A struggling natural gas export project on the British Columbia coast is on the cusp of being built after Chevron Corp. agreed to take over as operator of Kitimat LNG.
Chevron will buy out the minority positions held by Encana Corp. and EOG Resources Inc., establishing itself as a 50 per cent owner in a project that is ready for construction, but has seen lengthy delays amid difficulties in obtaining lucrative sales contracts.
Apache Corp., which had previously led the project, had not signed a single “off-take” agreement to sell liquefied natural gas to Asian buyers. Apache had expected to make a final investment decision in early 2012 and has spent hundreds of millions of dollars to prepare its site, not far from Kitimat, B.C., for construction. But without sales agreements, making a decision to build the project has proven impossible.
Chevron, however, is a major global LNG player with an interest in a half-dozen global projects, including two that it leads. In the LNG industry, which typically operates on lengthy contracts, buyers are often more comfortable with large industrial players with a proven record of delivering energy on time. Chevron’s heft is a sufficient boost to Kitimat LNG that Apache now says construction is all but a foregone conclusion.
“With Chevron in the project, the Kitimat project is really more of a when proposition rather than an if,” Bob Dye, Apache’s senior vice-president of global communications, said Monday.
He added: “they bring financial strength, operating experience and marketing expertise to the project.”
Chevron spokesman Tim Murphy was more circumspect. “We’re in it to make it happen,” he said. “But we’re going to take one step at a time. For us, really, this is day one and the project is still in FEED [front end engineering design].”
Apache and Chevron are already partners in Wheatstone LNG, an Australian project under construction that is expected to export 8.9 million tonnes of LNG a year. In Kitimat, Chevron will operate the terminal and pipeline. Apache will take care of gas production.
The deal may, however, encounter some opposition from first nations groups. Chevron has been the target of substantial activist attention after being ordered by an Ecuadorian court to pay $18-billion related to alleged environmental contamination. Chevron has not paid the amount, saying the mess was clean up and the judgment was based on a fraudulent process. But that issue may hurt Chevron’s prospects in B.C., an area where the environment is an especially delicate issue.
“The environmental lawsuit against Chevron from their activities in Ecuador will become a big issue I expect. Nothing is easy,” said a person familiar with the Kitimat LNG project.
Chevron is the latest major energy company to descend upon the British Columbia coast, drawn by the province’s large gas fields and proximity to Asian markets. North-western Australia is only slightly closer to Tokyo than Kitimat, for example – and Kitimat is far closer to Japan than other significant sources of current and future LNG in Qatar and Mozambique.
Other multi-national companies leading LNG projects in B.C. include Royal Dutch Shell plc, Petronas and BG Group plc. Exxon Mobil Corp. and CNOOC Ltd., through its pending acquisition of Nexen Inc., have both expressed interest in Canadian LNG exports. Sources have said Australia’s Woodside Petroleum Ltd. is also looking.
Together, those companies who have made public their Canadian plans are pursuing up to 75 million tonnes a year of LNG exports – a significant volume relative to the 460 million tonnes of global supplies in 2011.
And others may yet appear: “there’s a company out of India that’s recently expressed interest, too,” B.C. minister of energy and mines Rich Coleman said.
Mr. Coleman is “pretty happy” with the Chevron investment and the revitalizing effect it could have for a province that has characterized LNG as an oil sands-scale opportunity.
“If you’re going to attract this level of activity, you need to attract an international level of investment, because these things cost a lot of money,” he said. “Once you're in the game, you’re in the game seriously for a couple of generations. And that’s really important to B.C., given how much natural gas we have.”
Apache had previously pegged the cost of Kitimat LNG at $4.5-billion. Final engineering is not yet complete, however, and that number seems likely to rise. The National Energy Board has given approval for the project to export 10 million tonnes of natural gas a year. Estimates compiled by engineering firm Bentek suggest a project of that size on the B.C. West Coast could cost $10-billion to $12.5-billion to build.
The Chevron deal closes off a potentially lucrative market for Encana Corp., the Calgary-based producer that has struggled against low natural gas prices. The push for Canadian LNG exports is driven largely by a desire to deliver energy to Asia, where gas has traded for three to five times its value in North America. For Encana, however, bowing out of Kitimat LNG also relieves the cash-strapped company of a potentially major spending commitment.
Encana’s commitment to Kitimat LNG created a capital exposure that “would have been too large and it makes sense for [Encana] to focus capital on shorter cycle time oil opportunities rather than long cycle time LNG,” CIBC World Markets Inc. analyst Andrew Potter said in a note. And having Chevron on board “moves the dream of Western Canadian LNG exports closer to reality, which will bring some benefit to all Western Canadian producers.”
Encana and EOG did not disclose the value of their parts of the deal, which included selling 30 per cent interests, each, in Kitimat LNG, plus undeveloped land in north-eastern British Columbia and, for Encana, a commitment to a natural gas processing plant.
Apache netted $400-million (U.S.) from Chevron.
The Chevron deal may not be the last for Kitimat LNG, however. LNG buyers often prefer to have partial ownership in both natural gas fields and LNG facilities as well. In Australia’s Wheatstone, for example, the list of minority partners includes Kuwait Foreign Petroleum Exploration Company, Royal Dutch Shell plc. and Kyushu Electric Power Company.