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High-TAN Crude Oil – Force Majeure Declaration Leads to Litigation

Litigation, North America

July 1, 2016

A producer of high-TAN crude oil entered into a long-term supply agreement with a petroleum refiner to sell its crude oil under a mutually agreed formula price.  Prior to the commencement of the supply of crude oil, the refiner made various upgrades, including the installation of corrosion-resistant metallurgy and the addition of facilities to remove excessive salt from the crude.  The refiner also planned to reduce the potential harmful effects of the high-TAN material by blending it with less acidic crude oils, as well as through the injection of corrosion-inhibiting chemicals. 

After processing the high-TAN crude oil for a number of years, inspection of the facilities revealed higher than expected corrosion damage to the refinery equipment.  To prevent further damage, the refiner decided to greatly reduce the processed volumes and declared force majeure under the terms of the supply agreement.  The producer rejected the refiner’s force majeure declaration, arguing that the refiner had not adequately prepared the refinery for the high-TAN crude oil.  The producer’s position was that the crude oil quality was known by the refiner in advance and the volumes supplied were consistent with that quality.  The producer further implied that unfavorable market price shifts (for the refiner) were the primary motive behind the refiner’s actions. The refiner argued that it had acted prudently in upgrading and operating the refinery, and that the rates of corrosion were unexpectedly high. The parties entered into litigation, with the supplier eventually abrogating the agreement when the refiner refused to take the agreed volumes.

Baker & O’Brien was engaged to review the positions of the two parties and provide a written expert report to be entered into evidence.  Key issues addressed were: (1) whether the refiner’s engineering procedures adequately identified the necessary refinery upgrades given the known qualities of the high-TAN crude oil; and (2) whether the refiner’s project execution procedures properly implemented the necessary upgrades.  The parties settled the case prior to going to trial.