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When the big boys show up to play

December 26, 2012

Chevron has stepped forward to save the struggling Kitimat LNG project. The company will buy out the minority positions held by Encana Corp. (ticker ECA on TSX) and EOG Resources Inc. (EOG on NYSE) and will provide half the cost ($10-billion to $12.5-billion) to build the LNG facility, and to take over as the prime operator of the facility when built.

The overall result of the sale is a 50-50 joint venture between Apache Canada (NYSE:APA) and Chevron – in order to establish the partnership, the following three steps comprise the deal:

1. Chevron will pay an undisclosed sum for a 60% stake from EOG and Encana.

2. Apache will pay $150MM to Chevron to increase its stake in the project to 50%.

3. Chevron will pay $550MM to Apache for a 50% stake in approximately 644,000 acres worth of natural gas fields in the Liard and Horn River basins, both of which are located in northeastern British Columbia.

Chevron (ticker CVX on NYSE) is a world super-major with a market cap of $212 B. Additionally, the company is a global LNG player with an interest in a half-dozen 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. The construction could be complete by 2017, but the official Kitimat LNG website is vague on timing.

Current plans call for two liquefaction trains, each with expected capacity of 5 million tons of LNG per annum (about 750 million cubic feet of gas per day). Kitimat has received all significant environmental approvals and a 20-year export license from the Canadian federal government. The 463-km Pacific Trail Pipeline will provide a direct connection between the Spectra Energy Transmission pipeline system and the Kitimat LNG terminal when it is completed.

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. Encana is big in the North American natural gas market, but has little LNG experience. Chevron fits the bill.


The Liard and Horn River gas plays in north-eastern BC will provide the natural gas for the Kitimat LNG facility. All tolled these two basins contain at least 75 tcf of natural gas according to the NEB. In 2010, Alberta produced 4.1 trillion cubic feet of gas compared to 1.1 tcf for BC. As the massive recent discoveries are sent to market BC’s production will rise and likely exceed Alberta’s in a few short years.

The move by Chevron brings gravitas to the Kitimat LNG project. These guys know about LNG and can successfully build and operate such facilities. This must be seen as positive for the economy of BC, for the direct jobs to be created in this huge project, the economic spin-offs associated with the project and with the ongoing export of natural gas to Asian markets.