December 14, 2004 --- Vol. 10, No. 118December 2004

Agrium, Unocal settle; plant to close in November without new gas supplies

Agrium and Unocal have settled their dispute over gas supplies to the Nikiski fertilizer plant Agrium purchased from Unocal in 2000. Under a new gas sales agreement, Unocal will provide a total of 34 billion cubic feet to the plant through the end of October. At that time, Agrium said in a statement released today, the facility will close unless it can find alternate economic gas supplies.

Unocal said in a statement released today that it has reached a final settlement with Agrium of all claims arising from litigation regarding natural gas sales to Agrium’s fertilizer plant and the original sale of that plant to Agrium by Unocal.

Unocal said that under the settlement, all litigation between the companies will be dismissed with prejudice.

As part of the settlement, Unocal said, the companies have entered into a new gas sales agreement, effective Dec. 1, with defined monthly gas delivery obligations that terminate Oct. 31, 2005. Unocal also said it will pay Agrium $25 million for early termination of the existing gas sales agreement, which originally ran until June 2009, full release of Unocal of all environmental claims, and resolution of all other issues, including certain contingent payment due Unocal under the 2000 purchase and sales agreement for the fertilizer plant. The settlement payment is in addition to remaining liquidated damages due under the existing sales agreement, and Unocal said it expects to take a $15 million after-tax special-item charge to earnings in the fourth quarter 2004 as a result of the settlement.

“This settlement provides clarity and certainty to the two parties,” Kevin Tabler, land and government relations manager for Unocal Alaska, told Petroleum News. “We are glad to see these issues resolved so that we can get back to the business of exploring for and producing oil and gas.”

Agrium said in a statement that the settlement “establishes a definitive gas supply obligation from Unocal to the Kenai facility” until Oct. 31, 2005, to supply a total of 34 billion cubic feet of gas, “on the same price basis as the current gas supply agreement.” Agrium said the new gas supply agreement will allow it to operate “at an average rate of 66 percent” through Oct. 32. “This rate could be further augmented with third party gas purchases during 2005,” the company said.

Mike Wilson, president and CEO of Agrium, said in the company’s statement: “The new gas supply agreement will enable us to continue to meet our ongoing customer requirements for nitrogen from Kenai for 2005, while we explore alternative gas supply agreements” beyond the end of October.

“While Agrium remains committed to working with local gas suppliers to develop alternatives, the facility will close in November of 2005 unless alternate economic gas supplies are obtained,” Wilson said.

Lisa Parker, Agrium’s Nikiski spokeswoman, told Petroleum News: “This wasn’t an easy decision for Agrium. The employees here are top notch.” Parker said there are two ammonia and two urea trains at the Nikiski plant, and running at capacity the plant uses 53 bcf a year. The plan, she said, is to operate one ammonia and one urea train through the winter, the same way the company operated last winter. In the April to May timeframe the plant will ramp up and start the other train, and run it through September, and then scale back to one train again.

Calgary-based Agrium spokesman Richard Downey said Agrium believes there is still a lot of gas in the Cook Inlet region, but “there just haven’t been enough drilling and enough finds to replace” gas reserves. Asked if the plant could be reopened if there was a significant find later, Downey said that would depend on when the find was made. The plan now is to shut the plant down, he said, but not to dismantle it immediately.

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