Officials say Unocal delivering what it can

Posted: Wednesday, October 06, 2004

Unocal Corp. wells dedicated to supplying natural gas to Agrium's Nikiski plant are producing as fast as possible, and Monday a company spokesperson said it was not clear Unocal will ever be able to meet the obligations resulting from arbitration earlier this year.

"Unocal is in full-out production from the dedicated gas fields," said Roxanne Sinz. "We are delivering that product to Agrium."

The exact amount delivered from each of Unocal's dedicated properties varies monthly, she said. The gas is produced by roughly 25 active, producing wells. Explaining the "roughly" qualification, Sinz said some of the wells in the Swanson River field produce both gas and oil.

Agrium Corp. officials announced Monday that Unocal had informed the company it would be unable to supply the quantities of gas required under the July 2004 arbitration agreement.

An arbitration panel had determined that Unocal Corp. had failed to deliver the gas it promised when the two companies signed a gas purchase and sale agreement in 2000 transferring ownership of the Nikiski plant from Unocal to Agrium. The panel also said Unocal owed Agrium U.S. Inc. $38.6 million for failing to deliver natural gas under an existing.

At the time, Agrium President and CEO Mike Wilson had said the company was pleased the panel had found the contract obligated Unocal to supply gas "substantially in excess" of the volumes proposed by Unocal.

Indeed, the panel required Unocal to supply 48.7 billion cubic feet of gas during the current contract year, a figure Wilson said 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.

The inability of Unocal to meet that obligation means Agrium will be unable to operate at near full capacity as planned, according to Agrium spokesperson Lisa Parker.

Sinz said the wells dedicated to fulfilling the Agrium contract are tapping "very old fields" incapable of the level of production necessary. Unocal is paying Agrium cash penalties in lieu of gas.

The original gas purchase and sales agreement, or GPSA, stated a cap of $50 million in liquidated damages was set for the life of the contract, which runs through 2009. In other words, $50 million would be the maximum Unocal would be required to pay if it cannot meet its obligations. Unocal officials said in July they believed that provision is enforceable.

However, the panel reserved the power to determine later whether Unocal's liability for damages would be limited to the $50 million should it fail to make good on delivery of specified contract quantities after June 30, 2004.

In a July press release, Unocal said it expected to reach the cap for liquidated damages over time. Tuesday, Sinz said Unocal had never met the monthly delivery mark set by arbitration. Whether they ever will is unclear, she said.

Under the agreement, the two companies can meet periodically for what's called a "reserve certification" wherein delivery levels may be set. The agreement says that can happen annually, but one party or the other has to actually call a meeting.

What those levels might look like is, essentially, trying to predict the future, Sinz said.

"We don't know what levels will be set at," she said.

Sinz noted the arbitration panel had confirmed that Unocal was only required to deliver gas produced in wells dedicated to the Agrium contract. The oil and gas giant is under no obligation to divert gas from any other properties or contracts to meet its obligation to Agrium.

Unocal has a contract to deliver gas to Enstar Natural Gas Co. from wells not dedicated to Agrium. That gas, in turn, heats homes, schools, hospitals and other infrastructure throughout Southcentral Alaska, she said.

If Unocal finds new gas sources that exceed the needs of its other customer, it would look to market that gas. Again, however, Unocal would not be required to divert that gas to meet its Agrium shortfall. Agrium would be free to enter a new contract with Unocal for that new gas, however, Sinz said.

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