Apache Corporation is unloading its stake in two LNG projects, including Kitimat LNG and its associated upstream assets in the Horn River and Liard basins, to Woodside Petroleum Limited of Australia, an experienced LNG player.
The company also said it’s exiting Wheatstone LNG in Australia. The company announced its intention to exit both projects in the summer.
Under a deal that closed in early 2013, Chevron Canada Corporation and Apache Canada Ltd. each became a 50% owner of the Kitimat LNG plant, the Pacific Trail Pipelines and 644,000 gross undeveloped acres in the Horn River and Liard basins.
Chevron bought into the project by taking out Encana’s and EOG’s positions in Kitimat.
EOG had entered the project by agreeing to acquire the shares of Galveston LNG Inc., a private Calgary-based company whose subsidiary Kitimat LNG Inc. was helping to develop the export facility. At the time, Kitimat LNG owned 49% and Apache earlier in the year had acquired 51% of the planned project.
Encana entered the project in early 2011.
Apache had been under pressure from activist investor JANA Partners LLC, which wanted Apache to free up cash flow by exiting the two major LNG projects in Canada and Australia.
On Monday (December 15), it announced it is selling its interest in Wheatstone LNG and Kitimat LNG, along with accompanying upstream oil and gas reserves, to Woodside Petroleum for a purchase price of US$2.75 billion.
Apache will also be reimbursed for its net expenditure in the Wheatstone and Kitimat LNG projects between June 30, 2014, and closing, which is estimated to be approximately $1 billion.
Under the terms of the agreement, Apache will sell its equity ownership in its Australian subsidiary, Apache Julimar Pty Ltd., which owns a 13% interest in the Wheatstone LNG project and a 65% interest in the WA-49-L block, which includes the Julimar /Brunello offshore gas fields and the Balnaves oil development.
The transaction, which has an effective date of June 30, 2014, will also include Apache’s 50% interest in the Kitimat LNG project and related upstream acreage in the Horn River and Liard natural gas basins in British Columbia.
In mid-2012, Apache grabbed headlines across North America for its results on a prolific Liard shale validation well, but analysts noted that the resource would likely languish in the absence of a gas price revival or the construction of a LNG plant on British Columbia’s North Coast.
Based on current estimates, Apache’s net proceeds upon closing are expected to be roughly $3.7 billion. Receipt of proceeds from this transaction will trigger an estimated $650 million cash tax liability, approximately $600 million of which is associated with the income tax due on Apache’s overall foreign loss account balance. Upon incurring this income tax liability, Apache estimates that it will have the flexibility to repatriate cash generated from foreign operations and/or future international strategic transactions with minimal U.S. cash tax impact.
Upon completion of the transaction, Apache will continue to hold upstream acreage offshore Western Australia in the Carnarvon, Exmouth and Canning basins along with related hydrocarbon reserves and production. Apache will also retain its 49% ownership interest in Yara Holdings Nitrates Pty Ltd. and 10% interest in the related ammonium nitrate plant.
The transaction is expected to close in the first quarter of 2015 and is subject to necessary government and regulatory approvals and customary post-closing adjustments.
The sale of the Kitimat LNG project is subject to certain operator consents.
“The LNG game is beyond the scope of Apache,” said Dirk Lever, managing director of institutional equity research with AltaCorp Capital Inc. “Also, Apache is reigning in and refocusing on production — this has been as a result of shareholder action. Recall that on Friday they sold a gas plant to [Keyera Corp.] as well.
“For Woodside, they have expertise and customers, so they likely feel they are a natural fit to go in with Chevron. With Petronas effectively playing turtle for a while, it will be IOC’s that will be the developers of LNG. Huge capex and long lead times do not work for smaller players.”
The sale is good for improving the probability of the Kitimat LNG project moving forward, added Geoff Ready, senior analyst of oil and gas with Dundee Capital Markets. “The critical path on the project seems to be the lack of takeaway contracts secured for the LNG cargoes. Having global LNG titans like Chevron and Woodside working together on this is optically positive, however it doesn’t guarantee success.”
The Horn River assets are essentially a part of the LNG project. Development of the gas from this shale is to supply the LNG facility, he noted.
Chevron spokesperson Gillian Robinson said that the company looks forward to welcoming Woodside Petroleum to the Kitimat LNG project.
“Woodside Petroleum brings significant experience to the Kitimat LNG project and Chevron has a long history of working with Woodside, primarily through our joint venture in the North West Shelf LNG Project in Australia, which has been in operation since 1984,” she noted. “Today’s announcement does bring resolution to one of the key elements required to reach a FID.”
The remaining elements include: greater cost and project execution certainty through completion of FEED; a clear, competitive and stable fiscal framework with the B.C. government; additional First Nations support; and firm LNG marketing agreements.
Woodside in July filed an application with the National Energy Board seeking approval for a 25-year export licence.
The project is proposed to be located on provincial Crown land in northwestern British Columbia, approximately 30 kilometres north of Prince Rupert on the TsimpseanPeninsula at Grassy Point, within the Skeena Queen Charlotte Regional District.
Earlier this year, Woodside secured the exclusive right to negotiate a long-term tenure for a LNG facility at the south site of Grassy Point after reaching an agreement with the B.C. government.
The future of this project wasn’t addressed on Monday, however.
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