An arbitration panel appointed to determine Unocal’s natural gas supply obligations to Agrium’s Kenai, Alaska nitrogen facility ruled late yesterday that Unocal owes Agrium $36.5 million plus $2 million interest for under-delivery of gas between July 2002 and April 2004. The panel directed determination of additional damages to June 30, 2004, and it ordered Agrium to reimburse Unocal $5 million for excess royalties that have been paid by Unocal to the state of Alaska.
Unocal sold Agrium the nitrogen facility in 2000. The ruling applied to the two companies’ 2002 gas purchase and sale agreement.
The panel agreed with Unocal on a major point of contention between the two firms when it determined that the gas purchase and sale agreement was a reserves-based contract limited to certified reserves in the leases that were specifically dedicated to Agrium.
The $36.5 million damage assessment was levied because Unocal’s full production from the dedicated properties did not meet the schedule of deliveries as interpreted by the arbitration panel.
The panel set Unocal’s annual supply obligation for the contract years ending June 30, 2005, June 30, 2006, and June 30, 2007 as 48.7 billion cubic feet, 36.3 bcf, and 18.6 bcf, respectively.
Agrium said forecast gas supplies “decline to a nominal amount subsequent to June 30, 2007. Either party to the contract may request a reserve certification annually which could increase or decrease delivery obligations after June 30, 2005.” The gas purchase and sale agreement runs through June 30, 2009.
The agreement sets a cap of $50 million on liquidated damages for the life of the contract, but Agrium said the panel “specifically reserved for further determination whether Unocal’s liability for damages is limited to $50 million should Unocal fail to deliver the specified contract quantities after June 30, 2005.”
Unocal said it believes the cap will be enforceable.
Additional litigation related to the asset purchase and sale agreement is pending in California Superior Court in Los Angeles County. Unocal said trial on those issues is expected to begin late this year.