Update on TWE International Arbitration
Tuesday, 31 March 2015
TerraWest Energy Corp. (“TWE”) has advised its
shareholders that pursuant to the international arbitration proceedings
(“Arbitration”) initiated against China National Petroleum Corporation (“CNPC”)
and PetroChina Company Limited (PetroChina”) ( together “Respondents”) counsel
for TWE, the law firm of Winston and Strawn formally submitted TWE’s Statement
of Claim to the Arbitration Tribunal (“Tribunal”) on March 27, 2015.
The Statement of Claim outlines TWE’s arbitration
case and describes the various contractual breaches and mismanagements over
time by the Respondents. According to the Arbitration procedures the
Respondents have a period of time to receive and study the Statement of Claim
and will be expected to provide a formal response statement within a deadline
established by the Tribunal. The statement of claim seeks US$1.8 billion in
Previously both TWE and Respondents had named their
arbitrators and the two persons selected a third to act as chair of the tribunal.
The arbitration tribunal is acting according to the rules of the United Nations
Commission on International Trade Law (2010) (“UNCITRAL”) and among other
things will in due course determine the site and venue for arbitration
of the Project
TerraWest Energy Corp. (‘‘TWE’’), is a private
company incorporated in British Columbia in 2003. Petromin Resources Ltd.
(“Company” or “PTR”) invested in TWE through private placement in 2007 and
holds 73,333,334 common shares and 700,000 preferred shares representing 17.29%
of the undiluted capital stock of TWE (13.40%
of the fully diluted ).
TWE was incorporated by various parties to pursue
coalbed methane (“CBM”) exploration and development in Peoples Republic of
China (“China”) and following extensive review of geological and technical data
of northwestern China focused its activities in the southern Junggar Basin of
At the time, China United Coalbed Methane Corp.,
Ltd. (“CUCBM”) held the exclusive right to cooperate with foreign parties in
CBM exploration and development in China according to the China Petroleum Law.
CUCBM was owned 50/50 by China National Coal Corp. and PetroChina Company Ltd.
(“PetroChina”), two China state-owned corporations.
TWE secured a thirty year Production Sharing
Contract (“PSC”) with CUCBM in late 2005 covering 653.518 sq km (252 sq miles)
in the Liuhuanggou area of the southern Junggar Basin. The PSC was held as to
47% TWE and 53% CUCBM and officially came into effect on March 1, 2006 after receiving
approval of the Ministry of Commerce of the PRC (‘‘MOC’’). The PSC references a
five year exploration period which will be extended under certain terms and
conditions and a twenty year production period.
TWE was a first mover in CBM in the Liuhuanggou
area of the southern Junggar Basin which was targeted by TWE because in the
early 2000’s it combined the favourable features of:
coal resources in relatively thick seams;
gas transportation infrastructure with expansion planned;
local gas markets within larger, growing, national gas market;
toward deregulated gas pricing;
urban area; and,
government economic and development policies.
Under the terms of the PSC TWE was named operator
and was responsible for all exploration expenditures. Commercial CBM was to be
developed by pro rata capital investment and the parties would share gas
production pro rata after operating cost recovery, TWE’s exploration cost
recovery and pro rata development cost recovery.
During the initial five (5) year exploration period
TWE successfully confirmed the gas potential of the PSC area and as previously
disclosed, issued two independent reports on gas resources. TWE reported
NI51-101 Discovered Gas Initially in Place and Contingent Resources for a
certain area of the PSC from a March 2010 report by Norwest Corporation. TWE
reported Society of Petroleum Engineers Framework of Resource Management System
(SME PRMS) Original Gas in Place and Unrisked Gross Prospective Resources for a
larger area of the PSC, from an October 2011 report by Netherland Sewall and
TWE also reported Chinese reporting standard CBM
resources and reserves from a report by Norwest Corporation in June 2012 which
converted the previously estimated NI51-101 figures to the Chinese standard.
Note: see PTR news releases of 21 June 2010, 12
October 2011 and 23 August 2012 in the Appendices.
Based on the extensive resource potential supported
by the independent evaluations TWE made formal application for extension of the
PSC exploration period in November 2011 following exchanges of correspondence
and discussions with the its Chinese partner.
As previously disclosed, TWE was advised during the
2008-2009 time period that PetroChina planned to sell out of CUCBM and CUCBM
would transfer its rights and obligations in various PSC’s including
Liuhuanggou to PetroChina. PetroChina effectively took over administration of
the PSC in late 2008 but the transfer was not confirmed until a June 2011
agreement (“Modification Agreement”) between TWE, CUCBM and CNPC. The
Modification Agreement novated CNPC into the PSC and transferred CUCBM’s rights
and obligations to CNPC, which apart from retaining part of its own management
and regulatory functions, further transferred its rights and obligations to
PetroChina, a subsidiary of CNPC. In the Modification Agreement all original
terms and conditions of the PSC are confirmed and CNPC also guarantees the
performance of the obligations it assigned to PetroChina.
There are two categories of matters under dispute.
