Arbitration panel awards Agrium $38.5 million-plus

Kay Cashman

An arbitration panel tasked with determining Unocal’s natural gas supply obligations to Agrium’s nitrogen facility in Alaska ruled July 23 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 royalties paid to the state of Alaska.

Unocal sold Agrium the nitrogen facility in 2000. The ruling applied to the two companies’ gas purchase and sale agreement under which Unocal would continue to supply natural gas to the Nikiski plant until June 30, 2009, at $1.20 per thousand cubic feet, subject to annual adjustment dependent on gas reserves in specified Cook Inlet fields.

A third, independent party was tasked with assessing the gas reserves in those fields and adjusting them annually. If reserves fell, then the amount of gas that Unocal had to supply dropped.

According to a July 2002 interview with Unocal spokeswoman Roxanne Sinz, adjustments had been negative, so Unocal thought it should be able to cut its supply of gas but Agrium has not wanted it to do so because gas prices had increased and Agrium would be forced to buy gas at higher prices from other suppliers. At that time Unocal was receiving $2.75 per mcf for gas sales to Enstar, subject to adjustment depending on Henry Hub prices and inflation. As of June of this year, Unocal is receiving as much as $4.74 per mcf from fields not dedicated to Agrium under the two companies’ 2000 gas purchase and sale agreement.

The panel agreed with Unocal on the 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 specified reserves that were specifically dedicated to Agrium in the 2000 agreement.

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, at 48.7 billion cubic feet, 36.3 bcf and 18.6 bcf, respectively.

“Either party to the contract may request a reserve certification annually which could increase or decrease delivery obligations after June 30, 2005,” Agrium said.

Although the gas purchase and sale agreement runs through June 30, 2009, Agrium said the forecast for gas supplies from the dedicated properties shows a “decline to a nominal amount” after June 30, 2007. And since the arbitration panel decided Agrium could only expect to receive gas from those properties specified in the original agreement, the fertilizer facility will not be able to count on Unocal for low-cost gas after that time.

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.