Primeline Energy has begun arbitration proceedings against China National Offshore Oil Corp. (CNOOC) for continuing disputes over the development, production and sale of gas from the LS36-1 gas field in the East China Sea.
Primeline, which has 49% stake in LS36-1 in Block 25/34, sent a letter to CNOOC giving formal notice of its intention.
The CNOOC proceeding is separate from the Zhejiang Gas arbitration by Primeline against Zhejiang Gas Natural Gas Development Co. over claims for payment of unpaid and partially paid gas sale invoices.
Subsequent to the commencement of the Zhejiang Gas arbitration, Zhejiang Gas filed a request with the Zhejiang Province Hangzhou Intermediate Peoples Court challenging the validity of Primeline’s reliance on the arbitration provisions in the contract relating to the sale of gas from LS36-1 (Gas Sales Contract).
The basis of the challenge is that, as Primeline is not a signatory to the Gas Sales Contract but sells through CNOOC as agent, there is no jurisdictional basis for Primeline to initiate the Zhejiang Gas arbitration and only CNOOC could institute such arbitration.
Primeline said it received a notice from the China International Economic and Trade Arbitration Commission that the Zhejiang Gas arbitration has been suspended until the court resolves this challenge.
So, Primeline considers that it has a clear right to institute the Zhejiang Gas arbitration in view of the failure by its agent, CNOOC, to institute arbitration proceedings in accordance with the Gas Sale Contract. And, therefore, considers Zhejiang Gas’ move to be simply an attempt to delay the Zhejiang Gas arbitration.
Following the challenge, Primeline wrote to CNOOC to reaffirm its position that if the latter had enforced the terms and conditions of the Gas Sales Contract and led the Zhejiang Gas arbitration, Primeline would not face the same jurisdictional challenge from Zhejiang Gas.
However, CNOOC failed to file arbitration against Zhejiang Gas upon Primeline’s numerous requests made after CNOOC attempts to settle the disputes with Zhejiang Gas failed.
The subject of the CNOOC arbitration includes claims of its mismanagement in relation to the development of LS36-1 and breach of fiduciary duties as agent under the Gas Sales Contract.
Primeline said it may face 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 CNOOC as operator. The firm is in discussions with the banks to secure support during the Zhejiang Gas and CNOOC arbitrations.
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