Limetree Bay Terminals LLC v Unipec America Inc - ICDR Case No 01-20-0014-7261 - Final Arbitration Award - 14 September 2022
Country
Year
2022
Summary
International Centre for Dispute Resolution
James H. Carter, Chairperson
James M. Hosking, Arbitrator
Diana E. Marshall, Arbitrator
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IV.FACTUAL BACKGROUND
16. LBT is the owner of a crude oil terminal on the Caribbean Island of St. Croix (the "Terminal") that was constructed by Hess Corporation in 1966 in conjunction with a crude oil refinery (the "Limetree Bay Refinery") that Hess, later in a joint venture with Venezuelan oil company PDVSA that was called Hovensa, also operated there. LBT purchased the Terminal from the estate of its bankrupt prior owner Hovensa and embarked on a substantial refurbishment program in order to bring it back into operation.
17. A separate company, with which LBT shared certain management members and employees, purchased the Limetree Bay Refinery at about the same time.
18. Shortly after Hovensa entered bankruptcy, Unipec considered purchasing the facility and conducted a multi-day onsite inspection of the Terminal. Unipec did not purchase the Terminal and instead entered into the TLA with LBT in 2015 (JX0001), to become the "anchor tenant" at the Terminal, agreeing to lease crude oil storage space for a 10-year term. The TLA was amended once, on December 23, 2016. (JX0003)
19. Unipec, the trading arm of Sinopec, is one of the largest purchasers of U.S. crude oil in the world. It entered into the TLA at a time when the U.S. lifted a ban on crude oil exports to China. Unipec planned to use this storage capacity in the Western Hemisphere in connection with purchases of crude oil for shipment to China but also in part to be able to take advantage of "contango" market conditions, when the market price of crude oil is lower than the futures price.
Such a situation offers a trader with storage capacity the ability to buy and store crude oil on which it can at the same time sell futures at the higher price, eventually delivering the product from storage to the ultimate buyer.
20. The TLA requires LBT to make available at least 2,000,000 barrels of crude oil storage capacity, permits LBT to supply as much as 10,000,000 barrels of capacity, and requires LBT to perform related services. It requires Unipec to lease up to the full 10,000,000 barrels of capacity if it is made available and pay a monthly fee of $0.41 per barrel, subject to certain agreed rate increases. So long as LBT makes at least 2,000,000 barrels of capacity available, Unipec must pay for the full capacity made available, up to the limit of 10,000,000 barrels, regardless of the amount of storage capacity Unipec actually uses each month. The storage fees total approximately $50 million per year.
21. The Terminals today consist of 167 operational aboveground storage tanks with more than 34 million barrels of storage capacity, including 13 million barrels of crude oil capacity and storage capacity for other products. LBT's marine port houses seven active docks and a recently constructed Single Point Mooring ("SPM") system capable of transferring product to and from Very Large Crude Carrier ("VLCC") vessels.
22. The Terminal was almost half a century old in 2015 and in need of substantial refurbishment. LBT and Unipec accordingly made repair and refurbishment of the Terminal's tanks and other equipment by LBT a condition of their agreement. In 2015 and 2016, LBT invested more than $400 million in capital improvements as part of this effort, which was required as a condition precedent to commencement of Storage Fee charges and was accomplished without objection by Unipec. (See CX0134, CX0150) Unipec was assigned 21 specific tanks to provide 10,000,000 barrels of storage capacity.
23. Refurbishment of the Terminal was completed in 2016. Unipec began using the Terminal in September of that year and proceeded to store substantial quantities of crude oil there, ramping up gradually to nearly 6,000,000 barrels by early 2017. But starting in mid-2017, market conditions changed, and it became less profitable to store crude oil for future sales. Unipec began removing its Product from the Terminal, and by the first half of 2018 it was barely using the Terminal at all. Unipec then increased its use of the Terminal somewhat, to around 1,400,000 barrels of capacity, in mid-2018 through February 2019, after which Unipec again removed most of its remaining Product.
