Chevron has wasted no time sending a clear-cut message to potential Asian buyers of Canadian LNG: Unless sales are closely tied to, or on par with oil prices they can forget any contract deals.
Just over a month after striking a deal to become operator of Kitimat LNG, with Apache holding the remaining 50 percent, Chevron Chairman and Chief Executive Officer John Watson took a hard line, unwilling to continue the struggle Kitimat’s former ownership group (Apache, Encana and EOG Resources) experienced in trying to arrange offtake orders.
No sooner had Chevron moved into the venture that the “phone started ringing,” he said. “We’re a credible buyer in the marketplace and I think buyers throughout Asia, Japan and Korea are very interested in Chevron and interested in the project.”
And his message to them it that “substantial (LNG) prices” are needed to underpin multi-billion dollar export schemes that include the high cost of developing resources in northeastern British Columbia, building pipelines and completing liquefaction and tanker terminals on the British Columbia coast.
Similar challenges have seen the cost of new Australian projects get caught in an inflationary spiral.
U.S. projects on the other hand have the advantage of existing gas pipeline networks and existing import terminals that can be easily converted to exports.
“I can tell you it takes a large capital commitment and most companies in the world aren’t going to make that commitment without having pricing that gives them a fair return. That pricing is going to need to be something close to oil parity, or the projects won’t get built,” Watson told analysts.
“What we see is continuing growth in (LNG) demand. There’s a lot of gas out there, but pulling these projects together and getting them online ... in time to meet that demand, is a different matter.”
He declined to discuss a possible timeline for Kitimat LNG until a sales agreement is negotiated. “We hope to close the transaction soon.”
Push by Asian utilitiesChevron’s entry into Western Canada coincides with a push by Asian utilities to link LNG sales to North American gas prices.
“You’ve got this trend of Henry Hub indexation, which is perceived to be a lower level of pricing, creeping into the expectations of Asian buyers nowadays in an attempt to squeeze seller margins,” said Asish Mohanty, an LNG analyst with energy consultant Wood Mackenzie.
Some of those objectives were bolstered last summer when Cheniere Energy, operator of the Sabine Pass LNG project, signed contracts that require offtakers to pay 115 percent of Henry Hub gas prices, plus US$2.25-$3 per million British thermal units to cover the costs of liquefaction.
Most existing LNG deals are linked to oil, usually Brent prices, making the price about 14-15 percent of the price of a barrel of Brent, although some older sales contracts are as low as 13 percent of Brent.
Although somewhat late on the scene, Chevron is seen as bringing heft to the Kitimat project, which already holds the only large-scale export permit from Canada’s National Energy Board, covering 10 million metric tons per year.
Tom Valentine, a partner in the law firm of Norton Rose Canada that played an advisory role in the Kitimat transaction, said that “if you look around the world there is only a handful of companies that can legitimately say they are world leaders in the LNG space. Chevron would be one of them.”