A Canadian subsidiary of Chevron Corp. (NYSE: CVX) plans to buy a 50% interest in the Kitimat liquefied natural gas project from EOG Resources (NYSE: EOG) and Encana Corp. (NYSE: ENA) for an unspecified amount.

In addition, Chevron plans to buy a 50% interest in the proposed Pacific Trail Pipeline (PTP) and a 50% interest in 644,000 acres of oil and natural gas rights in the Horn River and Liard Basins in British Columbia from EOG and Apache Corp. (NYSE: APA).

Encana and EOG Resources — currently 30 percent non-operating partners in Kitimat LNG and Pacific Trail Pipeline — will sell their interests to Chevron and exit the venture. As part of the transaction with Chevron, Apache will increase its ownership of the plant and pipeline to 50% from 40%.

Once both transactions close, Apache and Chevron will be 50% joint venture partners in the Kitimat LNG project, The PTP pipeline and the upstream acreage in the Horn River and Liard basins. Chevron will operate the pipeline and the LNG export facility while Apache will operate the upstream assets.

The proposed two-train Kitimat LNG Project, currently progressing through the Front-End Engineering and Design (FEED) phase, has a Canadian National Energy Board license to export 10 million tons per annum of LNG. An equity research report from Dahlman Rose & Co. said the facility is scheduled to start operations in 2017.

"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 George Kirkland, vice chairman, Chevron Corporation.

"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."

Additionally, Chevron Canada Ltd. will acquire approximately 110,000 net acres in the established Horn River Basin from Encana, EOG and Apache, and approximately 212,000 net acres in the Liard Basin from Apache. Chevron Canada Limited and Apache will each hold a 50% interest and Apache will operate these two natural gas resource developments.

Gary Luquette, president, Chevron North America Exploration and Production, said, "This investment by Chevron Canada Limited 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. It will enable our North America operations to play an increasingly important role in Chevron's global growth."

"With experience developing LNG projects, marketing expertise and financial wherewithal, Chevron is the preferred coventurer to join Kitimat LNG," Farris said. "Apache has a proven record in finding and developing shale gas resources in Canada and is the logical operator for the upstream elements of the joint venture.

"We are pleased to expand our relationship with Chevron that began with the Wheatstone LNG project now under construction in Western Australia," Farris said. "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."

Chevron is the operator and led marketing efforts at Wheatstone, a two-train plant with capacity of 8.9 million tons of LNG per annum that is expected to commence operations in 2016. Chevron also operates the Gorgon LNG project in Australia and LNG Angola.

"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 completion. The 30-day initial production rate averaged 21.3 million cubic feet of gas per day, or 3.6 million cubic feet (MMcf) per day per frac stage. The ultimate recovery from the D-34-K well is estimated to be 18 billion cubic feet of gas. "We believe this is the most prolific shale gas resource test in the world," Farris said.

As part of this transaction, Apache 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 percent. Apache's net proceeds are expected to be approximately $400 million. The transaction, which is subject to certain government approvals, is expected to close in the first quarter of 2013.

As is customary in LNG projects, Apache and Chevron will explore sales of equity interests in the plant and upstream assets to foundation customers.

Kitimat LNG, at Bish Cove on the northern British Columbia coast approximately 400 miles (650 km) north of Vancouver, is currently completing front-end engineering and design, and early site work is under way. Current plans call for two liquefaction trains, each with expected capacity of 5 million tons of LNG per annum (about 750 million cubic feet of gas per day). Kitimat has received all significant environmental approvals and a 20-year export license from the Canadian federal government.

The 290-mile (463-km) Pacific Trail Pipeline will provide a direct connection between the Spectra Energy Transmission pipeline system and the Kitimat LNG terminal. The project has strong support from many of the First Nations along the route.

Equity analysts from Dahlman Rose & Co. said the deal should close in the first quarter 2013 and should strengthen Chevorn’s global LNG footprint and the North American LNG export market. The Kitimat LNG projct has been delayed several times for a variety of reasons, but Chevron’s presence should push it forward, Dahlman Rose reported.

“We believe Kitimat was having a difficult time securing buyers with oil-indexed pricing to underpin the large capital investment. Chevron’s success in securing contracts for Kitimat will be closely monitored b industry watchers, along with the associated pricing mechanism,” the report stated.

For Dahlman Rose & Co., the transaction underscores the importance of Asian LNG end markets. Spot prices for natural gas in Asia are around $17.10 per MMBtu, while Henry Hub is around $3.35 per MMBtu. “Despite global economic uncertainties, global LNG demand has increased at a faster rate than conventional gas over the past three years, with Asia account for 63% of the demand,” the report stated.

Chevron’s strong balance sheet can absorb the purchase. Dahlman analysts estimated the entire transaction will cost Chevron around $1.3 billion, about $400 million to Apache and $450 million each to Encana and EOG Resources.
RBC Capital Markets was advisor to Apache, EOG and Encana in the sale preparation of portions of their Horn River Basin holdings. Chevron is based in San Ramon, California. Apache is based in Houston.