Repsol LNG Sale Seen Delayed as Shale Goring Canaport

Repsol SA’s effort to sell a liquefied natural gas business for about $2.7 billion has bogged down over its unsuccessful 25-year commitments to ship gas into Canada, two people familiar with the matter said.

Spain’s biggest oil explorer has found that Canaport, its underutilized LNG import hub, was a hurdle to closing a deal, the people said, asking not to be identified because the sale talks are private. Royal Dutch Shell Plc has negotiated for the assets, which are mostly in southeastern Canada, Trinidad and Tobago, Peru and Spain, one of the people said.

For six months, the sale has been a centerpiece of Repsol’s $6 billion divestment program needed to avoid a debt-rating downgrade to junk. None of the 30 biggest oil companies is rated below investment grade, according to data compiled by Bloomberg. Repsol’s contracts to supply foreign gas to North America have soured after the extracting of natural gas from shale rock created a glut of the commodity and caused prices to plunge.

Canaport “has become a big white elephant for Repsol due to the North American gas-supply demand fundamentals,” said Cameron Gingrich, senior manager of gas services at Calgary-based consultancy Ziff Energy Group.

Repsol is still negotiating a price for the assets in a “restructured” deal that may include Canaport, one of the people said. The Spanish company had expected to complete it by early February, a person familiar with the deal said in mid-January.

Argentine Seizure

Finding buyers for the other LNG businesses, in the Caribbean, Peru and in Spain, will be easier, Gingrich said. Gail India Ltd. and partner Electricite de France SA placed a non-binding bid for Repsol’s LNG assets in Trinidad and Tobago, Reuters reported, citing the company’s chairman.

Canaport could be turned into an export terminal or a storage site, said Ricardo Barcelona, who advises senior executives on energy issues as managing director at Barcino Capitas Ltd.

The required investment to enable Canaport to serve as an export terminal would be about $2.5 billion to $4 billion, according to estimates from an October report by Atlantica Centre for Energy, a Saint John-based energy think-tank.

The buyer may also be interested in turning Canaport into a storage facility, as “it is becoming increasingly profitable to store gas and sell during the winter or at peak prices,” Barcelona said.

Repsol’s shares fell 2.7 percent to close at 15.38 euros in Madrid, the second-worst performer on the benchmark IBEX 35 Index. The 13-company Euro Stoxx Oil & Gas Index fell 0.2 percent.

Argentina Nationalization

Spokesman Kristian Rix in Madrid at Repsol and Jonathan French, a London-based Shell spokesman, declined to comment.

Kate Shannon, a spokeswoman for Canaport LNG in Saint John, declined to comment. Carolyn Van der Veen, a spokeswoman for Irving Oil in Saint John, did not immediately reply to phone and e-mail messages.

Repsol put the assets up for sale after Argentina seized its YPF unit and refused to pay. The nationalization followed the Spanish company’s January announcement of the discovery of 22 billion barrels of potential oil in shale rock in Argentina. Repsol is seeking $10.5 billion for a 51 percent stake in YPF.

Selling the LNG division “is one of the main corrective measures that we expect Repsol to implement in order to cut debt meaningfully,” Francois Lauras, VP-senior credit officer at Moody’s said in an e-mailed response to questions.

U.S. Market

Canaport imports LNG from ships and turns the fuel into gas for moving by pipeline to southeast Canada and to the far larger U.S. market. The import value of all LNG shipments into Canaport totaled about C$49.5 million ($49.4 million) in 2012, 61 percent less than in 2011, according to LNG import data from the Canadian National Energy Board.

Shipments from its location in New Brunswick into New England fell an annual 51 percent in the first 10 months of 2012, Bentek Energy LLC data reported by U.S. regulators show.

Canaport, 75 percent owned by Repsol, has a capacity to send out 1.2 billion cubic feet of natural gas per day and averaged just 0.325 billion cubic feet a day into the New Brunswick pipeline for the week ending Feb. 7, according to El Paso, Texas-based LCI Energy Insight data.

The terminal, jointly owned with Canada’s Irving Oil Corp., was built primarily to supply the U.S. market.

In 2006, the Spanish driller signed a contract with Emera Brunswick Pipeline Co. Ltd. to move gas from Canaport to the U.S. border, and another with Maritimes & Northeast Pipeline LLC, to take it 420 miles south to Dracut, Massachusetts, according to Repsol’s 2011 annual report.

Profitable Business

The 25-year leases became effective in 2009 and were booked as $1.8 billion in liabilities, according to the annual report. The plant is part of a multicontinent LNG business that earned Repsol 386 million euros in operating profit in 2011, or 8 percent of the total.

LNG import terminals in Canada and the U.S. were mostly undermined by the boom of shale-gas production that could supply America for almost 20 years, U.S. Energy Information Administration data show.

GDF Suez SA, the biggest buyer of gas in Europe, bid for some but not all of Repsol’s LNG assets, said a person familiar with the situation without naming the assets left out. The person asked not to be identified as talks were private.

Russia’s Gazprom OAO, the world’s biggest gas producer, dropped out of bidding because it wasn’t interested in Canaport, according to a person familiar with the matter.

“There’s no future whatsoever for import terminals in the U.S. or Canada,” Stuart Joyner, head of oil and gas analysis at Investec Securities Ltd. in London, said in an interview.

Before it's here, it's on the Bloomberg Terminal.