Digging Deep

Rick Wilkinson, Twists in the Sand: 50 Years in the Turbulent Life of Beach Energy, (Media Dynamics, 2011), 431 pages, $25 plus postage through www.beachenergy.com.au 

Proponents of the resources super profits tax (notably Labor politicians and media commentators) seem to be under the delusion that making money from resources is easy. All miners have to do is dig a hole and the money rolls in, so they should pay extra taxes.

Twists in the Sand by Australia’s veteran (and best) oil industry journalist Rick Wilkinson should change that perception, assuming any left-wingers will read a down-to-earth corporate history.

Beach Energy is today ranked as one of Australia’s top listed companies. But the road to riches was tortuous and uncertain. In its half-century of corporate life, Beach has survived almost every possible disaster, from dry holes to international corporate knavery.

Two morals can be drawn from this book, both familiar to share market veterans. The first is that the resources industry is inherently uncertain. The second is that even when a company can prove it has been robbed blind by its controller, it is likely to gain little effective recourse through litigation.

Beach’s story began with the geological adventures of the late Reg Sprigg, a larger-than-life character whose mentors included Sir Douglas Mawson. In his enthusiasm for exploration, Sprigg took hair-raising risks. To explore the deeper seabed under the St Vincent Gulf he used a homemade five-ton diving bell. He did a gravity survey of the forbidding Simpson Desert in 1962, which was only the third time it had been crossed. His operations manager, Darby von Sanden, was equally rugged. When a light aircraft bent its propeller on a landing strip in the outback, von Sanden hammered it straight with the back of an axe and the plane somehow managed to take off again.

Sprigg was the main founder of Beach Petroleum (as it then was) in the early 1960s. The timing was good, coming just after the discovery of the Moonie oilfield in southern Queensland. Beach raised £1.6 million in five-shilling shares paid to two shillings each. Sprigg does not seem to have been a great manager, but he was an inspiring leader who engendered fierce loyalty among his staff. That devotion even transmitted itself to some of Beach’s shareholders, although their loyalty was tried sorely.

Beach started with three prospective areas: the Simpson Desert, the St Vincent Gulf from Adelaide to the Yorke Peninsula and the Otway Basin on the Victoria–South Australia border. The first two have never yielded a barrel of oil and while the third has produced oil and gas it must still be regarded as promising rather than any sort of bonanza.

Sprigg poured enormous enthusiasm and hard work into Beach’s exploration but the prospects were unrewarding. Beach expanded its interests to New Zealand and Turkey but still didn’t find payable oil. Indeed, Turkey was then a chilling place to work. Once Beach complained to the police about thefts of gear from their site. The police duly arrived, took two workers from the team over a hill and shot them on the spot. Effective response, but not quite what the local manager wanted. Beach quit Turkey soon after.

Beach funded itself by gradually calling the remaining three shillings owed on the shares, and then making more share issues. Thanks to Sprigg’s close friend Norm Shierlaw (better remembered as the chairman of the famous nickel company Poseidon) Beach also found backers in two of Australia’s foremost mining companies, North Broken Hill and Broken Hill South. It was not until late 1979—nearly eighteen years after Beach had listed—that it struck commercial gas in the North Paaratte well in western Victoria. The moral of the story is that you need very patient capital to be a resources investor.

Discovering gas was step one. Step two was selling it, which proved challenging. The logical market was Warrnambool, but Victoria’s state-owned Gas and Fuel Corporation had the monopoly on supply and tried to shut Beach out of the market. An agreement for Beach to supply the gas was not reached until 1984. Meanwhile in 1981 Beach took a gamble by drilling an expensive offshore well in the Otway Basin called Triton-1. It cost $12 million and was a dry hole which nearly wrecked the company. 

Then Beach switched its focus to Queensland and in 1984 hit oil in the Bodalla South-1 well. After twenty-two years, it had discovered commercial oil. But success brought perils of its own, because Beach became the target of corporate raiders and worse. In 1987 Claremont Petroleum, controlled by Sydney entrepreneur Grant Jagelman, bought the Beach shares formerly owned by North BH and announced he was going to make a takeover bid. It was a logical bid, because Claremont and Beach had adjoining properties and would have made a good fit as a merged group. The Beach board opposed the bid, but shareholders—perhaps understandably tired of waiting for success—weren’t listening and Claremont won 64 per cent of Beach.

That might not have been a bad result operationally, but the real problem was further upstream. Claremont was controlled by Jagelman’s company Moage and in 1987 a controlling stake in Moage was bought by parties associated with the Adelaide-based Independent Resources Ltd (IRL). IRL was in turn controlled by a shadowy London-based operator named Malcolm Johnson, nicknamed “Jockey” because of the similarity of his name to that of Australia’s premier racing jockey at the time. Physically the two would never have been confused, because the London “Jockey” stood six foot three, making him more than double the size of the Randwick horseman.

