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Chevron and Apache team up at Kitimat LNG project

Chevron has shaken up the race to export liquefied natural gas (LNG) from Canada’s west coast by teaming up with Apache to develop the Kitimat LNG project

In a series of transactions announced on 24 December 2012, Chevron bought out Houston-based EOG Resources and Calgary’s Encana Corporation’s 30% interests in the proposed 5 million tonne per year (t/y) Kitimat LNG export terminal. Apache, which had a 40% interest in the project, then bought a 10% stake from Chevron, making the pair equal partners in the development. Chevron will operate Kitimat :LNG.

The companies have also established a 50:50 upstream joint venture, operated by Apache, to develop 655,000 acres of undeveloped lands in the shale-gas rich Horn River and Liard basins. Any discoveries made on the acreage will be developed as feedstock for Kitimat LNG.

Neither EOG nor Encana disclosed the terms of the deal. However, Apache said it would earn net proceeds of $400m after increasing its ownership of the LNG plant to 50% and paying Chevron an undisclosed sum to equalise interests in jointly-held exploration lands.

Chevron has also agreed to buy a controlling 50% stake in the Pacific Trail Pipeline, a proposed 463 km pipeline that will send 1 billion cubic feet per day (cf/d) of gas from British Columbia’s remote shale-gas basins to the Kitimat plant.

Both the terminal and the pipeline have been approved by national regulators. In 2011, Canada’s National Energy Board granted Kitimat LNG a 20-year licence to export up to 10m t/y of LNG, the first such licence awarded in Canada.

Though Kitimat was the first of a number of proposed LNG export projects to gain regulatory approvals, it has struggled to make progress.

The problem has not been finding enough gas. Apache estimates its Horn River and Liard acreage holds more than 50 trillion cf of recoverable resources. In June 2012, three Apache wells at Liard averaged 30-day initial production rates of 21.3m cf/d. Expected recovery from a single well is estimated at 18bn cf. These production numbers rank Liard among the top North American unconventional plays tested to date. “We believe this is the most prolific shale gas resource test in the world,” said Apache chief executive Steven Farris.

Apache and its partners, though, have been unable to secure the long-term contracts to sell the gas. These contracts are vital for Kitimat to secure financing. Until now, Kitimat has been dominated by upstream independents Apache, EOG and Encana, whose core business is to drill wildcat wells, not develop complex, large-scale LNG terminals.

That has put it at a disadvantage to heavyweight competitors such as Shell, which has teamed up with major Asian customers Korea Gas Corporation, Mitsubishi and PetroChina under long-term purchase and production arrangements for a proposed 12m t/y plant, LNG Canada, also on the west coast.

Those crucial buyers have been more willing to throw their support behind Shell, a supermajor with extensive LNG experience, than a group of independents players. Chevron should change all that. The US supermajor brings the experience, credibility and cash Kitimat LNG needs to get off the ground.

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