24. Market conditions changed dramatically again in about April 2020, largely due to the Covid-19 pandemic, which affected global economic activity adversely and produced "super contango" trading conditions. Unipec quickly increased use of the Terminal, jumping from storage of fewer than 150,000 barrels in March 2020 to 5,700,000 barrels in June 2020, using 18 tanks. (Neal WS, para. 40; Lever WS, paras. 49-55) Unipec states that it made a trading profit of approximately $9 million per tank at the Terminal, totaling about $160 million, during this contango period. (Li WS, para. 39)
25. LBT and Unipec encountered operational difficulties with a number of the deliveries to the Terminal in 2016-2018 involving, as characterized by Unipec, issues such as alleged unexplained variances (both losses and gains) in the volume of Product stored at the Terminal; inability to measure the volumes stored in each tank accurately; possible contamination of Product; and leaks in pipes due to corrosion. These were the subject of complaints by Unipec to LBT.
26. Unipec personnel became frustrated with the number of these incidents and with what they considered a lack of customer service they received from LBT, which was a continuing source of friction.
27. In 2017-2018, Unipec and Sinopec personnel conducted an "HSE audit/review" of the Terminal, including a three-day visit by a five-person team to evaluate "the status of legal compliance, management system and procedures, risk control measures and emergency response capability" of the Terminal. (CX0248) That review was positive in almost all respects but identified four "Opportunities for Improvement." (CX0250) It did not cause Unipec/Sinopec to identify anything as a breach of the TLA.
28. Operational incidents continued to be a source of friction in 2019-20. The most significant economically of these, and the only one for which Unipec claimed compensation, involved discharge of a cargo from the MT Parthenon TS on or about April 17, 2020, in which approximately 22,000 barrels of Unipec crude oil were placed in the wrong tanks, due to human error, and mixed with lower-quality crude there that reduced its value. LBT and Unipec negotiated a financial settlement by which LBT purchased the Product, which resolved that issue. (Charles WS, paras. 382-83)
29. In June and again in August 2019, Unipec sent John "Tony" Leech, an "independent auditor and engineer" employed by Oil Inspections (USA) Inc., to "conduct a due diligence inspection of the Terminal, including general operations and individual tanks." (JX0046) Mr. Leech made a visual inspection of Tanks 7512 and 7513 and observed extensive corrosion. He recommended "a review of my provisional observations by a qualified API 653 inspector not previously associated with the Terminal." His report to Unipec on his June inspection (JX0032) concluded:
I have serious concerns about the mechanical integrity, safety and environmental suitability of the tanks, and until further evaluation is performed I am not comfortable that these tanks are fit for service.
Over the course of a forty plus year career of terminal operations and inspections, I have never encountered a supposedly operational terminal of this scope in such a poor condition.
30. Mr. Leech was listed initially by Unipec as a proposed witness in this arbitration but was not called and also did not present written testimony.
31. At the same time as Mr. Leech's initial visit, in June of 2019, LBT advised Unipec that Tank 7513, which was empty at the time, had experienced a collapse of its floating roof, which Mr. Leech attributed in his report to rust damage to a leg supporting it. (JX0032) LBT, which ascribed the collapse to recent heavy rains, took Tank 7513 out of service for repairs and substituted Tank 7515, which had been used previously by Unipec. (JX0030)
32. Those events caused Unipec to send Mark Baker, an expert in crude oil tank inspection, to inspect Tank 7515, which he determined was fit for continued service (JX0033), and to inspect other assigned tanks to determine their compliance with API (American Petroleum Institute) Standard 653 ("API 653"), which addresses "Tank Inspection, Repair, Alteration, and Reconstruction." While Mr. Baker noted various issues with a number of the tanks requiring eventual attention, he concluded, based on inspections during three trips he took to St. Croix in the summer and fall of 2019, that there was no deficiency in any of the tanks requiring them to be removed from use. Mr. Baker nevertheless advised that he had observed cracks in the foundations of certain tanks and that the concrete foundation of one of the tanks, number 7403, in particular, displayed cracks at certain points and should be evaluated by a structural engineer prior to using the tank in order to determine its suitability for service and possible repairs. (JX0041)
33. On October 2, 2019 Unipec sent LBT a "notice of certain issues" at the Terminal, stating that Unipec "would like to work with you to resolve, repair and/or remedy these issues." (JX0046) The letter nevertheless included notice that, because of these "recently discovered areas and aspects of the Terminal operations" that Unipec claimed did not meet TLA standards, Unipec invoked Schedule A, Section 3.5 of the TLA (containing default and cure provisions, quoted below).
