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Update on TWE International Arbitration
Tuesday, 31 March 2015
TerraWest Energy Corp. (“TWE”) has advised its shareholders that pursuant to the international arbitration proceedings (“Arbitration”) initiated against China National Petroleum Corporation (“CNPC”) and PetroChina Company Limited (PetroChina”) ( together “Respondents”) counsel for TWE, the law firm of Winston and Strawn formally submitted TWE’s Statement of Claim to the Arbitration Tribunal (“Tribunal”) on March 27, 2015.
The Statement of Claim outlines TWE’s arbitration case and describes the various contractual breaches and mismanagements over time by the Respondents. According to the Arbitration procedures the Respondents have a period of time to receive and study the Statement of Claim and will be expected to provide a formal response statement within a deadline established by the Tribunal. The statement of claim seeks US$1.8 billion in damages.
Previously both TWE and Respondents had named their arbitrators and the two persons selected a third to act as chair of the tribunal. The arbitration tribunal is acting according to the rules of the United Nations Commission on International Trade Law (2010) (“UNCITRAL”) and among other things will in due course determine the site and venue for arbitration proceedings.
Background of the Project
TerraWest Energy Corp. (‘‘TWE’’), is a private company incorporated in British Columbia in 2003. Petromin Resources Ltd. (“Company” or “PTR”) invested in TWE through private placement in 2007 and holds 73,333,334 common shares and 700,000 preferred shares representing 17.29% of the undiluted capital stock of TWE (13.40% of the fully diluted ).
TWE was incorporated by various parties to pursue coalbed methane (“CBM”) exploration and development in Peoples Republic of China (“China”) and following extensive review of geological and technical data of northwestern China focused its activities in the southern Junggar Basin of Xinjiang, China.
At the time, China United Coalbed Methane Corp., Ltd. (“CUCBM”) held the exclusive right to cooperate with foreign parties in CBM exploration and development in China according to the China Petroleum Law. CUCBM was owned 50/50 by China National Coal Corp. and PetroChina Company Ltd. (“PetroChina”), two China state-owned corporations.
TWE secured a thirty year Production Sharing Contract (“PSC”) with CUCBM in late 2005 covering 653.518 sq km (252 sq miles) in the Liuhuanggou area of the southern Junggar Basin. The PSC was held as to 47% TWE and 53% CUCBM and officially came into effect on March 1, 2006 after receiving approval of the Ministry of Commerce of the PRC (‘‘MOC’’). The PSC references a five year exploration period which will be extended under certain terms and conditions and a twenty year production period.
TWE was a first mover in CBM in the Liuhuanggou area of the southern Junggar Basin which was targeted by TWE because in the early 2000’s it combined the favourable features of:
- extensive coal resources in relatively thick seams;
- operating gas transportation infrastructure with expansion planned;
- growing local gas markets within larger, growing, national gas market;
- trend toward deregulated gas pricing;
- near urban area; and,
- supportive government economic and development policies.
Under the terms of the PSC TWE was named operator and was responsible for all exploration expenditures. Commercial CBM was to be developed by pro rata capital investment and the parties would share gas production pro rata after operating cost recovery, TWE’s exploration cost recovery and pro rata development cost recovery.
During the initial five (5) year exploration period TWE successfully confirmed the gas potential of the PSC area and as previously disclosed, issued two independent reports on gas resources. TWE reported NI51-101 Discovered Gas Initially in Place and Contingent Resources for a certain area of the PSC from a March 2010 report by Norwest Corporation. TWE reported Society of Petroleum Engineers Framework of Resource Management System (SME PRMS) Original Gas in Place and Unrisked Gross Prospective Resources for a larger area of the PSC, from an October 2011 report by Netherland Sewall and Associates.
TWE also reported Chinese reporting standard CBM resources and reserves from a report by Norwest Corporation in June 2012 which converted the previously estimated NI51-101 figures to the Chinese standard.
Note: see PTR news releases of 21 June 2010, 12 October 2011 and 23 August 2012 in the Appendices.
Based on the extensive resource potential supported by the independent evaluations TWE made formal application for extension of the PSC exploration period in November 2011 following exchanges of correspondence and discussions with the its Chinese partner.
As previously disclosed, TWE was advised during the 2008-2009 time period that PetroChina planned to sell out of CUCBM and CUCBM would transfer its rights and obligations in various PSC’s including Liuhuanggou to PetroChina. PetroChina effectively took over administration of the PSC in late 2008 but the transfer was not confirmed until a June 2011 agreement (“Modification Agreement”) between TWE, CUCBM and CNPC. The Modification Agreement novated CNPC into the PSC and transferred CUCBM’s rights and obligations to CNPC, which apart from retaining part of its own management and regulatory functions, further transferred its rights and obligations to PetroChina, a subsidiary of CNPC. In the Modification Agreement all original terms and conditions of the PSC are confirmed and CNPC also guarantees the performance of the obligations it assigned to PetroChina.
