Agrium, Unocal still disagree

Posted: Thursday, October 07, 2004

Agrium Corp. and Union Oil of California continued to disagree Wednesday over whether Unocal is required to deliver natural gas to Agrium from properties not dedicated to the Unocal-Agrium gas-supply contract.

It is a disagreement that potentially could be headed to court.

Contrary to a position taken by Unocal on Tuesday, Agrium officials said Wednesday that the oil and gas producer is required to deliver the promised volume of gas to Agrium's Nikiski ammonia plant, even if that means tapping gas from wells other than those dedicated to the Agrium contract.

A Unocal spokesperson said Tuesday that Unocal was not required to deliver gas from any other properties, and further, that because it was failing to meet that contractual obligation, it was paying monetary damages instead.

Wednesday, an Agrium spokesperson took issue with Unocal's position, citing a July decision by a panel arbitrating breach-of-contract claims leveled by Agrium against Unocal for failing to deliver a promised amount of gas.

"The arbitration panel determined that Unocal must deliver the ACQ (annual contract quantity) volume for a given year, even if it turns out that its dedicated reserves or delivery is insufficient," Agrium spokes-person Richard Downey said Wednesday.

In quotes from the arbitration decision provided by Downey, the arbitration panel recognized "that our interpretation could result in Union (Oil of California) having to supply some nondedicated gas in order to meet its ACQ and DCQ (daily contract quantity) obligations."

The arbiters said that interpretation was a consequence of the contract procedures Unocal had put in place when it sold the Nikiski plant to Agrium in 2000. Had Unocal wanted to sell only gas from dedicated properties, the arbiters said, it could have created a contract that said just that.

Downey said Unocal requested a clarification from the arbitration panel Aug. 18 in an attempt to determine whether it was only obligated to deliver the ACQ from dedicated reserves and, to the extent it was unable to meet that obligation, that Agrium's sole remedy was to seek liquidated damages -- that is, cash. The plant sales agreement limited any liquidated damages to $50 million.

"The panel denied Unocal's application for clarification and, in so doing, Agrium believes the arbitration panel has rejected Unocal's contention that its only obligation was to deliver the ACQ from dedicated reserves," Downey said.

He also noted that the panel reserved the power to revisit the $50 million damages cap and determine if it was enforceable. It has not done so to this date, but Agrium's position on the damages issue is clear.

"Agrium maintains that Unocal is not capped at the $50 million on liquidated damages, especially if it chooses not to deliver the ACQ as per the arbitration panel's ruling," Downey said. "Agrium is taking appropriate legal proceedings to determine the enforceability of the $50 million cap on liquidated damages."

Late Wednesday, Barry Lane, a Unocal official, said Agrium's assertion is incorrect and that regardless of the portions of the document cited by Downey, other provisions in the arbitrated agreement specifically spell out that Unocal is under no obligation to deliver gas from nondedicated properties.

"We have the option to do so, if we choose," Lane said. That choice is not an obligation, however, he noted.

Lane supplied copies of portions of the arbiters' decision covering Unocal's curtailment obligations regarding uncommitted gas that appeared to back up Unocal's interpretation.

When Unocal and Agrium signed the plant sale and gas-delivery agreement in 2000, liquidated damages provisions were included. However, Lane said, that doesn't mean either party thought at the time they'd be used.

"The certification (of gas reserves) at the time of the sale indicated that there was enough gas" to meet the terms of the contract, Lane said. "Both parties believed there would be enough. Liquidated damages were a trade-off of the risks against the certification of resources. Determining reserves is, at best, an estimate."

Downey's interpretation that in denying Unocal's Aug. 18 application for clarification the panel also had rejected its contention that it was only obligated to deliver gas from dedicated properties also was wrong, Lane asserted.

According to Lane, all the panel did in denying the application for clarification was to note it already had addressed the issues in the original arbitration decision in July and wasn't going to take them up again.

In a letter to the parties signed Sept. 14, arbiter Richard Strickland denied Unocal's request saying, "The panel believes that the partial award (rendered July 21) is clear in what it decided."

Lane said that letter demonstrated the denial did not reflect a lack of merit in Unocal's request, as Agrium implied.

The issue over whether gas from nondedicated properties must be used to fulfill Unocal's obligation to Agrium, and the issue whether the $50 million cap is enforceable have put the two corporations at odds.

The outcome to this dispute could well be important to the peninsula's economy. Agrium has said without an adequate gas supply, it cannot operate its Nikiski plant at or anywhere near full capacity -- and that translates to jobs.

Agrium has indicated the plant actually could close by the end of 2005 if it cannot secure sufficient gas.

Unocal, meanwhile, insists it is delivering all the gas it can from its dedicated properties; properties that Unocal spokes-person Roxanne Sinz said Tuesday were "very old fields."

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