Chevron a game-changer for Kitimat LNG

Industry giant brings experience, marketing smarts to B.C. project

When one of the world’s leading energy firms agreed this week to buy and operate a proposed liquid natural gas (LNG) project on the British Columbia coast, Kitimat moved a big step closer to becoming a significant exporter.

The Kitimat LNG project, first planned as an importing site when natural gas was expensive, reversed direction three years ago. Gas reserves were increasing and prices were dropping due to more widespread “fracking,” the fracturing of rock formations that releases trapped gas. Until Chevron stepped in on Monday, the Kitimat project was owned by three firms that were better known as upstream oil and gas players — Encana, Apache and EOG — and progress was being made.

Enter California-based Chevron, an industry giant that is also operator and part owner of the immense Gorgon gas field and related LNG development in Western Australia — the world’s largest new liquefied natural gas project. Chevron and Apache will share ownership and Chevron will operate the Kitimat LNG project and related Pacific Trail Pipeline that will bring gas from northeastern B.C. Chevron will also purchase 644,000 acres of petroleum and natural gas rights in the Horn River and Liard Basins in B.C. Apache will manage the upstream assets.

It was a deal that essentially had to happen. Asish Mohanty, senior gas analyst for global consulting and research firm Wood Mackenzie, told the Journal last month that the Kitimat LNG project was furthest along in terms of obtaining its regulatory approvals and engineering work, but had the wrong mix of owners.

Other proposed LNG projects had larger and more experienced owners — such as Petronas and Shell — but were not even at the regulatory approvals stage.

Mohanty said Asian customers looking at Kitimat LNG “see a venture comprised of upstream independents who are not perceived as having the necessary LNG experience to carry such a project forward.”

That has now changed. “The Kitimat LNG development is an attractive opportunity that is aligned with existing strategies,” said Chevron vice-chairman George Kirkland.

Encana and EOG both said they were selling their stakes to focus on core operations.

“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 toward its development,” said Encana chief executive Randy Eresman. “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.”

Apache called the deal a milestone.

“With experience developing LNG projects, marketing expertise and financial wherewithal, Chevron is the preferred co-venturer to join Kitimat LNG,” said Apache chief executive Steven Farris.

The proposed Kitimat LNG project is in the front-end engineering and design phase. The first phase will be able to export 1.4 billion cubic feet per day, or five million tons of LNG per year, which could double in the future.

In October 2011, the National Energy Board granted Kitimat LNG a 20-year export licence to serve international markets.

The project is one of several under development on B.C.’s northern coast. A feasibility study into an LNG facility near Prince Rupert has been done by Petronas and Progress Energy Resources. Work is going ahead to determine timelines, cost and labour requirements. Petronas recently acquired Progress and had said if Ottawa approved the purchase it would look to build a larger plant than had first been considered.

Royal Dutch Shell PLC and three Asian partners have also announced plans to build an LNG gas export terminal in Kitimat, B.C.

Another small project called BC LNG that will export .25 bcf/day, is owned by the Haisla First Nation and Houstonbased LNG Partners. Its first shipment is expected in 2014.

Wood Mackenzie said speed is required by B.C., since international LNG competition is heating up. Australian LNG projects will hit the market in 2018, about the same time that some of America’s glut of gas is liquefied for export.

The main competition for B.C. will be from brownfield expansions being planned in Australia, and the huge gas deposits of Mozambique and East Africa.

“It is not going to be bleak for Canadian LNG after 2019, it’s just that there will be more competition. But demand will still be growing,” Mohanty said.