The Dispute
There are two categories of matters under dispute. Firstly the unilateral, undisclosed and unwarranted reduction of the exploration area covered by the PSC. Secondly, failure to act to prevent and restrict unauthorized and illegal exploration drilling and coal mining within the PSC area. TWE is asserting that actions or non-actions that led to the dispute are breaches of the PSC and breaches of law that have resulted in damage to TWE.
Firstly, TWE became aware of a discrepancy between the stated area (653.518 sq km or 252 sq miles) of its exploration rights under the terms and conditions of the PSC and the area referenced in the related CBM exploration permit issued by the PRC Ministry of Land and Resources to CNPC and naming TWE as the foreign contractor.
The discrepancy was noted informally and TWE subsequently repeatedly requested formal clarification from CNPC (hereinafter together with PetroChina referenced as “Respondents”) which has the obligation for the renewal of permits required to support the CBM operations of the PSC.
Secondly, Furthermore TWE had noted from time to time unauthorized coal drilling within the PSC as well as increased coal mining activity including re-opening of previously closed coal mines and opening of new coal mines. China regulations specifically prohibit new exploration drilling or mining in areas where mineral (or hydrocarbon) rights have already been issued. It is illegal for new permits for resource exploration and development to be issued on top of existing permits.
TWE repeatedly noted these activities to Respondents and sought assistance to protect TWE’s rights under the PSC, to no avail.
The matter between TWE and Respondents was disclosed in the Company’s announcements dated 17 June 2013, 9 September 2013, 15 October and 23 October 2013, wherein it was noted TWE sought clarification and response on the following matters before continuing planned exploration activities in the CBM project:
1. clarification on discrepancy of the CBM exploration area relating to its exploration rights, including highly prospective CBM zones and fairway lands, between the PSC and the renewed CBM exploration permits and investigation on reported unauthorised coal drilling activity within the Contract Area and any land title mismanagement by CNPC;
2. dispute on Respondent’s failure to certify two international independent expert reports on evaluations of CBM discovered resources and natural gas resources originally in place (OGIP) commissioned by TWE and provided to Respondent’s in support of the application for extension of the exploration period of the PSC;
3. dispute on Respondent’s failure to validate the capital expenditure incurred by TWE on the project as required by the PSC; and,
4. dispute on Respondent’s failure to cooperate to clarify the land status with relevant ministries.
Furthermore as previously disclosed, TWE formally declared a dispute with Respondents and provided notice of intent to file for arbitration according to the terms and conditions of the PSC. Respondents did not ever provide any clarification or response to the above points,
The significant administrative matters relating to unauthorised coal drilling and mining were initially considered to be standalone matters that subsequently appear potentially related to the land title mismanagement by Respondents and hence became included in TWE’s dispute with Respondents.
A search of the web-based data of the Ministry of Land and Resources of China suggests that new coal exploration and mining permits have been issued and/or earlier permits have been renewed and greatly expanded without required consents within the PSC area since 30 December 2005 (the date of execution of the PSC) in contravention of Chinese law. In this regard, Respondents have failed to assist to monitor or prevent unauthorised issuances of such permits despite TWE’s multiple notices referencing the activities.
In early 2014 TWE engaged international arbitration counsel to assist the resolution or prosecution of the dispute. TWE issued notices relating to the unresolved CBM lands dispute including formal notice of dispute and arbitration to Respondents, and has followed the required process by providing notice of selected arbitration procedure to Respondents.
Notice to Terminate the PSC & Formal Notice of Arbitration
As disclosed in the Company announcement of 7 July 2014, on 3 July 2014 TWE issued to Respondents a notice to terminate the PSC (‘‘Termination’’). As advised by counsel, TWE issued the Termination because the breaches of the PSC made the project no longer financially or operationally viable; breaches including but not limited to the breakdown in the relationship between TWE and Respondents, the reduction in the CBM exploration area as described above and the scale of new coal mining activities.
All disputes and arbitration survive termination according to the terms and conditions of the PSC.
The Company announcement also disclosed that on 4 July 2014, TWE formally served a notice of arbitration on Respondents relating to the Dispute, seeking an award of damages as compensation for the losses caused by Respondent’s breaches of the PSC, together with declaratory relief, costs and interest. The formal notice of arbitration initiated the international arbitration process.
In the event of a disagreement on procedure, the terms and conditions of the PSC describe a default arbitration procedure to be followed, according to internationally-accepted due process. Such default procedure is in effect and the arbitration is following the rules set out by UNCITRAL.
As required by the process TWE and Respondents each nominated one arbitrator according to the rules and the two named persons selected a third person to chair the arbitration tribunal (“Tribunal”).
The Tribunal initiated procedures in the fourth quarter of 2014 and Respondents eventually filed a response to TWE’s Notice of Arbitration. As noted, TWE submitted its Statement of Claim to the Tribunal on March 27, 2015.
Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.
Appendix 1 PTR News Release of August 23, 2012
Appendix 2 PTR News Release of October 12, 2011
Appendix 3 PTR News Release of June 21, 2010 |
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