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RSM vs VOG and RDL Arbitration

13 Dec 2013

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 Whilst numerous RSM claims were either withdrawn or rejected, the Tribunal has determined that the cure period for RSM’s “unequivocal default” should have been 30 days and not the 15 days contended for by the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.”  

Background

In July 2011, VOG announced an increase in its effective working interest in the Logbaba Field to 95%, following the serving of a Notice of Forfeiture (“Notice”) on RSM, which previously had held a 38% interest in the Logbaba Field. This course of action followed RSM’s repeated failure to pay cash calls pursuant to the terms of the operating agreement between the parties. The forfeiture provisions of the operating agreement are subject to Texas law and operated automatically on service of Notice following RSM’s failure to rectify its default within the default period prescribed by the operating agreement.

VOG further announced on 25 October 2012 that arbitration proceedings had been initiated by RSM in relation to the forfeiture of RSM’s interest and was to take place in June 2013 (the “Arbitration”).

VOG has always vigorously defended the claims believing its action in forfeiting RSM’s interest to be reasonable and entirely in accordance with the agreements between the parties.  The opinion of VOG’s UK and US lawyers was that the forfeiture should be upheld. The arbitration was expected to take place in June 2013.

The hearings and various post-hearing submissions and replies in the arbitration with RSM Production Corporation were completed in June and July 2013 and the judgement of the Tribunal was anticipated at the end of September 2013.

On 1st November 2013 VOG announced that the Secretariat of the International Chamber Commerce ("ICC") has informed the Company that pursuant to Article 24(2) of the Rules of Arbitration, the ICC International Court of Arbitration has extended the time limit for the above case until 29 November 2013.  On the 2nd December 2013 VOG announced receipt of a further extension until 31st December 2013

For further information, please visit www.victoriaoilandgas.com or contact:

Victoria Oil & Gas Plc

Kevin Foo/Chane Brooks/Laurence Read Tel: +44 (0) 20 7921 8820

Fox-Davies Capital

Daniel Fox-Davies Tel: +44 (0) 20 3463 5010

Strand Hanson Limited

Angela Hallett / Stuart Faulkner Tel: +44 (0) 20 7409 3494

Tavistock Communications

Ed Portman / Conrad Harrington / Simon Hudson Tel: +44 (0) 20 7920 3150

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