Chevron struggles to meet buyer price ideas on Canadian Kitimat LNG

Author: Ruth Liao

2014/03/13

Asian buyers who remain resistant to oil-indexation on new long-term LNG contracts remain at loggerheads with Western Canadian LNG project developers. This has led to a delay on an investment decision for the Canadian Kitimat LNG project, according to US developer Chevron.

The proposed 10mtpa Kitimat LNG project and associated Pacific Trail Pipeline were not included in a list of the company’s estimates for final investment decisions (FIDs) in 2015-2016 shown to investors during a security analyst meeting on 11 March.

Chevron and US-based Apache are jointly developing Kitimat after Chevron bought out the stakes from former partners EOG Resources and Encana.

Chevron has stated that 60-70% of Kitimat’s future production would need to be secured under firm sales agreements before moving toward final investment.

Chevron CEO John Watson cited “a lot of tension” between buyers and sellers, as a result of relatively low-cost brownfield projects and domestic gas prices in the US, and the oil-indexed contract prices being marketed from the greenfield Western Canadian projects.

Some buyers have secured Henry Hub indexed prices on brownfield LNG sites but Canadian developers are keen to secure potentially more expensive oil-indexed terms for projects to guarantee a return on investment.

“It will take a meeting of the minds by customers and suppliers, or we’ll see that gap widen over time,” he said.

The comments by Chevron’s executives have been the starkest yet on a project that initially enjoyed first-mover advantage.

Kitimat LNG was the first Canadian LNG project to receive its 20-year export approval from the country’s National Energy Board (NEB) in October 2011, but has not yet secured a foundational customer.

In late February, fellow Kitimat LNG developer Apache indicated its interest in potentially selling down its stake in the venture. Chevron’s Watson said the company did not plan on increasing its percentage from 50% should Apache offer to pare down its share.


Australian expansion

Chevron is also considering a fourth train at its 15.6mtpa Gorgon LNG project in Western Australia, which is under construction and was anticipated to be starting up mid-2015.

The Barrow Island project, considered the world’s most expensive in absolute terms, is expected to cost $54bn, after a series of cost blow-outs reported earlier.

Chevron’s senior vice president for upstream, Jay Johnson, said there was the potential for a brownfield expansion, given that 11 trillion cubic feet (tcf), or 311 billion cubic metres, was available in the Geryon and Chandon fields. However, Gorgon would require firm LNG contracts in order to underpin a potential fourth train. 
Chevron could also consider de-bottlenecking the first three trains in order to produce up to another 3mtpa. ( See GLM 26 September 2013 .)

Chevron’s partners ExxonMobil and Shell each hold a 25% stake in Gorgon, while Chevron, as operator, holds 47.333%. The remaining shareholders, Japanese utilities Osaka Gas (1.25%), Tokyo Gas (1%) and Chubu Electric (0.417%), have secured offtake capacity.

Chevron’s 8.9mtpa Australian Wheatstone project, which was estimated to be about 30% complete, now has 85% of its LNG sales committed in gas sales. Ruth Liao