By John Lee.
- Pearl Petroleum terminated Enerflex's contract for the Khor Mor Gas Expansion Project due to alleged performance issues and project delays.
- Enerflex disputes the termination, citing a deadly drone attack near the project site and invoking force majeure due to safety concerns.
A significant dispute has emerged between Pearl Petroleum, developer of the Khor Mor field in the Kurdistan Region of Iraq, and Canadian company Enerflex, over the development of a key gas expansion project.
Pearl Petroleum, a five-company consortium comprised of Dana Gas, Crescent Petroleum, OMV, MOL and RWE, announced on 19th August that it had issued a formal notice of termination to Enerflex, the EPC (engineering, procurement, and construction) contractor for the Khor Mor Gas Expansion Project (KM250).
According to Pearl, numerous performance issues during the contract's execution significantly hindered Enerflex's ability to meet its obligations, leading to unacceptable delays in the project's completion. Pearl emphasized that the delays had forced it to take direct control of the remaining project phases to safeguard its interests and ensure that the project is completed on time. The company also reserved its rights to pursue potential claims for damages.
Enerflex responded by disputing the termination. It claims that its difficulties stemmed from an external security threat, citing a deadly drone attack near the project site on 26th April, which had severely impacted the safety of operations. Enerflex invoked force majeure in the aftermath of the attack, suspending work and demobilizing personnel due to safety concerns. The company maintains that it had been collaborating with Pearl to address the situation and consider viable options for project completion.
Enerflex argues that Pearl's decision to terminate the contract is an attempt to circumvent the company's contractual rights to suspend work while the project site remains unsafe. With construction reported to be 85-percent complete, Enerflex is seeking to protect its financial and legal standing, noting that the termination notice could result in significant financial implications, including a $160 million unbilled revenue asset and a $31 million Letter of Credit related to the project.
Statement from Dana Gas:
Dana Gas (PJSC) provides an update regarding the notice of termination issued by Pearl Petroleum Co. Ltd ("Pearl") to Enerflex the EPC contractor for the KM 250 project.
On 19 August 2024, Pearl announced that it has formally issued a notice of termination to Enerflex, following numerous performance issues which have arisen during the execution of the contract works.
The ongoing impact of these performance issues has materially affected Enerflex's ability to meet its contractual obligations, leading to unacceptable delays and hindering the progress and timely completion of the Khor Mor gas expansion project (KM250) in the Kurdistan Region of Iraq (KRI).
As a result, Pearl Petroleum has been compelled to intervene directly to ensure the timely and successful completion of the project.
To safeguard the interests of Pearl Petroleum, its stakeholders and the people of the KRI, the Company has taken the necessary step of issuing this notice of termination. This action will enable Pearl Petroleum to assume direct control over the remaining phases of the project, ensuring that it is brought back on track and completed in the timeliest manner.
Pearl also reserves all its rights under the contract including potential claims for damages.
Statement from Enerflex:
Enerflex Ltd. (TSX: EFX) (NYSE: EFXT) ("Enerflex" or the "Company") today provided an update of a modularized cryogenic natural gas processing facility in Kurdistan (the "EH Cryo project").
As previously announced, and in response to a drone attack on April 26, 2024, that resulted in fatalities at an operational facility proximate to the EH Cryo project, Enerflex provided its customer with notice of Force Majeure, suspended activity at the project site, and demobilized its personnel. Since that time, Enerflex has worked collaboratively with its customer to evaluate the situation and assess potential options to complete the project notwithstanding the prevailing security situation at the project site.
Despite these efforts, Enerflex has received a notice that its customer intends to terminate the EH Cryo project contract with effect as of September 8, 2024. Enerflex views the purported termination as a wrongful attempt by its customer to circumvent Enerflex's contractual rights to suspend performance while the project site remains unsafe; a conclusion that is supported by expert security input. Enerflex intends to dispute such wrongful purported termination and to protect its position in respect of the EH Cryo project.
As of June 30, 2024, construction of the EH Cryo project was approximately 85% complete. Revenues associated with the EH Cryo project are recognized within Enerflex's Engineered Systems product line and any amounts not yet invoiced are presented as an unbilled revenue asset on Enerflex's consolidated statements of financial position. The net unbilled revenue asset recognized for the EH Cryo project was approximately $160 million at the end of the second quarter of 2024. As at June 30, 2024, the EH Cryo project represented approximately 6% of the Company's Engineered Systems backlog. The Company has provided a $31 million Letter of Credit in support of its obligations under the EH Cryo project contract, which financial security is funded with the Company's Revolving Credit Facility and LC Facility. As Enerflex views the customer's termination as improper, Enerflex would similarly view any drawing of such financial security in the prevailing circumstances as similarly improper.
Enerflex is focused on resolving this matter while protecting the best interests of the Company and its stakeholders. Enerflex will continue to update stakeholders as and when appropriate.
For information on Iraqi law, see our Legal Services page.
(Sources: Dana Gas; Enerflex)
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