Could Chevron Jumpstart the North American Natural Gas Sector?

The natural gas sector ended the year on a high note following the announcement that one of the world’s leading energy firms has agreed to operate — and buy a partial stake in — a proposed liquefied natural gas (LNG) project on Canada’s British Columbia coast.

Kitimat LNG’s project moved a step closer to reality last week when Chevron (NYSE:CVX) announced that it will buy out the minority positions that Encana (TSX:ECA,NYSE:ECA) and EOG Resources (NYSE:EOG) hold in the endeavor. In doing so, Chevron has established itself as a 50-percent owner in a project that is ready for construction, but has fallen victim to a number of delays amid uncertainty surrounding sales contracts.

Chevron also confirmed that it will take a 50-percent interest in approximately 644,000 acres of petroleum and natural gas rights in the Horn River and Liard Basins in British Columbia. Chevron and Apache (NYSE:APA) will now share ownership of the project, with Chevron operating the plant and related Pacific Trail Pipeline, which is set to transport oil from Northeastern BC.

In October 2011, the National Energy Board granted Kitimat LNG a 20-year export license to serve international markets. The proposed project is currently in the front-end engineering and design phase; during its first phase it will be able to export 1.4 billion cubic feet (bcf) per day, or 5 million tons of LNG per year, a number that is expected to double in the future, according to the Calgary Herald.

Apache previously led the project, but never signed an offtake agreement to sell LNG to Asian buyers, an article in The Globe and Mail states. The company originally expected to make a final investment decision earlier in 2012; however, without guaranteed sales agreements, the decision to move the project forward proved impossible.

Investor concerns eased

Chevron’s involvement in the project will likely ease LNG investors’ concerns about the endeavor. The LNG industry is normally operated on lengthy contracts, and buyers are often more comfortable dealing with large industrial players (such as Chevron) that boast a proven track record of delivering product on time.

On that note, Apache stated that Chevron’s involvement is a massive boost for the project, giving the impression that construction is now likely a foregone conclusion. In a press release, G. Steven Farris, Apache’s chairman and CEO said, “Kitimat LNG is the first mover among British Columbia LNG projects, and we expect the momentum of this project will accelerate with this new joint venture.”

“With Chevron in the project, the Kitimat project is really more of a when proposition rather than an if,” added Bob Dye, Apache’s senior vice president of global communications, in comments to The Globe and Mail. “They bring financial strength, operating experience and marketing expertise to the project.”

LNG exports driven by overseas markets

The push for Canadian LNG exports is being driven largely by a desire to deliver energy abroad — particularly in Asia, where gas trades for three to five times the values recorded in North America. Gas prices have plummeted on the back of booming supplies as a result of increasingly efficient extraction methods and large-scale reserves uncovered in shale plays.

The Chevron-Apache union is not the first between the firms. The two parties are already partners in Wheatstone LNG, an Australian project that is under construction and is expected to export 8.9 million tonnes of LNG a year.

While the Kitimat project is the farthest along in terms of obtaining regulatory approval and engineering work, some market observers had begun to question the mix of owners involved. There was a sense that potential customers saw Encana and EOG as upstream independents who did not have the necessary experience to move the project forward.

Those assumptions seem to have been justified by the fact that both Encana and EOG noted that they sold their stakes in the project to focus on “core” operations. Encana, for one, says it remains committed to natural gas export development.

“This investment by Chevron, a multinational LNG player, represents a key step in the development of LNG export from Western Canada,” said Randy Eresman, Encana’s president and CEO. “Our main goal since we first acquired an interest in Kitimat LNG almost two years ago was to help ensure the progression of this project towards its development. While we are no longer a direct participant in this project, we continue to support LNG export as vital to diversifying markets for North American natural gas.”

Rich Coleman, BC’s minister of energy and mines, maintained this sentiment, telling The Globe and Mail that he is “pretty happy” with Chevron’s move and the revitalizing effect it could have on the province.

“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.”

First Nations to be consulted

Chevron’s intent was highlighted when it immediately confirmed that it will work with First Nations in the northwest to help the proposed facility move forward. The conciliatory move seems to be a response to ongoing public forums and a very public war of words between Enbridge and First Nations groups that lie along the proposed Northern Gateway pipeline route.

Chevron’s senior external communications advisor, Lief Sollid, said the company plans on conversing with First Nation groups to relay how the project would benefit their communities. He also stated that Chevron’s experience in the global LNG market will help advance the scheme, according to a CFTK-TV report.

“We have significant experience in building LNG facilities and in marketing the gas and building long term relationships with clients. So we bring that experience to the Kitimat LNG project and we certainly believe we can help move it forward.”

Encana and EOG have not disclosed the values of their parts of the deal, but Apache said it netted $400 million from Chevron.

 

Securities Disclosure: I, Adam Currie, hold no direct investment interest in any company mentioned in this article.

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