Many hurdles remain for Kitimat LNG project, Chevron boss says

CALGARY—Many hurdles remain before American oil giant Chevron Corp. can decide the fate of its planned liquefied natural gas (LNG) project in Kitimat, B.C., and finding a new partner is just one of them, CEO John Watson said.

“It’s not a schedule-driven project. It’s an economics-driven project,” Watson told reporters ahead of the annual Spruce Meadows Changing Fortunes Round Table in Calgary.

This summer, Chevron’s partner in the project, Texas-based Apache Corp., announced it was getting out of the LNG game, putting the future of the Kitimat LNG project in question.

Chevron, headquartered in California, has said it has no interest in increasing its 50 per cent share of the project.

That leaves it up to Apache to sell its half-stake in accordance with an agreement it signed with Chevron, said Watson.

But even without the uncertainty over the partnership structure, a number of items need to be crossed off the list before a final investment decision can be made.

Chevron needs sales contracts with customers, clarity concerning British Columbia’s fiscal regime, more knowledge of its resource potential in northeastern B.C. and support from First Nations.

But Watson, who is also chairs Chevron’s board, said there is time for all of those conditions to be met, as he expects the world demand for LNG to stay strong for decades to come.

“If you look forward, energy demand worldwide will be growing roughly two per cent a year for the next 20 years. Much of that growth will be in natural gas. It will be displacing coal for environmental reasons. It will be displacing nuclear for environmental reasons and it will be meeting growing demand,” said Watson.

“The purchasers are anxious to have supplies from reliable locations such as Western Canada. There does need to be a meeting of the minds when it comes to price, so that price can underpin the economics in a world where costs have risen.”

Chevron’s project is one of many proposals for Canada’s West Coast that would see natural gas chilled into a liquid state, enabling the fuel to be transported abroad by tanker.

Of the bunch, Kitimat LNG is the furthest along.

However, competing proposals led by European energy giant Royal Dutch Shell PLC and Malaysia’s Petronas have had an easier time signing up deep-pocketed Asian firms to buy the resource.

Canada has some advantages over competing LNG producers around the globe, such as the relatively short distance between the B.C. coast and Asia, said Watson.

“But the locations where LNG plants will be built are remote, the transportation cost to bring the gas from B.C. and Alberta are significant and we have to make sure there’s a balance between costs and the revenue that will be received before the projects will move,” he said.

Watson says Canada isn’t the only part of the world where LNG projects are under pressure.

For example, those in Australia and Africa have had their share of cost challenges, too.

Proposals for the United States Gulf Coast have an edge when it comes to infrastructure, he added.

Watson also said Chevron is looking for a partner to help it develop its more than 120,000 hectares in Alberta’s promising Duvernay shale.

“It is quite natural for us to have a partner, so we have been looking to take on a partner as a normal part of our process of developing resources,” said Watson.

“But we’re pretty excited about the opportunity and there is interest and what form that interest takes in terms of the type of partner, remains to be seen. I won’t get ahead of that.”