09/08/2016 - 15:36

Quadrant Energy has court win

09/08/2016 - 15:36

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A Supreme Court judgement has shone a light on the fractious relationship between joint venture partners Quadrant Energy and Santos. 

Quadrant Energy has court win
Quadrant Energy is led by chief executive Brett Darley.

A Supreme Court judgement has shone a light on the fractious relationship between joint venture partners Quadrant Energy and Santos

The legal score stands at two to one in favour of Santos, after oil and gas producer Quadrant Energy scored a legal victory against its joint venture partner over a stalled $262 million project on Varanus Island.

The Quadrant win comes after Santos was successful in two other legal disputes, with a fourth matter yet to go to trial.

In a Supreme Court ruling handed down late last month, Justice John Chaney dismissed claims by Santos that the Varanus Island upgrade had not been properly authorised.

The court ruling also revealed the project remains stalled, despite the two companies having already spent most of the budgeted amount.

The case revolved around an upgrade of compression equipment at the gas processing plant on Varanus Island, which is one of the major sources of gas for Western Australia’s domestic market.

Private equity backed Quadrant Energy inherited the case when it bought Apache Energy’s Australian operations in 2015.

Santos had contended that Apache pursued the upgrade without appropriate authorisation under their joint operating agreement.

In May 2012, Santos (which held a 45 per cent stake) wrote to Apache declining to approve the relevant ‘authority for expenditure’ (AFE).

Santos said it had insufficient insight into the benefits of the project, and was unable to conclude it was economic.

Apache responded by saying it was therefore obliged to perform the work on a sole-risk basis.

Between August and October 2012, Apache approved several AFEs totalling more than $300 million in relation to the project, including awarding an engineering procurement construction contract to engineering firm Clough.

Up to July 2015, the project had incurred costs of $175.4 million.

Santos paid its share of these costs under protest, after Apache issued a series of cash calls.

The court ruling said the modules associated with the project were in a long-term storage facility.

This week, a spokesman for Quadrant said the start date was dependent on domestic gas market demand.

The spokesman also said the company was pleased the court found it had not breached the terms of its joint operating agreement with Santos.

The court case heard lengthy testimony on the operating agreement and the definition of the terms production and development.

Justice Chaney preferred Apache’s interpretation of the operating agreement, which he said allowed for review and amendment at any time.

He ruled in Quadrant’s favour despite acknowledging the upgrade project might be considered a development project rather than a production program.

“In my view, on the proper construction of the JOA, notwithstanding that the (upgrade) might be categorised as a development project as that expression is commonly understood in the industry, it is capable of being the subject of a production Programme and Budget pursuant to Article VIII of the JOA,” Justice Chaney ruled.

The Varanus Island matter is one of four disputes between Santos and Quadrant in recent years.

Santos has also taken court action over its claim that Quadrant had been taking more than its 55 per cent equity share of gas from the John Brookes field.

This matter has yet to go to trial.

A third matter revolved around attempts by Santos to remove Quadrant as operator of the Spar gas field in the Carnarvon Basin, by issuing a material breach notice on the basis Quadrant had carried out unauthorised development work.

Quadrant responded by taking the matter to court, and in September last year, Justice Chaney ruled there had been a material breach of the operating agreement.

The court ruling gave Santos the green light to pursue the removal of Quadrant; however, this option was not taken up as Quadrant has appealed the ruling.

A fourth matter commenced after the change of ownership.

Under the Spar joint operating agreement, Santos has pre-emptive rights over Apache’s 55 per cent interest in the project.

Santos successfully claimed the pre-emption notices issued by Apache Energy were flawed.

It’s understood Quadrant has yet to reissue the pre-emption notices.

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