The connection between Jockey Johnson and Beach was not immediately apparent. Johnson operated through an international web of companies, typically based in tax havens such as Jersey, Liechtenstein, Liberia, Cyprus and Panama. The ultimate holding vehicle, insofar as there was one, was Ska Trust in Hong Kong. Ska was a blind trust, in that its beneficiaries were undisclosed. However, there is no doubt that Johnson, based in London, exercised control, even though he rarely appeared as a director of any of the intervening companies. Thus, above Beach, there was a huge upstream web of interests—effectively controlled by Johnson—almost none of which was disclosed to the Australian investing public. This lack of disclosure breached Australian law, especially when the downstream companies began doing deals with the upstream entities.

Roughly half of Wilkinson’s book is devoted to tracking the labyrinthine deals between IRL and other Johnson-controlled entities on one side and Beach on the other. Wilkinson is to be congratulated for the mental stamina he devoted to following the complexities. He relied heavily on a 400-page judgment in the South Australian Federal Court by Justice John von Doussa, who did a praiseworthy job of unravelling the relevant transactions.

The deal which kneecapped Beach was its purchase of a part-interest in the North and South Burbank oilfields in Oklahoma. Johnson associates had bought these interests for $US3.6 million and sold them almost immediately to Beach for $US28 million. As Beach did not have that much cash, it incurred heavy debts to other Johnson-controlled entities as part of the purchase agreement.

It looked a dreadful deal as soon as it became public. It was devised to get IRL off the hook for debts it owed and for money for other companies which had been used illegally to cover IRL commitments. When IRL failed to lodge accounts in time in 1989, it was suspended from trading on the Australian Securities Exchange along with eight associated companies, including Beach.

A long, complicated fight for control of Beach ensued. Eventually, a board which included Peter Dunn and David King was installed with the backing of Westpac. The new board began to unearth details of the scandalous dealings. They were greatly aided when two of Johnson’s colleagues, London-based lawyer Lynne Brooke and a corporate soldier of fortune, Trevor Bailey, volunteered to supply information. Bailey’s assistance came at some cost. He flew in from the USA and was accommodated at Mount Lofty House outside Adelaide. With some help from his Jamaican girlfriend, Bailey managed to drink the hotel’s entire stock of Grange.

His thirst could be partly excused because he feared for his life. According to Bailey he had received a phone call from an associate of the Jockey who was a former member of the British SAS, warning Bailey that if he said anything out of line he would have his legs broken or could “end up like Malcolm’s driver”. The chauffeur had recently been found dead in the garage of Johnson’s Kitzbuhel property.

After a marathon court case, Justice von Doussa found that the Burbank purchase agreement was not an arm’s length deal and gross breaches of duty had been committed by Johnson, as well as IRL directors Michael Fuller and Joseph Cummings, both Adelaide lawyers. He also found that the same men, by permitting Beach to enter the transaction knowing the Burbank price had been ramped, had been involved in dishonesty and contravention of the Companies Code.

But it was a hollow victory for Beach. Fuller and Cummings went bankrupt, so no money could be recovered from them. When charged with criminal offences, they successfully used the Dietrich defence that the case should not be brought because they could not afford to defend themselves properly—even though both of them were lawyers. The Australian Securities Commission (then the corporate regulator) tried to extradite Johnson from England. He fled to his mansion in Austria to avoid proceedings, but was eventually arrested and brought back to England. But he delayed extradition procedures for so long that the Australian authorities dropped the case. He now lives in another mansion in Surrey.

Another key director was the English businessman Sir Cecil Burney. He too had a mansion, staffed with servants who lived in cottages by the gates. He was never prosecuted and died in 2002 at the age of seventy-nine. The moral here is that company law is often quite ineffective at either preventing fraud or punishing the fraudsters and those who aid them, especially if the deeds are committed by people who live overseas. And investors rarely recover their losses.

Beach, freed from IRL and under a new chief executive, Reg Nelson, began to recover. It managed to recapitalise itself a little by annulling several of the purported debts which IRL had lumbered it with and selling its interest in Burbank. Commercial gas flows from four successful Otway wells helped its cash flow, and then it struck oil in the Cooper Basin.

By 2006, Beach had revived to the point where it could buy control of Delhi Petroleum, which owned extensive oil and gas interests in the Cooper Basin, mostly in partnership with Santos. Its bold bid was successful and the subsequent rise in the oil price made it a spectacularly brilliant move. In 1996, Beach had been worth some $10 million. After the Delhi acquisition a decade later it was worth more than $825 million and had become one of Australia’s top 200 listed companies—which has probably put it on the current hit list of Julia Gillard and Bob Brown. Beach is successful today, but the success came very hard.

As a footnote, by 2008 the Burbank field was producing oil, but heavily diluted. For every 100 barrels of fluid emerging, only half a barrel was oil; the other 99.5 barrels were water. So even with oil at $US100 a barrel, the field would still be scratching to justify the price Beach was forced to pay. 

Trevor Sykes’s most recent book is Six Months of Panic: How the Global Financial Crisis Hit Australia (Allen & Unwin).