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Apache muddies BC waters, pulls out of Kitimat LNG for onshore
In abandoning what the British Columbia government once viewed as the launching pad for a multibillion dollar LNG industry, Apache has also created a void that will not easily be filled and added to a darkening cloud over the province’s hopes of building a new, profitable industrial sector.
Only three years ago, Premier Christy Clark declared that by adopting a “more aggressive approach” to exploiting the province’s natural gas riches, Kitimat could become operational in 2015, a bold target that even Apache agreed was achievable.
But, under extreme pressure from activist investor Jana Partners, Apache has unloaded its 50 percent stake in the Kitimat LNG project and its 13 percent share of Australia’s Wheatstone LNG operation, as part of jettisoning US$10 billion in assets over the past 18 months to make North American onshore operations the focus of its business.
The LNG move reflected more than just industry dissatisfaction with the British Columbia government’s determination to add an export tax to the royalty and corporate taxes it would collect from Kitimat.
It sent out the clearest signal yet that Apache and operator Chevron (even though it is one of the top global energy players) have been unable after several years to secure buyers for the LNG resource without relinquishing their hopes to achieve oil-indexed pricing for the LNG in Asia.
‘Fundamental weakness’ Ed Kallio, director of gas consulting at Ziff Energy (a division of Solomon Associates), said that even though Kitimat is a “shovel-ready project,” the partners have been struggling to deal with a fundamental weakness, with the “A-list” of Asian energy players involved in rival LNG projects for Canada’s West Coast.
In particular, Korean, Chinese and Japanese companies are participating in the Shell-led LNG Canada project, with a terminal planned for the Kitimat area, and the Petronas-operated Pacific Northwest LNG project near Prince Rupert.
Those global LNG buyers who are not capable of taking an equity position in British Columbia’s operations are also turning their efforts to arranging supplies from United States projects, Kallio said.
Fadel Gheit, an analyst with Oppenheimer & Co., said the “odds have increased that there will be no Kitimat,” while Bill Gwozd, senior vice president of gas serves at Ziff Energy, said the commodity pricing stand-off between Asia’s prospective buyers and British Columbia’s LNG probably played a role in Apache’s departure.
He said Apache is effectively saying it “can’t afford to play around and dance. We need the market to step up and pay the right price.”
Uday Turaga, chief executive officer of ADI Analytics in Houston, told Bloomberg that it’s possible Chevron might attract a partner with experience in developing LNG and with contacts that missed the first wave of investment in Canada.
“I don’t think there will be a dearth of suitors who want to take Apache’s place,” he said. “It’s going to be a bit of rough weather for the project until additional partners can be lined up.”
Long-term issues George Kirkland, Chevron’s vice chairman and executive vice president for upstream production, told analysts on his company’s second-quarter conference call that Apache “needs to move through the issues and we need to get a new partner.”
He said the project needs to reach its target of signing up long-term buyers in Asia for 60 to 70 percent of Kitimat’s planned production of 11 million metric tons a year before a final investment decision can be made.
“We’re not going to do a project unless it’s economic,” Kirkland said.
While it waits on that front, Chevron will continue drilling the Liard formation in northeastern British Columbia to prove up reserves as Kitimat feedstock, while surveying the route for the Pacific Trails pipeline to deliver gas from TransCanada’s Merrick Mainline system to the Kitimat liquefaction and tanker terminal.
Apache Chief Executive Officer Steven Farris told an analysts’ call that Apache intends to “completely exit the Wheatstone and Kitimat LNG projects,” but that won’t undermine Kitimat’s value.
The goal for Apache is to reposition itself for “profitable and repeatable North American onshore growth,” the company said in a statement.
“Whether we’re in it or not, it is a world-class project with world-class reserves and frankly Chevron and Apache at this point are way ahead of anybody else in that arena.”
Farris said it makes sense for someone else who can handle the long time horizon to complete an LNG project to enter the picture.
Governments sign MOU The Kitimat ownership shuffle quickly erased what would otherwise have been positive news from the British Columbia government, which signed a non-binding memorandum of understanding with the Chinese government, pledging cooperation and information sharing to help advance British Columbia’s LNG sector.
The two sides said they will “work together with appropriate authorities to secure and facilitate the entry of foreign workers” to the province, while “respecting the priority of hiring domestic labor when possible.”
Natural Gas Minister Rich Coleman said his government cannot avoid hiring temporary foreign workers - especially those that require highly specialized experience in the LNG industry - to fill some of the 100,000 jobs will be created if several LNG facilities materialize.
Still living in hopes that the British Columbia government can convert LNG revenues into a C$100 billion prosperity fund over the next 30 years, an alliance of five municipal governments in northwestern British Columbia has formed an alliance to seek a 3 percent share of those riches, while also counting on a slice of the controversial Enbridge Northern Gateway oil sands bitumen pipeline, plus gold, copper and molybdenum mines.
The government said only that it is committed to ensuring that provincial communities “realize the full potential of opportunities afforded by major industrial developments.”
Fracking concerns But, in keeping with the recent trend of one step forward, one back, a scientific review led by Simon Fraser University researchers said the environmental impacts of hydraulic fracturing to extract natural gas - an underpinning of the resources that will serve as LNG feedstock - are not well understood and could pose a threat to the province’s ecosystems.
Simon Fraser conservation biologist Viorel Popescu said poor regulation and inadequate disclosure of the chemicals used for fracturing have left huge “knowledge gaps” about the downside of the process.
He warned that British Columbia is on the verge of launching a massive expansion of its gas sector without knowing the consequences.
Popescu said that the 24 states in the U.S. with active shale gas reservoirs each has a mandate and regulations, but “may not require that proprietary chemicals be disclosed,” while Canada leans towards greater transparency.
But it’s important to know “what we are putting into the ground, how much stays there and how it migrates,” he said.
- Gary Park
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