An arbitration panel has determined that Unocal Corp. owes Agrium U.S. Inc. $38.6 million for failing to deliver natural gas to Agrium's fertilizer plant in Nikiski under an existing gas purchase and sale agreement.
Agrium purchased the plant from Unocal in 2000 and the two corporate giants signed a gas purchase and sale agreement, or GPSA, that set forth the terms under which Unocal was to sell gas to the plant. Unocal was to supply a specified amount of gas, the lifeblood of fertilizer manufacture. Agrium alleged, however, that beginning in mid-2002, Unocal breached that contract by reducing the supply of gas.
Arbitration over the issues began May 24.
In a press release Friday, Agrium said it was awarded $36.5 million in damages, plus $2.1 million in interest. That damage award would be reflected in the company's third-quarter financial statement, the company said.
"We are pleased that the panel found that the contract obligates Unocal to supply gas volumes substantially in excess of Unocal's proposed volumes," said Agrium President and CEO Mike Wilson.
The panel determined that Unocal must supply 48.7 billion cubic feet of gas during the current contract year. Wilson said that should allow the plant to operate at 92 percent of capacity through June 30, 2005, and at 70 percent of capacity the following contract year without additional gas purchased from third parties.
That's good news for Agrium workers. The company had said earlier this year that unless adequate gas supplies could be found, the Nikiski plant might have to close by the end of 2005. Agrium said it remained committed to finding alternative gas supplies for the facility and to work for changes to pipeline systems and policies that would allow for the plant's continued operation.
"I'm glad that it's resolved, I think it's going to be good for the area here, and that it's going to get people back to work," said Kenai Peninsula Borough Mayor Dale Bagley.
Kenai Mayor John Williams speculated the decision will benefit employees of both companies.
"Not only will it bring people back to work for Agrium, it may also stimulate some activity in Unocal's ranks to go after more gas," he said.
"The decision bodes well for the employment picture in the next couple of years for both sides, I think."
The decision is not some magic bullet to solve the problem of dwindling gas reserves in the Cook Inlet basin, however.
"One thing they do agree on is there is a limited life expectancy under the present gas delivery plan, that seems to be about two years," Williams said. "Now my hope is that within that period of time either new gas is developed that can be made available at a reasonable figure that Agrium can live with and that a decision of the future of a gas line to the slope may be made."
In its own press release, Unocal said the binding award covered deliveries under the GPSA between July 2002 and April 2004. The award does not include amounts that are owed for May through July 2004, or that may be owed from August 2004 through the end of the contract, Unocal said.
"The arbitration panel agreed with Unocal that the GPSA is a reserves-based contract," Unocal said. "However, Unocal's full production from dedicated properties did not meet the schedule of deliveries as interpreted by the arbitration panel."
The panel's decision laid out the methodology for determining past and future gas delivery quantities and for calculating liquidated damages arising from under-deliveries of gas to Agrium's plant, Unocal said.
Unocal noted that the GPSA sets a cap of $50 million on liquidated damages for the life of the contract. Unocal officials said they believed that limit would be enforceable.
However, the panel has reserved the power to determine later whether Unocal's liability for damages is limited to the $50 million should it fail to make good on delivery of specified contract quantities after June 30, 2004. That's important because Unocal may not be able to meet those obligations in full during the life of the contract that runs through 2009.
"Based on current delivery projections from certain dedicated fields, Unocal expects to reach the cap for liquidated damages over time," the press release said.
Unocal spokesperson Roxanne Sinz said because of expected shortages in the availability of natural gas, Unocal may not be able to meet future contract requirements and will have to pay further damages up to the $50 million cap.
Leslie O'Donoghue, general counsel for Agrium, said the issue arose because the contract was limited to dedicated reserves. She declined to comment on what the panel might ultimately decide concerning the damages limitation, saying company officials had not yet had time to assess the matter.
She did agree that it could become an important issue in the future and said it reaffirmed Unocal's obligation to expedite development and production of new gas supplies.
Simultaneously with Agrium's suit, Unocal counter-sued Agrium, filing its legal papers in mid-2002. For its part, Unocal sought a favorable ruling against Agrium's allegations and a judgment for an earn-out payment of $17 million basically an agreement that required Agrium to make additional payments to Unocal for six years depending on the price of ammonia after the September 2000 sale, plus interest accrued since May 2002.
Unocal also sought $900,000 in "reliability bonuses" due under the GPSA and reimbursement of the $5 million in excess royalties it paid to the state of Alaska. Agrium disputed any liability for the royalty payments.
The arbitration panel ordered Agrium to reimburse Unocal the $5 million in excess royalties.
Agrium, meanwhile, also had sued over environmental liabilities, specifically arguing that Unocal had misrepresented the condition of the plant and other environmental matters, and over the terms of the "earn-out" arrangement.
According to Unocal's SEC filing, Agrium also asked for rescission of the sale of the plant a cancellation of the sales contract in addition to, or as an alternative to, monetary damages. According to Sinz, those issues remain in litigation. A California Superior Court in Los Angeles County is to begin proceedings on those matters Dec. 15.
Agrium's Wilson said he saw the panel's decision as an "overall positive," adding that the company now enjoys an additional certainty in its gas supply.
Beyond the 48.7 billion cubic feet of gas due by June 30, 2005, Unocal also is obligated to deliver 36.3 billion cubic feet the following year and another 18.6 billion cubic feet by June 30, 2007.
Clarion reporter Jenny Neyman contributed to this story.
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