Baker & O'Brien, Inc.

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Fertilizer Plant Makes a Stink About Gas Supply Shortages

International Arbitration, South & Central America

May 1, 2020

Ammonia is a key ingredient in many fertilizer products.  The ammonia manufacturing process converts natural gas to hydrogen, which is chemically combined with nitrogen from air to form ammonia.  A large ammonia plant consumes enough natural gas to heat 100,000 homes during a typical winter and depends upon a reliable supply of large volumes of natural gas.  A natural gas supplier depends upon the ammonia producer to take delivery of the gas that it supplies.

Gas Supply Agreements (GSAs) establish commercial and technical conditions for the supply of natural gas.  Common contract provisions include: technical parameters of gas quality, temperature, and pressure; contract quantities; contract price; a requirement for the buyer to pay for contract quantities it does not take; and a requirement for the seller to compensate the buyer for contract quantities that are not delivered.

A dispute developed between an ammonia producer and a gas supplier regarding the delivery of contract quantities of natural gas stipulated in a GSA.  The ammonia producer claimed that the natural gas supplier curtailed deliveries, while the gas supplier claimed that the ammonia plant was unable to take its contract quantities due to planned and unplanned shutdowns.  The GSA provided a clear method to determine take-or-pay damages, but provisions for determining damages related to supply curtailments relied upon the ammonia producer’s contribution margin using generally accepted engineering calculations.

Baker & O’Brien was engaged to investigate claims made by the ammonia producer and the gas supplier.  We reviewed historical operational records for the ammonia plant and natural gas supply to validate claims from both parties.  We prepared an independent assessment of damages based upon the methodology set out in the GSA, which required an analysis of the ammonia plant’s fixed and variable operating expenses and sustaining capital investment.  Our findings were presented in an expert report that was submitted for settlement negotiations, leading to a resolution of the dispute.