Firstly the unilateral, undisclosed and unwarranted reduction of the
exploration area covered by the PSC. Secondly, failure to act to prevent and
restrict unauthorized and illegal exploration drilling and coal mining within
the PSC area. TWE is asserting that actions or non-actions that led to the
dispute are breaches of the PSC and breaches of law that have resulted in
damage to TWE.
Firstly, TWE became aware of a discrepancy between
the stated area (653.518 sq km or 252 sq miles) of its exploration rights under
the terms and conditions of the PSC and the area referenced in the related CBM
exploration permit issued by the PRC Ministry of Land and Resources to CNPC and
naming TWE as the foreign contractor.
The discrepancy was noted informally and TWE
subsequently repeatedly requested formal clarification from CNPC (hereinafter
together with PetroChina referenced as “Respondents”) which has the obligation
for the renewal of permits required to support the CBM operations of the PSC.
Secondly, Furthermore TWE had noted from time to
time unauthorized coal drilling within the PSC as well as increased coal mining
activity including re-opening of previously closed coal mines and opening of
new coal mines. China regulations specifically prohibit new exploration
drilling or mining in areas where mineral (or hydrocarbon) rights have already
been issued. It is illegal for new permits for resource exploration and
development to be issued on top of existing permits.
TWE repeatedly noted these activities to
Respondents and sought assistance to protect TWE’s rights under the PSC, to no
The matter between TWE and Respondents was
disclosed in the Company’s announcements dated 17 June 2013, 9 September 2013,
15 October and 23 October 2013, wherein it was noted TWE sought clarification
and response on the following matters before continuing planned exploration
activities in the CBM project:
discrepancy of the CBM exploration area relating to its exploration rights,
including highly prospective CBM zones and fairway lands, between the PSC and
the renewed CBM exploration permits and investigation on reported unauthorised
coal drilling activity within the Contract Area and any land title
mismanagement by CNPC;
dispute on Respondent’s
failure to certify two international independent expert reports on evaluations
of CBM discovered resources and natural gas resources originally in place
(OGIP) commissioned by TWE and provided to Respondent’s in support of the
application for extension of the exploration period of the PSC;
dispute on Respondent’s
failure to validate the capital expenditure incurred by TWE on the project as
required by the PSC; and,
dispute on Respondent’s
failure to cooperate to clarify the land status with relevant ministries.
Furthermore as previously disclosed, TWE formally
declared a dispute with Respondents and provided notice of intent to file for
arbitration according to the terms and conditions of the PSC. Respondents did
not ever provide any clarification or response to the above points,
The significant administrative matters relating to
unauthorised coal drilling and mining were initially considered to be
standalone matters that subsequently appear potentially related to the land
title mismanagement by Respondents and hence became included in TWE’s dispute
A search of the web-based data of the Ministry of
Land and Resources of China suggests that new coal exploration and mining
permits have been issued and/or earlier permits have been renewed and greatly
expanded without required consents within the PSC area since 30 December 2005
(the date of execution of the PSC) in contravention of Chinese law. In this
regard, Respondents have failed to assist to monitor or prevent unauthorised
issuances of such permits despite TWE’s multiple notices referencing the
In early 2014 TWE engaged international arbitration
counsel to assist the resolution or prosecution of the dispute. TWE issued
notices relating to the unresolved CBM lands dispute including formal notice of
dispute and arbitration to Respondents, and has followed the required process
by providing notice of selected arbitration procedure to Respondents.
to Terminate the PSC & Formal Notice of Arbitration
As disclosed in the Company announcement of 7 July
2014, on 3 July 2014 TWE issued to Respondents a notice to terminate the PSC
(‘‘Termination’’). As advised by counsel, TWE issued the Termination because
the breaches of the PSC made the project no longer financially or operationally
viable; breaches including but not limited to the breakdown in the relationship
between TWE and Respondents, the reduction in the CBM exploration area as
described above and the scale of new coal mining activities.
All disputes and arbitration survive termination
according to the terms and conditions of the PSC.
announcement also disclosed that on 4 July 2014, TWE formally served a notice
of arbitration on Respondents relating to the Dispute, seeking an award of
damages as compensation for the losses caused by Respondent’s breaches of the
PSC, together with declaratory relief, costs and interest. The formal notice of
arbitration initiated the international arbitration process.
In the event of a disagreement on procedure, the
terms and conditions of the PSC describe a default arbitration procedure to be
followed, according to internationally-accepted due process. Such default
procedure is in effect and the arbitration is following the rules set out by UNCITRAL.
As required by the process TWE and Respondents each
nominated one arbitrator according to the rules and the two named persons
selected a third person to chair the arbitration tribunal (“Tribunal”).
The Tribunal initiated procedures in the fourth
quarter of 2014 and Respondents eventually filed a response to TWE’s Notice of
Arbitration. As noted, TWE submitted its Statement of Claim to the Tribunal on
March 27, 2015.
Neither TSX Venture Exchange nor its Regulation Services Provider (as
that term is defined in the policies of the TSX Venture Exchange) accepts
responsibility for the adequacy or accuracy of this release.
Appendix 1 PTR News Release of August 23, 2012
Appendix 2 PTR News Release of October 12, 2011
Appendix 3 PTR News Release of June 21, 2010