34. That notice cited a large number of issues, the first of which was a need to "Inspect and Conduct Necessary Repairs of Foundation Issues for Tank 7403 and Other Tanks." The issues listed next, in order, were: areas of corrosion and failing paint on tanks; an outside inspector's use of ultrasound (rather than radiography) to inspect certain welds; repairs to a high-level alarm system; implementation of a "formal process" for regular measurements of inventory and variances; removal of standing water and improvement of drainage; and removal of vegetation around tanks and construction debris from a tank dike area. There also were others.
35. When Unipec advised LBT of these concerns, LBT removed Tank 7403, which had been constructed in 1969, from service and retained a structural engineering firm, Jacobs Engineering, to evaluate it and execute repairs. LBT also wrote to Unipec on October 11, 2019, disagreeing with its invocation of an alleged Event of Default based on these complaints. (JX0047)
36. LBT also created a separate maintenance program dedicated entirely to addressing Unipec's October 2, 2019 complaints, with a list outlining action items (called "Appendix A") that was updated and provided to Unipec on a regular basis. (Charles WS, para. 372; RX0313)
37. On October 17, 2019 Unipec wrote to LBT (JX0049) stating that issues Unipec had raised previously remained unresolved and that Unipec would not pay storage charges for "any deficient or nominated tanks, such as Tanks 7403 and 7512, until all of the operational and tank issues are cured or fixed and we are confident that the highest safety, environmental and legal standards are met."
38. Jacobs Engineering delivered its assessment of Tank 7403, dated October 21, 2019, which started from an assumption that the foundation design of the tank was in compliance with applicable codes at the time of its construction and provides adequate support for the tank. Jacobs recommended repairs (JX0050), which included pouring structural concrete to reinforce the foundation for the tank.
39. LBT also advised Unipec on December 13, 2019 that LBT had taken steps to address the issues raised by Unipec's October 2, 2019 notice, had "resolved all of the most central items identified in the letter, and has a clear plan to resolve any other outstanding items." LBT also contested Unipec's right to withhold payment for three tanks based on Unipec's October 17 letter (Tanks 7410, 7403 and 7515) and claimed that about $2.7 million in storage fees were due and owing as of that time. (JX0068)
40. Unipec responded by letter of December 20, 2019, which reasserted Unipec's claim of a right to withhold fees (now mentioning Tanks 7403, 7410, 7515 and 7512) and reiterated Unipec's previously noticed claims with respect to Terminal and tank issues still not cured or completed. The letter concluded: "As always, Unipec looks forward to working with Limetree Bay to resolve these matters and to bring all leased tanks and the terminal in compliance with our agreement. We look forward to coming to an amicable resolution of all issues with Limetree Bay." (JX0069)
41. Unipec wrote again on January 17, 2020, reiterating various issues and adding others, referring to them as "notices" and "requests" pursuant to Sections 2.5 and 3.5 of Schedule A of the TLA. The letter said that "Tank foundations have cracks and deterioration present on many of the tank ring wall foundations, valve containment boxes, and piping supports.. .. It appears many of the cracks will at minimum require sealing to prevent water intrusion into the concrete. We understand Limetree Bay commissioned a review by a civil engineer for all the tank foundations. Please provide any results that you have not already provided and please provide any updates you may have. Please also provide an updated concrete timeline of all repairs to and projects for the tank foundations." (JX0073)
42. Meanwhile, Mr. Baker recommended that Unipec's counsel retain Dr. Sukru Guzey, who was an assistant professor at Purdue University and also worked with Mr. Baker's firm, to evaluate Tank 7403 to determine whether its design was in accordance with the relevant codes and standards at the time of construction. He was retained in December 2019 and began his work on the evaluation of the Tank 7403 design in February 2020. His study was based on the as-built drawings for similar Tanks 7512, 7513 and 7516 because design documentation for Tank 7403 was unavailable.
