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Apache exit seen threatening Chevron-led LNG plant in Canada

REBECCA PENTY and BRADLEY OLSON

SAN RAMON, California (Bloomberg) -- Chevron Corp’s plan to build a natural gas shipping terminal on Canada’s Pacific Coast faces mounting challenges with the exit of its partner, Apache Corp.

The proposal to liquefy the fuel in Kitimat, British Columbia, the first to get export approval in Canada, was already delayed by prior ownership changes including the departures of Encana Corp. and EOG Resources Inc. It’s among more than a dozen Pacific Coast LNG export plants being considered by companies seeking higher prices for the fuel in Asia, including Royal Dutch Shell Plc and Petroliam Nasional Bhd.

Chevron, based in San Ramon, California, probably won’t pursue Kitimat LNG on its own, given the cost overruns at its Gorgon project in Australia, said Fadel Gheit, an analyst with Oppenheimer & Co. in New York. The cost to build Gorgon, where Chevron has partners including Exxon Mobil Corp., surged to $54 billion from an estimate of $37 billion in 2009.

“The odds increase that there will be no Kitimat,” Gheit said in a phone interview on July 31. “I would not think that they would be interested in going it alone. They had a bad experience in Australia with Gorgon and their co-pilots were Exxon, the best in the business.”

Apache, facing pressure from activist hedge fund Jana Partners LLC to cut spending and focus drilling in the U.S., heeded the investor’s advice on July 31 by stating it will exit the Canadian project and will sell its stake in the Wheatstone LNG facility under construction in Australia.

Apache gained 1.4% to $102.66 at the close in New York after earlier rising to $104.57, the highest intraday since March 2012. Chevron fell 2.5%.

‘World Class’

Kurt Glaubitz, a spokesman for Chevron, declined to comment on Apache’s departure from the project.

“I don’t think the complete exit by Apache has an impact on Kitimat going forward one way or the other,” Apache Chairman and CEO Steve Farris said on July 31 on a conference call with investors. “It is a world-class project with world-class reserves.”

Chevron and Apache had already been seeking a buyer to acquire part of their interests in Kitimat LNG to defray costs. The project, the first to receive an LNG export license from Canada’s National Energy Board in 2011, has yet to be sanctioned.

Petronas Plan

Petronas, plans to be the first to decide whether to proceed with a Canadian LNG export project. The Malaysian state-owned company is targeting a decision on the C$9 billion ($8.3 billion) to C$11 billion proposal by the end of this year.

Kitimat LNG was initially considered by Calgary-based developer Galveston LNG Inc. as an import terminal last decade and the concept was switched to an export facility after vast supplies of gas from shale across North America flooded continental markets. Galveston attracted Apache as a partner and was later acquired by EOG. Encana joined the project in 2011.

Chevron stated it would enter Kitimat LNG the following year, when Encana and EOG sold their stakes to focus on producing onshore fuels. The project was delayed after Chevron joined as the partners reorganized roles, undertook additional studies and sought more partners to spread costs.

Kitimat LNG’s early export license gave it a head start on the other Canadian proposals, and it succeeded in lining up pipeline approvals and aboriginal support.

Buyers Search

After that, the project struggled to find buyers for its gas. Apache’s departure now pushes Kitimat LNG lower on the list of the plants that may be built, Ed Kallio and Cameron Gingrich, directors at Solomon Associates LLC’s Ziff Energy division in Calgary, said in a phone interview.

“They were having issues finding markets, unlike Shell and Petronas,” Kallio said.

By losing Apache, Chevron may attract a partner with experience developing LNG and contacts in the market that missed the first wave of investment in Canada, said Uday Turaga, CEO of ADI Analytics in Houston.

“I don’t think there will be a dearth of suitors who may want to take Apache’s place,” Turaga said in a phone interview. “It’s going to be a bit of rough weather for the project until additional partners can be lined up.”

08/01/2014

 

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