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Chevron Takes 50% Stake in Kitimat LNG

Chevron Corp. subsidiary Chevron Canada Ltd. will acquire a 50% operating interest in the Kitimat, British Columbia (BC), liquefied natural gas (LNG) export project and proposed Pacific Trail Pipeline (PTP), and a 50% interest in 644,000 acres of petroleum and natural gas rights in the Horn River and Liard Basins in BC, and be a partner in the project and acreage with Apache Corp., the companies said last month.

"The Kitimat LNG development is an attractive opportunity that is aligned with existing strategies and will drive additional long-term production growth and shareholder returns," said Chevron Corp. Vice Chairman George Kirkland. "This investment grows our global LNG portfolio and builds upon our LNG construction, operations and marketing capabilities. It 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."

In September, Apache and Kitimat partners EOG Resources Inc. and Encana Corp. said they were seeking an investor in the project (see NGI, Sept. 17). Last Monday Wells Fargo Securities analyst David Tameron wrote that EOG had been "repeatedly telling investors not to own [its] shares for Kitimat optionality.

"The transaction makes sense to us as APA [Apache] has partnered with CVX [Chevron] in Australia's Wheatstone [LNG project] and it validates recent Street chatter about CVX exploring the project" wrote Tameron. "From our perspective, the transaction refines each company's focus and allows EOG and ECA [Encana] to gracefully and inconspicuously exit a segment that may not have been part of the long-term plant. Additionally, we believe that the presence of a major should theoretically help move the project forward."

Kitimat LNG and Pacific Trails, born as an import scheme in the early 2000s and converted into an export plan as the shale gas glut emerged, has held development approvals for years and obtained its federal 20-year export license last winter from Canada's National Energy Board (NEB). But despite repeated optimistic predictions, the former team of Apache, EOG and Encana was unable to obtain long-term overseas export contracts required to support construction of the Pacific Coast terminal or the associated pipeline.

Canadian industry, government and investment market spokesmen emphasized that Chevron's move injects global-scale financial strength and especially LNG operating and marketing experience into the BC project.

The San Ramon, CA-based, international energy conglomerate has LNG interests in Australia, Africa and South America. Wary Chevron officials set no deadlines and made no specific promises about construction and terminal opening dates. But the big corporation's arrival in the BC Pacific Coast project "moves the dreams of western Canadian LNG exports closer to reality, which will bring some benefit to all western Canadian producers," CIBC World Markets Inc. said in a note to investors.

Under the terms of the agreements, Chevron Canada will acquire all of the interests owned by affiliates of EOG and Encana in the proposed Kitimat LNG Project and PTP. Thereafter, Chevron Canada will equalize interests with Apache subsidiary Apache Canada Ltd., resulting in Chevron Canada and Apache each holding a 50% interest in both the Kitimat LNG Project and PTP. Operatorship of both facilities will transfer to Chevron Canada.

"This investment by Chevron Canada Ltd. captures significant resource and acreage in proven and emerging natural gas basins in Canada, and is a key opportunity to expand our overall North America exploration and production portfolio," said Chevron North America Exploration and Production President Gary Luquette. "It will enable our North America operations to play an increasingly important role in Chevron's global growth."

The proposed two-train project, currently in the front-end engineering and design phase, received the first Canadian National Energy Board license to export the equivalent of about 750 MMcf/d of LNG (see NGI, Oct. 17, 2011).

All together, Chevron Canada will acquire about 110,000 net acres in the Horn River Basin from Encana, EOG and Apache, and about 212,000 net acres in the Liard Basin from Apache, the company said. Chevron Canada and Apache will each hold a 50% interest, and Apache will operate the two natural gas resource developments.

Apache said it will sell to Chevron a 50% interest in its 100%-owned undeveloped Liard and Horn River acreage for $550 million. Apache will pay Chevron to equalize interests in other Horn River acreage owned by Apache, Encana and EOG. Apache also will pay Chevron to increase Apache's ownership of the LNG plant and pipeline projects to 50%. Net proceeds are expected to be about $400 million.

"This agreement is a milestone for two principal reasons: Chevron is the premier LNG developer in the world today with longstanding relationships in key Asian markets, and the new structure will enable Apache to unlock the tremendous potential at Liard, one of the most prolific shale gas basins in North America," said Apache CEO G. Steven Farris. "Kitimat LNG is the first mover among British Columbia LNG projects, and we expect the momentum of this project will accelerate with this new joint venture."

Encana is selling its 30% interest in Kitimat and PTP, as well as about 32,500 acres of undeveloped land in the Horn River. The transaction also includes Chevron's assumption of Encana's take-or-pay processing commitments for the first phase of the Cabin Gas Plant, Encana said.

"This investment by Chevron, a multinational LNG player, represents a key step in the development of LNG export from Western Canada," said Encana CEO Randy Eresman. "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 towards its development. 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."

Besides its 30% stake in Kitimat and PTP, EOG is selling about 28,500 undeveloped Horn River acres. "While we still believe in the viability of the Kitimat project, our decision to exit is consistent with EOG's focus on domestic onshore crude oil production, which is generating more immediate reinvestment opportunities," said EOG CEO Mark G. Papa.

Apache and Chevron said they will explore sales of equity interests in the LNG plant and upstream assets to foundation customers.

Apache will operate the new joint venture's development of 220,000 gross acres in the Horn River Basin and 424,000 gross acres in the Liard Basin. "At Liard and Horn River, we have built substantial positions in two of the most prolific shale gas plays in North America, with more than 50 trillion cubic feet of resource potential," Farris said.

In June, Apache announced long-term test results from three wells at Liard, including the D-34-K well, which was drilled to a vertical depth of 12,600 feet with a 2,900-foot lateral and a six-stage hydraulic fracturing (fracking) completion. The 30-day initial production rate averaged 21.3 MMcf/d, or 3.6 MMcf/d per frack stage. The ultimate recovery from the D-34-K well is estimated to be 18 Bcf. "We believe this is the most prolific shale gas resource test in the world," Farris said.

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