43. LBT advised that repairs to Tank 7403 were complete in March 2020. Dr. Guzey concluded that same month, based on information that was available to him, that Tank 7403 was "grossly under-designed" because of an insufficient number of reinforcing rebars in the concrete and that the foundation might "open up and fall," causing the tank to collapse. (Tr. 2168-69) Dr. Guzey advised Unipec that the design issues also "could begin to appear in other tanks that shared the same details." (Guzey Rebuttal Report, para. 10)
44. Unipec did not disclose Dr. Guzey's analysis to LBT at that time. Although the Parties exchanged additional letters about their disputes throughout 2020, Unipec's summary regarding Tank 7403 in a letter of April 17, 2020 was that Unipec "continued to have reasonable concerns" based on Mr. Baker's inspection report and would not use or pay storage fees for that tank. (JX0089) Unipec continued to store its Product at the Terminal in other tanks during this time.
45. In July of 2020, LBT advised Unipec that it was removing Tanks 7516 and 7512, which were filled with Unipec's Product, from Unipec's tank schedule and substituting Tanks 7411 and 7412. Tanks 7516 and 7512 have piping connections to the Limetree Bay Refinery, and LBT had other plans for those tanks. LBT already had begun moving Unipec's Product into the substituted tanks, without prior consultation with Unipec.
46. Unipec protested this tank substitution and Product movement without its consent, and LBT responded that these actions at the Terminal were within its discretion pursuant to the TLA.
47. The Limetree Bay Refinery, which is adjacent to the Terminal, had closed in 2012 and been acquired and restarted by an alleged affiliated company of LBT in or about 2015. In February 2021, the refinery experienced an incident in which steam and oil were released into the atmosphere, causing a vapor of crude oil to contaminate surrounding homes. This resulted in national media coverage and governmental actions and private lawsuits that compelled closure of the refinery and led to bankruptcy of its owner and its eventual sale.
48. On July 13, 2021, Unipec sent LBT a notice of termination of the TLA, invoking provisions of Section 3.5. (CX0011) It cited three alleged independent Events of Default: (a) failure to "operate the Terminal to the highest industry standards, and at a very minimum equal to those of other comparable first-class operators of terminal facilities" pursuant to Schedule A, Section 2.5; (b) failure to "ensure that all Terminal interconnections and facilities such as piping, docks, and related facilities are fully functional and operational for purposes of" the TLA in accordance with Section IX; and (c) a claim that LBT "appears to have become insolvent and otherwise unable to pay its obligations as they become due in the ordinary course." The third ground was based on assertions that LBT was or might be financially responsible for problems with the refinery.
49. Unipec removed substantially all of its remaining crude oil from the Terminal prior to its July 13 notice of termination and stated therein that it would not bring any additional Product to the Terminal. Unipec nevertheless has continued to pay LBT storage fees for all tanks other than Tanks 7403, 7410, 7513 and 7515 during the pendency of this arbitration.
