US oil and gas company Apache says it will exit both Chevron-operated LNG projects, Kitimat and Wheatstone, in which the company holds equity interests in order to focus on its more lucrative onshore business.
Apache’s Chairman and CEO G. Steven Farris (pictured, right) announced the company’s intention to leave the two LNG projects at Apache’s second quarter results presentation on 31 July 2014. “In light of our expanding opportunity set in North American onshore, we are evaluating our international assets and are exploring multiple opportunities, including the potential for separation of some or all of them through the capital markets,” he said.
The decision to exit both projects comes after Jana Partners, which invested US$1 billion in Apache, urged the company to focus on its North American onshore business and exit its international assets, the Wall Street Journal reported.
GlobalData analyst Jonathan Lacouture told OE that it was investors that influenced the decision. “Apache’s divestiture (due to Jana Partners) is something they are pushing because they want low-risk money and US liquids is where that is at,” he says.
Apache’s decision, Lacouture says, comes at the right time for the company. “Apache quit on Wheatstone at the right time, right before development is about to start ramping up.”
Farris told investors on 31 July that he doesn’t believe Apache’s exit will negatively impact Kitimat’s value: “Frankly, whether we’re in it or not, it is a world class project with world class reserves, and Chevron and Apache, at this point, are way ahead of anybody else in that arena. We’ve always been in a position that we felt like we could not be in these LNG projects. And I just think it’s important that we state that.”
Lacouture agrees with Farris’ assessment that Apache’s exit won’t hurt Kitimat, or Wheatstone for that matter.
“They (Apache) had a 13% equity share (on Wheatstone). It increases the risk for Chevron, and they already have a lot of risk with Wheatstone and Greater Gorgon,” he says. “I don’t see it having too huge an impact on the project, which is already 30% complete as of March this year. They are well on the way in regards to the offshore and onshore component, although it (Apache leaving) might result in delays.”
Lacouture said Chevron will likely fill the hole left by Apache’s exit with a new equity partner. For Wheatstone, he says it will likely be on the buy side.
“In terms of the overall health of the project, I don’t see it having a rippling effect. Chevron and a lot of these other companies have learned a lot about cost blowouts and how to perform on these LNG projects,” he says.
“It will be interesting to see what happens with Julimar and Brunello as Apache and their partner KUFPEC still own equity in those fields,” Lacouture notes. “The plan was to pipe the gas to the Wheatstone LNG facility, but now that Apache doesn’t have a stake it will be interesting to see what unfolds.”
Chevron spokesperson Kent Robertson told OE that Chevron intends to seek new partners.
“Chevron is not increasing its current holding,” Robertson said. “Therefore we are focused on resolving the project partnership with Apache.”
Chevron also continues to advance both projects. “For Kitimat, that means advancing work on resource appraisal, and determining design, cost, and schedule,” he said. “Wheatstone is 40% complete and continues to target a 2016 startup.”
Kitimat LNG
Chevron joined the Kitimat LNG in December 2012, buying out EOG and Encana’s stake in the project. Chevron’s entrance into the project saw both the supermajor and Apache opting to increase their stake to 50%, with Chevron Canada serving as operator for Kitimat LNG and the proposed 480km-long Pacific Trail pipeline, while Apache was to operate the upstream assets at Liard and Horn River basins in Northeast British Columbia.
Kitimat will be developed as a two-train facility, built on Bish Cove near Kitimat, British Columbia, about 400mi. north of Vancouver on First Nations land, under an agreement signed with the Haisla Nation. In 2011, the Canadian National Energy Board approved Kitimat for license to export up to 10MPTA of LNG.
The project is still in the FEED phase. In January 2014, Chevron and Apache awarded an EPC contract to a consortium composed of JGC and Fluor. Once a final investment decision is made on the project, full construction of the Bish Cove facility will begin.
Wheatstone LNG
Wheatstone is the more advanced of the two projects Apache plans to leave. Construction began on the $29 billion project in 2011 when the final investment decision was made.
