ltd & Anor v Origin Energy Ltd & Ors [2008] QSC 201

SUPREME COURT OF QUEENSLAND CITATION: AGL Wholesale Gas Ltd & Anor v Origin Energy Ltd & Ors [2008] QSC 201 PARTIES: AGL WHOLESALE GAS LIMITED (ACN 072 948 504) (first applicant) AGL ENERGY LIMITED (ACN 115 061 375) (second applicant) v ORIGIN ENERGY LIMITED (ACN 000 051 696) (first respondent) ORIGIN ENERGY RETAIL LIMITED (ACN 078 868 425) (second respondent) ORIGIN ENERGY CSG MARKETING PTY LIMITED (ACN 008 750 945) (third respondent) FILE NO/S: S5509 of 2008 DIVISION: Trial Division PROCEEDING: Application ORIGINATING COURT: Supreme Court at Brisbane DELIVERED ON: 1 September 2008 DELIVERED AT: Brisbane HEARING DATE: 27 August 2008 JUDGE: Dutney J ORDER: That paragraphs 1(d) (viii), 1(n), 1(o), 1(p) and 1(q) of the schedule to the subpoena be deleted CATCHWORDS: ARBITRATION – CONDUCT OF THE ARBITRATION PROCEEDINGS – PROCEDURE AND EVIDENCE – SUBPOENAS – where gas sales agreement between parties – where arbitration currently on foot to determine market price for gas – where arbitrators are required to have regard to all economic and other relevant factors in determining market price – where applicant issued subpoenas against third parties – where third parties apply for parts of the subpoenas to be set aside – whether various documents required to be produced by subpoena lack apparent relevance to the issues in arbitration proceedings Commercial Arbitration Act 1990 (Qld) -- 1 of 12 -- 2 Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 199 CLR 413, referred to Spencer v The Commonwealth (1907) 5 CLR 418, considered Xstrata Queensland Limited v Santos Ltd & Ors [2005] QSC 323, considered COUNSEL: J Sheahan SC with D S Piggott for the applicant J McKenna SC with M Hoch for the first respondent T P Sullivan for the second respondent T Deane (solicitor) for the third party SOLICITORS: Allens Arthur Robinson for the applicants Corrs Chambers Westgarth for the first respondent Mallesons Stephen Jaques for the second respondent Clayton Utz for the third party THE DISPUTE [1] AGL Wholesale Gas Limited and AGL Energy Limited (together “AGL”) are parties to a Gas Sales Agreement with Origin Energy Limited and some of its related entities (together “Origin”). [2] Clause 9 of the Gas Sales Agreement provides for a price review by way of arbitration pursuant to the Commercial Arbitration Act 1990 (Qld) (the “Act”). An arbitration is presently on foot before the Honourable Michael McHugh QC AC and the Honourable Robert Hunter QC. The arbitrators are required to determine the market price for gas at Moomba as at 1 May 2009 for similar quantities under similar terms and conditions as the Gas Sales Agreement. In making that determination the arbitrators are required to have regard to all economic and other relevant factors but not to any transaction to supply or purchase gas to the extent that the gas is to be used for the purposes of electricity generation. [3] The relevant terms of the Gas Sales Agreement are as follows: “9.1 Price Review (a) The Sellers Representative or the Buyer may, by notice given to the other: (i) by 1 January 2007 and/or (ii) by 1 January 2013 require a price review for the purposes of determining the market price for Gas at Moomba, which market price will be the Base Price (‘New Base Price’) effective from the beginning of the fifth Contract Year or the tenth Contract Year, as the case may be. (b) The price review will proceed in accordance with the following fundamental principles: (i) the price review must determine the market price for Gas at Moomba for similar quantities of Gas to -- 2 of 12 -- 3 that which will be made available for delivery under this Agreement, (ii) the price review must determine the market price for Gas at Moomba for Gas to be supplied under similar terms and conditions to this Agreement; … (d) If notice is given under clause 9.l(a), the Buyer and the Sellers' Representative must promptly negotiate, without prejudice to any subsequent arbitration, during the first three Months of the PR Period in an attempt to reach agreement on the New Base Price. If agreement is not reached by the last day of that third Month, the Parties must immediately proceed to have the New Base Price determined by arbitration in accordance with the following provisions of this clause 9. The Parties will bear their own costs in negotiating pursuant to this clause 9.1(d). … 9.2 Appointment of price review arbitrators (a) In the event an arbitration is required under clause 9.1(d), then within seven days of the end of the third Month of the PR Period, the Sellers' Representative and the Buyer will each appoint one arbitrator. If either fails to appoint an arbitrator within that time and continues in that failure for a further seven days then the other Party must request that an arbitrator be appointed for the Party failing to do so by the President of the Law Society of Queensland within, to the extent possible, seven days of the request by that other Party. … 9.3 Parameters of price review arbitration (a) The function of the arbitrators and/or the umpire is to determine the New Base Price to apply from the relevant Price Review Date: (i) strictly in accordance with the fundamental principles set out in clause 9.l (b); and (ii) in accordance with the parameters set out in clause 9.3. (b) The arbitrators will determine the New Base Price as at the relevant Price Review Date such that, overall, the New Base Price represents the best assessment by the arbitrators of the market price for Gas at Moomba as