Apache Canada and EOG Canada are sole owners of the planned Pacific Trail Pipeline that will feed the LNG plant they are looking at building in Kitimat.
Pacific Northern Gas announced last week that it had sold its 50 per cent share to those companies for $50 million.
Apache will now own 51 per cent of PTP and EOG the remaining 49 per cent.
For Apache and EOG, the pipeline company completes the set – they now own the gas producing wells in Northeastern BC, the proposed LNG plant and the pipeline that connect the two.
For PNG, the deal provides “full and fair value for our stake in PTP for our shareholders,” said CEO Roy Dyce.
PNG will receive $30 million when the deal closes at the end of this month and a further $20 million when Apache/EOG decide to proceed with the Kitimat LNG plant, a decision Dyce expected to be made before the end of the year with the plant beginning production in 2015.
Stacking that $50 million against the approximately $7.5 million PNG had spent on the pipeline project since 2005, he said that translated to about $9-10 per share, after deducting taxes and “transaction related expenses which include management incentives.”
While it was not PNG that initiated the talks that led to the sale, Dyce said the company felt “negotiating with the partners was the right thing to do”.
And throughout that process PNG’s key objective had been “to protect the interests of our customers and our long term business prospects.”
While its customers will not directly benefit from the sale proceeds (see story below), Dyce said they will from two other agreements.
The first relates to the PTP and will see PNG operating and maintaining the line for the first seven years. Thereafter, the agreement is subject to five-year renewals which Dyce was confident would come PNG’s way.
He suggested it would be very hard for another operator to outbid PNG given his company’s built in advantages. And he did not think it likely Apache/EOG would want to take on maintenance-operations themselves since they were primarily in the gas exploration and production business.
As for what PNG would be paid for operating/maintaining the line, Dyce would only say “revenues will be based on market rates (for) large diameter pipelines.”
The other agreement relates to PNG’s existing pipeline which, with the closures of its major industrial customers over the years, is now running at a fraction of capacity.
At the moment LNG Partners LLC has an option to use 80 million cubic feet/day of that unused capacity.
It must decide by June 30, 2012 whether to exercise that option.
If it does not, then this second agreement between PNG and Apache/EOG will kick in under which the latter would ship 30 million cu.ft/day through the PNG line beginning in 2015. And should the Kitimat LNG plant be expanded that will increase to 50 million cu.ft/day, the equivalent of 54,000 gj per day. The agreement is good for 20 years.
PNG would be paid 35 cents/gj for delivering the gas – the last contract between PNG and Methanex saw the latter paying a 50 cents/gj delivery charge.
Based on Dyce’s numbers, at 30 million cu.ft/day PNG would receive just over $4 million a year – $6.9 million a year at 50 million – from the second deal.
As for what PNG would be paid for operating/maintaining PTP, Dyce would only say “revenues will be based on market rates (for) large diameter pipelines.”
However, he expected the combined revenues from the two agreements, “will result in PNG’s customers receiving reductions in gas delivery rates similar to those that would have prevailed if PNG had continued to own a 50 per cent stake in PTP.”
While both agreements are subject to BC Utilities Commission approval, Dyce anticipated they would be approved given the benefits for PNG’s customers. He expected them to be filed with the commission within in a year
Of course, he pointed out customers could be even better off if LNG Partners LLC did exercise its option on the spare capacity and continued to use it for 20 years as well.
While that would kill the agreement with Apache/EOG, LNG Partners would be shipping more gas – 80 million cu.ft – and would be paying a higher toll of 50 cents/gj for a total PNG revenue of $15.77 million per annum.
Explaining the difference in the delivery charge, Dyce said LNG Partners would not be building a pipeline so PNG would be there baseload supplier.
That allowed PNG to negotiate a higher rate as well as a price escalator over time.
Dyce said that even if only one these project proceeds, it will be good news for PNG.