Dispute between Sharjah’s Crescent Petroleum and Iran moves to damages phase

Sharjah’s Crescent Petroleum says an arbitration tribunal in The Hague has commenced the damages assessment phase in a long-running dispute over a gas supply contract with the National Iranian Oil Company (NIOC), in what will probably result in a multibillion-dollar award.

The dispute is being widely watched as Iran seeks to re-establish relationships with international oil companies in anticipation of sanctions being lifted if a final deal on its nuclear programme can be reached this summer.

Iran, despite vying with Russia as the holder of the world’s largest gas reserves, is a net importer of gas and has struggled to follow through on agreements to supply it.

The dispute with Crescent involves a deal first struck in 2001 under which NIOC was supposed to supply 600 million cubic feet a day of gas by pipeline from its Salman field, in the southern Arabian Gulf, to Sharjah.

Dana Gas, also based in Sharjah and 21 per cent owned by Crescent, was to have distributed the gas once it landed.

“The damages quantification phase of the proceedings has now commenced,” a Crescent spokesman said, requesting anonymity.

A three-man arbitration panel set up under the terms of the contract reached a verdict last July in favour of Crescent.

“The international arbitration tribunal confirmed in its ruling last year that the 25-year gas contract is valid and binding and that NIOC has been in breach of its obligations to deliver gas since December 2005, while rejecting all of NIOC’s claims and excuses,” said the spokesman.

Initially the dispute was over the low oil-linked gas price that Crescent had negotiated from NIOC in 2001, a time when oil prices were below US$10 per barrel. It later ran into technical problems as well as obstacles that were due to Iran’s internal oil politics, according to people familiar with the process.

Crescent declined to comment on the amount the panel may award.

Last year, Iran’s industry minister, Mohammad Reza Nematzadeh, was quoted by official news agencies referring to an “$18 billion fine” related to panel’s finding, although he later retracted the statement.

There are not many directly comparable cases, although industry experts point to another arbitrated gas supply dispute Iran has with Turkey, where the Paris-based International Court of Arbitration ordered Iran to pay Turkey $900 million in a case involving a disruption of just two weeks.

Crescent and NIOC will have talks about reaching a compromise, the spokesman said, but it seems unlikely the two would be able to revive the contract at this point.

“Negotiations take place between the parties to explore possible settlement but it is really a matter for NIOC to decide how they wish to address the issue,” he said. “It’s a question of their credibility in meeting their obligations in the eyes of the market and our customers.”


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