at the Price Review Date for similar quantities under similar terms and conditions as this Agreement, and otherwise in accordance with clause 9.1(b). (c) Subject to clauses 9.1(b) and 9.3(d), in determining the New Base Price, the arbitrators will have regard to all economic and other relevant factors. (d) The arbitrators must not have regard to any transaction to supply or purchase Gas to the extent that the Gas is to be used for the purposes of electricity generation. -- 3 of 12 -- 4 … 9.5 Confidentiality of proceedings The Parties and the arbitrators and umpire will keep all proceedings, hearings in the proceedings, transcripts of any hearing in the proceedings, pleadings, discovered documents, witness statements and any other evidence, private and confidential and will not disclose any of that information other than for the purposes of the arbitration. This will not apply to information which: (a) a Party can demonstrate has already been published; or (b) a Party is obliged to disclose by law (including the ‘Listing Rules’ of the Australian Stock Exchange Limited). 9.6 Commercial Arbitration Act to apply Except as otherwise provided in this clause, the Commercial Arbitration Act 1990 (Queensland) will apply to any arbitration carried out for the purposes of a price review under clauses 9.1 to 9.8 (inclusive).” [4] The arbitrators made directions requiring the parties to exchange notices identifying the economic and other relevant factors they intend to rely upon. [5] In particular, in Origin’s particulars of economic and other relevant factors the following appears: “5. Transportation of gas in Eastern Australia between 2009 and 2014 will continue to be constrained by pipeline capacity, contractual commitments of that capacity, and the terms upon which that capacity has been contractually committed. … 6. Supply of gas in Eastern Australia between 2009 and 2014 will be limited by: (a) pipeline connections within that market; (b) the capacity of pipelines to transport Gas; (c) the extent and the terms contracted pipeline capacity; … 7. Demand for Gas in Eastern Australia … (e) will increase significantly throughout the period 2009 to 2014 by reason of the development of significant liquefied natural gas (LNG) projects: (i) six projects of significance have been announced for the development of liquefied natural gas for export from north Queensland (the first 5 from Gladstone) particularly for the Asian market, based on Queensland coal seam gas reserves: … B. Queensland Gas Company Limited and BG Group plc (a leading participant in the global LNG market); -- 4 of 12 -- 5 … If only one of the two largest of these LNG projects were to proceed, it would result in the liquefaction of more than 200 PJ of Gas per annum from Eastern Australia for export as LNG, commencing in 2012; …” [6] AGL applied to the court to issue subpoenas pursuant to s 17 of the Act. On 10 July 2008 Martin J gave AGL leave to issue subpoenas against certain third parties. Relevantly this included the present applicant, Queensland Gas Company Limited (“QGC”). [7] It was a condition of the orders made by Martin J that recipients of subpoenas may apply to the court to set aside the issue of the subpoena. [8] The applications now before the court are both applications to set aside parts of the subpoena issued to QGC. The applications are brought by QGC and by BG International Limited (“BG”). BG’s interest is that it is counterparty to agreements that fall within the scope of the subpoena to QGC. [9] The parts of the subpoena to which objection is taken are those which require production of documents which AGL submits are relevant to those parts of Origin’s particulars of economic and other relevant factors set out above. [10] The Schedule to the subpoena sets out particular documents or categories of documents QGC is required to produce. In issue before me were documents falling within paragraphs 1(d), 1(n), 1(o), 1(p), and 1(q) of the schedule. The relevant parts of the schedule read as follows: “(d) Agreements to which QGC is a party for the transportation of Gas to a location in Eastern Australia, by way of: … (viii) the proposed Queensland Hunter Gas Pipeline; … for transportation at any time on or after 1 December 2002, other than any Agreement under which transport is not expected to commence until 1 May 2014 or later; … (n) reports prepared for: (i) the Board of Directors; (ii) the CEO (or equivalent); … which consider the targeted time frame for front end engineering and design (FEED), for final investment decision (FID) and for first production in relation to liquefied natural gas (LNG) projects including any reports which consider factors that may lead to delay in relation to LNG projects; (o) reports prepared for: -- 5 of 12 -- 6 (i) the Board of Directors; (ii) the CEO (or equivalent); or … which consider how water production will be managed in relation to the extraction of gas from coal seam methane fields; (p) all correspondence with Government bodies or other regulatory bodies in relation to water management issues arising from the process of extracting gas from coal seam methane fields; (q) reports prepared for: (i) the Board of Directors; (ii) the CEO (or equivalent); or … which consider how Ramp Gas may be managed.” MATERIAL FACTS Queensland Hunter Gas Pipeline [11] Documents relevant to paragraph 1(d)(viii) relate to a proposal to construct what is known as the Queensland Hunter Gas Pipeline from the Berwyndale South Gas Plant to the Hunter Valley in New South Wales. [12] On 27 