Unocal and Agrium have reached a final settlement of all claims arising from a 2-year-old legal dispute over natural gas sales by the oil giant to the fertilizer company.
In a press release Tuesday afternoon, Unocal Corp. announced that all litigation between Union Oil of California, Agrium Inc. and Agrium U.S. Inc. would be dismissed "with prejudice," meaning all outstanding issues are resolved and claims ended.
The net result, Unocal said, means cutting Agrium a $25 million check and supplying gas under a new contract through Oct. 31, 2005.
According to an Agrium press release, the settlement obliges Unocal to supply a total of 34 billion cubic feet of gas at the existing contract's price. That volume would permit Agrium to run its fertilizer plant at an average rate of 66 percent through October.
"This agreement delivers numerous important benefits for Agrium," said Agrium CEO and President Mike Wilson. "One key advantage is that it clearly defines firm gas supplies from Unocal in 2005, with improved remedies for nonperformance." (Issues of contention had included varying interpretations of the existing contract's non-performance damage provisions).
Wilson said the gas supply would enable Agrium to continue meeting its customers' demands for nitrogen through 2005, while the company explores alternative gas supply arrangements for beyond the October cutoff.
"Given that global nitrogen markets are expected to remain tight, we anticipate strong profitability at Kenai in 2005," Wilson said.
Kevin Tabler, land and government affairs manager for Unocal said Unocal is glad a settlement has been completed.
"It brings clarity and certainty" to the gas obligation, he said, "and will allow Unocal to focus on its core business - exploring for gas and oil."
The settlement brings to a close a dispute that brought the two companies before an arbitration panel in an effort to resolve at least some of the issues, but threatened to send other matters into superior court.
The dispute between the two began after Unocal and Agrium signed a Gas Purchase and Sale Agreement, transferring the Nikiski fertilizer plant to Agrium U.S. Inc. in 2000. That agreement included a contract to supply Agrium with natural gas and provided for liquidated damages of up to $50 million to Agrium should Unocal be unable to meet its gas obligation.
Unocal did not fulfill its part of the bargain and Agrium filed suit in mid-2002. Agrium also sued Unocal claiming the oil company had misrepresented the condition of the general effluent sewer at the plant and what were listed as "other environmental matters."
Further, Agrium sued over the terms of an "earn-out" arrangement that essentially required Agrium to make additional payments to Unocal for six years, depending on the price of ammonia after the September 2000 sale.
In a later supplement to the suit, Agrium amended its claims alleging Unocal had breached conditions of the sale's closing, certain indemnification obligations, and that Unocal had violated a pertinent health and safety code. Agrium asked that the sale contract be canceled, either in addition to or as an alternative to monetary damages.
Unocal counter-sued seeking a favorable ruling against Agrium and a judgment for an earn-out payment of $17 million, plus interest. Unocal also sought some $900,000 in "reliability bonuses" due under the sale agreement and reimbursement of $5 million in excess royalties it paid the state, an amount Agrium said it did not owe.
On July 22, an arbitration panel ruled Unocal owed Agrium $38.6 million in damages and interest for failure to supply the required gas through April 2004 and ordered determination of further damages through June 2004.
At the time, the panel reserved for future determination whether Unocal's liability would be capped at $50 million, should Unocal fail to deliver as promised beyond June 2004.
However, the arbiters left many other issues unresolved, and those appeared headed for court.
As part of the settlement announced Tuesday, Unocal and Agrium entered a new gas sales agreement effective Dec. 1 of this year. It defines monthly gas delivery obligations terminating Oct. 31, 2005.
According to Unocal, the oil company will pay Agrium a net amount of $25 million for early termination of the existing gas sales agreement (which was to run until June 2009). Agrium will release Unocal from all environmental claims and resolve all other issues. Included in those other issues is Agrium's obligation to pay Unocal under the earn-out agreement.
According to Agrium's press release, Agrium is due a total of $47 million "in recognition" of the loss of gas supply beyond October 2005 and for environmental and other liabilities. But Agrium owed Unocal $22 million under the earn-out agreement.
Thus, Unocal will cut a check to Agrium for the difference, $25 million, Tabler said.
When all payments and savings resulting from the settlement are factored in, it represents "a total positive impact" to Agrium of $105 million, Agrium said. That is in addition to the sum awarded by the arbitration panel, the company said.
Wilson said the agreement avoided what could have been "a very long and drawn out court case."
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