Agrium: Unocal won't honor gas commitments

Posted: Tuesday, October 05, 2004

Agrium Corp. said Unocal Corp. has informed the company it will be unable to supply quantities of natural gas specified in an arbitration settlement agreed to in July.

The settlement specified a goal for Unocal to supply 48.7 billion cubic feet per day of gas to Agrium's ammonia and fertilizer plant in Nikiski. The gas was to be supplied from certain Cook Inlet producing properties owned by Unocal.

Lisa Parker, Agrium spokes-person, said her company has received a letter from Unocal informing it that the volume of gas specified in the arbitration settlement for the current year cannot be supplied.

That means Agrium will not have enough gas to produce at full capacity for the rest of this year, Parker said.

Had Unocal been able to supply the volume of gas specified in the agreement, the plant would have been able to operate at near full-capacity, Parker said.

The two companies reached a partial settlement in late July in the arbitration, part of an ongoing suit between Unocal and Agrium.

A Sept. 27 Agrium press release also cast doubt over whether the plant would receive an adequate amount of gas to profitably operate.

In the press release, Agrium said "there continues to be uncertainty relating to whether Union Oil Company of California will meet its contractual obligations by supplying gas from nondedicated sources (those not initially directed to the plant), the volumes that will be supplied from dedicated properties (those historically used to supply the plant) and on the outcome of the dispute as to whether there is a limitation on the amount of total damages recoverable."

Agrium has been having difficulty securing enough gas to operate its plant at capacity and has been engaged in litigation with Unocal over a contract for that company to supply gas to Agrium's Nikiski plant.

The release continued by saying that due to the uncertainty over gas supplies that "the future profitability of the Kenai facility, including the amount of future damages, the future carrying value of the Kenai facility and any other related charges, remains uncertain."

An arbitration panel reached agreement in late July on two of the three points of uncertainty cited by Agrium in the release. The panel agreed on a settlement that interpreted Unocal's supply contract to provide for gas from certain oil and gas producing leases, or dedicated sources, and not from other properties that Unocal is producing, or nondedicated sources.

The arbitration settlement also provided for a $50 million ceiling on damages paid by Unocal under the contract. The arbitration settlement required Unocal to pay $39 million in damages to Agrium, leaving a potential $11 million in potential further claims against Unocal.

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