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The following is an excerpt from an Interface Consulting work product issued for use in litigation, arbitration, or mediation (dispute resolution). Names, dates, and other information has been modified for client confidentiality purposes.

 

Stella-Morris Plant Partners v. Freya International Litigation

I. Introduction

A dispute has arisen between Freya International Mimir River Project, LLC (Freya International), Stella Co. (Stella), and Stella-Morris Plant Partners (Stella-Morris) relative to several contracts. On September 5, 2001, Freya International notified Stella that Stella was in default relative to two (2) contracts, which hereafter will be referred to as Contracts 1 and 2. Additionally, Freya International indicated that Stella’s default under Contracts 1 and 2 constituted a default by the joint venture of Stella-Morris under two (2) separate contracts, which will be referred to as Contracts 3 and 4.

On September 19, 2001, Stella-Morris filed a lawsuit against Freya International seeking payment for the work Stella-Morris performed relative to Contracts 3 and 4. Shortly thereafter, in October 2001, Freya International filed its response to Stella-Morris’s lawsuit and filed a counterclaim seeking damages from Stella-Morris.

This supplemental opinion will focus on Freya International’s allegation that Stella failed to properly design or construct the Celeste Gas Plant Project, with specific emphasis on the compressor systems....

 

II. Summary of Opinion

Interface Consulting’s first opinion discussed and concluded that Freya International, among other errors:

  • Provided out-of-specification feedstock to the Celeste Gas Plant;

  • Provided feedstock to the Celeste Gas Plant that was contaminated with rust, sand, and other forms of foreign debris;

  • Wrongly blamed Stella for the improper feedstock, which caused operating and maintenance problems;

  • Wrongly terminated Stella on Contracts 1 and 2, in part, due to the effects of providing the improper feedstock;

  • Improperly defaulted Stella-Morris on Contracts 3 and 4, in part, due to the improper feedstock used at Celeste which contributed to Freya International’s decision to default Stella on Contracts 1 and 2; and

  • Realized that rising natural gas prices, combined with smaller increases in product prices and the failure of Celeste Gas Plant to supply the ZSM-5 catalyst stream, rendered the Mimir River Fractionation Project unprofitable.

This supplemental opinion focuses on Freya International’s allegation that Stella failed to design and construct the Celeste Gas Plant in a proper manner. This report will address Freya International’s allegations that the compressor systems at Celeste were not designed properly which resulted in, among other things, vibration problems.

Based on Interface Consulting’s subsequent investigations, it is our opinion that:

  • Freya International fed gas to the Celeste Gas Plant that was contaminated with excess levels of sulfur and hydrogen sulfide (hereafter H2S).

Freya International fed a gas to the Celeste Gas Plant Project that contained significantly more H2S and other forms of sulfur than mandated under the contract. Contract Exhibit B, Basis of Design, provides for a maximum of 20 parts per million (hereafter ppm) H2S and a total sulfur content of 65 ppm as shown below.

Contract Exhibit B
Basis of Design...

Project documents indicate sulfur components and H2S concentrations in the feed gas were over 300 ppm (approximately 460% of the contract limit) – as shown in the documents below – and sometimes were over 1,000 ppm, which is 1,400% more sulfur than allowed by contract.

  • The sulfur and H2S reacted with iron in the pipes inside the Celeste Gas Plant and inside the pipeline between the Celeste Refinery and Freya International's Celeste Gas Plant, producing iron sulfide and iron oxide.

H2S and other sulfur compounds in the feed gas react with the iron in the pipes feeding Freya International's Celeste Gas Plant to form iron sulfide, which takes the appearance of a black powder. Iron sulfide will convert to iron oxide, a form of rust, when exposed to oxygen.  The presence of liquid water and other liquids in the pipes worsened the corrosion and accelerated the amount of iron sulfide produced. The black powder, consisting of iron sulfide and possibly iron oxide, was carried into the Freya International Celeste Gas Plant with the feed gas as shown in the following graphic.

 

 

 

 

  • The iron sulfide and iron oxide coming into the Celeste Gas Plant with the feed gas, together with the unforeseen liquids condensing in the pipeline from the Celeste Gas Plant, resulted in damage and operating problems for the Celeste Gas Plant, damage for which Freya International wrongly blamed Stella;

  • The Freya International-alleged vibration problems concerning the compressor systems started after Freya International made repairs and modifications to the compressors contrary to the terms and conditions of its contract with Stella. Thus, any operational and maintenance problems relative to the alleged vibration problems are Freya International’s responsibility, not Stella’s.

…One of Freya International's complaints against Stella is the failure to design and construct a compressor system that did not exhibit severe vibration. The following timeline shows the relevant compressor activities that occurred during the period of March to September 2001, and substantiates that the vibration problems manifested themselves after Freya International tampered with the compressor systems.

 

Graphic-Schedule.jpg

 

As shown above....

 

 

III. Discussion of Opinion

In this section, we will discuss....

III.A. Freya International Fed Gas that Contained Significantly More Sulfur and H2S than Mandated Under the Contract

III.B. H2S and Sulfur Compounds Caused Corrosion and Formed Iron Sulfide

III.C. Any Compressor Vibration Issues are Freya International’s Responsibility

Stella was Not Required to Perform a Pulsation Study

Stella’s Design and Construction Met Contractual Requirements

 

IV. Signature

 
 

V.  Exhibits