Lessons to be learned from the turmoil over Petrocorp

Press, 5 March 1988, Page 20

Lessons to be learned from the turmoil over Petrocorp

Brendon Burns,

of our political staff, analyses

the implications of this week's Govt asset sale

Last- year, a television advertisement traded on Kiwi pride in exhorting New Zealanders to buy shares in Petrocorp. It became evident last month that such nationalism was no match for a foreign price, higher than that being offered by New Zealand companies for the Government’s 70 per cent stake in Petrocorp. Now, New Zealand’s biggest company is buying’ the fifthbiggest company. While Fletcher Challenge has 60,000 shareholders, the sale does not allow the widest possible! spread of investment such as a! public float would offer. I

But collectively, New Zealanders seem to have ' breathed a sigh of relief that ownership of Petrocorp has not gone off-shore. Fletcher Challenge’s purchase does, however, raise ia number of questions. I

The Government has retained the right to buy back into Petrocprp. This provides, said the Minister of State-oymed Enterprises, Mr Richard Prebble, some protection for the Government in the event of a dramatic increase in oil prices.

This is now deemed a necessary clause, although unlikely to be used. Such caution was not apparent in the planned sale of Petrocorp to British Gas. ! The National Party opposition deserves to feel a degree of satisfaction for its insistence that New Zealand should not be left" without a role in such crucial industries. But its concerns about Fletcher Challenge’s monolopy of bulk natural gas supplies remain unanswered.

When Mr Bolger was criticising the sale to British Gas last month, Mr Prebble defended it as providing greater competition. He said: "A sale by the Government to potential New Zea-

land buyers could have led to the monopolistic practices Mr Bolger complains of.” I Mr Prebble was referring to Brierley’s, which would have controlled bulk gas supply and much reticulation; if it had bought Petrocorp.

But, with the sale of! Fletcher Challenge, a monopoly on the bulk supply of gas| remains. One example of the possible power of such a monopoly is that Fletcher Challengers direct competitor in the pulp and paper industry, N.Z. Forest Products, runs its Kinleith mill on natural gas. This supply pipeline is controlled by Fletctier Challenge with its purchase of th[e controlling interest in Petrocorp. Beyond the issue of the monopoly which Fletcher Challenge has acquired,, it has also gained a guaranteed return on i Petrocorp if oil and gas prices were suddenly to slump. A “put” option requires the Government to buy 100 million Fletcher Challenge shares in 1992 — if the company requires this. The price would be $4 a share, which was the market value of the shares earlier this week, before the British Gas purchase was aborted. Damage As well as this | guarantee, Fletcher Challenge gains what Mr Hugh Fletcher estimates to be, about $lOOOl million in tax write-offs against i Petrocorp losses. This does not'include any estimate of losses involved in the multi-million dollar development

of the Maui B gas platform. Petrocorp has a half-share in the Maui field. 1

Oil and gas exploration is a risky and very expensive business, and tax write-offs ) are necessary to ensure new reserves are! found and developed. But much of the exploration in which Petrocorp has a share has already been carried out. ! The new oil discovery at Waihapa in Taranaki, in which it has a major shareholding, is yet to be proved, but shows much promise to' surpass previous finds.

Mr Fletcher believed Petrocorp will make a profit and that the company has been bought at a good time. He admitted to thinking he had “blown it” by not offering more when first bidding for Petrocorp.

Such was the keenness to acquire the company that i after British Gas was named as buyer, Fletcher Challenge told the Government it would match the price. I ; The Government insists that such an offer and Labour Party opposition to the sale to British Gas did not cause it to cancel the sale to the foreign company. But a former senior negotiator for the Government has said it appears that terminating the deal was always planned. Mr Geoff patson, a former deputy secretary of Trade and Industry, headed the Government officials team which negotiated the Maui igas contracts.

He said )the clauses which the Government has chosen to reveal do not indicate anything that

should have surprised the Crown officials negotiating with British Gas. Such clauses would have been subject to bargaining, he said in an ‘(‘Eyewitness” television interview on Thursday. Mr Datson believes New Zealand's reputation ' abroad will have been damaged by the abrupt termination of the deal by the Government.

Good buy His view cannot be accepted as definitive, but it does refocus attention on I the i Government’s motives in cancelling the initial agreement. ! Mr Lange has suggested British Gas may have seized on the internal turmoil the sale had created to push I for an even better deal than it had already secured. But the Government wasted no time 'in seizing the opportunity to be rid of the foreign buyer. This followed strong Labour Party opposition to the sale, including an apparent walk-out of Labour backbenchers from Parliament last week, when privatisation! was | being debated. Suggestions [of Labour members crossing the floor on privatisation issues ) were beginning to emerge. That sort of prospect fills even; the toughest-minded Government with horror. Whatever led to the aborted sale, it is evident that Petrocorp was at the very least a good buy. Mr Fletcher was obviously relieved to have secured the purchase when hid company had earlier offered too little.

Taxpayers chn still legitimately ask if the deal eventually

concluded on their behalf was a good one for them. The price paid is about the same as the $BOO million cash injection the Government gave to Petrocorp last financial year. Petrocorp was never intended to be sold at this time. It was brought forward because the Government could not conclude negotiations on key S.O.E. assets, notably Electricorp, in time to ensure the targeted and much trumpeted Budget surplus is achieved. I j The need to ensure .that surplus put Petrocorp’s sale on the fast track; this cannot have enhanced the prices offered. A public share float is not possible because of the depressed prices caused by the sharemarket crash and the need to have the money now.

Although a public) company, Petrocorp as a State-controlled organisation [is the Government’s first major foray into privatisation. There was the earlier sale of New Zealand Steel but this was really just selling an asset the State had been forced to acquire. I Petrocorpj along with the Bank of New Zealand, was the first State-controlled organisation to encourage the public to buy its shares. It pointed to its technologies and natural resources, only later to have these sold, even if briefly, to an overseas buyer. At the eleventh hour, Petrocorp was returned to New Zealand hands. If taxpayers are again offered — as they should be — the right to again buy shares in State assets, they have every right to be dubious about heart-tugging appeals to invest in their country; at least until they are assured their investment will remain ini New Zealand hands and that a fair price has been paid to the taxpayers.