May this year, QGC announced an agreement with two joint venture partners to examine the feasibility of building and owning a new gas fired power station in New South Wales to be supplied from QGC’s coal seam gas reserves in southern Queensland. This power station would take advantage of a current proposal to build a pipeline from the Berwyndale South Gas Plant to the Hunter Valley in New South Wales known as the Queensland Hunter Gas Pipeline. [13] Construction of the Queensland Hunter Gas Pipeline has not yet commenced. A pipeline licence has been applied for in Queensland and New South Wales but to date the proponents of the proposed pipeline have not publicly announced whether or not the pipeline will proceed. In other words, at present no final investment decision has been made in relation to the pipeline by those propounding the proposal. [14] QGC’s announcement to the Stock Exchange of 27 May 2008 relevantly contained the following: “The gas for the power station would be transported by a new underground pipeline to be constructed as part of the Queensland Hunter Gas Pipeline project. QGC would be a significant foundation customer with the pipeline starting at QGC’s Berwyndale South processing plant near Chinchilla and stretching 820 kilometres to Newcastle. The New South Wales Government’s proposals to restructure parts of the State’s electricity sector provided the impetus to QGC to prepare for a major investment in new gas fired power generation.” -- 6 of 12 -- 7 [15] The contracts manager for QGC, Mr Timmons has deposed in his affidavit that QGC has executed a conditional agreement with the proponents of the proposed Queensland Hunter Gas Pipeline. Unsurprisingly in light of the fact that the pipeline has not yet been constructed that agreement does not contain agreed or determined transportation tariffs. Rather it contains a price formula the inputs for which will not be determined until the pipeline is built. Completion of the pipeline is not expected until June 2011 or early 2012. The transportation tariffs will depend upon the cost of the construction and operation of the pipeline. [16] According to Mr Timmons QGC is presently the only customer which would be supplied with gas by the proposed pipeline. No arrangements have been entered into with any other customers or prospective customers. Mr Timmons is apparently aware that the proposed pipeline will only proceed in the foreseeable future if QGC is a foundation customer. [17] For its part, QGC’s participation is reliant on the proposed Hunter Valley Power Station project proceeding. At this stage, QGC is not committed to the power station and will not be likely to make a decision until some time in 2009 or 2010. Gladstone LNG Project [18] QGC and BG have executed a conditional agreement in relation to the development of a liquefied natural gas (LNG) project at Gladstone. The project involves an estimated $8 billion development program which, if it proceeds, will involve construction of a plant near Gladstone, construction of a new pipeline from QGC’s reserves to the LNG plant and additional gas production and processing facilities. An announcement in relation to the project was made in February 2008. A number of subsequent announcements have been made including an announcement on 15 July 2008 that Bechtel has been granted the contract for the front end engineering design of the plant. The most recent announcement indicates that a final investment decision on the project is expected to be made in early 2010. [19] At this stage, environment approvals have not been obtained. Feasibility studies have not been completed. Applications have not been made for the necessary licences or permits. Despite this, there are large numbers of documents of a highly confidential and commercially-sensitive nature which relate to the proposal. These include documents relating to how the project might be developed, its timing, its costs, its structure, the production costs, agreed rates of return, projected revenue, potential markets and marketing strategies and technical and commercial issues concerning the project generally. [20] At present there are at least four LNG projects proposed for Gladstone. Mr Timmons says that it is unlikely that all of these projects would be developed in the foreseeable future. Water management -- 7 of 12 -- 8 [21] QGC has a large volume of documents which satisfy the description of reports to the board or the CEO in relation to water management issues. Water management is a significant issue in the production of coal seam gas. [22] In lay terms, the water within and covering the underground coal seams needs to be removed to allow the methane gas to be extracted from coal. The water that is extracted has varying levels of contamination and salinity. The appropriate disposal of this water is a significant cost component of the production of the gas. Ramp Gas [23] The use and marketing of what is known as ramp gas is also significant element of an LNG plant. Ramp gas is the gas produced from coal seam methane fields before the volume of gas is at a level sufficient to sustain the operation of an LNG plant. An LNG plant requires the throughput of substantial volumes of coal seam methane gas. Because of the costs associated with an LNG plant, the company must have significant proven reserves of coal seam methane gas before it commits to such a project and must have significant volume of gas ready from the time the plant becomes operational. As a result the company must bring some of its wells