Risks of International Arbitration - Victoria Oil & Gas

Victoria Oil & Gas (VOG) ICC International Court of Arbitration Award

I think its important people look at but disregard Victoria Oil & Gas (VOG) in the context of Rurelec but not Oxus Plc (OXS) or Churchill Mining (CHL)! Its annoying that the VOG case wasn't covered in the public domain the same as Bolivia albeit its unsurprising as its two companies involved. This raises some of the risks for CHL & Oxus that albeit may find in their favour will present some issues such as fault being laid at their doors as it is NOT a straight nationalisation process that Rurelec had the benefit of. 

The arbitration award/decision still leaves a cloud over the company. Now looking at the RNS and decision, what it reads to me is that VOG were too quick with their default. You will notice there's an absence of an apology to shareholders for this action. They basically for the sake of 15 days, cost themselves a significant amount of money. Obviously there's more to it than that, but that's the facts of it. RNS in Italics...

The Company announces that the Award in the ICC Arbitration proceedings brought by RSM has now been handed down to the parties. Whilst numerous RSM claims were either withdrawn or rejected, the Tribunal has determined that the cure period for RSM's "unequivocal default" should have been 30 days and not the 15 days contended for by the Company.  Consequently the automatic contractual forfeiture of RSM's interest in the Concession has not been upheld.   

 ICC Arbitral Proceedings

In May 2013 the Tribunal accepted RSM's request to withdraw four of its claims in the arbitral proceedings 'with prejudice' including its claim that Rodeo Development Limited (RDL) had unilaterally and wrongfully applied for an Exploration Licence of 44 sq. km adjacent to the Exploitation License area. In June 2013 the evidentiary hearing took place in Denver, Colorado.  On 11 December 2013 the ICC published the Award in this matter.

In summary the Tribunal's findings were as follows:

1.   The Second Cash Call issued by RDL to RSM was validly made in accordance with the contracts signed by the parties;

2.   RSM does not have a carried interest in the Logbaba project and the Tribunal has upheld RDL's interpretation and operation of the cash call procedure;

3.   RSM was "unequivocally in default" by failing to pay the Second Cash Call on time;

4.   A valid default notice was served by the Company on RSM on 2 July 2011;

5.   The parties had "sharply conflicting, equally plausible interpretations of the First Arbitration Award determined in RDL's favour on 31 May 2011." The 'conflict' related to whether there had been a prior default by RSM evidenced in the 31 May 2011 arbitration award. If there had been a previous default as the Company contended, then the 15 day contractual cure period applied to the second default before automatic forfeiture. If there was no earlier default the period was 30 days;

6.   Notwithstanding the Company's reasonable position on the question of a prior default, the Tribunal found that it had not been established to the level of certainty required by Texas Law when dealing with forfeiture of a participating interest. Accordingly the Tribunal declared that RSM's 40% interest in the Exploitation Licence for the Concession has not been forfeited;

7.   As a consequence the LA102 and LA104 wells which were to be transferred to RSM under the terms of the first arbitral award dated 31 May 2011 must now be transferred to RSM. These wells are shut in and abandoned, having been drilled in the 1950's.

8.   Success in the arbitration was found to have "been divided" such that each party is to bear its own costs of the proceeding;

As a consequence of the matters outlined above, the position between the parties is as follows:

·    RSM must now pay the Second Cash Call in the amount of US$4.1m promptly or else risk a further default.

·    In accordance with the Tribunal's endorsement of RDL's operation of the cash call procedure, RDL will shortly be issuing a third cash call for RSM's 40% share of expenditures incurred since the second cash call (June 2011) in the amount of approximately US$20m. RSM is obligated to pay the third cash call within 10 days of receiving the cash call failing which it will once again be in default.

·    RSM is required to pay all future cash calls for on account sums and expenditures in accordance with the terms of the agreement.

·    RDL remains entitled to recoup approximately $65 million of drilling costs before RSM can claim its share of profits.

·    RDL will now be pursuing RSM for payment of US$512,000 representing the unpaid costs awarded to RDL in the first arbitration.

Commenting on the Arbitration Kevin Foo, Chairman, of Victoria Oil and Gas; "We had a dispute with RSM and it is now resolved. The Company now has a contributing partner responsible for 40% share of all costs going forward and who is obliged to pay an outstanding cash call of approximately $4 million.  Additional  cash calls of approximately $20m are also due to be issued imminently.   Under Agreements with RSM, RDL expects to recoup the majority of its $65m capital expenditure on wells 105 and 106 before any profit distribution is due to RSM. Furthermore, VOG's subsidiary RDL is entitled to apply for an additional 44 sq. km area exploration area that borders our existing 20sq km Exploitation License on three sides."

What is not mentioned is that there could be further risks of Arbitration and costs due to the way the manner has been handled so far including the 'Business Relationship' between the two parties. Likewise I am unsure whether RSM can afford to pay their share of the 'cash calls'. I would assume so, or they would not have proceeded with the Arbitration? Surely they were aware of the possible outcomes and as such made sure they could afford the consequences of their actions i.e. Paying their share! Will it be positive if RDL (VOG's subsidary) maintain their holding and RSM default, yes assuming they don't rush to default RSM. 

If RSM have not got the cash, I forsee a) further default (and legal action) or b) a deal to reduce their (RSM) % interests and obtain a form of free carry for the works so far. Either way, what investors can learn from this is its a company that has repeatedly had jam tomorrow, even their production guidance has been reduced how many times since it started? Their forecasts for New Customers? What does amaze me is why shareholders tolerated it for so long without a change of Board / Management? If the past is an indicator of future success then the returns are...? Will I invest in VOG? Yes but nothing significant, but I'd not be betting the house on it, all the bad news is priced in albeit I find it strange that Directors can claim their full salary package/consultancy fees on the basis they have hit HOW many targets? Perhaps I'm expecting too much from the "leaders" of a company in terms of responsibility.