Australian Court Backs Southern Oil

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An Australian court last week ruled in favor of Australian rerefiner Southern Oil Refining in its litigation against transformer oil rerefiner Hydrodec Group and its now dormant Australian subsidiary. The case stemmed from a commercial dispute over a base oil rerefining joint venture that the companies entered in 2015.

The Supreme Court of New South Wales issued its decision in the case on Jan. 29.

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Among other findings, the court concluded that Southern Oil is entitled to a total of A$1.6 million (U.S. $1.2 million) from Hydrodec Australia, including A$64,685 to cover monthly capital charge payments for June and July 2019; A$1.1 million as a termination payment; and A$417,652 to cover monthly tolling fee payments for June and July 2019.

The court denied Hydrodec’s various cross-claims, including its seeking of repayment for previously paid tolling fees and damages it sought over Southern Oil’s alleged mixing of polychlorinated biphenyls-contaminated deliveries of oil feedstock with other feedstock.

The court also ordered Hydrodec to remove a hydrotreater plant – including PCB-contaminated receiving tanks – from the Bomen rerefinery site, adding that Southern Oil can apply for more damages if some or all of those assets are not removed.

In 2015, the two companies announced their partnership with much optimism. At that time, Southern Oil started a used oil rerefinery that it had relocated from Young to Bomen, a northern suburb of Wagga Wagga, New South Wales. Part of the facility was a joint venture with Hydrodec that included a hydrotreater that had a capacity to produce 20,000 liters per day and a footprint of about 120 square meters. Southern Oil operated the plant on a toll basis for Hydrodec.

At that time, Southern Oil had expressed optimism that operating the rerefinery with the hydrotreater would help it prepare the company to enter the API Group II and III base oil market. Southern Oil had two rerefineries that converted used engine oils to Group I base stocks.

That optimism came to an abrupt halt in 2018, when Hydrodec decided to exit Australia following a 2018 business review. As a result of that review, the board decided that several factors – the sub-scale capacity of the Australian plant, the impact of the business on management bandwidth, and the limited and fragmented domestic market – limited prospects for the joint venture. It decided its capital would be better shifted behind U.S. growth plans, so it initiated a formal process to sell the group’s Australian assets and business.

Hydrodec closed its Australian business in 2018 and then announced it was terminating its tolling contract with Southern Oil. Subsequently it sold its plant on Southern Oil’s facility in Bomen to Greenbottle Re-refining (UK) Ltd., a company controlled by Andrew Black, a non-executive director and a substantial shareholder of Hydrodec.

Southern Oil then sought to recover monies it claimed were due under its terms, primarily for capital works carried out to host the Hydrodec plant of approximately U.S. $1.25 million.

In a press release, Hydrodec said it is reviewing its options, including the possibility of an appeal. Southern Oil Refining did not respond to request for comments by deadline.

The case judgement with the New South Wales Supreme Court is titled, “Southern Oil Refining Pty Ltd v Hydrodec Australia Pty Ltd [2021] NSWSC 24.

The Australian government’s scientific research body, the Commonwealth Scientific and Industrial Research Organization, developed and registered the electrical transformer oil rerefining process under the name Hydrodec. Hydrodec Group was subsequently formed and listed in 2004 on the London Stock Exchange to commercialize the technology worldwide. Hydrodec claims the process produces transformer oil that tests better than new, and that it completely eliminates PCB, toxic chemicals banned under international regulations. Transformers are used for switching electrical supply from low to high voltage for transmission over long distances and back to low voltage nearer to end users. Transformer oil insulates and cools transformers.