Artur Zurabyan of ART DE LEX evaluated the claim of Lukoil JCS against Sinopec, a Chinese firm that reneged on an agreement worth USD 1.2 billion
Lukoil announced that the Chinese firm, Sinopec, has revoked its agreement from April 2014 to purchase 50 percent of the assets of Caspian Investment Resources Ltd. (CIR) by the end of 2014. Even before the agreement, Sinopec owned 50 percent of CIR’s assets. Lukoil considers the action as a breach of terms and has requested compensation from the London arbitration court. The amount of Lukoil’s claim is unknown, but the cost of the failed sale is estimated at USD 1.2 million. Sinopec reneged on the agreement because of the fall in oil prices. As a result, the price of USD 1.2 billion is no longer as attractive as it once was.
CIR owns several minefields in Kazakhstan, including North Buzachi, Karakuduk, and Arman. It also owns Kazakhoil Aktobe that, since 2005, has been operating its minefields in Alibekmola and Kojasai in Kazakhstan. According to Lukoil Overseas data, its reserves are 160 million tons, and the firm has invested a total of USD 958 million.
Lukoil increased its assets in 2005 by USD 2 billion, when it acquired Kazakhstan Nelson Resources that it later assigned to CIR. In 2006, Lukoil sold 50 percent of its CIR shares to Mittal Investments, a company that Lakshmi Mittal owned, for USD 980 million. Mittal Investments also took on about USD 160 million of CIR debt. Four years later, Mittal Investments sold its shares to Sinopec, ignoring the purchase option that Lukoil had.
In 2013, Lukoil shares in the production of these fields amounted to 10.2 million barrels of oil. The numbers are decreasing, aside from the fields in North Buzach. According to a source close to Lukoil Overseas, the firm is focusing on other projects in Kazakhstan, and it planned to use the funds from the sale of CIR for geologic exploration, including some sites in the Caspian region of Kazakhstan.
“It is obvious that because the oil prices have decreased, Sinopec could point to significant changes in circumstances as a reason to breach the agreement,” says the head of Corporative Practice of Goltsblat BLP, Anton Panchenkov. He noted that the damages Lukoil can claim is the difference between the price of the April 2014 agreement and the current price of the assets.
The head of the International Arbitration and Dispute Resolution Practice of the ART DE LEX law firm, Arthur Zurabyan, stated that “according to English law, Lukoil will not receive full compensation and should do its best to decrease the amount.” According to Zurabyan, Lukoil should sell the assets, which are declining in value, as quickly as possible. It then could demand that Sinopec make up the difference. Otherwise, the court may reduce the compensation by the amount of losses Lukoil could have avoided had it sold the assets quickly.
According to Kirill Tachennikov, an analyst from BKS, the current value of 50 percent of CIR is about USD 600-700 million, given the decline in oil prices. He doubts that Lukoil will succeed in finding a buyer.
The Russian version of this posting is located at http://artdelex.ru/rus/publications/artur-zurabyan-rukovoditeli-praktiki-mezhdunarodnogo-arbitrazha-art-de-lex-otsenil-osnovaniya-i-vozmozhnye-perspektivy-trebovanii-oao-lukoil-v-svyazi-s-otkazom-kitaiskogo-kontragenta-ot-pokupki-kazahskih-aktivov-lukoila-tsenoi-v-12-mlrd.
