Big gun Chevron shows up for LNG play

The northwest received some good news for 2013 with an announcement that Chevron is taking a 50 per cent share in the KM LNG project.

The northwest received some good news for 2013 right at the end of 2012 in the form of an announcement that Chevron is taking a 50 per cent share in the KM LNG project, the largest of the northwest liquefied natural gas projects so far to receive environmental approval.

The surprise was not so much the arrival on the scene of such an important player in the global LNG gas market – although I had expected Exxon to be the one – but that it took as long as it did.

EOG and Encana, both 30 per cent owners of KM LNG, had been grumbling about the lack of progress on the project and they as well as 60 per cent majority owner Apache had indicated they were prepared to sell up to a 30 per cent share.

One thing that always bothered me about the project was that ownership was in the hands of that trio.

Granted, they are reputable companies with a good track record and have ample proven and potential natural gas reserves to supply the proposed plant.

However, to my knowledge they were not pipeline builders and, more importantly, they lacked experience in LNG.

(While Apache has a stake in the Wheatstone LNG project in Australia, it is very much a junior partner at just 13 per cent with Chevron owning 64 per cent.)

The latter may help to explain in part why KM LNG hasn’t been able to make any headway on nailing down buyers for its product, a circumstance that has delayed an official announcement that the project is a ‘go’.

Asian customers are not going to make the sort of long term commitment KM LNG was looking for without being confident in the source of supply. How confident were they likely to be relying on three rookies in the business?

Despite all the prep work that has been going on at the Beese Cove site near Kitimat, there has been a growing impression that the project was spinning its wheels.

The FEED study – front end engineering and design – was originally supposed to be completed a year ago. Today there is still no firm date for its completion.

On the pipeline itself, while Shell (Kitimat) and BG (Prince Rupert) swiftly followed their announced intention to build LNG plants with the naming of the pipeline builder for their projects, there has been nary a word from KM LNG.

Add in the lack of progress on contracts and you do not have a very inspiring picture.

That was reflected in a TD Securities report from September 27. Assessing the likelihood of the various northwest LNG projects going ahead, it rated Shell and BG as ‘high’ but KM LNG only as ‘medium’.

That despite the fact that KM LNG has all its environmental approvals and a licence to export while the other two have only just started down that long road.

Now that EOG and Encana have been bought out by Chevron and Apache with each now owning half of the project and Chevron taking on responsibility for the plant and pipeline, I suspect that if TD were to do an update today, they would give KM LNG top rating.

But there is still one more shoe to drop, the buy-in by Asian customers.

In a June 2012 study of LNG markets, PFC Energy stated, “The ability to secure equity in the entire value chain is a critical value creator and it also enhances security of supply as buyers have direct knowledge of and participating interests in the projects that supply them.”

In other words, the potential customers want a slice of the LNG plant, pipeline and gas field pies.

Shell obviously knows the game – Korea Gas, Mitsubishi and PetroChina all have a share in its proposed project.

Chevron as well since their KM LNG deal includes their purchase of a piece of the action in the natural gas fields that will feed the Kitimat plant.

Quite when there will be an announcement of Asian participation in the KM LNG project “value chain” is unknown, but I suspect it will not be long in coming.

In the meantime, the involvement of Chevron certainly means the project is finally starting to get some traction.

And that can only be good for Terrace since this community has always benefited from industrial activity in Kitimat, particularly in the retail and service industry sectors.

msdbax@citywest.ca