Primeline settles Zhejiang Gas dispute after ‘long and hard battle’

China-focused E&P company Primeline Energy has settled its dispute with Zhejiang Natural Gas Development Company in relation to the gas sales contract (GSC) for LS36-1, off China. 

The company has been in dispute with Zhejiang Gas regarding the price payable under the gas sales contract.

According to Primeline’s statement from Wednesday, Zhejiang Gas did not pay in full for gas delivered, did not off-take in accordance with the GSC and failed to make payment under the take-or-pay arrangements, all of which significantly impacted Primeline’s cash flow.

CNOOC China Ltd. (CCL) is a joint seller and acts as agent for Primeline under the GSC. After lengthy negotiations by CCL and Primeline with Zhejiang Gas without agreement, Primeline started arbitration proceedings against Zhejiang Gas before the China International Economic and Trade Arbitration Commission (CIETAC) in April 2016, requiring Zhejiang Gas to make full payment for the gas off-taken and comply with the take-or-pay obligations set out in the GSC.

The settlement 

Primeline said that, following extensive negotiations, CCL and Primeline entered settlement agreements with Zhejiang Gas on March 1, 2017. The settlement is based on a pricing arrangement that results in Primeline receiving the original price agreed under the GSC for its share of gas delivered up to December 31, 2016; and then at a price which represents a reduction of about 7% from the GSC price, fixed from January 1, 2017 for the rest of the GSC delivery period.

Pursuant to the settlement, Primeline will receive approximately RMB 256 million (CAD$49 million) net of VAT for its share of all outstanding unpaid or partly paid amounts due for natural gas delivered to the end of 2016 and for the 2015 and 2016 take-or-pay payments; Primeline will withdraw the CIETAC arbitration against Zhejiang Gas; and once the settlement payment is received, Primeline will settle its own overdue payment owed to China Oilfield Services Limited (COSL) in the order of RMB116 million (CAD$22 million) in relation to the 2015 drilling contract and COSL will withdraw its arbitration proceedings against Primeline.

This settlement fully resolves the current dispute with Zhejiang Gas. However, the settlement does not affect or halt the previously announced ongoing arbitration against CNOOC and CCL under the Petroleum Contract in relation to the LS36-1 development and production which was started in June 2016 and which is continuing.

Dr. Ming Wang, CEO of Primeline commented: “Primeline has always favored a negotiated solution for the disputes, despite having been forced to resort to the formal process of arbitration. We are delighted that after a long and hard battle, Primeline’s commercial interest has been protected and we believe the deal represents the best possible outcome in the current market conditions. The agreed settlement enables us to look forward to normal production in the LS36-1 field and a stable cash flow.”