The Wheatstone LNG project will have an onshore facility at Ashburton North, 7.5 mi. (12km) west of Onslow in Western Australia. Wheatstone will consist of two LNG trains with a combined capacity of 8.9MPTA and a 200 TJ/d domestic gas plant, and a pipeline connecting to the Damiper-to-Bunbury natural gas pipeline.
Offshore facilities will gather and partially process gas and associated condensate and deliver it onshore for further processing. The Wheatstone processing platform will be Australia’s largest offshore platform, Chevron says. The platform will be located in 73m of water, with its steel gravity-based substructure measuring 100m high. The topsides weigh 35,000 tonnes and have been designed to withstand 12 story-high cyclonic waves. Once the topsides are installed on the substructure, they will be about 28m above the sea level.
The platform topsides have a total deck area of 20,000sq m and includes: inlet facilities to receive the incoming gas and condensate production, separation and cooling equipment to separate the gas from the liquids (condensate and water), compression facilities to bring the gas to the required export pressure, dehydration equipment to dry the gas and de-water the condensate for transport to shore, and export facilities to tie-in the 225km export trunkline transporting gas to the Ashburton North plant site. Marine facilities will include a shipping channel, turning basin, materials offloading facility, and export jetty.
Chevron says 80% of Wheatstone’s LNG will be fed by the Wheatstone and Iago fields, operated by Chevron, KUFPEC and Kyushu Electric Power Co. The remaining 20% will be supplied from the aforementioned Julimar and Brunello fields.
Chevron operates the project, and holds 64.14% interest. Its joint venture partners include: Apache (13%), KUFPEC (13.4%), Tokyo Electric Power Co. (TEPCO, 8%), and Kyushu Electric Power Co. (1.46%).
In October 2013, Chevron signed a long-term sales and purchase agreements with TEPCO to supply LNG from the project. Under the agreements, Chevron subsidiaries, together with subsidiaries of Apache and KUFPEC, will supply Tohoku, Japan with 0.9 MTPA of LNG for up to 20 years.
Future of Australian LNG
Apache’s divesting from Wheatstone is somewhat indicative of the endemic issues with LNG production in Australia but it is company specific, Lacouture says.
“Apache has massive tracts of shale and plus they are an American company, and they have that tethering to the US,” Lacouture says. “But a lot of the companies that are producing offshore Australia are Australian companies (Woodside, BHP Billiton, and Santos). They have large stakes in LNG off Australia. I don’t see those companies moving stakes because it is their home country.”
Lacouture says while Apache leaving Chevron’s Wheatstone project won’t have a huge effect on the project nor the industry as a whole, however, it is indicative of the overall oil and gas industry’s waning enthusiasm for these kinds of massive LNG projects. He noted that GDF Suez and its partner Santos recently put Bonaparte FLNG on hold. The companies stated in June that they had decided to consider other potential development options.
“What’s really becoming a really big issue for companies is risk, both sovereign (due to unstable countries) and capital,” Lacouture says.
“Capital risk in Australia is high enough to have people want to divest, but then you have the sovereign risk problem in volatile regions in the world. These two risk factors, you have to have a balancing point.” Lacouture notes that New Zealand is seeing a renewed interest in their onshore and offshore assets because of their stable government.
Australian LNG also has another problem, its pricing point. Many Asian buyers, such as Japan and Korea, are calling for Henry Hub pricing instead of the much more preferred by industry oil-linked prices. Lacouture says the projects that are doing the best despite the low LNG price (around $10 MMbtu) are the coal seam gas developments in Queensland, due to their low upstream costs. Whereas the larger deepwater developments are harder to produce.
Lacouture says Australian LNG has been volatile for the past several years, but advises that most companies should opt to consolidate stranded gas reserves into a single project rather than each consortium make their own, in order to bring costs down. He cites the Northwest Shelf project as an example. Additionally, companies could share facilities such as what ENI and Anadarko have teamed up to do off Mozambique.
In the short-to-medium term, Lacouture says, he is not worried about the Australian LNG market, saying that the projects post-FID will be fine.
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