April 26, 2016 / 4:36 PM / 3 years ago

Husky may take legal action in gas dispute with China firm

CALGARY, Alberta (Reuters) - Husky Energy Inc said on Tuesday it was confident a dispute with China’s CNOOC Ltd over delivery payments for South China Sea gas will be resolved but warned it would take legal action against the state-owned energy company if necessary.

Husky operates and owns 49 percent of the offshore Liwan Gas Project, approximately 300 kilometres (190 miles) south of Hong Kong, while CNOOC holds the remaining interest and buys the gas from Husky through a take-or-pay contract. Such an agreement requires CNOOC to pay for contracted volumes whether it receives them or not.

A pipeline outage in the first quarter affected natural gas sales from Liwan, and Husky said it received payment only for actual volumes of around 150 million cubic feet per day, roughly 50 percent of contracted volumes.

At the same time, CNOOC officials said there had been price changes in the Guangdong natural gas market and asked Husky to consider a cut to the fixed price the Chinese company pays for gas.

“Our view is that there’s no contractual basis to change the price unilaterally. We have a legally binding take-or-pay contract in place,” Husky Chief Executive Asim Ghosh said during a call to discuss the company’s first-quarter results. He added that he was confident there would be a satisfactory outcome with Husky’s “long-standing” partner.

Calgary, Alberta-based Husky, in talks with CNOOC to find a solution, said it will take legal action in the absence of a satisfactory outcome.

FirstEnergy Capital analyst Mike Dunn said the fixed-price agreement had been made before Liwan went ahead and was key to Husky’s final decision to invest in the project.

“The price commitment seems to me to be the more sacrosanct,” Dunn said, adding that it was fixed in local currency but amounted to around $13 to $15 mcf/day.

Husky shares dropped 10 percent on the Toronto Stock Exchange to C$15.93, which TD Securities analyst Menno Hulshof described as “excessively negative.”

“While these issues clearly carry headline risk, and could take some time to resolve, the potential impact to our Husky net asset value estimate is not significant,” he wrote in a note.

Editing by Paul Simao and Steve Orlofsky

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