50. On July 16, 2021, Unipec wrote to LBT advising that Unipec was withdrawing its request in this arbitration for an order for specific performance of LBT's obligations under the TLA and instead would seek a determination in an award of Unipec's right to terminate the TLA, the effective date of which would not be set until after this Tribunal's ruling. (JX0130)
51. Ease of travel to St. Croix was disrupted by Covid-19 in 2020-21; but in October 2021 a team of experts retained on Unipec's behalf, including Mr. Baker, and Unipec counsel visited the Terminal. Mr. Baker took a number of pictures of tanks, which he shared with Dr. Guzey. They concluded that Dr. Guzey should extend his analysis to other tanks at the Terminal, which he determined had been constructed from similar designs. Dr. Guzey concluded that, because of that similarity, the foundations of all of the series 7400 and 7500 tanks were "under-designed in Day 1" when constructed. (Tr. 2173-74) He recommended that they all be removed from service or, alternatively, be filled to only one-half of their capacity, in order to avoid risk that a tank or tanks might collapse.
52. This analysis was first disclosed to LBT when Dr. Guzey's expert report was submitted in this arbitration, together with those of other Unipec experts, on December 3, 2021. LBT protested that the reports sought to raise, on an untimely basis and without any opportunity to cure, almost 200 additional issues involving the condition of the Terminal. Following an exchange of correspondence, the Tribunal entered Procedural Order No. 3, which is incorporated herein by reference, addressing the interim treatment of these additional allegations.
53. On December 22, 2021 Unipec supplemented its July 13 notice of termination by incorporating the expert reports of four witnesses, including that of Dr. Guzey, which the letter claimed identified "197 discrete problems with the Terminal and LBT's failures to perform under the TLA." (RX0494)
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VIII. AWARD
279. WHEREFORE, for the reasons set forth above, the undersigned Arbitrators hereby DECLARE and AWARD as follows:
(a) Under the TLA, the Operator must aspire to meet the highest industry standards but, at a very minimum, must comply with standards equal to those of other comparable first- class operators of terminal facilities.
(b) Unipec America Inc.'s request for a declaration that it may terminate the TLA is denied.
(c) Under the TLA, Limetree Bay Terminals, LLC has the exclusive, unilateral right to determine which tanks shown on Schedule F, as it may be amended from time-to-time by the agreement of the Parties, shall be utilized for the storage of Product owned by Unipec America, Inc., and LBT must give Unipec America, Inc. advance notice of such determination with respect to each cargo of Product delivered to the Terminal. However, once initially stored, Limetree Bay Terminals, LLC may not then move or transfer Unipec America, Inc.'s stored Product to any other tank, whether it is on Schedule F or otherwise, without Unipec America, Inc.'s prior consent.
(d) Unipec America, Inc. has breached the TLA by failing to pay Storage Fees due to Limetree Bay Terminals, LLC in the amount of $20,758,606.67 and must pay to Limetree Bay Terminals, LLC the sum of $20,758,606.67 within 30 days from transmittal of this Final Award to the Parties.
(e) The administrative fees and expenses of the ICDR totaling $46,408.14, and the compensation and expenses of the Arbitrators totaling $525,460.40, shall be borne by Unipec America, Inc. in the amount of $428,901.40 (75% of the total of these costs) and by Limetree Bay Terminals, LLC in the amount of $142,967.14 (25% of the total of these costs). Therefore, Unipec America, Inc. shall reimburse Limetree Bay Terminals, LLC the sum of $153,296.23, representing that portion of said fees and expenses in excess of the apportioned costs previously incurred by Limetree Bay Terminals, LLC upon demonstration by Limetree Bay Terminals, LLC that these incurred costs have been paid.
(f) All other claims and counterclaims are denied. This Final Award is in full settlement of all claims and counterclaims submitted in this arbitration.
280. This Final Award may be executed in any number of counterparts, each of which shall be deemed an original, and all of which shall constitute together one and the same instrument.
We hereby certify that, for the purposes of Article I of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards, this Final Award was made in New York, New York, United States of America.
Dated: New York, NY
September 14, 2022
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