Primeline starts arbitration against Zheijang. Prepares another for CNOOC

Chinese energy company Primeline Energy has started arbitration proceedings against Zheijang Gas, relating to a dispute over non payment for gas from an offshore gas field in China. In addition, the company is looking to start another arbitration, against its partner in the field in question, CNOOC.

According to Primeline, the dispute relates to the sale of gas from the LS36-1 Gas Field which is the subject of the Petroleum Contract for Block 25/34 in the East China Sea between Primeline and CNOOC, under which CNOOC acts as operator.

The LS36-1 was discovered by Primeline and was developed by CNOOC and Primeline during 2010-2014 on the basis of take or pay gas sale agreements with Zhejiang Gas originally dating back to 2008 and finalised in the Gas Sales Contract, Primeline says. The parties to the Gas Sales Contract are CNOOC China Limited (acting for itself and as agent for Primeline) and Zhejiang Gas.

However, Primeline claims that after a sharp decline in international oil and Chinese natural gas prices, Zhejiang Gas has been requesting, since February 2015, that the gas price for LS36-1 be reduced, initially from April 1, 2015, then further from November 20, 2015, to match onshore pipeline gas price guidelines issued by the Chinese Government.

“While the Gas Sales Contract provides that the parties should at some point agree a price adjustment mechanism, Primeline’s position is that any such price adjustment mechanism must be negotiated and is subject to the parties’ mutual agreement and Zhejiang Gas is not entitled to unilaterally reduce the gas price agreed upon by parties under the Gas Sales Contract,” Primeline says.

According to Primeline, Zheijang in 2015 failed to offtake the minimum quantity of natural gas in 2015, as stipulated in the Gas Sale Contract, and “has only made partial payment for gas delivered since June 2015 at the reduced price it has proposed in the negotiations and has failed to pay the invoice, dated February 2, 2016, for the take or pay balancing payment for 2015.”

Zheijang, Primeline claims, has failed to pay, and the invoice and the shortfall payment now amount to a total of circa RMB374 million, or around 57.7 million U.S. dollars.

CNOOC up next?

Separately, Primeline has blamed CNOOC China Limited, the operator of the field, for not taking action to enforce payment by Zheijang. Primeline thus claims that CNOOC China Limited is in breach of Petroleum Contract 25/34 and the various agreements entered into in relation to development of LS36-1 in that CNOOC China Limited has failed its duties as agent for Primeline in the Gas Sales Contract and as operator of LS36-1.

The company said that unless all the issues are resolved, it intends to start separate arbitration proceedings outside China under United Nations Commission on International Trade Law (“UNCITRAL”) rules against CNOOC and CNOOC China Limited for the mismanagement of the development and production of LS36-1 leading to delay, poor performance and cost overruns.

Primeline has said that the company faces the risk of default under its project finance loan with China Development Bank, China Export and Import Bank and Shanghai Pudong Development Bank without full payment from Zhejiang Gas and continued operation of LS36-1 by CCL as operator.

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