China Oilfield Services Limited (COSL) has started arbitration proceedings against a subsidiary of oil and gas company Primeline Energy before the China International Economic and Trade Commission (CIETAC).
Primeline said on Tuesday that the arbitration against its subsidiary Primeline Energy Operations International Limited (PEOIL) is in relation to a claim for payment under the turnkey drilling contract dated August 14, 2015, between COSL and PEOIL. Under the terms of the drilling contract, COSL agreed to drill two wells for PEOIL as the operator in Block 33/07.
The oil company explained that the dispute between the pair derives from overall operational and commercial issues the company has encountered in the last two years with Primeline’s other subsidiaries.
The subsidiaries, Primeline Energy China Ltd. (PECL) and Primeline Petroleum Corp (PPC), are both suffering from the default of Zhejiang Natural Gas Development Company and the related dispute with China National Offshore Oil Corporation (CNOOC) and its subsidiary CNOOC China Ltd. (CCL).
These other disputes are the subject of separate arbitrations that began earlier this year. The arbitration against Zhejiang Gas arises out of the inability to make full and proper payment to PECL/PPC and CCL regarding the sales contract of gas from the LS36-1 field.
Primeline said that the amount claimed by COSL is RMB 119 million ($17.85 million). However, the total amount due from Zhejiang Gas as of the end of August under the gas sales contract is estimated to be RMB 435 million ($65.3 million).
The company added that the breach of contract by Zhejiang Gas has led to significantly lower cash flow and presented difficulties in the ability of PECL and PPC to service their obligations under the project finance loan for the development costs of the LS36-1 gas field and its normal operations.
PECL and PPC have managed to meet the project finance repayment obligations to date, but PEOIL is unable to make payment of COSL’s costs under the drilling contract for the two wells without prior resolution of the disputes between its subsidiaries with Zhejiang Gas and CNOOC as a whole.