Chevron Corp. (CVX), the second-largest U.S. oil company, agreed to buy a 50 percent stake in the proposed Kitimat liquefied natural gas terminal from Encana Corp. (ECA) and EOG Resources Inc. (EOG), joining the competition to ship the fuel from North America to Asian markets.
Chevron will also acquire 50 percent of a pipeline serving the Canadian project and drilling rights for 644,000 acres in British Columbia’s Horn River and Liard basins, according to a statement from the San Ramon, California-based company today. It will operate the LNG terminal and pipeline, and project partner Apache Corp. (APA) will handle the acreage.
Chevron joins Royal Dutch Shell Plc (RDSA) and Malaysia’s Petroliam Nasional Bhd in pursuing gas exports from western Canada to Asian markets, where the heating and power plant fuel sells at a premium to North American prices. The Kitimat project has a license from Canadian regulators to export 10 million metric tons a year of the liquefied fuel.
The involvement by Chevron in Kitimat LNG “elevates the probability of this project going ahead and expedites the timeframe,” said Daniel Cheng, a portfolio manager who helps oversee C$375 million ($378 million) at Matco Financial Inc. in Calgary, including Encana and EOG shares. “The partners in that project were stalling because they were having a hard time securing long-term, oil-linked price customers.”
Chevron will probably pay a total of $1.3 billion, William Featherston, an analyst for UBS AG in New York, wrote in a note today. All of the companies involved declined to provide terms of the deal.
Apache Chairman and Chief Executive Officer Steven Farris estimated in March the Kitimat project would cost $15 billion, including the terminal, pipeline and investment in related drilling wells.
The cost of building LNG terminals, which chill gas to -260 degrees Fahrenheit (-160 Celsius) to make it a liquid that can be shipped on tankers, has surged in recent years as competition for materials and workers has increased, James T. Jensen, president of Jensen Associates, said in a phone interview today.
Apache is still completing the design process that will help develop cost estimates, Paul Wyke, a spokesman for the Houston-based company, said in an e-mail today. Chevron hasn’t set a schedule for a final investment decision on the projects or for when exports will begin, Gareth Johnstone, a company spokesman, said in a phone interview.
Chevron and Apache are already partners in the Wheatstone LNG export project in Australia. Chevron also is developing the Gorgon LNG project in Australia, an effort that may cost as much as A$52 billion ($54 billion) and begin first shipments in 2015.
“The British Columbia projects are trying very hard to compete with Australia,” Jensen said. “The fact that Chevron is getting in suggests that they’ve found it interesting compared to what else they have.”
The Kitimat project is 400 miles (650 kilometers) north of Vancouver. The Pacific Trail pipeline would stretch 290 miles, connecting the terminal to a pipeline system owned by Spectra Energy Corp. (SE)
The project “is ideally situated to meet rapidly growing demand for reliable, secure and cleaner-burning fuels in Asia, which are projected to approximately double from current levels by 2025,” Chevron Vice Chairman George Kirkland said in the statement. The transaction, subject to approval from Canadian regulators, is expected to close by the end of March.
The Horn River and Liard shale basins hold an estimated 50 trillion cubic feet of potential gas, Farris said in a separate statement today.
Apache expects to net about $400 million on the transaction, according to the statement. It will sell a 50 percent stake in the Liard acreage to Chevron for $500 million and pay Chevron to raise its stake in the terminal, the pipeline and the other producing areas to 50 percent from 40 percent.
“Chevron is the premier LNG developer with longstanding relationships in key Asian markets,”Farris said.
Both EOG and Encana held 30 percent stakes in the Kitimat project. Apache said it and Chevron will explore sales of stakes in the terminal and acreage to customers.
EOG, based in Houston, is selling to focus on onshore crude oil production, “which is generating more immediate reinvestment opportunities,” Chairman and CEO Mark Papa said in a separate release. K Leonard, a spokeswoman for the company, didn’t immediately return voicemail messages seeking comment.
For Encana, Canada’s largest gas producer, “we do not have former experience in LNG projects and Chevron does,” Jay Averill, a spokesman for the Calgary-based company, said by phone today. “Bringing in a global player like Chevron, which does have the experience and the financial ability to bring this to fruition, takes the project to the next step.”
Chevron fell 1 percent to close at $108.63 in New York. Apache dropped 1.7 percent to $78.68 and EOG dropped 0.7 percent to $122.77. Encana declined 2.3 percent to C$19.66 in Toronto.
Chevron was “one of a fairly short list of natural buyers,” Menno Hulshof, an analyst at TD Securities in Calgary, said in a note to clients today.
RBC Capital Markets acted as financial adviser for Apache, Encana and EOG on the Horn River acreage sale.
Exxon Mobil Corp. (XOM) is the largest U.S. oil company.
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