into production prior to the LNG plant commencing operation. Some coal seam methane wells must flow continuously from the time they are brought into production whilst others do not. The gas which is produced in the lead up to an LNG plant commencing operations is called ramp gas. [24] How ramp gas can be profitably managed is an important part of a coal seam methane gas producer’s business. There are numerous documents which fit the description in the subpoena in relation to ramp gas. [25] Again, the documents are highly confidential and commercially-sensitive. APPARENT RELEVANCE [26] The primary submission made in support of the objections to the subpoena is that the documents in issue lack apparent relevance to the issues in the arbitration. [27] The significance of the apparent relevance test was discussed by McMurdo J in Xstrata Queensland Limited v Santos Ltd & Ors [2005] QSC 323 and in particular in paragraph 49. There his Honour said: “This question involves the interpretation of the Xstrata Agreement, and in particular cl 10.12. The respective statements of contentions in the arbitration indicate some difference between Xstrata and the Producers as to the proper interpretation of their agreement. Such a difference is a question for the arbitrators, and its answer might require evidence admissible in aid of the task. This is not the occasion in which to decide such a question between Xstrata and the Producers. If there is an interpretation which is reasonably open, according to which the documents sought would be apparently relevant, then the relevance requirement is met.” -- 8 of 12 -- 9 [28] Later at paragraph 55, his Honour went on to say: “The question of what is meant by apparently relevant was extensively discussed by Moffitt P (with whom Hutley and Glass JJA agreed) in National Employers’ Mutual General Association Ltd v Waind and Hill at 378-386. Moffitt P said that the requirement of apparent relevance could be stated in terms that the documents must ‘relate to the subject matter of the proceedings’, a relatively undemanding requirement. However, he also said that the relevance of documents must be more clearly demonstrated where there are competing considerations such as privacy: ‘The crucial question in relation to the exercise of the discretion to permit inspection [of documents produced to the court] is whether the documents have apparent relevance to the issues. It is at the [stage when the documents are tendered] that questions between the parties of relevance in fact and admissibility are ruled upon. The judge is in some difficulty in determining whether documents are relevant prior to the presentation of the evidence or at the commencement of the case. If there is particular objection from the witness, or questions of privacy are involved, no doubt procedures can be adopted to ensure that only relevant documents are inspected. In other cases, it would appear appropriate to proceed to exercise the discretion [to permit inspection], provided the documents are apparently relevant or are on the subject matter of the litigation.’” [29] QGC and BG submit that documents relating to pending projects have no apparent relevance because they do not bear on the calculation of the market price. In this context, pending projects are those to which QGC is not presently committed but which are under investigation. [30] Therefore, the argument before me turned on the proper construction of the words “market price” in clause 9.1(b) of the Gas Sales Agreement. [31] Economic and other factors are made relevant by clause 9.3(d) but are expressly said to be subject to clauses 9.1(b) and 9.3(d). [32] 9.3(a) emphasises the requirement that the arbitrators are to determine the price strictly in accordance with the fundamental principles set out in clause 9.1(b) which require a determination of the “market price”. [33] In a nutshell, QGC and BG submit that the market price is the price determinable by the market based upon information which is either known or ascertainable save in respect of some limited exceptions such as existing confidential supply or sales agreements which although withheld from the market are nonetheless apparently relevant to the market price. -- 9 of 12 -- 10 [34] Put another way, the question is whether the arbitrators are permitted under the terms of the arbitration agreement to examine the source material which, together with subsequently obtained information will be relevant to the ultimate decision of the board of QGC whether or not to proceed either with the construction of the power station in the Hunter Valley or the LNG plant at Gladstone. [35] AGL submits that market price in this context is the price which the market would pay were it acquainted with all the facts irrespective of whether some facts were available to the negotiating parties at all. [36] The starting point for the debate is Spencer v The Commonwealth (1907) 5 CLR 418 at 441 per Isaacs J: “To arrive at the value of the land at that date, we have, as I conceive, to suppose it sold then, not by means of a forced sale, but by voluntary bargaining between the plaintiff and a purchaser, willing to trade, but neither of them so anxious to do so that he would overlook any ordinary business consideration. We must further suppose both to be perfectly acquainted with the land, and cognizant of all circumstances which might affect its value, either advantageously or prejudicially, including its situation, character, quality, proximity to conveniences or inconveniences, its