Unocal, Agrium file suits over Nikiski fertilizer plant gas sale agreement
Steve Sutherlin PNA Managing Editor
Unocal Corp. and Agrium Inc. have been unable to negotiate a resolution to a dispute about their gas sales agreement for Agrium’s fertilizer plant in Nikiski. The dispute is headed to court, but it is yet to be determined which court will actually hear the case.
On June 10 Unocal filed suit over the agreement against Agrium in U.S. District Court in Los Angeles, while Agrium filed its own suit against Unocal in California state court.
Unocal sold the Nikiski plant to Agrium in 2000 for $321 million, plus annual participation payments for six years related to future ammonia and urea prices.
According to Unocal’s complaint, Agrium has failed to pay the annual earn-out amount of $16.6 million, which was due Jan. 15.
Agrium said in its 2001 annual report it withheld payment from Unocal because the liability has been set off against other amounts currently owing by Unocal, and because Agrium disputes the calculation of the earn-out due to differences over the application of a reference price adjustment factor.
Agrium said no payment is due to Unocal in the event that Unocal cannot meet its obligation to deliver gas under the Kenai gas contract.
At the time of the sale, the companies said that Unocal’s Alaska oil and gas business unit would continue to supply natural gas to the Nikiski plant until Jan. 30, 2009, at $1.20 per thousand cubic feet, subject to annual adjustment dependent on gas reserves in specified Cook Inlet fields. Reserves down 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 Unocal Alaska spokeswoman Roxanne Sinz, adjustments to date have been negative, so contractually Unocal should be able to cut its supply of gas but Agrium has not wanted it to do so because gas prices have increased and Agrium would be forced to buy gas at higher prices from other suppliers. Unocal is currently receiving $2.75 per mcf for gas sales to Enstar, subject to adjustment depending on Henry Hub prices and inflation.
“We have supplied over 100 billion cubic feet of gas to Agrium’s plant to date and have met their gas needs 99.9 percent of the time. We’re going to continue to supply them with gas during the litigation and will work with them to facilitate the purchase of a third party gas supply that can meet their needs,” Sinz told PNA July 11.
She said the two companies have been negotiating for months but came to an impasse and decided to let the courts decide. Legal sources said it could take several weeks or several months to work out the jurisdictional conflict and determine whether the case will be heard in federal or state court, before any progress is made solving the issues in the lawsuits. Agrium seeks gas for plant expansion Agrium spokeswoman Lisa Parker told PNA July 17 the suit her company filed contained 12 points, primarily revolving around the issues of natural gas supply for the plant, environmental indemnity and the calculation of earn-out points. The primary issue, she said, is gas supply for the plant.
“The question is, will they back out on the contract that was approved by the Securities and Exchange Commission, or will they meet the future gas needs under what was prescribed at the time of the sale,” Parker said.
Parker said the conditions in the purchase agreement recognized the competitive situation facing the plant.
“The product that comes from the facility is exported and competes on the world market,” Parker said. “We’re not dealing with the Lower 48, we’re competing against companies getting gas for 75 cents to a $1.25 per mcf.”
Feedstock represents up to 80 percent of product cost at the plant, Parker said.
“We are working diligently to come up with alternative gas supplies, not only because of our disagreements with Unocal,” she said. “We’ve talked about expanding the plant if we can get the gas.”
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