Arbitration Panel Makes Decision on Unocal Gas Sales Dispute

Unocal Corporation said an arbitration panel found it owes Agrium U.S. Inc. $36 million plus $2 million in interest for underdelivery of natural gas to Agrium's fertilizer plant in Alaska.

The binding award covers deliveries under the Gas Purchase and Sale Agreement (GPSA) between July 2002 and April 2004. The arbitration panel agreed with Unocal that the GPSA is a reserves-based contract. However, Unocal's full production from dedicated properties did not meet the schedule of deliveries as interpreted by the arbitration panel.

Unocal sold its Kenai, Alaska, fertilizer plant to Agrium in 2000. The GPSA sets forth the terms under which Unocal sells gas to the plant.

The panel's decision laid out the methodology for determining past and future gas delivery quantities and for calculating liquidated damages arising from underdeliveries of gas by Unocal to the plant. The GPSA sets a cap of $50 million on liquidated damages for the life of the contract. Unocal believes the cap will be enforceable. The sales contract runs through June 2009.

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. Based on current delivery projections from certain dedicated fields, Unocal expects to reach the cap for liquidated damages over time.

The arbitration panel also ordered Agrium to reimburse Unocal $5 million for excess royalties that have been paid by Unocal to the state of Alaska. Unocal expects to record a special item charge in its second quarter 2004 results based on the arbitration ruling.

Additional litigation related to the asset Purchase and Sale Agreement is pending in California Superior Court in Los Angeles County. Trial on those issues is expected to begin late this year.

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