surrounding features, the then present demand for land, and the likelihood, as then appearing to persons best capable of forming an opinion, of a rise or fall for what reason soever in the amount which one would otherwise be willing to fix as the value of the property.” [37] Senior counsel for AGL argued, in effect, that the reference to “perfect acquaintance” with the land as explained by Isaacs J meant that the negotiating parties were aware of every fact then in existence, whether ascertainable by them or not, which might bear on the price either was prepared to pay or accept. [38] The passage from Isaacs J in Spencer was further referred to by McHugh J in Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 199 CLR 413 at 436: “Value is determined by forming an opinion as to what a willing purchaser will pay and a not unwilling vendor will receive for the property. In determining that value, there must be attributed to the parties a knowledge of all matters that affect its value. Those matters will include the predicted impact of future events as well as the experience of the past and the rates of return on other investments.” [39] After referring to Spencer, his Honour went on: “The market for the property is, therefore, assumed to be an efficient market in which buyers and sellers have access to all currently available information that affects the property.” [40] Counsel for AGL placed emphasis on the reference to an “efficient market”, a term widely understood as referring to a theoretical market in which all relevant -- 10 of 12 -- 11 information was readily available whether that information was confidential to third parties or not. [41] Counsel for QGC and BG concentrated on the reference to currently available information as indicating that only that information to which the public has or can gain access without resort to such processes as subpoena can be taken into account. [42] Some guidance as to the boundaries intended by McHugh J can be found in the paragraphs which follow and in particular in paragraph 52: “Consequently, savvy buyers and sellers are continually attempting to predict the future course of events that affect the supply and demand for properties because in turn those events will affect the prices that properties will bring. Present value, therefore, cannot be divorced from future prospects. If rational buyers believe that there is a real risk that property prices will decline from the prices paid yesterday, they will not be prepared to pay the same prices today. In so far as the risk of a general decline in prices is reasonably foreseeable, the market will factor that risk into the value of properties. The true value of a property on a particular day therefore reflects the likelihood of any risk that the price for the property in the reasonably foreseeable future will rise or fall on what it would have fetched the day before.” [43] I read the foregoing passage as indicating that the prospect of future uncertain events is a factor that will be taken into account as a risk factor in the determination of price without any detailed analysis of the degree of certainty involved. [44] In my view, the relevance of the documents in issue is not sufficiently arguable to satisfy the test of apparent relevance, particularly in circumstances where the information sought to be disclosed is of such a sensitive and confidential nature. [45] Here the projects are at such a preliminary stage that even the likelihood of obtaining the necessary approvals for the project to proceed is still essentially a matter of speculation and no commitment has been made to proceed whether or not those approvals are obtained. In relation to the Gladstone project, on the material before me it appears that whether it proceeds will depend in part at least upon the development of other competing projects promoted by others. [46] Even in the theoretically efficient market to which McHugh J referred, the “rational buyer” can only factor in the risk of and the projected size of future projects. That information is contained in the releases to the Stock Exchange. I accept the comment of Mr Craddock in his affidavit at paragraph 19 that a proposal “that is still at an early stage of development will carry little weight as a pricing signal … Such proposals are generally complex and contingent on passing many milestones in the course of their development and, until the major milestones are achieved, it is pure speculation as to whether a proposal will proceed”. It could be added that in part, at least, a decision whether or not to proceed with a project may be subjective such that no analysis of preliminary data by an arbitrator can take the matter beyond a mere possibility. -- 11 of 12 -- 12 [47] I am not satisfied that it is arguable that in determining a market price, even in an efficient market, regard would be had to preliminary information preparatory to whether or not an announced project will or might proceed. [48] Because questions concerning ramp gas and water management are relevant only to the extent that they impact upon the LNG proposal for Gladstone, documents relating to those have no greater relevance than documents relating to the proposed plant itself. [49] Of course, as the arbitration progresses a further basis of apparent relevance in relation to the subject documents might emerge. That is an issue for another day. [50] In the circumstances, I order that paragraphs 1(d) (viii), 1(n), 1(o), 1(p) and 1(q) of the schedule to the subpoena be deleted. -- 12 of 12 --