Chevron has made one of the boldest moves yet to turn Canada’s LNG export hopes into reality by taking over control of the Kitimat LNG project that has been stonewalled by its inability to secure long-term buyer contracts.
In a radical overhaul of Canada’s most advanced LNG venture, Chevron will buy out the minority positions of Encana and EOG Resources, each of which held 30 percent stakes, while former operator Apache will raise its stake to 50 percent from 40 percent.
Chevron Canada spokesman Leif Sollid told Petroleum News that the transaction is “very exciting news” for his company, putting Kitimat in the forefront of North American plans to access Asian markets with its vast stores of shale gas.
But the immediate focus “is on working through the transition period with Apache and taking operatorship within 90 days,” he said.
The arrival of Chevron is the most significant development yet on the Canadian LNG scene, introducing a global LNG player with several projects in the works, including Chevron’s 69.14 percent interest in the Wheatstone project of northwestern Australia, its role in the Gorgon project in Western Australia and a 36.4 percent interest in a project in Angola.
Sollid said Kitimat will become part of Chevron’s strategy to meet the projected growth in Asia’s LNG demand, which is expected to double between now and 2025.
Apache calls it as milestone
Apache Chairman and Chief Executive Officer Steven Farris described the deal as a milestone.
“With experience developing LNG projects, marketing expertise and financial wherewithal, Chevron is the preferred co-venturer to join Kitimat LNG,” he said.
Apache Canada spokesman Paul Wyke noted that Apache and Chevron “have a history of working together and are partners in the Wheatstone project,” while Chevron has long-standing relationships in key Asian markets.
“Although we anticipate the momentum will accelerate with the new partnership, the partners will make a final invest decision (FID) after we achieve the remaining significant milestones of secure off-take contracts and completing front-end engineering and design,” he told Petroleum News.
“We are undertaking early works to position the project for a shorter post-FID construction period,” Wyke said.
None of the company officials was prepared to set a timetable for first LNG shipments, or confirm earlier forecasts of a startup in 2017.
However, the research and consulting firm of Wood Mackenzie said that “while efforts and decisions taken over the next two years will determine the winners and losers in Canadian LNG, the current slate of projects and promoters suggests the first (exports of) Western Canadian LNG is unlikely before 2019.”
Strong multinational positions
What is clear from recent developments is that multinational companies are now strongly positioned to compete for market share.
They have made public their plans to pursue up to 75 million metric tons per year of exports, a large slice of the global supplies of 460 million metric tons in 2011.
The line-up for Canada includes Royal Dutch Shell (with Asian partners PetroChina, Mitsubishi and Korea Gas), BG Group, ExxonMobil, Malaysia’s Petronas and now China’s CNOOC, through its pending acquisition of Nexen, which has a major role in British Columbia’s Horn River play.
British Columbia Energy Minister Rich Coleman said a company based in India he did not identify has “recently expressed interest, too.”
He said the arrival of Chevron should have a revitalizing impact in a sector the British Columbia government believes could transform the province’s economy by matching the energy output of the Alberta oil sands.
Premier Christy Clark said British Columbia could be enjoying the financial benefits of LNG 50 years from now provided it acts quickly before the opportunity evaporates.
Analyst: Moving ‘the dream’
CIBC World Markets analyst Andrew Potter said in a note that Chevron “moves the dream of Western Canadian LNG exports closer to reality, which will bring some benefit to all Western Canadian gas producers.”
Reynold Tetzlaff, an analyst with PricewaterhouseCoopers, said there is “no question” that Canada is in a race to Asia and “Australia is currently winning the race.”
Ron Loberec, Deloitte’s Canadian resources spokesman, echoed that view, forecasting that Australia will “make tens of billions of dollars out of its gas contracts.”
Along with the change of Kitimat LNG ownership positions, Chevron will acquire a 50 percent interest in the Pacific Trail Pipeline, connecting the Spectra Energy pipeline from British Columbia’s Horn River and Liard basins with a liquefaction plant and tanker terminal at the deepwater port of Kitimat on the northern British Columbia coast.
It will also gain 50 percent of 644,000 acres of petroleum and natural gas rights in the two basins, seen as the major supply source for Kitimat’s planned two-train system to export 10 million metric tons a year of LNG.
Under the transaction, Chevron will acquire 110,000 net acres of the established Horn River play from the three former Kitimat partners and 212,000 net acres of Liard from Apache.
Financial details not released
Although the complete financial details were not released by the companies, the original cost of the project was set at $3 billion, since raised to $4.5 billion — a figure that is widely expected to be well short of the final mark.
Apache said it would sell its interest in the undeveloped Horn River and Liard acreage for $550 million.
It projected its own net proceeds at $400 million after paying Chevron to equalize interests in other Horn River properties it held in conjunction with Encana and EOG and to increase its ownership of the LNG plant and pipeline projects to 50 percent.
Long deemed the front-runner in the race to export LNG from Canada, Kitimat is armed with a 20-year export permit issued by Canada’s National Energy Board. The only other export approval is for the BC LNG Export Co-operative, which is designed to export only 1.8 million metric tons a year.
Farris said the new ownership structure “will enable Apache to unlock the tremendous potential at Liard, one of the most prolific shale gas basins in North America.”
Apache has estimated its Horn River and Liard resource potential at 50 trillion cubic feet and reported that test results from one of three wells at Liard averaged 30-day initial production of 21.3 million cubic feet per day or 3.6 million cubic feet per day from each of six fracture stages, placing ultimate recovery from the well of 18 billion cubic feet.
Encana still supports LNG
Encana Chief Executive Officer Randy Eresman said his company’s major objective since joining Kitimat in March 2011 was to ”ensure the progressing of this project towards its development.”
Although Encana is no longer a direct participant “we continue to support LNG export as vital to diversifying markets for North American natural gas,” he said.
Encana spokesman Jay Averill told the Calgary Herald that although his company gained useful experience being part of the project, LNG is “not our core business. Chevron knows how to build and operate one of these projects, as well as negotiate contracts. So we see this as a positive and logical next step for Kitimat.”
Potter said the capital exposure for Encana “would have been too large; it makes sense for Encana to focus on shorter cycle time oil opportunities rather than long cycle time LNG.”
